Potential funds design and credit system October 2013

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The previous input credit system lack of clear accountability between the different sets of players

Problems identified in the input credit system

• Regional governments provide credit guarantees but do not pressure borrowers to pay back.

• Loan collection takes place through multiple sets of interactions (primary cooperatives collecting from farmers, cooperatives unions collecting from primary cooperatives, etc.) so ultimate responsibility for collections is diffused. Frequently, funds are retained by cooperatives as working capital or misappropriated by the leadership.

• In case of default, CBE is paid back by regional governments fully. Hence there are reduced incentives for CBE to apply pressure on borrowers or guarantors.

• A lot of circulation of cash in the system among the several actors in the credit system increasing the likelihood of money being misused.

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Over the past few months, the ATA has been working to diagnose problems in the current input credit system

Cash/credit flowProduct flow

International supplier

Agricultural Input Supply Enterprise

(AISE)

Coop Union & Federations(Selected by

AISE)

Commercial Bank of Ethiopia (CBE)

(Loans for Cooperative Unions)

Regional Agricultural Bureaus

Primary Cooperatives

Smallholder farmers

Cooperative Unions

Source: IFPRI, 2012; stakeholder interviews

Commercial farms

Payment for default

Credit

Cash

Input Flow

Credit guarantee

CBE issues loans to cooperative unions via a regional

representative; funds are sent straight to AISE

If coop default, regional government

covers the balance

Regional government credit is no longer

passed on to farmers, but some primary

coops offer loans to members from their

own funds

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4

The new input credit system addresses many of the problems with the old system

Expected impact of the new system on the existing one

• Substitutes regional governments’ guarantee with a market-based risk sharing mechanisms –credit guarantee fund (partial), risk insurance, etc.

• Relieve the cooperatives from the credit disbursing and collection responsibility. Instead, the cooperatives will focus on their core business of input retailing, output marketing

• Establish cooperatives as the parties responsible for demand estimation of inputs and therefore take ultimate responsibility for any unsold input.

• Minimize the use of cash by introducing a voucher system and electronic transactions to prevent leakages and use of funds for unintended purposes by farmers and other parties .

• Channel input credit through microfinance institutes (MFIs) or other appropriately placed financial institutions that have extended reach in rural areas and have low rates of non-performing loans (NPL) to provide input credit and loan collection.

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These benefits can be seen in the schematic for the new input credit system

Funding Institutions (CBE)

Financial Institutions (Microfinance Institutions)

Primary Coops

Credit guarantee fund

(by the gov’t & development

partners)1

Coop unions Farmers

Voucher on credit

Farmer presents voucher for input provision

Inputs provided to farmers

Voucher redeemed for credit against loans; additional cash payments as necessary

Loans for capital adequacy for farmer vouchers

Loan repayment

Payment for fertilizer

E-voucherCash FlowInput Flow Loan repayment Output Flow

Payment for seed and chemicals

1 Necessary in initial years; could be phased out eventually, especially if a robust contract farming platform establishes designated markets for farmer output2 Purchasing arrangement will vary by crop and region but could include letters of intent to purchase or more formal contract agreement

Agricultural input producers,

international suppliers, and importers

Agricultural inputs (improved seed, fertilizers and chemicals)

Loan repayment

Voucher aggregation

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Payment for union fertilizer purchase

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Why is liquidity injection needed in the agricultural sector?

• Lack of liquidity in the Ethiopian finance system due to the large public investments to build infrastructure (power, roads, railway, etc.)

• Smallholder farmers’ access to finance has been limited and contributed to lower adoption rate and usage of improved inputs and technologies

• ATA has therefore focused significant effort in the past few months to (1) find a source for additional liquidity specifically to the agricultural sector and (2) design a credit guarantee fund to incentivize financial institutions to provide financial products to the sector

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• Increase smallholder farmers’ income in a commercially viable manner for long-term sustainability and generate hard currency through import substitution and exports. Some low hanging fruits include:– Ethiopia currently spends ~$250 million / year on imported wheat,1 which could be replaced by

domestic production– In 2010, Eastern Africa imported ~860,000 MT of maize at a cost of ~$250 million, 2 which Ethiopia could

supply– Ethiopia currently spends ~$25 million / year on imported malt,3 which could be replaced by domestic

production

Goal

Overview of the fund

• ~$150-250 million• Focused on hundreds of thousands of smallholder farmers (exact number TBD)• Initial crop focus: Maize, wheat, and barley• Provide all necessary financing needs to focus smallholder farmers: Input credit, working capital for output

marketing, mechanization, storage, etc.

Size and scope

• Leader: Government of Ethiopia• Implementation partner: WFP• Potential funders: IFC, IMF, IFAD, other partners

Setup

1. Ethiopian Revenues and Customs Authority (ERCA), USDA Foreign Agricultural Service, Ethiopian Wheat Sector Development Strategy.2. FAO.3. ERCA.

The agriculture investment revolving fund will provide an infusion of international capital to provide for smallholder farmer financing needs

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Proposed Integrated Funds model – how the pieces could fit together2

Large-scale liquidity fund

• Provides overall liquidity to the system through international donor funds

• Can be used to support the CGF as well as other agriculture finance needs (marketing, mechanization, aggregation, etc.)

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Risk mitigation tools (CGF, insurance, etc.)

2• A fund that serves as

collateral to incentivize investment in agriculture

• A weather-index insurance or multi-peril insurance

Input purchase system

3• ATA-supported system

that provides increased liquidity to farmers to buy inputs through use of credit vouchers

Various parts that could be integrated

Large-scale liquidity fund

Funds the credit guarantee fund, which guarantees the liquidity fund, input credit, and other agriculture financing

Also funds other agriculture finance needs

Donors can fund the CGF directly (e.g., GIZ)

Donors can fund the liquidity fund overall (e.g., IFC)

Farmers

MFIs

Primary coops

Funds for input credit

Output Marketing: Contract Farming

Output Marketing: Contract Farming

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Output Marketing: Community Warehouse Receipt System

Innovations to help our country grow