Session iii ii nixon bugo - agra

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Session iii ii nixon bugo - agra

  1. 1. AGRA & Partners: Facilitation of the Impact Investing Fund for African Agriculture (IIFFAA) Nixon Bugo EMRC Agribusiness Forum, Kampala, Uganda 3 – 6 October 2010 December 22nd, 2009 PwC
  2. 2. Agenda 2 Impact Investing Fund for African Agriculture3 Next steps and Conclusions4 Challenges and opportunities in agriculture in Africa1 AGRA’s Innovative Finance Initiatives 3-6 8-13 15-62 64-66 61-64
  3. 3. PricewaterhouseCoopers Slide 3 The challenge in agricultural lending  In Sub-Saharan Africa, agriculture accounts for 70% of the labor force, over 25% of GDP but only a few percentage points of commercial bank loans and investments.  Agriculture continues to be given low priority for investment despite the food security challenge and the potential for economic growth;  Many regions in different countries, so called breadbasket areas, dispose of consistent rainfall and plenty of arable land and therefore have a huge development potential;  Several governments have launched multiple initiatives to address the lack of financing to the agricultural sector with limited results for small-scale farmers;  Banks have not lent sufficiently to agriculture due to three main reasons: o Banks have a high risk perception of the agricultural sector; o Banks do not see agriculture as a strategic sector to engage in; o Banks do not have sufficient outreach for efficient lending. Challenges and opportunities in agriculture
  4. 4. PricewaterhouseCoopers Capital constraints facing African agriculture Slide 4 Source: CIA - world-factbook, Central bank of Congo, Central bank of Nigeria, Central bank of Kenya, Central bank of South Africa; BCEAO – Annual Report 2008 Contribution of agriculture to total GDP and outstanding loans to agriculture as % of total loans Challenges and opportunities in agriculture
  5. 5. PricewaterhouseCoopers Current situation of the African agricultural sector …but has huge opportunitiesAgricultural sector faces challenges… Slide 5 Rise in food demand Declining global food stocks Growing opportunities for  Food  Feed  Energy Agriculture is key for economic growth and employment in Africa However low agricultural productivity  0.5 t/ha compared to global average of 5 t/ha A declining trend over the last 30 years Africa has increased expenditure on food exports to $30 billion annually 43 African countries considered as low- income and food-deficient Challenges and opportunities in agriculture
  6. 6. PricewaterhouseCoopers Unlocking this potential requires a productive, efficient and competitive agricultural sector Hurdles for accessing financeHow to achieve this Slide 6 Efficient access to finance for the entire agricultural value chain; Support banks to increase capacity for lending to agriculture; Support farmers to increase productivity and market access. High transaction costs for banks; Capacity constraints for banks to enter the sector; Perceived high risk of lending; Historically high default rates due to moral hazard;  “Government money mentality” Lack of focus (overview ) on the entire agricultural value chain. Challenges and opportunities in agriculture
  7. 7. Agenda The Alliance for a Green Revolution in Africa2 Impact Investing Fund for African Agriculture3 Next steps4 Challenges and opportunities in agriculture in Africa1 3-6 8-13 15-62 64-66
  8. 8. PricewaterhouseCoopers Risk sharing agreement (50/50) with Centenary Rural Development Bank (CERUDEB) in Uganda; CERUDEB lent $1 million to farmers. Now lending $4 million based on the original $500,000 guarantee; Five years after the guarantee, the total default and draw down on the guarantee is only $10,400. Loan guarantee facility of $5 million by AGRA and IFAD to Equity Bank of Kenya, 2008; Leveraged $50 million in loans to agriculture; Interest rates lowered from 18% to 10% to smallholder farmers; Around 100 specialized staff recruited by the bank; At end of 2009, 1 Billion Kenya Shillings ($13 million) lent, representing 23.6% of targeted loan portfolio; Small-scale farmers lent 715 million KS ($9.5 million), 73.9% of total borrowing; By June 2010 the Portfolio stood at more than $20 Million Large-scale farmers have borrowed 187 million KS ($2.5 million) representing 19.3%; Agribusinesses have borrowed 64 million KS ($1 million) or 6.7% of total borrowing; Loans to 27,248 small scale farmers, 568 large scale farmers and 220 agribusinesses. AGRA’s Experience: Innovative Finance Slide 8 Uganda: Centenary Rural Development Bank Kenya: Equity Bank The Alliance for a Green Revolution in Africa
  9. 9. PricewaterhouseCoopers AGRA provided $1.1 million loan guarantee facility to National Microfinance Bank in Tanzania; The Financial Sector Deepening Trust has provided a further guarantee facility of $1 million; $10 million of loans now being provided to smallholder farmers and Agro dealers; Lending rate lowered from 28% to 15%; Reduced demand for high collaterals from farmers by the bank; The bank has not reported any actual losses or requests for a draw down on the facility; NMB estimates to recover at least 50% of the expired overdrafts; To date, about 6,200 agrodealers have been trained and certified and eligible to access credit under this program. Examples of AGRA’s Experience in Innovative Finance Tanzania: National Microfinance Bank The Alliance for a Green Revolution in Africa Slide 9
  10. 10. PricewaterhouseCoopers AGRA’s Experience: Innovative Finance A $10 million loan guarantee provided to lend $100 million in loans through Standard bank; The program aims to assist 750,000 farmers in those countries in Tanzania, Ghana, Uganda and Mozambique; Standard bank provides interest rates of +3% for small holder farmers and up to +5% for agri-businesses; The Uganda loan facility was launched in December 2009; As of March 1, 2010, Ushs 1.2 billion (US$630,000) has been lent; Different types of loans totaling $4.34 million, are currently in evaluation stage; In Ghana, Standard Bank has already extended $2 million to smallholder farmers in the Millennium Village project in Ghana; A pipeline totaling $17 million in possible new lending to farmers has been identified; $ 8 Million loans have been approved for disbursements. Mozambique and Tanzania have just commenced their loan operations. Tanzania, Ghana, Uganda and Mozambique: Standard Bank The Alliance for a Green Revolution in Africa Slide 10
  11. 11. PricewaterhouseCoopers Agenda 2 Impact Investing Fund for African Agriculture3 Next steps4 Challenges and opportunities in agriculture in Africa1 The Alliance for a Green Revolution in Africa 3-6 8-13 15-62 64-66 61-64
  12. 12. PricewaterhouseCoopers AGRA’s success story in leveraging commercial banks  Unlock access to finance for the entire agricultural value chain;  Sustainable leverage potential –10 times/systemic change;  Build capacity of banks to serve the agricultural sector;  Lower default rates than perceived by banks;  Technical assistance to Banks;  Risk adjusted interest rates. Key evolution The Alliance for a Green Revolution in Africa Slide 12
  13. 13. PricewaterhouseCoopers Slide 13 Fund set up project  Unlock access to finance at scale for agriculture (at least USD$4 billion);  Syndicated risk sharing pooled facility to foster competition between banks and lower interest rates for farmers and agribusinesses;  Lower the risks faced by commercial banks;  Decrease transaction costs of bank lending to agriculture;  Develop a technical assistance strategy to allow efficient agricultural lending;  Build social impact mechanisms to measure effectiveness of lending to agriculture. Vision: create the conditions for long-term and sustainable bankability of small-scale farmers Objectives Project structuring
  14. 14. PricewaterhouseCoopers Uniqueness in the design approach Slide 14 Market driven approach taken by the Fund Open architecture and collaborative platform for investors, governments, banks and technical assistance providers Strong innovation potential High harmonization potential Capacity to create a systemic change through the commitment of key actors along the chain Social development of small-scale farmers Development of the agricultural value chain New value potential for intermediaries and banks Food security for the region/country Project structuring
  15. 15. PricewaterhouseCoopers Consultation Workshop with African commercial banks, NGO’s & investors Slide 15 Consultation & InterviewsFund development process A unique process involving various actors in the development of the Impact Investing Fund 1 2 In-depth meetings with selected players Desktop research Development of the Fund 3 4 IFC EIB USAID DEG BMGF AfDB MIGA IFAD 35 organisations/funds interviewed as to role as investors in such funds; 15 commercial banks interviewed; Several investors showed a strong interest to participate; Several African banks showed interest as lender banks. Project structuring
  16. 16. PricewaterhouseCoopers Slide 16 Strong focus on commercial bank perspective Attractive guarantee coverage for the bank; Insurance package for farmers; Technical assistance support for banks, farmers, small businesses etc.; Risk coverage reduction over time allowing the banks to take ownership; Reduction of own funds requirements through guarantees; Opportunities for business development; Potential incentive payments for low claims experience; Preferential allocation of more guarantees in the event of low claim rates or strong social impact performance; Provision of data and expertise to ease market entry; Opportunity to display corporate socially responsibility. Incentives for banks Project structuring
  17. 17. PricewaterhouseCoopers Slide 17 Emerging Issues Tailoring of fund structure, share classes and governance to investor needs; Allowing full flexibility necessary; Very few initiatives stimulating commercial lending to small scale-farmers at scale; No harmonised model or market practice available for risk sharing mechanisms; No one-size-fits-all model for risk sharing existing (first loss/last loss/ shared loss); A simple guarantee is not sufficient for intermediation and technical assistance across the value chain; To allow efficient delivery of finance  Need multiple de-risking solutions. Assessment of current practices Project structuring
  18. 18. PricewaterhouseCoopers Slide 18 The Impact Investing Fund for African Agriculture: A 5 components de-risking solution package Impact Investment Fund Structure Investors African commercial banks Agricultural loan beneficiaries Guarantee vehicle (SIF) Technical Assistance Catalyst (Fiduciary Account)   Risk Sharing and Insurance Bank incentives 1 5 3 4 Full value chain Technical Assistance Full value chain Impact Measurement Loan portfolio Loan portfolio Financial First Investors Impact First Investors 2  The concept
  19. 19. PricewaterhouseCoopers IIFFAA Description of the components Risk Sharing Facility (covered by the Fund) Insurance Component (covered by TA) Technical Assistance Facility (covered by TA) Bank Incentive Mechanism Impact Measurement Metrics Impact investing Fund for African Agriculture • Serves as performance measurement and reward tool for commercial banks • Provides social impact feedback to Impact First Investors. • Drives capacity building along the agricultural and financial value chain. • Deploys incentives to banks to strategically move into agricultural lending • Deploys risk sharing and insurance instruments that minimize the financial risk of lending to agriculture. 1 2 3 4 • Adds or helps in the development of index based crop and weather insurance. 5 Slide 19 Impact Investment Fund Structure Investors African commercial banks Agricultural loan beneficiaries Guarantee vehicle (SIF) Technical Assistance Catalyst (Fiduciary Account)   Risk Sharing and Insurance Bank incentives 1 5 3 4 Full value chain Technical Assistance Full value chain Impact Measurement Loan portfolio Loan portfolio Financial First Investors Impact First Investors 2  The concept (covered by Fund and TA) (covered by Fund and TA) Overall the TA account is estimated at 25% of all Fund assets
  20. 20. PricewaterhouseCoopers General investment target of the IIFFAA Slide 20 Investment rules Investors Commercial Banks Farmers Philanthropic Investors Donors / IFIs Commercial Institutional Investors Luxembourg Scheme Risk Sharing Vehicle Bank A Bank B Bank Z Risk Sharing Agreement  Credit agreement Interest: x% Credit Portfolio - Interest (x-y) - Default rate - Coverage rate on credit portfolio Liquid asset basket e.g. MMI Portfolio performance Offering Documents Investment vs. Return distribution Social Impact Matrix Continental sub-fund Regional sub-fund National sub-fund
  21. 21. PricewaterhouseCoopers General investment target of the Impact Investing Fund for African Agriculture ProductsLoan beneficiaries Slide 21 Food crops Cash crops Livestock Fisheries Etc. Small-scale farmers Medium-  large-scale farmers Agribusinesses, Agro-dealers and Processors Core objectives: 1. Sustainable social development for Sub-Saharan Africa’s agriculture and population; 2. Financial return for investors. Investment rules
  22. 22. PricewaterhouseCoopers General investment target of the Impact Investing Fund for African Agriculture Eligible loan beneficiaryEligible Portfolio Slide 22 Small-scale famers Basic entrepreneurial interest; Production of agreed products; Pre-agreement of a target market or off- taker; Subscription to the technical assistance provision and monitoring. Agribusinesses Provision of an entrepreneurial business plan; Subscription to the technical assistance provision and monitoring. 50-70% Small-scale farmers 30-50% Agribusinesses Ensure value chain coverage Limitation of default Investment rules
  23. 23. PricewaterhouseCoopers Technical Assistance allocation Slide 23 Technical Assistance allocation Loan beneficiariesBanks Motivation and acceptance to undergo capacity strengthening; Provision of social impact reporting; Assist farmers with TA in the range of 15% of loan or US$ 100-200 p.a Max budget for agribusiness: 5% of loan; For agribusiness: own investment > Fund TA investment. Budgets allocated after a need analysis; Budget depending on strategic commitment and performance; Amount considered in guarantee pricing; Max budgets allocated proportional to guarantee; Bank TA investment > Fund TA investment. • Default reduction; • Sustainability; • Bank commitment. • Default reduction; • Sustainability; • Beneficiary commitment.
  24. 24. PricewaterhouseCoopers Country sub-funds….To ensure targeted investments and development for the specific countries / regions Investors Commercial Banks Farmers Philanthropic Investors Donors / IFIs Commercial Institutional Investors or HNWI Bank A Bank B Bank Z Risk Sharing Agreement  Credit agreement Interest: x% Credit Portfolio - Interest (x-y) - Default rate - Line of risk on credit portfolio - Coverage rate on credit portfolio Technical assistance and Social Impact Matrix Impact Investing Fund Regional Sub-Fund National Sub-Fund Sub-fund: Nigeria Governments Slide 24 Sub-Funds Continental Sub-Fund
  25. 25. PricewaterhouseCoopers Sub-Fund investment policy Slide 25 Regional Sub-FundContinental Sub-Fund Core countries in scope: Uganda, Tanzania, Kenya, Ghana, Mozambique, Nigeria, Zambia, Malawi, Ethiopia, Rwanda, Cameroon, Mali, Senegal, Burkina Faso, Niger; In the long term equal representation of core countries; In case national sub-funds exist for core countries, the exposure of the continental fund to such countries will be decreased. • Investor protection; • Risk diversification; • Development of small scale farmers. • Development all across Africa Sub-Funds 3 Regions: West, East, Central; In the long term equal representation of countries in regions; In case national sub-funds exist for countries in a region, the exposure of the continental fund to such countries will be decreased.
  26. 26. PricewaterhouseCoopers The Risk Sharing Facility Slide 26 Tailored risk sharing solutions • The facility will cover a percentage of a lending portfolio of a bank to agricultural loan beneficiaries • The guarantees will take the form of letter of comfort and claims will only be made when there are actual losses realized on the portfolio. • The risk sharing facility will consider: the volume of lending; the part of the value chain that the bank is lending to; the term of lending; The type of bank, experience and capacity for agricultural lending and; the commercial conditions such interest rates, guarantee and collateral requirements. • First loss arrangements for banks that want to lend to the smallholder agricultural sector, or a clear long term commitment to the sector by the employment of dedicated staff or other investments. • Only shared loss arrangements for lending to agro-dealers, seed companies, fertilizer companies, equipment leasing, agro- processors and millers etc, or to medium scale commercial farmers. • The risk sharing facility will be accessed by the banks at a fee. The guarantee fee will be set at a level based on the financial economics of the fund Objectives: increase bank lending to agriculture and creating financial return for investors The 5 components
  27. 27. PricewaterhouseCoopers The Insurance Component Slide 27 Insurance • Identify existing insurable risks and existing solutions for coverage, such as crop and weather risks; • Assist in the development of insurance solutions such as weather index insurance, yield insurance etc. in countries where such insurance products are not available; • Cooperate with local and international insurance providers willing to extend their offerings to assist in the development of appropriate local insurance products • Link insurance products such as life insurance to the loan provided by banks to loan beneficiaries. Objectives: • Add another de-risking factor and develop micro-insurance; • Cooperation with local and global insurance players to develop adequate insurance products; • Use existing innovative market solutions. The 5 components
  28. 28. PricewaterhouseCoopers The Technical Assistance Facility (pre-lending) Communication CentreKnowledge & Innovation Centre Slide 28 Use multimedia channels to propagate and inform on agricultural financing in order to expand the acceptance and understanding among farmers and banks; Provide educational training to banks and intermediaries on agricultural finance; Organize conferences and networking to build a community for sharing information and best practices. Analyse key factors in default rates; Analyse the financing needs and specificities of the different agriculture value chains; Introduce technological and financial innovation to reduce the cost for banks and farmers; Provide Financial engineering support to bank for proposing packaged solutions; Provide a Social Impact reference framework and analyze associated data; Provide training courses to banks and intermediaries. The 5 components
  29. 29. PricewaterhouseCoopers The Technical Assistance Facility (on an ongoing basis) Agricultural value chainBanks Slide 29 Provide support on increasing productivity through optimal use of seed, soil, irrigation, herbicide & pesticide; Support farmers on ways of developing access storage facilities & markets; Provide farmers financial education and planning to propagate a culture of banking; Support farmers with their initial relationship to the banks. Support banks in building capacity to serve the agricultural sector; Advise banks on developing tailored products such as term financing facilities for the agricultural sector; Support banks in expanding their outreach to the farmers and agricultural sector to ensure wide distribution; Objective: creating a catalyst for change with the TA Fund The 5 components
  30. 30. PricewaterhouseCoopers Bank Incentive Mechanisms Slide 30 Incentives • Appropriate incentive mechanisms to move banks to a strategic commitment to agricultural lending • Bank Incentive Mechanisms would include:  Reduction of own funds requirements through the provision of eligible guarantees;  Potential incentive payments for low claims experience;  Provision of data and expertise to ease market entry; • Avoid moral hazards; • Reward economic and social performance such as low default rates, higher lending to small scale farmers, etc. Objective: set incentives for long term financial viability and strategic moves into agricultural lending The 5 components
  31. 31. PricewaterhouseCoopers Impact investing metrics/bank rating Slide 31 Methodology and impactImpact investing metrics/bank rating Client activity (economic) 40 points Bank activity 60 points Scoring based on: Bank activity (% of agri and smallholder loans as to total loans, In-house training and promotion..); and Client (farmers, agri businesses) activity (growth in revenue/ income, change in number of employees…). Certification and labelling by independent third party; Banks receiving a certification would receive incentives (such as lower guarantee fees…) from the fund to encourage greater lending to the agricultural sector. Objective: Reward bank performance and report social performance to investors The 5 components
  32. 32. PricewaterhouseCoopers Impact investing metrics/bank rating Slide 32 Client activityBank activity - Number of Scheme loans advanced as a % of all loans advanced in the same time period - Amount advanced through the scheme as a % of total lending in the period - In-house training and promotion - % growth in agricultural loans advanced outside AGRA scheme less growth in total commercial loan portfolio The 5 components - Revenue split by agricultural sub-sector - Growth in revenue income - Change in profit margin over the reporting period - Change in number of employees - Type of employees - Change in number of female borrowers - Change in yield (arable farming only) - Growth in proprietor asset base (smallholders) - Access to healthcare services (smallholders) - Proportion of children in school - Provision of subsidised services by employer (assets, access to education and healthcare) Environmental impact - Environmental degradation - Change in ground water levels on an annual basis - Waste water being discharged to water bodies - New or improved access to energy
  33. 33. PricewaterhouseCoopers Impact investing metrics/bank rating Slide 33 Process The 5 components FUND MANAGER Board of Directors External Social Impact Advisors Technical Assistance Committee Investment Committee Financial Operations Reporting On the ground operations Investor Mgt. Asset Mgt. Guarantee Mgt. Risk Mgt. Bank deals TA Mgt. • The rating will be generated by collecting portfolio level social impact indicator data by bank • Dedicated external Social Impact Advisors will generate bank ratings to ensure independence and fairness and make use of ratings to attract additional investment to the scheme.
  34. 34. PricewaterhouseCoopers Governance of the Impact Investing Fund Slide 34 Functions of the Fund bodiesStructure of the Fund governance FUND MANAGER Board of Directors Advisory Committee Technical Assistance Committee Risk Sharing Committee Financial Operations Reporting On the ground operations Bank deals TA Mngmt Investor Mngmt Asset Mngmt Guarant Mngmt Risk Mngmt Board of Directors: Composition: key investors to the fund , representatives of country sub-funds, promoters and independent directors 5 year term, Ultimate power and liability Advisory Committee: Composition: promoters, main investors, independent members Decisions on conflicts of interest Decisions on changes to investment policy Risk Sharing Committee: Composition: Fund Manager, promoters, independent members Ex-post approval of all bank deals, performance monitoring of RSA Technical Assistance Committee: Composition: Fund Manager, promoter, main TA investors and independent members Ex-post approval of all major TA contracts and tool implementations Performance monitoring of TA Governance
  35. 35. PricewaterhouseCoopers THANK YOU 3-6 15-62 64-66
  36. 36. PricewaterhouseCoopers Slide 36 CONTACTS Nixon Bugo Innovative Finance AGRA Tel: +254 733 12 18 96 nbugo@agra-alliance.org

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