Show Me The Money  S C A A  Symposium 2009    Draft  Presentation    Jason  Potts And  Roy  Parizat    F A S T
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  • Success in the marketplace is all about timing, and producer finance is effective in the degree that it enables more flexibility to respond to market opportunities and needs.
  • Higher Lending Default Rates Few sustainable SME’s have either the skills or the tools available to adequately mitigate price and weather risk Price shocks – common in the coffee industry - have often resulted in significant lending default by coffee traders Weather shocks – common in coffee producing countries – can often destroy crops / reduce yields, resulting in lending defaults Price and weather shocks are occasionally followed by government led “debt forgiveness programs” leaving the banks with bad debts Banks perceive urban sector lending (personal lending and commercial / industrial lending) to be a better bet Lack of Bank Ag. Expertise Banks may not have in-depth understanding of the agricultural markets Banks may not have specific understanding of the sustainable sector agricultural markets and be unable to understand the difference between specialty / sustainable and convention coffee sectors Lack of understanding results in inappropriate lending due diligence processes that unfairly rate and score agricultural enterprises applying for lending A misunderstanding of actual risk may result in higher fees, smaller facilities and greater collateral requirements for agricultural borrowers Perception that large enterprises are Best Sustainable enterprises are generally smaller in scale and size than conventional agricultural enterprises Cooperatives can be seen as “weaker” than large commercial agri-enterprises, and are often perceived by banks as having: less professional management weaker balance sheets less power and influence with their key buyers less security to offer a bank Less ability to manage price and weather shocks Even where local bank branch managers want to lend to smaller enterprises their due diligence / credit assessment processes discriminate against smaller enterprises NOTE THE ELEMENT OF TRUTH TO THIS BUT ALSO THE ELEMENT OF STEREOTYPING HERE. SMALLER SME’S DON’T NECESSARILY HAVE RIGHT BANKING LANGUAGE OR MANAGEMENT; BUT SUSTAINABLE SMES ACTUALLY DO HAVE ABOVE PAR MANAGEMENT SYSTEMS AND THIS IS PARTLY WHAT POINTS THE WAY FOR EXPANDING ACCESS TO CREDIT IN THE AREA Urban lending is Sexier Non agricultural lending takes a much larger share of bank lending than its GDP share of the economy Banks often assume that lending to urban clients is a better bet as: transaction costs are lower than those for rural clients – clients much geographically closer to the banks security/collateral in urban areas is far easier to take a charge over and way more realisable urban enterprises have professional managers who speak the same language of finance loan sizes can be more attractive to the banks Lack of Collateral for Lending All banks take security / collateral when lending with the aim of seizing and realizing the asset should the borrower default, however agricultural collateral can prove challenging: banks often find themselves unable to seize collateral from agricultural enterprises following default, even where they have a charge over the land or the asset barriers to seizing assets can be both “physical” or legal many sustainable SME’s don’t have good quality assets available to pledge as collateral or where they do have assets are unwilling / unable to pledge these assets agricultural assets can be hard to sell even if successfully seized With urban borrowers (both retail and commercial) banks find it easier to both secure and realize assets following a loan default. NEED TO FIND A WAY OF HIGHLIGHTING THE FACT THAT AGRICULTURAL SMES ARE NOT THE “EASIEST” BANKING CLIENTS TO DEAL WITH, BUT ONE OF FAST’S PROPOSITIONS IS THAT THE WHOLESALE REJECTION OF FINANCING TO SMES IS A BIT LIKE THROWING THE BABY OUT WITH THE BATHWATER. THERE ARE A LOT OF RELIABLE BORROWERS IN THAT SEGMENT — WHAT IS LACKING ARE THE TOOLS TO IDENTIFY WHEN AND WHERE THIS IS THE CASE.
  • Need to add comments on why and how these other systems or arrangements help address some of the challenges/issues facing local banks 9Don’t mention challenges of these institutions here; mention those on the next slide. -local intermediaries: know their clients very well; provide delivery services and “personalized” service; but for high interest -micro-finance: rely on social networks to reduce risk; cater to small borrowers, but no SME business financing -multi-national traders: know their clients; have business relationships with clients (can generate mutually supporting relationship) but are not lenders per se; may have limited access to free capital for lending; no infrastructure to distribute, manage due diligence -Importers/roasters: same profile as traders except, may not have direct relations with producers (making it still more difficult to manage due diligence and risk) -Socially oriented lenders: drawing of social investment; have lower pressures to demonstrate high returns: gives more felxibility in risk taking; can leverage “social capital” of sustainable enterprises in same way as micro-finance. challenges
  • Add data on the broader Sustainable Finance Gap 1.5 billion…. In our notes, but not on the slide…. Need to understand the basic assumptions regarding our calculations
  • Two points: Situation worse But it has raised awareness of the importance of finance as a key ingredient of sustainable trade Re: situation worse: The Financing Gap has worsened due to the recent gloab banking crisis / “credit crunch”: Local banks are withdrawing existing facilities from clients Local Banks are offering smaller facility sizes to their clients Multinational Traders are struggling to secure finance for their businesses and increasingly reluctant to offer financing packages to partners (especially the smaller / weakest clients) (Some) socially oriented lenders are reducing their growth in lending Interest rates for agricultural enterprises have not seen a reduction in their interest rates despite global reductions in central bank rates
  • Banks are clearly reluctant to lend sufficiently to the agricultural sector Lending that does occur is through the use of lending mechanisms and tools that enable agricultural lending whilst protecting the lender. Local domestic banks rely heavily on collateralized lending, especially warehouse based lending for the coffee sector. At times they will also consider providing finance through letters of credit. Socially oriented lenders will primarily rely on “relationships” based upon forward contracts agreed between producers and buyers.
  • A holistic program has been implemented to increase the provision of finance to the agricultural sector The program is led by the Association of Honduran Banks (AHIBA) reflecting the desire of the banks to increase their lending to the agricultural sector All key stakeholders national have bought in to the project: Local commercial banks Agricultural associations (including IHCAFE) The banking regulator There is a uniform desire to tackle the financing gap by identifying – and addressing – the barriers to agricultural lending The program is supported and part financed by the World Bank and the Inter American Development Bank ------- The program is a four year action plan for increasing financing for agriculture through: Improving the risk management of agricultural enterprises (coffee and other agricultural commodities) Improving the knowledge of banks in agricultural risk management Identifying barriers to lending in existing banking regulation and working with the regulators to overcome these barriers Introduction of pilot projects for improving financing to the agricultural sector In addition work is being undertaken (outside of the program) to examine the implementation of index-based weather insurance ---- Specific targets have been agreed by the Association of Honduran Bankers for improving financing for the agricultural sector including: All major banks trained in agricultural price risk management At least 100 agricultural enterprises trained in price risk management Training of banks in new methodologies for assessing lending for agricultural enterprises Identification of regulatory barriers to lending and ongoing work with the government to address identified barriers 10% increase in the number of agricultural enterprises receiving financing
  • Price risk management is a reason cited by banks for not lending to the coffee sector This barrier can be overcome by SME coffee traders developing their own risk management programs and practices Training in coffee sector price risk management is shortly to be made available by the World Bank’s Commodity Risk Management Group Rollout from 2H 2009 of an online comprehensive training course in price risk management for coffee sector SME’s CRMG is aiming to form relationships with NGO’s, training institutions and capacity building enterprises to enable them to adopt and utilize the course
  • Potential Size of Fund: Year 1 - $2.5 million capital $7.5 million guarantees Year 2 - $4.5 million capital $13.5 million guarantees Year 3 - $5.0 million capital $15.0 million guarantees Number of Beneficiaries (SME’s receiving guarantees): Year 1 – 35 SME’s Year 2 – 60 SME’s Year 3 – 70 SME’s ---- Possible Profile of beneficiaries of the guarantee fund: Smaller SME’s – cooperatives and associations with less than 1,500 members New entrants to the sustainable sector – less than four years of certification by a sustainable production program Lacking in finance to grow their businesses – unable to secure sufficient international or domestic finance to fulfil their market potential
  • Can we say point 2? On what grounds?


  • 1. SCAA Symposium 2009 Show me the Money New Financing Models at Origin
  • 2. Presentation Overview
    • The need for finance by specialty and sustainable coffee producers
    • The existing barriers to the provision of sufficient finance for the coffee sector – the “financing gap”
    • Overcoming the financing gap – ways of increasing the availability and flow of lending
    • A Proposal: Consumer Driven Guarantee Fund
  • 3. Brief Introduction to SCI & FAST
    • Sustainable Commodity Initiative (SCI):
    • Partnership of IISD and UNCTAD
    • Focused on building an enabling infrastructure for sustainable consumption and production
      • technical assistance; impact assessment; financing and policy support
    • In 2006 partnered with the Social Venture Network in the formation of FAST
    • The Finance Alliance for Sustainable Trade (FAST)
    • Membership based trade association focussing on improving access to finance for sustainable trade producers by:
      • R educing transaction costs and risk
      • Improving investment and economies of scale
  • 4. Why Financing Matters for Sustainable Coffee Key Barriers to Market Entry and Continued Growth of Sustainable Coffee Producers:
      • Poor Market Information
      • Inadequate Physical Infra-structure
      • Under-developed Management Capacity
      • Low Savings and Capital
      • Finance is a vital element for overcoming these “natural” market barriers
  • 5. Financing Issues and Experiences at Origin: Views From the Floor
  • 6. Financing Needs of SME Coffee Businesses
      • Pre-finance
      • to cover inputs into production prior to harvest
      • Trade credit
      • to enable SSMEs (producer organizations) to buy on credit to produce and sell on international markets
      • Term loans
      • to enable SMEs (and farmers) to invest in infrastructural improvements
  • 7. Domestic Bank Financing for Agriculture Local / Domestic Banks are reluctant to lend to their agricultural sectors Country Agricultural Share of GDP (%) Bank Lending to Agriculture (%) Burundi 34.9% 10.7% Kenya 27.9% 6.4% Malawi 37.8% 15.2% PNG 34% 4.5% Uganda 32.7% 6.8% Zambia 18.5% 9.3%
  • 8. Causes of L o w Levels of Financing to SME Agricultural Producers
    • Historical Issues with lending to the agricultural sector – high(er) default rates (due to price and weather volatility)
    • Lack of bank understanding of agricultural enterprises
    • Perception that smaller agricultural enterprises are higher risk than larger enterprises
    • Perception of higher returns with lower transaction costs for urban sector lending
    • Perception of poor management in SME agri enterprises
    • Lack of collateral available for banks to secure lending against
    • Issues with reclaiming lending following defaults, the inability to seize assets used to secure loans
  • 9. Impacts of the Coffee Financing Gap
    • Impacts on coffee producers:
      • restricting infrastructure improvements
      • increasing risky behaviour due to sub-optimal coping techniques
      • preventing new entrants into sustainable and specialty sectors
      • Raises costs, reduces quality of production
    • Specific Impacts on Roasters:
      • May be forced to provide direct financing to secure supply (threat to own balance sheets)
      • May be forced to buy through importers who can provide financing
      • Higher risk of default
      • Less choice in supply
  • 10. Alternative Sources of Finance for Coffee Producers
    • Local / Domestic Banks
    • Local Intermediaries (Coyotes)
    • Microfinance Institutions
    • Multi-national Traders
    • Importers / Roasters
    • Socially Oriented Lenders
  • 11. Systemic Challenges F a cing Alternative lenders in the Coffee Sector
    • Intermediaries:
      • Higher interest rates
      • Low $$$ capacity
      • Only pre and short term financing
    • Traders:
      • don’t have lender expertise
      • have limited capital and are non-neutral
      • D on’t have proper infrastructure of managing risk and due diligence
    • Buyers and Roasters:
      • Same as traders with added challenge of smaller size and greater distance from producers (higher risk management costs)
    • Social lenders:
      • Rely on social investment small capital base
      • A dditional transaction costs of international lending
  • 12. The Scale of the Financing Shortfall in Sustainable Coffees
    • Estd. Value of Sustainable Coffee Exports:
    • Estd. Trade Finance Requirement:
    • Estd. Domestic Bank Financing:
    • Estd. Socially Oriented Lender Financing:
    • Estd. Importer / Buyer / Trader Financing:
    • The (Trade) Financing Gap:
    $2.11 billion $1.26 billion $400 million $210 million $200 million $450 million
  • 13. The Financing Gap is Now Affecting All Global Trade
    • The current crisis provides us with the opportunity of raising awareness of the harm that the sustainable trade financing gap is causing to the growth of global sustainable trade.
    “ The credit crunch adds an additional squeeze [to the global recessions reduction in global trade], thanks to an estimated shortfall of $100 billion in trade finance, which lubricates 90% of world trade.” (Economist March 28 th )
  • 14. Agricultural Lending in Honduras
    • Honduras provides an interesting case study of the agricultural sector and the reasons behind the lack of financing for the sector by local banks
    • 39.2% of the country’s labour force are employed in agricultural production, yet only 11% of bank lending is made to the agricultural sector
    • Reluctance to lend rose dramatically following Hurricane Mitch in 1998 and this reluctance has remained
    • Hurricane Mitch brought excessive rainfall, major flooding and extreme winds, which greatly damaged agricultural production.
    • Following the hurricane many agricultural enterprises were unable to repay their bank loans and the government implemented a debt forgiveness program, leaving banks with significant levels of non-performing loans on their balance sheets
    • As a reaction to this high level of agricultural bad debts banks started focussing their lending onto other economic sectors, primarily retail and commercial property and industry
  • 15. Honduran Bank Survey
    • A survey of Honduran banks (2007) identified the following six reasons (in order of prominence) for their reluctance to expand lending into the agricultural sector.
      • Weather Risk / Climate
      • Price Risk (Agricultural Price Volatility)
      • Politics
      • Technical Capacity / Administration
      • Plagues and Disease (affecting crops)
      • Culture of non-repayment
    Source: World Bank CRMG/AHIBA
  • 16. Bank Concerns about Agricultural Lending Source: World Bank CRMG/AHIBA
  • 17. Weather Risk
    • Rainfall (and other weather) variability leads to major differences in production and yields year to year – coffee yields are dependent on rainfall, sunshine and other climate variables
  • 18. Coffee Price Volatility
    • Coffee Prices (international and local) are highly volatile
  • 19. Existing Mechanisms and Tools for Agri-Lending Coffee Coop / SME Warehouse Coffee Transported Warehouse Receipt Bank Credit
  • 20.
    • Benefits:
      • The coffee in the warehouse provides realizable security to the banks, increasing their willingness to lend, even to clients that would normally not meet their “due diligence” standards
      • Provision of lending is related to need – i.e. as volumes of coffee grow lending increases
    • Disadvantages / Limitations:
      • Potentially higher transaction costs for borrowers (fees and storage costs)
      • Banks may offer low % lending against stocks – and/or use a $/lb valuation that is unrealistically low
      • Timing can be problematic with borrowers timing their transactions based on their lending requirements not on optimal market conditions
      • Useful for harvest finance and trade finance, not for pre-harvest / pre-season finance
    Warehouse Receipt Based Lending
  • 21. Contract Based Lending – Socially Oriented Lending 1.order 4.payment 5. Payment (minus loan & interest) Buyer (1) Places order with Producer Org Social Lender (2) Provides credit based on order volume and value Producer (3) Delivers coffee to Buyer Buyer (4) Pays full value to Social lender Social Lender (5) Pays order value minus loan amount and interest to Producer Org
  • 22. Contract Based Lending – Socially Oriented Lending
    • Benefits
      • Security is based on the value of the contract and the relationship between producer, buyer and lender
      • Often amounts of lending are higher per contract due to the sustainable premiums included in the contracts
      • Repayment is simplified as fully payment arrives with lender first
    • Disadvantages / Limitations:
      • Occasionally lenders demand contracts have fixed prices – raising price risk unnecessarily for producers
      • Rates and fees can be relatively high due to high transaction costs
      • Available funding can be limited due to size / scale of socially oriented lenders
      • Requires strong relationship between buyers, producers and lenders – not always possible
      • Lending may not be available for coffee production that is sold outside of certified schemes, even when the producer is certified
  • 23. Existing Mechanisms - Summary
    • The socially oriented lenders exist due to the unwillingness of local banks to provide sufficient lending to producers
    • Warehouse receipts are a mechanism for providing security for banks lending to producer organizations that they arguably don’t fully trust as credible clients
    • Contract based lending is great for producers that have large volumes of sustainable orders but as a result is often focussed on the strongest (not weakest) of sustainable producer groups
    • Both forms of lending may influence the trading behaviour of producer organisations resulting in sub-optimal trading patterns based on the need for financing rather than the maximization of income
    • Neither fully addresses the underlying problems that are restricting sufficient domestic credit being accessed by producers
    • Neither of the existing primary mechanisms provides opportunities for longer-term lending for infrastructural investment
  • 24. Overcoming the Financing Gap
    • Existing Initiatives for addressing the financing gap include:
      • Limited Term Lending based on Long Term Contracts
      • Guarantee Services to Encourage Local Banks to Lend long term
      • Pre-Finance built into Sustainability Programs (fairtrade contract)
      • Expansion on leasing services in developing countries
  • 25. Term Lending based on Long Term Contracts
    • Some socially oriented lenders will provide long term loans for infrastructural investment
    • Infrastructure funded includes:
      • Washing stations
      • Warehouses
      • Trucks
      • Investment in converting production methods to meet sustainability requirements and improve quality
    • Requires long term relationship and contracts with a buyer, who commits to pay for their coffee purchases via the socially oriented lender
    • Main issue: limited scale and limited number of loans
  • 26. Guarantee Services
    • The Rabobank Sustainable Agricultural Guarantee Fund (SAGF) provides a guarantee for local banks providing new finance to sustainable coffee producer organizations
    • The fund charges an annual fee which is met by the producer
    • The fund provides local banks with protection against default by the borrower
    • The guarantee level diminishes each year (over 3 to 4 years)
    • By the end of the fourth year the bank will know the client well and be able to continue lending
    • The guarantee is based on coffee contracts and hence is suitable for trade finance rather than long term investment
    • The size of the fund limits the number of loans possible
  • 27. Pre-Finance Built into Sustainable Programs
    • The Fairtrade Coffee Standard suggests that fairtrade buyers provide 60% pre-finance on signing of the contract
    • This financing has been calculated to be the minimum amount of finance that a coffee cooperative trading business requires to adequately fulfil the orders
    • The finance can be provided by the importer / buyer or provided via a lending institution
    • However the requirement is voluntary and not all fairtrade buyers will provide finance
    • As fairtrade penetration grows and more commercial entities start purchasing fairtrade coffee the provision of pre-finance may reduce
  • 28. Overcoming The Financing Gap
    • What else can be done to assist coffee producer organizations in overcoming the financing gap?
      • Expansion of guarantee services
      • Improved domestic bank education in the coffee industry – better risk assessment
      • Improved risk management for coffee producers– both price and weather
      • Improved financial management training of sustainable coffee producer groups
      • More support for pre-financing by the sustainable coffee programs and their buyers
  • 29. The Need to Get Banks Lending
    • Ultimately sufficient financing for coffee producers is dependent upon local banks, in their countries, providing sufficient lending services
    • This requires all in the coffee industry to start assisting their producers in improving their attractiveness as clients to the banks, by improving their managerial skills and risk management practices and processes
    • This requires banks to start better understanding the coffee sector and lending to well-managed coffee producers
    • This requires the socially oriented lenders to focus more on educating local banks in how to lend successfully to coffee sector clients – moving from talk to action
  • 30. Honduran Example
    • Work is being undertaken that directly targets the underlying causes of insufficient bank lending to agriculture
    Barrier to Lending Activity Being Undertaken Weather Risk Development of Index Based Weather Insurance Price Risk Risk Management Training (Banks and Agri SME’s) Political / Regulatory Identification of Regulatory Barriers Agri SME Mngt. Training and Capacity Development Culture – Non-Repyt. Reducing Agri Gtee’s and Marketing Campaign Agri Knowledge Training of Banks in Agri Lending
  • 31. Risk Management Training for SME’s
    • WB online training course enables a coffee sector SME to be:
      • introduced to price risk
      • develop the systems and processes required to identify and monitor risk
      • learn about the means for controlling risk (financial instruments and through physical contracts)
      • receive direction in establishing price risk management programs into their businesses
    • CRMG is currently looking for institutions who would be interested in rolling out the course to coffee sector SME’s
    • CRMG will be demonstrating the online training course for interested institutions on Sunday at 10:30 – 11:30 am room A406.
  • 32. What FAST is Doing
    • Leading collaborative projects involving coffee supply chain participants that directly improve access to finance, including:
      • Financial Literacy Training Toolbox for Sustainable Commodity Producer Organizations
      • Expanding Access to Guarantee Services for Sustainable Producer Organizations
      • Assisting Socially Oriented Lenders in Raising Additional Capital and Expanding their Lending e.g. Social Impact Assessment
      • Assisting Producers with Finding both Local and International Lenders through the Online Lending Marketplace
      • Advocating with Development Agencies and Technical Support Groups to Increase their Focus on Provision of Finance
    • The coffee financing gap is a global problem that requires collaborative multi-stakeholder solution.
  • 33. What Roasters Can Do
    • A few initial suggestions:
      • Work alongside socially oriented lenders to raise their profile with coffee drinkers who are potential investors
      • Offer hedging services to SMEs
      • Work with social lenders and FAST directly on producer’s behalf
      • Work with NGOs and development agencies to secure training and education for their producers so that they can become better
      • Consider providing financing (or guaranteeing financing) for their smaller producers who are struggling to gain access to necessary funds
      • Advocate with national agencies and sustainable certification agencies to put more focus into raising the availability of finance for sustainable producer organizations
      • Any others?
  • 34. A suggested practical step……..
    • Establishment of a new consumer-driven guarantee fund for smaller sustainable coffee producers
    • Guarantee fund created through the financial investments of North American and European roasters, consumers and other stakeholders
    • Roasters invest in and publicize the fund to assist the growth of new sustainable and specialty coffee producer groups
    • Guarantees used to secure lending for trade finance for new entrants into the sustainable coffee sector
  • 35. Consumer Driven Guarantee Fund Coffee Roasters Consumers Investors FAST Guarantee Service SME Lenders (including Lending Buyers) Coffee Buyers / Importers Gtee Fee Gtee Payment Order Coffee Trade Finance Outstanding payment $ investment
  • 36. Consumer Driven Guarantee Fund
    • Benefits for Investors (Roasters, Consumers and Others)
      • Preferential access to apply guarantees preferred producers (based on level of investment)
      • Guarantee facility helps ensure secure, quality and sustainable supply
      • Secure investment (but low or no returns)
  • 37. Consumer Driven Guarantee Fund
    • Prerequisites of the Guarantee Fund:
    • Sufficient interest of the roasters (and consumers) in investing in and promoting the fund
    • Sufficient willingness to invest in the fund without a financial return – only a social return
    • Low cost operations to minimize interest charges to SME beneficiaries
    • Marketable publicity for investors
  • 38.
    • For more info on financing options at origin, please visit
    • T hank You!