Promoting food security through innovative rural finance and risk management tools
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Access to a broad range of financial services influences food security mainly through enabling the availability and access dimensions. Financial services enable poor rural households to manage their diverse affairs, agricultural and non-agricultural. This has shown to stabilize the household income and facilitate all investment and consumption activities, which improves food security today and builds resilience to future idiosyncratic shocks. ©FAO
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Promoting food security through innovative rural finance and risk management tools
- 1. www.fao.org/ag/ags Promoting food security through innovative rural finance and risk management tools Calvin Miller Senior Officer and Group Leader, AGS Emilio Hernandez Agricultural Finance Officer, AGS 15 July 2015 Rome, FAO HQ
- 2. 1. Results from FAO-AGS global agenda: A framework to assess trends in rural financial markets in the developing world 2. Lessons from the field: rising innovation in agricultural finance and risk management: an inclusive process? 3. Key takeaways 4. Discussant views 5. Questions and answers Content
- 4. Source: Author compilation using WASDE, USDA data World total consumption and supply of grains and oils seeds (in trillions of MT) An analytical framework: The active search of the agricultural sector to satisfy a growing demand 0 500 1000 1500 2000 2500 3000 3500 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 Supply Consumption
- 5. The increase in supply has been similar across the world Total production of different commodities in Asia, LAC and Africa (in thousands of MT) Source: FAOSTAT 0 50000 100000 150000 200000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Asia Latin America Africa 0 50000 100000 150000 200000 250000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Cereals Fruits and vegetables Meats 0 200000 400000 600000 800000 1000000 1200000 1400000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
- 6. Some agricultural products are increasing in value more than others Total export value of different commodities in Asia, LAC and Africa (in millions of USD) Source: FAOSTAT Asia Latin America Africa 0 10000 20000 30000 40000 50000 60000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 10000 20000 30000 40000 50000 60000 70000 80000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0 2000 4000 6000 8000 10000 12000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Cereals Fruits and vegetables Meats
- 7. Rise in supply strongly determined by a rise in aggregate productivity levels globally Average yields for different commodities in Asia, LAC and Africa (in thousands of Hg/Ha) Source: FAOSTAT Asia Latin America Africa Cereals Fruits and vegetables 0 50 100 150 200 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 50 100 150 200 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 20 40 60 80 100 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
- 8. Source: Fuglie, K.O. 2012, “Productivity Growth and Technology Capital in the Global Agricultural Economy”, in Fuglie, K.O., S.L. Wang, and V.E. Ball (eds.) (2012), Productivity Growth in Agriculture: An International Perspective, CAB International, Oxfordshire, UK. Productivity gains have been the main source of output growth Sources of agricultural output growth rate globally
- 9. A critical determinant of productivity has been long- term investment in agriculture Agricultural capital stock in Asia, LAC and Africa (in million of 2005 USD) Source: FAOSTAT Asia Latin America and the Caribbean Africa 680000 700000 720000 740000 760000 780000 800000 820000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1700000 1750000 1800000 1850000 1900000 1950000 2000000 2050000 2100000 2150000 2200000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 0 100000 200000 300000 400000 500000 600000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
- 10. Dominance of domestic private investments in total agricultural capital stock Components of agriculture investment for a sample of 31 developing countries Source: ODI, 2012
- 11. Who has financed the rise in agricultural investments and how? With important exceptions, the formal financial sector has played a very limited role in the provision of financial services to agriculture in developing countries. Mounting evidence from global market analyses suggests informal sources of finance mainly from agricultural value chain (AVC) actors (i.e. wholesalers, processors, traders, warehouse operators, producer associations, etc.) have enabled a significant share of investments in agriculture. These agents who are non-specialized financial service providers, are able to respond to the finance gap thanks to unique informational advantages. From their informal status, they have enabled a ‘quiet revolution’ in agribusiness operations that has effectively responded to the expansion in global demand for agricultural products. References: Reardon et al., 2012; Miller and Jones, 2010; Mildler 2008; Gonzalez-Vega, et al. 2006
- 12. Risk management in rural and agricultural finance Agri-business segmentation Social and commercial insurances Traditional farming sector Emerging farming sector Commercial farming sector Agricultural risk assessment Capacity and competitiveness assessment Risk identification and quantification Sensitivity analysis Agricultural risk financing Risk layering Index insurance Insurance pool Technology and infrastructure (e.g. irrigation and warehouses) Institutional capacity building Data management Organization and governance Regulatory/supervisory framework Information and education Technical expertise Savings and equity formation Agricultural risk management
- 13. 0 2 4 6 8 10 12 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 AverageAgricultureShareofTotalCredit,% Africa Asia & Pacific Europe Latin America & Caribbean Other Developed World Agriculture share of credit by region, 1991-2013 Other Developed refers to Australia, New Zealand, Japan and North America Source: FAO, 2015 The investment trends contrast with a declining share of formal credit to agriculture
- 14. The lag of formal financial services to agriculture in LAC from the firm’s perspective Ag. credit as a share of total credit vs. ag. GDP as a share of total GDP for select countries in Latin America during 2010 Source: FAO, 2011
- 15. The lag of formal financial services to agriculture in Asia from the firm’s perspective Ag. credit as a share of total credit vs. ag. GDP as a share of total GDP for select countries in Asia during 2010 Source: FAO and WDI, World Bank 0 5 10 15 20 25 30 35 40 Cambodia Pakistan Vanuatu Bangladesh Bhutan Indonesia Sri Lanka Thailand Philippines Samoa Maldives Korea,… Ag credit as share of total credit (%) Ag GDP as share of total GDP (%)
- 16. The lag of formal financial services to agriculture in Africa from the firm’s perspective Ag. credit as a share of total credit vs. ag. GDP as a share of total GDP for select countries in Africa during 2010 Source: FAO and WDI, World Bank 0 10 20 30 40 50 Ethiopia Liberia Burundi Rwanda Malawi Ghana Tanzania Uganda Kenya Sudan Nigeria Zambia Namibia Botswana Seychelles Ag credit as a share of total credit (%) Ag GDP as a share of total GDP (%)
- 17. The prominent role of informal financial services in rural areas of Sub-Saharan Africa Total vs. formal use of saving and credit services in Sub-Saharan Africa region in 2011 (% rural people) Source: Compiled by author using FINDEX, 2012 0 5 10 15 20 25 30 35 40 45 50 Saved any money in the past year, rural Saved at a financial institution in the past year, rural Loan in the past year, rural Loan from a financial institution in the past year, rural %ofruralpopulation Informal savings market Informal credit market
- 18. Source: Compiled by author using FINDEX, 2012 Informal credit market 0 5 10 15 20 25 30 35 Saved any money in the past year, rural Saved at a financial institution in the past year, rural Loan in the past year, rural Loan from a financial institution in the past year, rural %ruralpopulation Informal savings market The prominent role of informal financial services in rural areas in East Asia and Pacific and South East Asia Total vs. formal use of saving and credit services in the EAP and South Asia region in 2011 (% rural people)
- 19. The prominent role of informal financial services in rural areas in Latin America Total vs. formal use of saving and credit services in the LAC (developing only) region in 2011 (% rural people) Source: Compiled by author using FINDEX, 2012 Informal savings market Informal credit market
- 20. Limitations of informal finance and opportunities for the formal financial sector to serve rural areas and agriculture The key limitation of the current scenario is that outreach is limited and the variety, adequacy and cost of financial services from these non-specialized sources are not optimal for clients. The lack of financial specialization comes at the cost of exclusion thus representing a sub-optimal equilibrium. Motivation for field research: The macro evidence suggests an environment of constant innovation from a number of agricultural value chains actors, financial institutions and government to deliver rural and agricultural financial services by merging specialized knowledge from different actors to deal with complex climatic, production, marketing, and financial risks References: Reardon et al., 2012; USAID, 2011; Gonzalez-Vega, et al. 2006
- 21. Producing Storing Production Price Operational Financing Institutional Infrastructure Quality control Technology Logistics Seasonal glut Processing Marketing Infrastructure Storage Price Product loss Govt. policy Technology Product supply Human resource Product quality Govt. policy Input Supply Quality Availability Infrastructur e Knowledge Financing These informal finance actors are able to assess risks that go beyond the individual client and include all aspects in the agricultural value chain From supply-driven “how we lend” to client driven “how can we structure finance to address client needs and risks”
- 22. Parafinanciera Service Provider Bank/ Non-bank Financial Institution Individual Producers Family Groups Civil Society 90 days 8 days Financial Institution - Parafinanciera Line of credit Parafinanciera - Producer Individual credit Producer Organizations FIRA parafinanciera credit delivery through VC intermediaries Mexico – Innovations in financing smallholders
- 23. FIRA Mexico Parafinanciera agribusiness services (credit, aggregation, technology, inputs, purchases and/or other related commercial services) Agri- entrepreneurs Services company Distributors Agro-industries Distributors Input suppliers Producers Types of parafinanciera agribusiness service providers
- 24. FIRA Mexico Summary of the parafinanciera system
- 25. BRAC, Bangladesh - BRAC Bank BRAC Cold Storage Potato farmers Potato seed dealers Wholesaler Buyers/Farmers Home Consumption & Seeds Potato production Sales by Farmers Seeds & inputs Financing Financing Financing Financing Loan Repayments Payment Payment (Service Charge) Seed Payment Potato production, cold storage, finance and marketing
- 26. The ECX WHR Financing -lending Ethiopian Commodity Exchange – managing market risks T+1 60 (30) days
- 27. A blended approach to AgVCF inclusion Companies Farmers / groups BDS providers MFIs Commercial Banks Terrafina Local NGO Rabo Advisory Services FAO & Int NGOs Rabobank (guarantee) Rabobank (loans) Adapted from Harms Ethiopian ComEx and WHR
- 28. Field level monitoring Assistance to farmers Loan/lease disbursement Selection of farmers Value additions: Guidance Market linkages Problem identification Intervention Association Farmer Bank/ Mobile Banking United Finance Limited – lending, leasing, factoring UFL, Bangladesh
- 29. Bolivia –Innovations led by specialized financial institutions: the case of CIDRE Long term investment credit Loan for irrigation Payment for produce Irrigation services Credit payment Sale of production TA in irrigation management and governance Source: Derived from CIDRE information Irrigation management association CIDRE Traders of agricultural produce for local markets Member producers in communities Suppliers of irrigation equipment
- 30. Key enablers of financial products offered CIDRE: Focus on long-term credit products for agricultural irrigation Savvy search for long term funding for the FI Investment in R&D for product design based on modern irrigation techniques and agricultural value chain dynamics Critical reliance on a regulatory framework allowing for experimentation in rural finance services Ability to identify alternative collateral requirements: irrigation shares
- 31. Key limitations of models used CIDRE: Large investment in R&D of the product to assess the client and all commercial actors involved, which needed support from international development agencies with shared vision A policy reform being put in place creates uncertainty as interest rates, lending methodology and portfolio structure will be centrally set
- 32. CIDRE results Fiscal year 2008 2009 2010 2011 2012 2013 Assets (millions of USD) 13.4 15.9 21.1 31.2 38.0 51.9 Number of active borrowers 4,198.0 2,836.0 4,194.0 5,156.0 7,180.0 9,344.0 % of rural borrowers 93.1 76.9 64.0 59.6 58.4 58.3 Gross Loan Portfolio (millions of USD) 10.2 11.5 17.0 25.7 34.1 47.5 % PAR (30+ days) - - 2.13 1.91 1.68 0.0149 % gross loan portfolio, rural 81.6 71.9 5.0 52.6 55.0 54.6 Average outstanding balance 2,425.3 4,051.4 4,046.7 4,454.6 4,745.9 5,079.0 Operational self sufficiency 1.1 1.4 1.1 1.2 1.1 1.1
- 33. CADENA is a social safety net programme specific to support poor smallholder farmers in case of a catastrophic event. For this, the State Governments buy catastrophic agricultural insurance from insurance companies to cover vulnerable areas. This created a market for catastrophic insurance that did not exist and sparked the development of insurance products unique for each region in Mexico. Mexico – Innovations in agricultural insurance promoted by public interventions: the case of CADENA Federal Government State Government Private insurance companies Public insurance company Eligible farmers in insured areas 80-90% of premium 10-20% of premium Indemnity for area insuredCash transfers in case of event Source: FAO, 2014
- 34. Key enablers for the agricultural insurance product offered The budget for the program became predictable and fiscally manageable as premiums are fixed ex-ante. A national market was created for catastrophic agricultural insurance products (index and multi-peril), inclusive of high-risk and marginalized States, that did not exist before and that is uncommon globally given the challenge of insuring systemic risks. Public and private insurance companies compete for that market and have the incentive to invest in the development of insurance products tailored to the risk-vulnerability ratio of each Mexican State. This enabled the expansion of the area covered per Peso spent, relative to an ex-post approach The delivery of index insurance products are meant to insure a portfolio, not an individual farmer. The prevalence of basis risk in index insurance products is spread in a wide area and it is borne by the State so it is easier to tolerate
- 35. CADENA results CADENA has facilitated a wide expansion of agricultural insurance covering 12 mo Ha in 2013 representing 65% of total area under production and covers 98% of the country’s municipalities. This represents a safety net for 3.7 mo smallholders, equivalent to 82% of the estimated smallholder population. 0 500 1000 1500 2000 2500 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 CADENA: Number and Percentage of Municipalities Insured NUMBER OF MUNICIPALITIES INSURED % municipalities insured Source: FAO, 2014 Source: Data from SAGARPA Private and public share of the catastrophic insurance market Coverage of CADENA at the municipality level
- 36. Key limitations of model used Cost-efficiency depends greatly on State Governments building specialized units to determine most appropriate coverage needs, but large federal subsidies are a disincentive to do this. Relying only on coverage advice from insurance companies has not resulted in appropriate coverage for some States, resulting in additional public expenditures Availability and sustainability of public resources to fund the programme (currently a premium market of over USD 190 m a year) Pre-existing capacity of public agencies to collect and analyze relevant climatic and production time series data needs to exist in order to facilitate the development of new insurance products in the short term
- 37. Key takeaways There is a favorable global agribusiness environment that motivates innovation mainly among private domestic agricultural actors that are heterogeneous and less organized, who are not well known Agricultural financing innovations in business models, financial instruments and use of technology are able to include poorer smallholder families The level of inclusion that is achievable will depend strongly on pre-existing conditions related to the enabling environment and level of local capacities Depending on this context, different private or public leaders in the design of finance arrangements emerge, all of them forming partnerships between them to merge their unique knowledge on the various types of risks to manage Barriers to making these partnerships systematic are the key constraint for mainstreaming innovations. These barriers relate to the difficulty of establishing coordination between actors that operate in very different professional networks
- 38. Thank you for your attention! www.fao.org/ag/ags www.ruralfinanceandinvestment.org