Day 2, Session 1, Part 1: Unlocking Agricultural Growth through Technology and Financial Security


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Day 2, Session 1, Part 1 of the Nigeria Strategy Support Program's 2012 Research Conference

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  • The total irrigated area is still well below the potential. Private irrigation, including unequipped Fadama is the major driving force. It will also be the key for the remaining 1.2 million ha of irrigation potentialEquipped public: RBDA (Federal Government), state govEquipped private: Equipped Fadama – 55,000ha, Private equipped (farmer-owned small-scale schemes) – 128,000 ha
  • Salient feature of the studyIntegrated use of state-of-the-art analysis/modeling tools (GIS+DREAM+SWAT)Capable of providing estimates of economic return, identifying high-potential investment area and assessingAMWS work by GATES FoundationetcOur work builds on these previous workExternalityIrrigation water use within each basinPartial equilibrium (?)Market-shed
  • Characteristics of rice producers vary across Nigeria, because of diverse agro-ecological and socio-economic environment they reside. In order to grow rice production sector in competitive manner in the short term, it is important to identify the types of rice producers who are currently practicing intensive production as they are likely to respond more sharply to improved production environment (price, infrastructure, processing facilities etc).We conduct cluster analysis to classify rice producers into various groups based on their characteristics (production behaviors) and access to various resources as summarized in the table.
  • Sorghum irrigation in the NorthRice / vegetable irrigation has some effect, but still limited – tractorization needed in the SouthAmong type 6, animal traction (+ tractor) seems to be substituting irrigation (?) in the North – in a sense that the characteristics of farm households are quite similar between them
  • Day 2, Session 1, Part 1: Unlocking Agricultural Growth through Technology and Financial Security

    1. 1. Understanding diversity in irrigation potential within Nigeria Hiroyuki Takeshima, Hua Xia, Liang You, Hyacinth Edeh (IFPRI) NSSP National Conference 2012: ―Informing Nigeria’s Agricultural Transformation Agenda with Policy Analysis and Research Evidence‖ Abuja, Nigeria – November 13-14, 2012
    2. 2. Research questions and methodologiesResearch questions• How much irrigation potentials are there in Nigeria?• How does such potential vary across regions?• Which type of irrigation system is transforming farm households in Nigeria?Methodologies• Irrigation potential – spatial diversity• Farm household and irrigator typologiesINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    3. 3. Irrigation in Nigeria – current picture Total cultivated area Irrigated million 32.1 ha Not irrigated 0.9 Public (equipped) 0.2 0.67 Private (equipped) million ha 0.03 Unequipped FadamaSource: FAO (2012) 0.9INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    5. 5. Irrigation potentials• How accurate can they be? – What might affect the exact potentials in different locations? • Location • Common resources / externality – water use within each basin • Imperfect market integration• Maximum potential from 4 types of technologies • diesel pumps • treadle pumps • communal river diversion • small reservoirsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    6. 6. Analytical framework A: Ex-ante Spatial Analysis Spatial disaggregation of agricultural development domains and spillover potential B: Biophysical Modeling (SWAT) C: Economic Modeling (DREAM) Hydrology Plant growth Predict the crop price effect from smallholder irrigations D: Benefit-cost Analysis Crop mix optimization, return to irrigation investment, and environmental impacts (e.g. water use increase). Source: Xie et al. (2012)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    7. 7. Key spatial unit of analyses: Market shed and Hydrological Basin Market shed River BasinSource: Authors (Hua Xie & Liang You)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    8. 8. Dry season irrigation potential Total irrigation potential area = 3.165 million ha Average potential = 1,000 USD / ha Net revenue Area (1000 Cumulative (USD/ha, year) ha) share (%) <500 57 2 500-1000 2,081 68 1000-2000 793 93 USD / ha 2000-3000 99 96 High : 8800 3000-4000 76 98 Low : 0 4000-5000 34 99 >5000 25 100 Source: Simulation by Hua & Liang Total 3,165INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    10. 10. Research questionResearch question• Does irrigation transform farm households?• Which irrigation types are more likely to have transformed farm households?Objective• Construct key hypothesesFarm level analyses – typology• Farm household level diversity• Key farm household characteristics needed for using irrigation – despite some potential, why only certain types of farm households use irrigation?• Key farm behavioral characteristicsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    11. 11. Methodology -• Cluster analysis• Living Standard Measurement Survey – Integrated Survey on Agriculture, 2010 (World Bank, National Bureau of Statistics in Nigeria)• Approximately 2000 farm households after dropping outliers (1100 for the North, 900 for the South)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    12. 12. Producer typologyTypes of variables used Behaviors Resources-Crop patterns -- Rainfall variation-Input use intensity (fertilizer, agro- -- Soil typeschemicals, seed purchase) -- Farming systems (North / South)-Production scale (farm size, sales) -- Proximity to rivers / dams-Irrigation -- Population density / access to town-Mechanization (tractor / animal -- Household characteristicstraction) -- Assets- Market orientation -- Non-farm income earning activities -- Labor cost (real wage)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 12
    13. 13. Variables used for cluster analysisCategories VariablesAgro-ecological Agroecological zones – FAO farming system (LGA average)(Natural resources) Soil type (LGA average) Historical rainfall variation (LGA average) Distance to major rivers (LGA average)Market access Total population density in the region where the household is located Distance to towns of 20 thousand inhabitantsResources (Human Household sizeresources) Level of education and literacy of household head Gender of household headResources (Assets) Total value of assets not including land Size of livestock equivalent stock or value of animal stock ownedLabor resource Real LGA median wage of land clearing / preparation (– ratio to LGA maize price)Land tenure Whether own any of the farm plotsProduction scale Total rainfed areaProduction scale Whether using irrigation or notunder irrigation Total irrigated area (continue to next slides)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    14. 14. Variables used for cluster analysisCategories VariablesProduction intensity Overall input intensity measured as the total value of inputs per hectare of farm area or cultivated area Fertilizer - Seed (value of purchased seed only), pesticide, herbicide Animal traction (Number of days per ha) Whether using tractor or not Tractor (Number of tractors used per ha) Whether hired labor for harvesting Whether the household took out any loan / credit (including non- agricultural credit) from either formal or informal sourcesIncome, non-farm Total expenditure per personactivities Whether having non-farm income Remittance income last month – other types of income (savings interest, rental of property etc)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    15. 15. Separate by North and SouthPastoralAgro-pastoral –millet / sorghumCereal – root cropmixed NorthRoot crop systemTree crop South systemCoastal artisanalFigure 1. Farming systems in NigeriaSource: Dixon et al. (2001) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    16. 16. Agro-ecological / Socio-economic factors ! ! ! ! !! ! ! !! !! !! ! ! ! ! ! ! ! ! ! ! ! !! ! ! !! ! ! ! ! ! ! !! ! ! ! ! ! !! !! ! ! ! ! ! ! !! ! ! !! ! ! ! ! !! ! ! !Major waterways / dams in Time of travel to nearest Nigeria town with population of 20kINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    17. 17. Types of farm households using irrigation in Nigeria - North Category Maize based system with Coarse grains / Rice / sorghum, legumes legume vegetable % share among northern farmers 15 4 14 35 30 3 Real wage (daily wage/maize 11 24 11 8 10 8 price) Fertilizer (Naira/ha) 4500 0 8400 4000 0 8200 Chemicals (USD/ha) 2200 3350 3900 1800 430 8600 Farm size 0.7 1.0 0.7 0.7 0.9 0.4 % using tractor 5 10 15 4 3 20 % using irrigation 10 0 1 4 4 63 % with non-farm income source 51 26 67 69 47 73 Household nonfood expenditure 36 34 57 38 30 43 (annual/pc) Household assets (USD) 198 204 510 295 149 271 Distance to the nearest river .017 .017 .017 .017 .017 .017 Distance to the nearest dam (km) 58 48 40 43 82 80 % selling their harvest 62 76 65 60 57 73 % selling or giving as gift 89 88 84 85 80 93 Source: Author’s calculations based on LSMS-ISA.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    18. 18. Types of farm households using irrigation in Nigeria - South Category Cassava Cassava, yam, grains Cocoa Rice system % share among northern farmers 30 41 9 9 8 4 Real wage (daily wage/maize 10 10 10 11 11 17 price) Fertilizer (Naira/ha) 0 0 0 0 0 9000 Chemicals (USD/ha) 0 300 1420 2800 5000 15000 Farm size 0.2 0.2 0.1 1.3 1.3 2.6 % using tractor 0 0 0 0 1 100 % using irrigation 0 1 0 3 9 29 % with non-farm income source 32 54 65 29 82 80 Household nonfood expenditure 49 78 109 41 108 111 (annual/pc) Household assets (USD) 88 308 310 249 253 671 Distance to the nearest river .017 .016 .017 .016 .017 .017 Distance to the nearest dam (km) 140 130 180 64 38 43 % selling their harvest 70 68 72 87 97 90 % selling or giving as gift 74 74 81 91 97 93 Source: Author’s calculations based on LSMS-ISA.INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    19. 19. Major types of irrigators in Nigeria Rice irrigators Vegetable Coarse grains / irrigators legumes irrigators Small-scale Tractorized larger Dry season Rainy season scale Supplementary• Coarse grains / legumes irrigation – mostly supplementary, little change in inputs intensityINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    20. 20. Types of farm households using irrigation in Nigeria• Descriptions of key farm households using irrigation • North • Small-scale rice / vegetable growers • Rainy season supplementary irrigation of coarse grains / legumes • Some substitutions of tractors vs (irrigation + animal traction) • South • Larger scale rice irrigators producing rainfed maize and cassava • Their production behaviors are distinctive, but unclear whether it is because of irrigation. More likely due to mechanization • Effects of irrigation – some but may not be substantialINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    21. 21. Concluding hypotheses• Irrigation potentials vary across locations. Support for irrigation needs to focus on areas with high potentials, instead of medium to low potentials.• Irrigation for rice / vegetables can be one of the options to transform farm households in Nigeria• Irrigation of coarse grains / legumes • mostly supplementary • Limited effect in changing inputs intensity, transforming farm households• Does irrigation really transform agriculture ? How ?INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    22. 22. UDP Technology in Nigeria Prof. B. Tarfa & Brian Kiger NSSP National Conference 2012: “Informing Nigeria’s Agricultural Transformation Agenda with policy analysis and research evidence” Abuja, Nigeria – November 13-14, 2012INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    23. 23. UDP Technology… Agenda What is UDP technology? What are USG? Benefits Challenges Building Demand Enabling Supply Moving Forward
    24. 24. What is UDP technology?Urea Deep Placement (UDP) is the practiceof placing briquetted urea 5-7cm deep inpuddled transplanted rice fields, at spacingof 40 cms. 40 cm
    25. 25. What are USGs? Urea Super Granules (USGs) are applied once a growing season— a week after transplanting rice seedlings. One USG is applied geometrically between 4 rice stands. They are oval compacted pellets produced by briquetting granular urea using briquetting machines to 1.8 gram or 2.7 grams. Notore Chemical industries is currently producing and marketing 2.7g in 10 kg bags. USG releases N slowly and is placed out of the reach of weeds’ roots.
    26. 26. The briquette productUrea Briquettes NPK Briquettes Urea + Diammonium phosphate + Muriate of Potash
    27. 27. How do farmers apply UDP technology?
    28. 28. Comparison of N Balance in Rice Fields Urea Split Application Urea Deep Placement Unaccounted 4% In Grain In Soil 23% 31% In Grain 42%Unaccounted 35% In Straw 9% In Soil 33% In Straw 23%
    29. 29. Comparison of Urea Applications2 Out of 3 Bags of Urea Lost using Split Application 1 Out of 3 Bags of Urea Lost using USG
    30. 30. What are the benefits of UDPtechnology? Increases efficiency of N use in rice by placing it in the soil—reducing N loss through gaseous emissions and/or floodwater run-off. In broadcast application of urea, 40% of N fertilizers volatizes into the atmosphere. Reduces weed competition as fertilizer is placed near rice plants’ roots. Nitrogen use efficiency under irrigated rice increases by 40%. Irrigated rice crop yields increase up to 50% (Niger State 2012).
    31. 31. UDP Benefits Rice Sector StakeholdersFor farmers: For the environment:• Decrease in production cost • Reduces Nitrogen• Increase in yield runoff and volatization• Increase in profit For entrepreneurs: • New area of business & profit • Opportunity to contribute to national development For the national economy: • Increase in rural employment opportunities • Increase in rice production
    32. 32. What are the challenges of UDPtechnology adoption in Nigeria? Limited Supply and Demand of USG UDP Best Practices are not well-known to rice farmers Many farmers complain that USG application is labor-intensive Farmers incorrectly apply USGs to other crops and/or do not practice rice cultivation and field management best practices, limiting USG’s yield effect.
    33. 33. In 2012…The FMARD (via NPFS), Notore and MARKETSII began collaborating on expanding the Supplyand Demand of Urea Super Granules intargeted Nigerian rice producing regions.
    34. 34. Building Demand:2012 UDP Technology Transfer Centers (TTCs) Kebbi 2012 Kebbi 2012
    35. 35. 2012 Dry Season Yields with Transplanted Rice UDP (Mt/Ha)* Farmers Practice (Mt/Ha)* Difference (Mt/Ha) 7.74 8.00 7.07 6.79 6.68 7.00 5.71 6.00Yields (Mt/Ha) 5.00 4.18 4.38 4.00 3.263.42 2.61 2.69 3.00 2.03 2.00 1.00 - Gombe Kebbi Niger Average
    36. 36. Cost-Benefit Analysis from 2012 UDPDemonstrations Farmers Practice UDP 447,051 450,000 400,000 350,000 311,813 299,150 300,000 267,847 250,000 Naira 200,000 147,900 150,000 100,000 50,000 - (50,000) Production Costs Harvest Revenue Overall Profit (43,966)
    37. 37. In 2012, MARKETS II facilitated… • 3 Technology Transfer Centers (TTCs) managed by rice farmers and state ADP officers; • Trained more than 2,000 farmers (including Notore staff) on UDP technology best practices in 2012; • Developed training curriculums to improve dissemination of USG benefits to farmers for coming seasons; • Partnered with Notore and the FMARD (via NPFS) on supplying USG to pilot rice growing markets.
    38. 38. Building Supply: Notore’s CommercialProduction of USG in 2012
    39. 39. Distribution (by state) of USG Sold in 2012 30 25 USG Sold (MT) 20 15 10 5 0 2012 Pilot States
    40. 40. In 2012, Notore… Developed a production line for briquetting urea, packaging and shipping it to select retailers; Developed supply channels of USG to targeted rice grower regions in Nigeria; Sold 75 Mt of USG in 10kg bags (7,500 unit sales); Developed agro dealer demonstration plots after attending the MARKETS II trainings at TTCs.
    41. 41. Moving Forward Work with old and new partners to expand USG supply while continuing to develop and expand market demand Explore USG application rates on other crops (soya, maize, tomatoes, sorghum) Explore briquetting NPK options Develop a mechanized applicator to facilitate labor of USG application
    42. 42. Thank you
    43. 43. The role of information and social networks in technology adoption: A case study of Urea Deep Placement technology Oluyemisi Kuku (IFPRI), Saweda Liverpool-Tasie (MSU), Akeem Ajibola (IFPRI) NSSP National Conference 2012: “Informing Nigeria’s Agricultural Transformation Agenda with policy analysis and research evidence” Abuja, Nigeria – November 13-14, 2012INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
    44. 44. Presentation Outline Introduction Factors that affect technology adoption Social Networks and social learning UDP Farmer field day visits • Farmer’s perceptions • Village promoters Lessons learned Future steps
    45. 45. Introduction The agricultural sector is crucial to the Nigerian economy • Largest employer • Food self sufficiency Agricultural productivity is low – working in agricultural sector is hard and unrewarding • Agronomic factors (e.g seed quality) • Farm management  poor production technologies  outdated farming methods Many technological innovations that can dramatically increase productivity • How to encourage adoption?
    46. 46. Adoption Decisions Most adoption studies in Nigeria use characteristics of the farm as well as demographic characteristics of farm households to predict adoption. Information as a factor growing in importance • often proxied by some measure of farmer contact with extension agents, or membership of farmer’s organization of some sort • farmers characterized as passive recipients of information from change agents e.g extension officers or sales agents representing producers These measures not robust enough to capture important information about adoption decisions
    47. 47. Social Networks and social Learning Social networks: systemic setups characterized by agents that develop, diffuse and use innovations, their interactions, and structures and rules Farmers can learn by doing or learn from others (Bandiera and Rasul, 2006). In the “learning from others” model: • learn through collective experimentation, discussion and persuasion • direct observation of neighbors’ experiments
    48. 48. Social Networks and social Learning While farmers learn from others, they do not learn from all farmers. Networks which involve more purposeful interactions (like friends) are more likely than mere spatial links (like neighbors who may or may not be friends) to appropriately disseminate information Not much information on the process of social learning in Nigeria : • Relevant studies treat farmers as passive recipients of information
    49. 49. Urea Deep Placement technology placement of 1-3 grams of urea supergranules or briquettes at a 7-10 centimeters (cm) soil depth shortly after the paddy is transplanted. Importance of irrigation
    50. 50. Urea Deep Placement technology Benefits • Lower costs:  Reduction in fertilizer costs per hectare due to only one application of urea  Reduction in weeding costs (weed only once) • Decrease in Nitrogen losses (40%) • Increase in yield (25-30 %)
    51. 51. Exploratory field work Farmer field days in Gombe and Niger Notore, USAID markets, IFDC Qualitative interviews with • About 10 farmers in Niger and Gombe • The main agrodealer in Niger • Several Notore officials • Relevant ADP extension agents
    52. 52. Exploratory field workFarmer’s practice UDP technology
    53. 53. Benefits identified by farmers Better yield Faster growth Less fertilizer use – for one farmer it was 6kg of USG as opposed to 20kg of normal fertilizer that he used previously. Lower overall labor costs – apply fertilizer only once.
    54. 54. Benefits identified by farmers Hands on learning: Many of the farmers were also able to tell us clearly the steps required to utilize UDP, even those who were not demonstration farmers. New associated technologies and methods: the farmers learned about transplanting and dry season irrigation, and also appeared to be very excited about this information
    55. 55. Social networks and social learning:The Village promoter A unique blend of social networks and commercial motivation to propagate a new technology. In Niger: • a model farmer, open to innovative practices, very popular, very well respected and well liked. • Called a village meeting to propagate the technology. Everybody we interviewed pointed to him as the source of their knowledge. • He has credibility because he also uses the technology on his crops in addition to selling • We are liaising with him as we plan a return trip In Gombe – perhaps not as effective. Farmers did not know that USG was available locally even though they expressed a wish to purchase.
    56. 56. The village promoter (Niger State) Fari Muhammed Shesi
    57. 57. Lessons learned Demonstration plots: An excellent tool being used by IFDC, and USAID markets. The farmers were very excited by the results of the use of UDP even on the look of the plants. They were very excited and enthused about what they saw and vowed to adopt for the rainy season. Hands on learning: Many of the farmers were also able to tell us clearly the steps required to utilize UDP, even those who were not demonstration farmers. New associated technologies and methods: the farmers learned about transplanting and dry season irrigation, and also appeared to be very excited about this information.
    58. 58. Lessons learned Information: Some village promoters are more effective and credible than others Financing: Village promoter has reported low adoption rates despite farmer enthusiasm • probably 10-15 percent of rice farmers in the village purchased the UDP in any appreciable quantities • Finances often mentioned as reasons for not adopting. • On return trip, these group of farmers would be interviewed to find out:  If these farmers bought any fertilizer at all, and just decided not to buy USG in addition (taking a risk averse OR  If they truly lacked the finances to buy any fertilizer at all.
    59. 59. Future Steps Exploratory visit to back to Niger state in December. Interest in: • Rate of adoption • Yields • Sources of and flow of UDP related information  Identifying if the flow of information and recognition of expertise has transcended the village promoter Larger evaluation of the technology in 2013 in collaboration with MSU and IFDC
    60. 60. Thank you
    61. 61. Policy Options for Promoting Agricultural Credit in Nigeria: Insights from Recent Innovations in Developing Countries Kamiljon T. Akramov International Food Policy Research Institute Washington, D.C., USA IFPRI-NSSP 2012 Research Conference Abuja, Nigeria November 13-14, 2012
    62. 62. Outline• Background• The financing gap in agricultural sector in Nigeria• Recent advances in agricultural finance • Credit delivery structures • Risk mitigating instruments • Value chain financing• Summary and conclusionsINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 63
    63. 63. Background• Agriculture plays a pivotal role in developing economies, driving equitable development and poverty reduction• Access to credit is one of the important challenges in agricultural sector • High real and perceived risk • High transaction and loan supervision costs• Governments and development partners have tried various approaches to improve farmers’ access to credit • Access to agricultural credit remains as a major problem in developing world• This presentation draws insights from recent advances in agricultural credit in developing countries to inform policy options in Nigeria INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 64
    64. 64. Financial intermediation in Nigeria improved in recent years 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 M2/GDP (%) (CPS/GDP) (%) Source: Central Bank of Nigeria (2012) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 65
    65. 65. But only small share of loans reaches agriculture despite its substantial share in overall economy60. 0.0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 AGGDP/GDP AGC/CPS Source: Central Bank of Nigeria (2012) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 66
    66. 66. How to improve farmers’ access to credit?• In the past, governments heavily invested but often unsuccessfully in agricultural development banks and various subsidy schemes• The Nigerian government has also launched a number of interventions to promote agricultural producers’ access to credit • ACGSF, ACSS, CACS, BOA • NIRSAL• In recent years a number of innovative approaches are being practiced to address constraints in agricultural credit • Advances in credit delivery structures (CDS) • Novel risk mitigating instruments (RMI) • Inventions in value chain financing (VCF) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 67
    67. 67. CDS: Foreign investment and institutional strengthening of rural banks• Rabobank created two institutions to advance rural banking and access to credit in rural areas of developing countries (van Empel 2010) • Rabo Development (RD) invests in financial institutions and provides management services • Rabo International Advisory Services (RIAS) provides technical assistance to banks and financial cooperatives • Provision of credit to farmers is focused on the value chains • Investments in Mozambique, Tanzania, Zambia, Rwanda, Paraguay, Brazil• Institutional strengthening of rural and community banks (RCB) in Ghana • Establishment of Apex Bank to provide payment clearing and liquidity management services to RCBs • Strengthening institutional capacity and policy framework to effectively oversight of rural financial services • Building ICT infrastructure including local area networks and satellite-based wide area networks • Mixed financial performance but credit to agriculture yet to increase INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 68
    68. 68. CDS: Linkage banking• Agricultural development bank or commercial bank – MFI partnership arrangements (Harper et al. 2008; Hannover 2005) • Banks do on-lending to MFIs or pay service fee or share part of interest earning • Allows to reduce transaction costs for banks and provides access to wholesale funds for MFI • Increases access to credit by poor smallholders • Improves repayment of credit because MFIs know how to provide and monitor financial services for poor rural households • Examples: NABARD (India), AFC (Kenya), BOA (Nigeria)INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 69
    69. 69. Extending agricultural credit in combination with RMI• Market-based arrangements can help to mitigate both price and weather related risk and improve access to credit by poor farmers • Futures and forward contracts • Risk pooling and index-based weather insurance• Extending agric. lending through insurance – BASIX in India (WB 2005, BASIX 2012) • BASIX is a group of companies that aims to expand agricultural credit by attracting funds from mainstream capital markets • BASIX reduces its institutional-level risk through appropriate mix of three risk mitigation techniques • Group-specific lending to increase repayment • Portfolio limits: 45% agricultural lending, 45% non-farm loans, 10% other • Loans offered in conjunction with insurance products: group term life insurance, cattle insurance, weather index insurance • Performance in 2010: about 1 million loans for total amount of over 14bln Rs; performing assets-99.2%, on-time repayment – 98% (BASIX 2012) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 70
    70. 70. Partial credit guarantee schemes in agriculture• Renewed interest in PCG schemes to increase investment into agriculture (Meyer 2011) • PCG schemes are also used in Nigeria• PCGs can (FAO 2011) • Provide additional collateral to farmers but cannot improve their capacity to repay loans • Leverage scarce public resources by ―unlocking‖ private capital but cannot make up for lack of liquidity• Recent WB study shows that (Beck et al. 2008): • When governments are involved in credit risk assessment, default rates are higher • Role of governments in PCG schemes should be limited to funding and management, and banks should be responsible for credit risk assessment and recovery • Limited use of risk management mechanisms by banksINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 71
    71. 71. VCF instruments: Warehouse receipts• Warehouse receipts system (WRS) is an old form of collateralized agricultural lending instrument• But limited scale economies and lack of appropriate institutional arrangements limit its use, especially for smallholders (Meyer 2011) • WRS are more prevalent in east and southern Africa than in west or central• Recently MFIs start to develop so-called micro-warrant financing systems • FONDECO (Bolivia) uses micro-warrant financing for rice and corn small producers • Smallholders have access to lower-cost seasonal loans, backed by stored grain while FONDECO benefits from less risk and reduced loan management costs • Grain mills benefits from higher demand for their facilities (Miller 2011)• Similar efforts are under way in Uganda and other countries (Meyer 2011)• But these schemes seem costly for smallholders without external financial and managerial support (Besigye 2009) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 72
    72. 72. VCF Instruments: Providing market linkages• Provision of credit to smallholder farmers becomes increasingly feasible when they are connected to a formal network of supply chain participants (Campaigne and Rausch 2010)• DrumNet project in Kenya is operating since 2005 by combing supply- chain approach with microfinance principals• It establishes relationships with key actors along a supply chain- a buyer, farm input dealers, a financier and links them to smallholders through a dedicated transaction platform• DrumNet serves as the intermediary in the flow of payments to ensure credit is repaid before earnings reach farmers’ accounts• This infrastructure enables access to credit for smallholders by • Assuring banks that farmers have a market for their produce and the means to adequately serve that market • Minimizing loan diversion by directly paying certified input retailers after distribution of inputs INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 73
    73. 73. VCF: Providing market linkages (cont.)• DrumNet encountered two major challenges • Partner noncompliance • Low agricultural yields• To address these challenges, DrumNet identified new products that can be bundled with supply chain • Performance rating • Crop insurance • Soil analysis • Payment systems similar to M-PesaINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 74
    74. 74. Agricultural credit constraints addressed by innovative approaches: Summary Mitigating risks Reduction of transaction & loan supervision costsCredit delivery structures• Attracting foreign investment + +• Strengthening rural banks +• Linkage banking +Risk reducing instruments• Combining credit with + insurance• PCG +Value chain financing• WRS + +• Providing market linkages + + INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 75
    75. 75. Overall policy lessons• Review of recent advances in agricultural credit suggests that promoting innovations in agricultural credit rests on • Creating supportive legal and institutional framework for provision of a variety of financial services to low-income rural households • Strengthening institutional capacity and ICT infrastructure of rural financial institutions • Providing appropriate training in both technical and management skills • Investing in economic and technological infrastructure in rural areas necessary• Interventions are more successful when they are implemented as a package• Government can play an important role in providing wholesale funding to credit constrained microfinance and rural banks• Monitoring and evaluation of new interventions in agricultural finance is very importantINTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Page 76