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Potential funds design and credit system


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International Food Policy Research Institute/ Ethiopia Strategy Support Program (IFPRI/ ESSP)and Ethiopian Development Research Institute (EDRI) Coordinated a conference with Agriculutral Transformation Agency (ATA) and Ministry of Agriculutrue (MoA) on Teff Value Chain at Hilton Hotel Addis Ababa on October 10, 2013.

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Potential funds design and credit system

  1. 1. Potential funds design and credit system October 2013
  2. 2. 2 The previous input credit system lack of clear accountability between the different sets of players Problems identified in the input credit system • Regional governments provide credit guarantees but do not pressure borrowers to pay back. • Loan collection takes place through multiple sets of interactions (primary cooperatives collecting from farmers, cooperatives unions collecting from primary cooperatives, etc.) so ultimate responsibility for collections is diffused. Frequently, funds are retained by cooperatives as working capital or misappropriated by the leadership. • In case of default, CBE is paid back by regional governments fully. Hence there are reduced incentives for CBE to apply pressure on borrowers or guarantors. • A lot of circulation of cash in the system among the several actors in the credit system increasing the likelihood of money being misused. 1
  3. 3. 3 Over the past few months, the ATA has been working to diagnose problems in the current input credit system Cash/credit flowProduct flow International supplier Agricultural Input Supply Enterprise (AISE) Coop Union & Federations (Selected by AISE) Commercial Bank of Ethiopia (CBE) (Loans for Cooperative Unions) Regional Agricultural Bureaus Primary Cooperatives Smallholder farmers Cooperative Unions Source: IFPRI, 2012; stakeholder interviews Commercial farms Payment for default Credit Cash Input Flow Credit guarantee CBE issues loans to cooperative unions via a regional representative; funds are sent straight to AISE If coop default, regional government covers the balance Regional government credit is no longer passed on to farmers, but some primary coops offer loans to members from their own funds 1
  4. 4. 4 The new input credit system addresses many of the problems with the old system Expected impact of the new system on the existing one • Substitutes regional governments’ guarantee with a market-based risk sharing mechanisms –credit guarantee fund (partial), risk insurance, etc. • Relieve the cooperatives from the credit disbursing and collection responsibility. Instead, the cooperatives will focus on their core business of input retailing, output marketing • Establish cooperatives as the parties responsible for demand estimation of inputs and therefore take ultimate responsibility for any unsold input. • Minimize the use of cash by introducing a voucher system and electronic transactions to prevent leakages and use of funds for unintended purposes by farmers and other parties . • Channel input credit through microfinance institutes (MFIs) or other appropriately placed financial institutions that have extended reach in rural areas and have low rates of non-performing loans (NPL) to provide input credit and loan collection. 1
  5. 5. 5 These benefits can be seen in the schematic for the new input credit system Funding Institutions (CBE) Financial Institutions (Microfinance Institutions) Primary Coops Credit guarantee fund (by the gov’t & development partners)1 Coop unions Farmers Voucher on credit Farmer presents voucher for input provision Inputs provided to farmers Voucher redeemed for credit against loans; additional cash payments as necessary Loans for capital adequacy for farmer vouchers Loan repayment Payment for fertilizer E-voucherCash FlowInput Flow Loan repaymentOutput Flow Payment for seed and chemicals 1 Necessary in initial years; could be phased out eventually, especially if a robust contract farming platform establishes designated markets for farmer output 2 Purchasing arrangement will vary by crop and region but could include letters of intent to purchase or more formal contract agreement Agricultural input producers, international suppliers, and importers Agricultural inputs (improved seed, fertilizers and chemicals) Loan repayment Voucher aggregation 1 Payment for union fertilizer purchase
  6. 6. 6 Why is liquidity injection needed in the agricultural sector? • Lack of liquidity in the Ethiopian finance system due to the large public investments to build infrastructure (power, roads, railway, etc.) • Smallholder farmers’ access to finance has been limited and contributed to lower adoption rate and usage of improved inputs and technologies • ATA has therefore focused significant effort in the past few months to (1) find a source for additional liquidity specifically to the agricultural sector and (2) design a credit guarantee fund to incentivize financial institutions to provide financial products to the sector 2
  7. 7. • Increase smallholder farmers’ income in a commercially viable manner for long-term sustainability and generate hard currency through import substitution and exports. Some low hanging fruits include: – Ethiopia currently spends ~$250 million / year on imported wheat,1 which could be replaced by domestic production – In 2010, Eastern Africa imported ~860,000 MT of maize at a cost of ~$250 million,2 which Ethiopia could supply – Ethiopia currently spends ~$25 million / year on imported malt,3 which could be replaced by domestic production Goal Overview of the fund • ~$150-250 million • Focused on hundreds of thousands of smallholder farmers (exact number TBD) • Initial crop focus: Maize, wheat, and barley • Provide all necessary financing needs to focus smallholder farmers: Input credit, working capital for output marketing, mechanization, storage, etc. Size and scope • Leader: Government of Ethiopia • Implementation partner: WFP • Potential funders: IFC, IMF, IFAD, other partners Setup 1. Ethiopian Revenues and Customs Authority (ERCA), USDA Foreign Agricultural Service, Ethiopian Wheat Sector Development Strategy. 2. FAO. 3. ERCA. The agriculture investment revolving fund will provide an infusion of international capital to provide for smallholder farmer financing needs 2
  8. 8. 8 Proposed Integrated Funds model – how the pieces could fit together 2 Large-scale liquidity fund • Provides overall liquidity to the system through international donor funds • Can be used to support the CGF as well as other agriculture finance needs (marketing, mechanizati on, aggregation, etc.) 1 Risk mitigation tools (CGF, insurance, etc.) 2 • A fund that serves as collateral to incentivize investment in agriculture • A weather-index insurance or multi-peril insurance Input purchase system 3 • ATA-supported system that provides increased liquidity to farmers to buy inputs through use of credit vouchers Various parts that could be integrated Large-scale liquidity fund Funds the credit guarantee fund, which guarantees the liquidity fund, input credit, and other agriculture financing Also funds other agriculture finance needs Donors can fund the CGF directly (e.g., GIZ) Donors can fund the liquidity fund overall (e.g., IFC) Farmers MFIs Primary coops Funds for input credit
  9. 9. Output Marketing: Contract Farming
  10. 10. Output Marketing: Contract Farming
  11. 11. 11 Output Marketing: Community Warehouse Receipt System
  12. 12. Innovations to help our country grow