Agriculture contributes to 40% of Malawi’s GDP of which 70% production is derived from smallholder farmers, 90% of exports are Agro industry based derivatives. Access to financial credit to enable production is a big challenge to farmers due to the lack of Credit worthy collateral and that banks require first class collateral in the form of property on the major cities of Malawi. As such due to the inadequate finance productivity is compromised and commodity orders cannot be immediately meet in bulk due to the fragmented nature of production leading to intermediaries in the form of vendors being aggregators for commodities in the value chain. The intermediaries reduce farmer’s profitability as the middlemen in the value chain increase. Government led interventions like crop up scaling and national export strategy will be sustainable on the back of increased access to agriculture finance and ease of doing business in Malawi. According to Finscope Malawi (2008), the importance of increasing access to credit, savings opportunities and other financial services as a means of reducing poverty has long been recognized in Malawi. The Ministry of Economic Planning and Development 2013 annual report ,indicates that the Agriculture sector declined by 2.3% in 2012 compared to a growth of 6.7% in 2011.The decline was mainly on account of a 67% decline in Tobacco production due to low prices. To move forward in Agriculture, we need to put agricultural industrialization back on the development agenda, in the form of value addition and mechanization to increase productivity. Pro poor policies are usually poor and focus must be on wealth creation, based on a healthy domestic investor market which in turn will attract foreign investment and more market driven agriculture.
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Contrasts to agriculture finance in Malawi by Morut Martin Isyagi
1. Constraints to Agriculture Finance
in Malawi
Morut Martin Isyagi
Director Agribusiness and Marketing
Farmers Union of Malawi
misyagi@farmersunion.mw
Inaugural ECAMA Research Symposium 8-10 October 2014
The voice of Malawian farmers
2. What is Farmers Union of Malawi?
Farmers Union of Malawi
(FUM) is an umbrella
body of farmer
organizations
in Malawi.
3. Role of Farmers Union
Provide a collective voice of farmers in
Malawi
Visible platform for interaction
A vehicle for collective action
Lobby for all farmers in Malawi
4. Farmers Union of Malawi
Vision
Ensure a union of Malawian farmers with a
powerful collective voice to advance the
interest of farmers
Mission
To promote and safeguard the interest of all
farmers in Malawi, and create a conducive
agricultural operating environment for
improved agricultural productivity, market
access and increased farmer incomes”
5. Key Operational Areas for FUM
Institutional
Development
Agribusiness
& Market
access
Policy
Advocacy
Partnerships
FUM
6. Malawi Agriculture contribution
80% of Foreign Exchange
39% of GDP
65% raw material supply
70% of Agric GDP from Smallholder farmers
7. Importance of Agriculture finance
Access to financial services promotes
Economic growth and development
Facilitates large scale production of raw materials
and value addition
Value chain economies of scale
Development of service industry
8. Taxonomy of Global risk
• ECONOMIC RISKS
• GEOPOLITICAL RISKS
• ENVIRONMENTAL RISKS
• SOCIETAL RISKS
• TECHNOLOGICAL RISKS
9. Variables that can influence agricultural production with varying intensity.
Environment/weather
Agricultural
production/
supply chain -
up- and
downstream
Biological
Political/Institutional
Market
Economic
Management &
operational Geo-political
Government
Source:Chris Blinaut 2014
10. Functions of Financial systems
Risk amelioration
Savings mobilisation
Information gathering of investments and
allocation of resources
Facilitates exchange
Types-Commercial Banks, Finance coops
Development of financial markets and
institutions is a critical part of the growth
process-Capital accumulation, technology
change (Machete 2014)
11. 5Cs of credit
Character
Willingness to repay, financial delinquency
Capacity
Strengths and weakness of agribusiness partners with
regard their financial, managerial and technical
capacity
Capital(Collateral)
Collateral based on products, contracts and processes
e.g. WHR
12. 5Cs of credit
Conditions
Short and long term conditions of the entire value
chain
Cash flow (Most important)
Most important for determining the amount and timing
of loans, repayment schedule and capacity
Agriculture credit places much weight on
cashflows and condition
13. Why is Agriculture finance a problem
High cost of lending(Cost to serve)
High cost of borrowing(Cost to client)
Lack of collateral-Limited financial ,Insurance instruments
Risky nature of agricultural production-Climate,
Seasonality,
Knowledge
Financial literacy, Economies of scale
Value chain-Lenders/Farmers
Markets,RDD
KYC-reliable information about borrowers
19. What should be done to promote access
Promote access through market driven
mechanisms –Land bank, Goverment catalyst
Enabling environment for private sector
investors-Legislation e.g. WHR, transport
infrastructure
Take measures to reduce sector wide risks and
transaction costs-Weather index insurance,
Eliminate political interventions-Export
bans,Elections,Food security vs. Food
entrepreneurship
20. Discussion
Competitive Agriculture is connected
agriculture
Increased productivity on the back of market
driven finance to meet offtakers requirements
Linking participants within a value chain in which
everyone involved has a vested interest
New approaches to Agriculture finance
reduce costs and risks facilitated through
value chain linkages, extension uptake
21. Discussion
Cash flow analysis, value chain assessment and
tailoring of loans with appropriate conditions is
critical.
Agriculture credit should be accompanied by
insurance but this is costly and requires
government intervention.
The most important insurance is built through
savings and accumulation of assets after
increasing productivity –Savings and investment
culture
22. Discussion
Agriculture finance depends on success of
Agriculture sector as a whole and
competitiveness, risk profile of the client and
value chain.
Government catalyst -EDF?,Development bank?
Land bank equivalent
23. Discussion
Harness Financial Cooperative movements
success into Agric cooperative as alternative
finance source
Demand driven market financed knowledge
generation and extension
Strengthening commodity cooperatives
24. Conclusion
Market driven and aligned Structured trade and
commodity finance e.g. NES crops less exposed
to interest rate shocks as earnings in USD.
Enabling environment to reduce costs of doing
business e.g. Export bans, Commodity acts,ID,
Financial instruments-WHRs,WII,Land bank
interventions, harnessing strength of financial
coops
Financial and value chain literacy-Productivity
Achieving inclusive sustainable Economic
growth from rhetoric to practice
25. Acknowledgments
Blignaut C : Certificate program in Agriculture
and rural finance, University of Pretoria 2014
Finscope : Malawi 2014 report
Legderwood J Etal: The New Microfinance
handbook ,Chp 10 pp 233-246,World bank
2014
Machete C: Certificate program in Agriculture
and rural finance, University of Pretoria 2014
World Economic forum :2013 Global risk report
,pp 4-5
26. Thanks for your attention and
to ECAMA and IFPRI