1. OWURAKU SAKYI-DAWSON (PhD)
DEPT. OF AGRICULTURAL EXTENSION
UNIVERSITY OF GHANA, LEGON
Africa Regional Workshop on Promoting Access to Rural Finance for
Enhanced Agricultural Productivity, 16th
July 2013. Accra International
Conference Centre

2. Introduction
• Focus
• … innovative options for bridging
agricultural and rural finance demand
and supply gaps in Africa
• - Strategies
• - Mechanisms
• - Complementary technologies
• - Policy issues
2

3. Supply gaps: Low supply to agric
and rural areas
Credit Supply Indicator Developing
Countries
All Africa Rural
Africa
High income
OECD and
non-OECD
Population with access to
financial services
20% 4%
Population with access to
formal credit
1%
% Bankable households 12% 91%
SME lending volumes as
percentage of GDP
4% 20%
% of rural population with
access to formal financial
services
10%
Nigeria Adult population ever
banked
26% 14%
Microfinance access by
households in WAEMU
20%
Agriculture households with
access to microfinance in
WAEMU
7%
3

4. Otheragric and rural finance supply
gaps in Africa
Supply gap?
 High and diverse demand exist – value chain
lens
 High unmet “demand in middle part” of value
chains
▪ E.g. small producers, traders, processors
▪ Impact – counter developmental?
4

5. Reasons forsupply demand gaps
– Supply side challenges e.g.
– Demand side challenges
– Constraints at the country, legal policy,
and management levels
5

6. Some principles in the
complementary approach
 Build long-term capacity of both
-financial services providers &
-value chain actors
 Provide incentives to the entities
participating
 Facilitate access to wide range of
services
6

7. International
market
Medium/ large-scale buyers and exporters
Local Traders
Farmers Association
Smallholder farmers
Retailers/Kiosks
Input Supply Companies
(Seeds, Fertilizers)
Commerci
al
Banks
Commerci
al
Banks
Domestic
market
MFIs, Credit
Unions,
Coops
MFIs, Credit
Unions,
Coops
MFIs or
Commerci
al Banks
MFIs or
Commerci
al Banks
Commercial
Banks
Commercial
Banks
Current finance flow (size of arrow indicates
volume)
Potential finance flow
COMPLEMENTARY APPROACH: POLICY FRAMEWORK
Source: USAID, 2005 7
BUILDON EXISTING VC & FINANCIAL RELATIONSHIPS

8. Local processors,
wholesalers
Commercial
banks equity
funds
Local traders,
producer
associations
Industrial
processors,
exporters
Small producers,
micro-enterprises
Commercial
banks and
companies
Banks,
microfinance
institutions,
companies,
unions
Microfinance
institutions,
savings and
credit co-ops,
companies,
associations
Short term loans, savings,
group loans
Medium-term loans,
leasing
Short and medium-term
loans, leasing
Long-term loans,
guarantees, equity
8

9. Strategies forfacilitating finance for
value chain development
 Craft a new value chain(s) –
– Financial and technical capacity building
• Cooperation between producers, buyer, financial agent
• Provide producers with access to financial services needed for their
business
 Expand an existing chain liquidity
– Lead firm strategy
• Strong lead firms in the chain used as vectors to reach non-bankable
suppliers
• The lead firm is the collateral for providing finance to the suppliers
 Unleashing investment capital into an existing
value chain
– Micro-leasing – through associations
– Temporary equity financing
9

10. Innovative mechanisms foreffective
agricultural and rural finance 1
• Warehouse receipts
– A receipt is given to the farmer after their
produce is sent to certified participating
warehouse e.g. Ghana Grains Council
– The receipt serves as a collateral for loans
• Contract farming / out-grower
schemes
– Buyers offer “cash or in kind” as a form of
credit for purchasing of produce
– E.g. Maize farming (informal) pineapple (formal)
10

11. Innovative mechanisms foreffective
agricultural and rural finance 2
• Re-purchase agreements (Repo
finance)
– Bank purchases the products from the
seller and also signs a contract to sell it
back to the previous seller later in the
future
• Private equity
– The financier (by a bank or an investor)
purchases shares from a value chain
company / actor
– The actor thus has capital to invest in
activities
11

12. Innovative mechanisms foreffective
agricultural and rural finance 3
• Leasing
– The actor e.g. the farmer is provided with
equipment for few years on a contract basis
– The lease is paid off by the farmer in
installments
– The leasing company may either reposes or
sell the equipment to the farmer at the end
of the lease period
– Process is less risky than provision of loans
to farmers
12

13. Innovative mechanisms foreffective
agricultural and rural finance 4
 Factoring
 An invoice is received by a farmer after
delivering produce to a buyer
 The invoice is sold to a third party
(Factoring house)
 The factoring house pays the farmer
deducting a fee, and sends the invoice to
the buyer for payment
13

14. Complementary supportive
technologies 1
• Use of ICT to bundling
development services with
agricultural finance:
• E.g. DrumNet
• Key actors within the supply chain are
identified eg. Banks, buyers, and input
dealers
– Smallholder farmers are linked to the
key actors
– Inclusion of ICT in the process
enhances its effectiveness and
efficiency
14

15. Complementary supportive
technologies 2
• The Kenyan example of M-PESA
(Mobile Money)
– This system was developed through
Vodafone with financial assistance from
DFID
– Lunched in March 2007
– Registered customers are able to send
money home without the need of a bank
account
– Customers purchase electronic money using
cash
– Mobile phones are used in performing
financial transactions
– The electronic money can also be converted
into cash, through its sale to agents
15

16. Mobile money in Africa 3
 Africa has been the hotbed for
Mobile Money:15 of the top 20
countries in the world wrt mobile money
usage
 An estimated 80% of adults still
unbanked, combined with new
developments in commercial payments
and a youth market with strong loyalty to
mobile channels
 The potential for growth is enormous 16

17. Esoko mobile technology platform for
value chain information exchange 4
 Uses SMS messaging aimed improving
transparency of markets and the
operational efficiency of organizations
 Collects and provides content such as
prices, bids and offers, weather, and
agricultural tips to which users can
subscribe.
 Farmers negotiate better prices, choose
markets, timing of sales, participate in
outgrower schemes through Esoko profiling
and reputational history. 17

18. Complementary supportive
technologies 5
 Biometric Technology in rural credit
markets: Malawi, Kenya, Tanzania
 Common biometrics (fingerprints, face,
iris, retina, speech, and handwritten
signatures) used
▪ This prevents identity theft
 Smallholder farmers can apply for loans
using this biometrics
18

19. Innovative riskmanagement in
rural and agriculture finance
 Financing Strategies + Innovative
Financing Mechanisms + Supportive
Mechanisms and Technologies
=Innovative risk management
 Bringing the business into the picture
 Using soft collateral in place of hard collateral
 Looking at the potential of the business case
rather than using past financial records
19

20. Critical stakeholders in reducing supply
demand gap in rural finance
 Governments
 Banks and other financial agents
 Private non-financial Companies
 Donors
20

21. The role of government in the
strategy
Appropriate legal framework wrt
financing strategies, mechanisms and
technologies
Other roles of government
• Minimal government intervention in the area
of setting interest rates
21

22. Role of banks and otherfinancial
agents in the strategy
 Extending credit to other / small
actors
 Aiding in setting-up of warehouse
receipt lending system
 Developing links between small
farmers, buyers, and suppliers
 Working with smallholder farmer
associations
22

23. Role of private companies in the
strategy
 Ensure that quality standards are
maintained by setting up the
warehouses and operating them
professionally
 Using the mechanisms
23

24. Role of donors in the strategy
• Partnering with community-based financial
organizations (CBFOs)
• Working with farmers not well integrated in
the product market
• Using subsidies to support the building
capacities of the lenders in areas of training
and technical assistance e.g. MiDA in
Ghana)
• Supporting lenders based on transparent
criteria
24

25. Conclusions:
 Strategy for effective agricultural and
rural finance is founded on the
realization that it is absolutely
necessary to integrate small and
medium scale farmers and other actors
into mainstream financial systems for
African Development
 Believe in existence of and workability
of a strategy for linking smallholder
farmers to financial markets
 But cannot be done as business as
usual 25

26. THANKYOU
CONTRIBUTIONS?
COMMENTS ?
ADDITIONS?
QUESTIONS
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