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.

1. Potential funds design and credit
system
October 2013

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
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
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
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
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. • 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
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. Output Marketing: Contract Farming

10. Output Marketing: Contract Farming

11. 11
Output Marketing: Community Warehouse Receipt System

12. Innovations to help our country grow