This document discusses strategies for improving access to financial services for agricultural value chains in Africa. It notes that while over 60% of Africa's population lives rurally and engages in agriculture, the agricultural sector lacks large-scale investment and access to financing. The document outlines challenges like risk, lack of infrastructure and weak market structures that impede agricultural financing. It then discusses various innovations and tools for managing risk and financing along commodity value chains, including microfinance, value chain financing, futures markets, warehouse receipts and using movable assets as collateral. The goal is to develop sustainable and holistic solutions that link smallholder farmers to markets and financial services.

1. Strategic Area C: Value Chain Development and
access to Financial services
ABRAHAM SARFO
CONFERENCE OF MINISTERS OF AGRICULTURE OF WEST
AND CENTRAL AFRICA
CAADP PILLAR II LEAD INSTITUTION
CMA/AOC - Conférence des Ministres de
l'Agriculture de l'Afrique de l'Ouest et du
Centre
Lead institution for CAADP-Pilar II
Tel: (221) 33 869 11 90

2. OUTLINE
INTRODUCTION AND
CONCEPT NOTES
CHALLENGES IN AGRICULTURAL
FINANCING
TRENDS AND INNOVATIONS IN RURAL
AGRICULTURAL FINANCING
TOOLS IN MANAGING RURAL FINANCING
TOOLS IN MANAGING RISK IN AGRICULTURAL
FINANCING
LESSONS LEARNT AND THE WAY FORWARD

3. Africa Agriculture Can Only Work
if Supported by ……
• POLICY
• Frameworks and • INFRASTRUCTURE
incentives that • Roads, railways, ports,
protect people, communications links that
attract investments facilitate the movement of
and facilitate people, goods services and
development ideas
Policy Infrastructure
Sustainable
Virtuous
Cycle
Market
Tools
Structure • MARKET STRUCTURE
• TOOLS • Strong Web of Actors
• Interventions to fix that facilitate efficient
Specific bottlenecks links between farmer
in a region, crop or supply and consumer
stage along the value demands
chain

4. The Problem of Agricultural
Financing
• Over 60% percent of Africa’s population lives in rural
areas where they are engaged in agriculture, both as a
source of food and income.
• In Africa, as in other developing markets, there have
been significant and sound developments in functional
financial markets, as well as in the uptake of latest
lending and other bank-related technologies.
• These improvements are, however, not vested in the
agricultural sector to any large extent, even though
investment in this sector is seen as the main engine of
economic and social growth, especially in the Sub-
Saharan African countries, for the years to come.

5. Major Risks Associated With Agric Microfinance
Risk Factors Effects
Weather Adverse Weather, pests Low yields and loss of
and diseases income
Price Market Forces (demand Lower prices and income
and Supply)
Financial Higher than anticipated Uncertain cash flow
input costs.
Length of production cycle
linked to inflation risk.
High cost of credit
Cash flow problems.
Regulatory Regulatory changes affect Changes in inputs costs
cost of production
6/21/2012 12:57 PM 5

6. Is Risk the Only Problem?
• Because of long-term neglect, the agricultural sector
needs large investments by both the farmers and,
through the provision of financing for such
investments, by financial institutions in order to boost
production.
• However, increased investment also means increased
exposure to risks and, in many cases, this translates
into exposure to new and little known-about risks.
• Improved and new risk management techniques and
instruments must, therefore, accompany investments,
both at the financial institutions and farmer levels, as
well as along the whole value chain.
HOWEVER RISK CAN BE REDUCED IF OTHER FACTORS ARE IMPROVED

7. Financing needs along the value chain
Typical financial needs of VC operators
Primary Processors
producers Industry Traders Market
1
Short term Bridging the period Bridging the period Bridging the period between
up to 12 between between - purchase (in bulk) and
months - purchase of inputs and - Purchase of intermediate retail
sale of harvest products and sale of (store value)
- delivery of produce and product - Export of product and
payment of buyers - delivery of products and payment of overseas buyers
payment of buyers
Long term Investment into Investment into Investment into
1-7 years - tree plantation - buildings - buildings
- greenhouses - equipment, machinery - vehicles
- storage space
- equipment, machinery

8. Financing value chain development
Investment into…
Physical & Institutional &
Financial Capital Human Capital
LT capital Forming Coop´s
(equipment) Primary
Vocational Producers
Industry Traders Market
1 ST working capital training
Support service Association Support
capacity (LT plus ST) building Service
Staff training Providers
Rural infrastructure Admin. Procedures
(from NRM to and organization Government
communications) (national or regional)

9. Financing value chain development
The role of public funds to pay for…
…physical & …institutional &
Financial Capital Human Capital
LT capital Vocational
(equipment) training
ST Privatecapital
working Funds Forming Coop´s
Public/private
Primary
Industry Traders Market
Producers
1 primarily ! Co-Financing
Support service Association
capacity (LT plus ST) building Support
Staff training
Public/private Public/private Service
Providers
Co-Financing Co-Financing
Rural infrastructure Admin. Procedures
(from NRM to and organization
Government
communications) (national or regional)
Public Funds Public Funds

10. New Definition of Agriculture Financing
OLD DEFINITION FARM BUSINESS NEW DEFINITION AGRIBUSINESS
processing, storage,
agriculture production packaging marketing
activity harvest time
activities etc.
agriculture crop and livestock consumer
inputs products
FINANCIAL FINANCIAL
REQUIREMENTS REQUIREMENTS
AGRICULTURE VALUE CHAIN – FROM FARM TO CONSUMER

11. EXAMPLE OF AGRICULTURAL VALUE CHAIN AND FINANCIAL INSTITUTION
ANALYSIS
International
Commercial
Market
Banks
Medium/Large- Scale Exporters
Commercial
Processors
Banks
Retailers /
Local Market
Commercial
Banks Wholesalers
Producer Association
MFIs, family &
Smallholder Producers
friends, personal
savings
Current
Input Suppliers Potential
(seeds, pesticides, fertilizers)

12. Honey, Kenya: Integrated arrangement (+factoring)
Honey Cleaning Primary Secondary Retail
Bulking
Production packaging processing processing
N=10 N=50
Beekeeper, Producer Collection Processor Honey
Traders Retailer market
producer group centre TARDA
Beehive Factoring
maker
Refinancing
FinServices
LT Loan
Association K-Rep
(Credit Bank
ooperative)
K-Rep Fedha
Source: adapted from (business) Services
KIT: „Value chain finance“, 2010

13. Problems financing VCs, especially farmers
High risk and cost of lending to small-scale farmers
• High transaction costs due to small scale of farms
• Little to no hard collateral of smallholders
• Many farmers don´t have a credit history and no bank accounts.
• The inherent risk of agriculture is high (crop failure, post-harvest loss)
• Agricultural markets suffer from price volatility and high price risk.
• Smallholders may see borrowing as a risk to their livelihoods.
• Informal moneylenders compete with the formal system.
• Rural and agricultural credit has a bad reputation due to past experience
with low payback rates and political interference
Weak value chain structure and governance
• Weak organization of business linkages entails high contract risk
• Fragmentation of operations, lacking business leadership
• Demand / market risk of final products
Financial institutions lack VC knowledge
• Financial institutions lack knowledge of agriculture and food markets
• Financial institutions have little to no experience in VC finance.
• The offer of agriculture-specific financial products is limited.

14. Challenges faced by Financial Institutions
agricultural finance service provision
 Low volumes of transaction, due to limited pieces
of land/agricultural projects. Income too meager
from such low value transactions.
 Spatial dispersion of farming enterprises rendering
them very costly to administer through follow-ups
and projects monitoring.
 Long gestation periods of most agricultural projects
Sugarcane, Tea, Coffee etc. This causes a challenge
especially when resources are scarce as huge
capital outlays are tied up. Subsequent shortages
push up the cost of credit due to a high unmet
demand
14

15. Challenges faced by Financial Institutions
agricultural finance service provision
 Seasonality of agricultural credit demand dictated by
seasonal nature of enterprises. The flip side is a strain on
farmers to undertake their financial obligations during off
seasons
 Due to the high seasonal nature of rain fed
agriculture, huge investments are incurred during
planting seasons and relatively low during other times of
the year generating a pattern of high credit demand
during planting seasons. This demand cannot be
adequately fulfilled at this time
 High covariant risks (vagaries of
weather, pests, fluctuating and often unpredictable
produce prices and markets etc).
15

16. Innovations In Rural Finance
Micro-
financial
services
New
technologies Value-chain
and transfers financing
of money
Innovations
Using
moveable Futures
goods as markets
collateral
Financial Services Provision 16

17. Definition Of Microfinance Institutions (Mfis)
• An MFI is an organization that provides financial services to
low-income individuals who have no access or limited access
to the formal financial sector (mainly commercial banks)
• MFIs refer to a wide variety of organizations, differing in
– size (number of members or groups)
– level of structuration
– legal status
• Depending on the country, these institutions may be
regulated or unregulated, and supervised or unsupervised by
the financial authorities or other entities
– some operators who may in practice be significant players in
microfinance are sometimes only allowed to offer credit
Financial Services Provision 17

18. How To Support MFI Development In Rural
Areas
• Financial support
– Over time, the funding needs of MFIs change.
– While subsidies or participation of donors in guarantee funds
might be needed to establish the institutions, the mature
structure can prove to be profitable, attracting new financing
sources: equity capital from private investors, commercial loans
from formal financial institutions, investment funds and dedicated
investments fund, and even flotation.
• Staff training and information
• Potential client training and information
• Support partnerships
– financial services delivery can piggyback on existing local
networks
– support greater use of technology and support relevant
partnerships in this area
Financial Services Provision 18

19. Definition Of Value Chain Financing
• Relationships between actors in the value chain
may facilitate financial flows
– directly (credit from one value-chain actor to another)
or
– indirectly (by making the potential client more
attractive to ‘traditional’ financial institutions)
• In general, the majority of agricultural finance in
developing countries is provided either from
savings or from within the value chain (i.e. direct
value-chain finance), with no direct involvement
of financial institutions
Financial Services Provision 19

20. Forms Of Direct Value Chain Financing
• Trader credit
involves short-term, seasonal loans (for working capital)
between producers and either input suppliers or
produce buyers
is usually provided in cash or in kind for suppliers
(inputs retailers, shopkeepers, etc.)
• Contract farming or out-grower schemes
are relationships in which buyers lend funds (either in
kind or in cash) to producers as part of a purchasing
agreement
Financial Services Provision 20

21. What Is Indirect Value Chain Finance?
• It is a link that is established between a financial institution
and value-chain operators thanks to the intermediation of a
value-chain partner
– this may be the case in contract farming
• bank lends to a producer based on that producer’s relationship with a
well-established buyer
– warehouse receipts
• bank lends to a producer based on the fact that a given quantity of
produce (detailed on the receipt) is stored in a certified warehouse
– when a buyer (or supplier) with a sufficiently strong reputation is
willing to stand surety for its producers, even small producers become
more attractive clients to financial institutions
– futures contracts, or long-term relationships with a strong partner can
be recognized and act as a guarantee
Financial Services Provision 21

22. Advantages Of Value-Chain Financing
• It builds on existing relationships and networks
– it overcomes information gaps
– it needs no additional infrastructure
• It would offer reduced non-repayment rates
– due to the familiarity and trust between actors
– it has easy ‘embedded’ repayment mechanisms (good
for cash-strapped farmers)
• It could provide technical assistance to
producers, thus increasing production revenue
and improving the profitability of the credit for
the producer
Financial Services Provision 22

23. Commodity Exchange Market
• Futures contract, in finance, refers to a standardized
contract to buy or sell a specified commodity of
standardized quality at a certain date in the future, at a
market-determined price (the futures price).
• The price stipulated by the agreement that should be paid
in the future upon delivery of the goods, reflects the
present expectation of future market conditions.
• Both parties of a futures contract must fulfill the contract
on the settlement date. To exit the commitment prior to
the settlement date, the holder of a futures contract has
to offset their position by either selling or buying it back
(assuming any financial gain or loss this may represent).
Financial Services Provision 23

24. Future Markets: In Practice
• Futures contracts are a common practice, and can
take many forms
They can take the simple form of an oral or written
agreement between the buyer and the seller, with short- or
longer-term engagements (such as in contract farming in
the latter case)
However, in some countries, the futures market has
developed towards a real futures commodity exchange –
this is a virtual marketplace
In Brazil, most commodities, from cattle to grain are
traded on open online futures markets
Financial Services Provision 24

25. How To Support Futures Market Development
• To develop, the futures market needs the existence of a well-functionning
bourse for commodities, including in particular
– Norms and grades
– Certification bodies
– Warehouse network
• The exchange's clearinghouse acts as counterparty on all contracts, sets
margin requirements, and crucially also provides a mechanism for settlement
• The staff of the exchange and main operators within the targeted sectors
should be trained in futures exchanges and the specificities and market
fluctuations of the products to be traded
• A reliable market information system needs to be created
But not all operators (in particular small-scale farmers) can trade in such a
virtual marketplace. This would rather benefit larger-scale farmers or
intermediaries. However, its advantage can trickle down the value chains.
Financial Services Provision 25

26. Moveable Goods As Collateral
Banks used to take as collateral only large fixed properties like
land, buildings or large equipment
In many African countries, land titling is not well developed
and lack of documentation or the unclear status of the
property prevents its use as collateral for most of farmers
Alternative goods and documents are now progressively used
as a guarantee
• the harvest can be used as collateral, e.g. with warehouse receipts /
warrantage
• the purchased equipment, e.g. with equipment leasing
Financial Services Provision 26

27. Warehouse receipts in practice
Warehouse
order
receipt
harvest
Client
Farmer warehouse
receipt
credit
warehouse
receipt
Bank
repayment
payment
Financial Services Provision 27

28. Advantages Of Warehouse Receipts
This system will enable farmers to avoid rushing to sell
their produce in accordance with their need for cash, but
rather with prevailing favorable market conditions
• this may be very useful, particularly in the cross-financing of
successive crops or with animal production
• farmers will be able to keep a higher share of the added value of
downstream activities
In addition, by bulking the products in a central modern
storage facility, this system could contribute to
• structuring the market and improving retained price for farmers
• improving the quality of the products
Financial Services Provision 28

29. Supporting Warrantage Development
Develop a network of modern warehouses across the
country
Support the establishment of clear norms and grades
Train and supervise managers for the development of a
reliable warehouse receipt system
• Training In Norms And Grades, And Administrative Issues
• Supervise And Build A Certification System In Order To Build Trust In All
Stakeholders
Inform and involve financial institutions in the scheme
Financial Services Provision 29

30. Equipment Leasing: Definition
• A lease is a contractual arrangement between two
parties, where the provider (the lessor) owns the asset
and lets the client (the lessee) use the equipment asset in
exchange for regular payments.
• In a finance lease, the lease period typically extends for
most or all of the equipment’s useful life, and the lessor
recovers the equipment costs plus interest through a
regular stream of lease payments. The lessee bears all the
costs of maintenance, damage and insurance and the
lease usually cannot be canceled. Furthermore, at the end
of the lease, the lessee usually has the option to purchase
the asset for a nominal price.
Financial Services Provision 30

31. Equipment Leasing In Practice
Financial Services Provision 31

32. How To Support The Development Of
Equipment Leasing
• The legal and institutional frameworks should be supportive of
such arrangements by
– adopting clear definitions of leasing concepts; and the rights and
responsibilities of lessor and lessee, in particular regarding the
priority of lessor’s claims over leased assets; and clear ground rules
for repossession of leased assets.
• Support the creation of links between leasing companies
(often urban based) and the local network of rural shops that
could provide maintenance, monitoring and other support
services
• Support links between equipment providers and financial
institutions to develop such offers in rural areas
Financial Services Provision 32

33. Definition Of Mobile (And Internet) Banking
• Mobile banking refers to the ability to perform balance
checks, account transactions, payments, etc. via a mobile
device such as a mobile phone. Mobile banking today is
most often performed via SMS.
• The advent of the Internet has already revolutionized the
financial services industry with the emergence of new
players, thanks to the considerably reduced fixed costs.
• The mobile banking development is in turn entering a new
era with a new generation of operators and in particular
mobile operators.
• Mobile phones are used to do a wide range of operations
such as payments and money transfers, savings, and
withdrawals.
Financial Services Provision 33

34. Functioning of mobile banking
Payment order
processed within
central database
and account Money
status checked transferred
from one
account to Confirmation
another of the transfer
received by
the local
agent
Cash or
Payment goods are
order sent given
Commercial transaction
by mobile
holder
Financial Services Provision 34

35. Advantages Of Mobile Banking
• Mobile banking has proved useful in many parts of the world with little or
no infrastructure development, especially in remote and rural areas – this
aspect of mobile commerce is also very popular in countries where most of
the population is unbanked
– thus in turn it should support microfinance development both for savings and
credit
• With mobile technology, banks can offer a wide range of services to their
customers, such as doing funds transfer while traveling, at low costs
– the ease and automation of some transactions would reduce operating and
transaction costs, making handling small amounts viable
• This technology should ease the collection of savings in financial institutions
and could help build on remittances or other source of non-farming income
for agricultural financing
• Much more people are equipped with a mobile phone than have a bank
account, creating tremendous potential for market development
Financial Services Provision 35

36. And Finally!!!
• Many of these initiatives are based on the premise that there is a
supportive policy environment that allows innovation to flourish.
• The gravest risks to sustainable financing for agriculture often
come not from inherent business risks or the inability of financial
institutions to design profitable financial products for the rural
population, but rather from misguided government interventions
such as
– subsidized interest rates and lack of or non-enforcement of
appropriate rules and regulations.
• Conversely,
– an enabling environment and legal framework
– enforcement of regulations
– and a supportive rural infrastructure
• would eventually lead to lower but sustainable interest rates by
reducing transaction costs and risks and increasing competition.
• All this would contribute immensely to making sustainable
access to finance a reality