Presentation by Lamon Rutten : "Value chain finance and risk management" presented at the Regional forum on cassava in Central Africa, from 6 to 9 December, 2016, in Yaoundé, Cameroon. More information: http://www.cta.int/en/news/regional-forum-on-cassava-in-central-africa.html

1. Financement de la chaîne de
valeur et gestion des risques
Forum Regional sur le Manioc
en Afrique Centrale
Yaoundé, 6-9 décembre 2016
Lamon Rutten

2. Situation
% of firms
identifying
access to
finance as a
major
constraint
% of firms
with a bank
loan/line of
credit
Proportion of
loans
requiring
collateral
Value of
collateral
needed (% of
loan amount)
% of firms
using bank
loans to finance
investments
Sub-
Saharan
Africa
42 24 79 171 18
Cameroon 55 30 83 213 31
CAR 46 26 84 233 25
Chad 47 21 75 136 4
Congo DR 39 9 72 152 7
Rep. Congo 45 13 68 47 8
Gabon 30 9 53 N.A. 6
Source: IFC, Access to Finance, 2014
SME access to bank finance
On the other hand, agricultural finance in 2015 accounted for 14.9%
of total bank credits, as compared to 7.6% in 2011.

3. Capital market
Banks
Farmers Processors Traders
Service
providers
Need to place money at a reasonable rate
Govern-
ment
borrowingBench-
mark
Need investment and working capital at a rate
that permits them to improve revenues/profits
Risks; tenor
mismatches
Why doesn’t
money flow to
agriculture?

4. Forms of agricultural finance
Traditional finance:
Loans based on client
risk assessment
Micro-finance:
Loans based
on social links
Value chain finance:
Loans based
on economic links
Secured finance
Unsecured
finance
Structured finance
Long-
term
finance
Medium-
term
finance
Short
term
finance

5. Bank
Client
Unsecured
finance
1. Due
diligence,
2. Loan
Hope
you get
your
money
back
If the client does not
reimburse, then the
bank can start
recovery procedures.
In case of bankruptcy
of the client, the bank
is just one of the
creditors, without any
preferential access to
the client’s assets.
Loan can have
conditions, eg.,
maintenance of
profit ratios, no
secured loans
from others

6. Who can get unsecured finance?
• People/companies with a good track record
• Those with good and stable revenues
• Those with good connections (high-risk for bank…)
• Those able to borrow if an organization is forced to lend
under a political mandate
• Those with good business plans and good stories
• Venture capital finance (eg., MITFUND)
• Crowdfunding on the internet (if you can combine
economic and social/environmental impact)

7. Small farmers are therefore not good candidates for unsecured
finance…
Efforts to give them such finance have in the past only led to
large losses for the government and a lot of corruption.
But at the same time, small farmers generally do not have the
security that banks need. Banks also know that farmers who
operate on a subsistence basis have a lot of financial
pressures… and in practice, seizing collateral in case of late
payment often does not make any sense.
The best possibilities is to engage in finance schemes that raise
farmers’ profitability and revenues, and reduce their risks (with
insurance and contracts with buyers). That’s value chain
finance, linking smallholders to large buyers.

8. Bank
Client
Secured
finance
Loan
Group
Equip-
ment
Guaran-
tor
Real
estate
Pay-
ment
If all goes well…
Bank
retains
ownership
Member-
ship
Client
meets
criteria
Partial
repay-
ment
Full
repay-
ment
Registra-
tion of
collateral
User
rights
Owner

9. Equipment finance (leasing)
Possible for both new and second-hand items. For new items,
the financier is directly invoiced by the vendor, and resells with
deferred payment terms to the client.
Operating versus financial lease
Normally, upfront deposit required (say 10-20%; can be more
for equipment with very limited secondhand market; period
normally from 1 to 5 years). Payments can be structured to
reflect buyer’s expected cashflow (eg. growth, seasonality).
The only security is on the equipment that is financed. In case
of loan default, the financier takes the equipment back, without
any need to have recourse to a court first.
It is essential that the financier can have a clear title, which
means that he has to be able to register the security.

10. The collateral that banks habitually accept as collateral leaves
much potential collateral unutilized. The general situation in
developing countries with respect to SME lending:
Source: IFC, Access to finance, 2014

11. One consequence: long-term assets
used for working capital finance
Long-term assets
(land, real
estate)
Long-term
investment
finance
Equipment,
machinery
Medium-term (5-
7 years) finance,
leasing
Crops, stocks,
receivables
Revolving
working capital
finance
How it should be:

12. Equip-
ment
Recei-
vables
Bank
Client
To properly use movable collateral one needs a proper
legal framework, and it is very useful to have a web-based
centralized electronic collateral registry. This permits
financiers to ensure they have first claim on collateral. A
World Bank project to create such a registry started in
Cameroon in April 2016.
Collateral
registry
Goods in
warehouse

13. A few words on microfinance
Microfinance can be unsecured, secured (by group
guarantees) or structured (value chain finance). Using joint
liability groups a the main lending instrument has been the
most common among MFIs.
While this is suitable for the typical microfinance one finds
in cities and small towns, it is not suited for agriculture:
- With its stress on regular group meetings and regular
repayments of small amounts, it has high operating cost. This
leads to interest rates that are too high for agriculture.
- Agriculture needs a fairly big loan at the start, then many
months of nothing, then, after harvest, reimbursement…
- Group lending may reduce credit risk, but it does nothing to
reduce performance risk (ie., to improve the
profitability/revenues of farmers)

14. In India, one of the largest rural MFIs is BASIX. It’s active in
25,000 villages, and has lent to more than a million people.
It had started in 1996, and in 2001, it was widely seen as a
very successful MFI. But then, its management did an
evaluation of its operations…
Findings: It wasn’t that successful at all. About 52% of its
clients showed increased incomes, but 23% showed income
declines. Reasons:
1. unmanaged risk;
2. low productivity; and
3. unfavorable terms in input and output market
transactions.
BASIX decided to turn from joint liability groups (secured
finance) to structured finance, in which it directly addressed
all three problems.

15. Risk management: among others:
- Insurance (life, sickness, even weather insurance)
- Active risk mitigation: if you borrow from BASIX to buy a
milk cow, BASIX will help you chose the cow, and
veterinarian services are included in the package.
Productivity improvement: BASIX set up its own extension
agency, training some 1,000 people to provide extension
services: soil-testing, integrated pest management, field
surveillance, linking farmers with the proper input markets,
health checkups of animals, livestock vaccination, training on
use of feed and fodder and better dairying practices. Farmers
pay an annual fee of around US$ 10.

16. Improving bargaining power in input and output markets:
BASIX started promoting contract farming schemes. Not all worked –
mostly because of problems with the buyers (who were not sufficiently
organized). But many did, eg., in potatoes, cotton, dairy. Eg in dairy,
BASIX worked on the whole value chain, enabling farmers to invest in
the first part of the chain (reception points with cooling centers).
In cotton:

17. Bank
Client
Value chain
finance
Input
provider
Offtaker
Payment Repayment
Inputs Produce
Pre-harvest Post-harvest
Seedlings,
fencing

18. Producer Processor
End-buyer
Warehouse
Supplier of
improved
varieties
Goods can be owned
by producer,
processor or end-
buyer…
Warehouse
receipt
finance
Payment of
supplier,
reimbursed
once
processor
pays
Factoring
Factoring
Working capital finance, based
on total of inventories (under
collateral management) and
receivables
Value chain finance can cover all
or parts of the value chain.

19. Value chain finance is revolving finance that scales
itself automatically to the (seasonal) needs of the
business (as long as certain covenants are met)
(because the credit line is linked to the movable
assets in the client’s business operations).
If goods become more expensive, automatically, the
credit line increases.
(But the bank will consider price risk, so in the
absence of a commodity exchange, the value of crops
will remain much discounted).
(CTA recently finished a report on the potential for a
regional commodity exchange in Central Africa, concluding
it is feasible as long as government are willing to set up a
proper licensing regime and then get out of the way)

20. Value chain finance tackles directly the main
constraints that hinder finance from flowing to
agriculture:
Risks; tenor
mismatches
Need investment and working capital at a rate
that permits them to improve revenues/profits
Bank
Agricultural sector
Collaboration with
value chain partners
makes it possible to
improve productivity
and revenues
Reduced risks,
permitting
lower interest
rates and
higher loans

21. Why reduced risk?
Because the bank
replaces
Credit risk
by
Performance risk.
Unwillingness to pay
Inability to pay
If the financing is structured properly, as long as the client
performs normally in the value chain (i.e., the goods arrive
with the intended buyer), the bank will get its money back.

22. Value chain finance starts on the demand side. The
starting point cannot be: farmers produce X, they
have to find a buyer.
Difference between a subsistence farmer and a
commercial farmer: the first tries to sell what he
produces, the second tries to produce what he can sell.
Ideally, buyers tap into an already known market. Eg., to
supply cassava flour to bakeries.
Successful schemes have relied on the private sector,
with governments in a supportive role and occasionally
as a catalyst; and often, donor agencies’ involvement, to
provide technical assistance to farmers so that they can
raise their productivity and revenues.
Technical assistance can also cover the capacity-building
needs of offtakers and banks.

23. Bank
Client
Using the value
chain for
financing
Input
provider
Offtaker
Payment Repayment
Inputs Produce
Ware
house
Confirmed
invoice
Factoring
Warehouse
receipt
finance
Deposit

24. Invoice discounting/factoring
A small seller delivers to a larger buyer, who is well-known
to the banks.
The buyer only will pay in 60 days, but confirms that the
goods have been delivered. I.e., the seller has a receivable.
The seller can now discount his receivable(s) with a bank or
a specialized financing company. He gets finance at an
interest rate that corresponds to the risk of his buyer.
In practice, factoring schemes nowadays normally work on
electronic software, in which invoices are created and
confirmed.
Financiers have to understand well how exactly to manage
this product, otherwise there are large fraud risks.

25. Accounts
Receivable
Financing
Legal Capacity
to
Secure
Accounts
Receivable
Credit
Framework to
Manage
Accounts
receivable
loans
Good
documentation
with capacity to
collect
Accounts
receivable
Cameroon adopted
the legal framework in
2014
Have banks already set
up the necessary
internal procedures? Do
they have competition
from non-bank financing
houses?
Is there already a
good electronic
invoicing platform
used widely by
Cameroonian SMEs?
For factoring to take
off, certain conditions
need to be met.

26. How do you open a factoring account with a
financier?
First, you provide information:
• Financial Statements (multiple periods)
• Accounts Receivable summary ledger, with listing of
creditors (buyers)
• Inventory summary schedule
Then, the bank will go through the following process:
• Analyse accounts
• Calculate average accounts due
• Calculate average inventory on hand
• Evaluate pool of buyers, and load their details
• Determine acceptable lending level
• Set loan covenants
• Set up reporting criteria to monitor (easiest in case of an
electronic invoicing system).
• Give clients an internet account.

27. A common form of factoring is Invoice Discounting.
Characteristics:
Assignment of all receivables
Non-disclosed or disclosed
Client does own collection
Buyers proceeds banked direct to bank/lender’s account
Reconcile account balances at each drawdown and
periodically
Ongoing reviews/field audits
Recourse to client in case of borrower default.
Financing is for 60-90% of the invoice value. The client
needs to have good accounting systems, and a well-
diversified client base.

28. What’s the operational process?
• Invoice batch sent weekly by client to bank
• Reports listing what the client processed that week
• All debtor payments must come to the client’s account at the
factoring bank
• Client can view the bank account through the internet
• Concentration issues are checked (i.e., overly important clients)
• Debtor ageing is reviewed (are clients paying late?)
• Calculate the “Available Funds” based on approved balance of
accounts due (at chosen funding ratio).
• Client can execute drawdowns any day
• Buyers (creditors) reviewed monthly to check ageing and for
signs of problem)
• Bi-monthly reviews performed at the client’s premises. The
reviews will focus on the client’s internal processes.

29. If the client’s processes are weak, then the bank is likely to
insist on non-recourse (or full-service) factoring. This is
somewhat more expensive, but the bank will take care of the
full process of debt recovery from buyers, and will take all the
risks related to late payment or non-payment by buyers.
In practice, this is the most suitable form of factoring for most
SMEs.
Invoices are still issued by the client, and have to be issued
properly (this will be checked from time to time by the bank).
All receivables are assigned to the bank, and the bank directly
interacts with the buyers.
Financing is 50-90% of the invoice value. Cash received is
often retained for a number of days.
Banks can also do single-invoice discounting.

30. Warehouse receipt finance is a game-
changer for agriculture
 France: overcoming mid-19th century
social tensions (revolution!) coming
from the gap between fast urban
growth and lagging agriculture
 US agriculture: enabling the
development of late 19th/early 20th
century agri-processing industry
 Globally: leveling the playing field by
creating a farmer- and SME-friendly
financing instrument
 … and a robust instrument, that can
be used in very difficult environments
(in Africa, warehouse receipt finance
has even worked while civil wars were
going on).

31. The concept: turn agri-
commodities into gold
Vault
Bank
Borrower
Deposit
gold in
bank vault … and get
an ‘easy’
loan
Implies that the banks
knows it’s gold

32. So why not extend this mechanism to
(processed) cassava and other commodities…
“Vault”
Bank
Borrower
Deposit
cassava in
bank
“vault”…
… and get
an ‘easy’
loan
The bank needs to know the
commodity’s value

33. What’s a good bank “vault” for
agri-commodities?
“Vault”
Bank
Borrower
Critical issue:
the relationship
between the
bank and its
“commodity
vault”
How can a bank effectively
extend its “vault” to include
warehouses suitable for
storing agri-commodities?
Affordable Safe

34. Post-harvest finance (crops in
warehouse)
In bank’s
own
warehouse
In independent
warehouse (“public
warehouse”)
In borrower’s
warehouse,
managed by:
Independent
collateral manager
(“field warehouse”
or “collateral
management”)
Borrowing
corporate
(“private
warehouse”)
Farmers
(warrantage)
Different possible relationships
between the bank and its “vault”…

35. One possibility is for the
bank to create a
warehousing subsidiary,
which sets up its own
warehousing network.
This has been done in
Latin America and Turkey.
But is this really part of a
bank’s core business?
Moreover, does it make
sense for a warehousing
network just to serve the
needs of one single bank?
Ware-
house(s)
Bank
Borrower
Warehousing
subsidiary
1. Deposit
commodities
in the
warehouse…
2… and get an
‘easy’ loan

36. Another option is to use
the borrower’s own
warehouse. But for this
warehouse to give
(almost) as much
security as a bank’s own
vault, the bank needs to
take over its control. It
does so using the
services of an
independent, financially
sound collateral manager
(CM) which will act as its
agent in controlling the
warehouse.
Ware-
house
Bank
Borrower
Collateral
manager
2. Control
1b. Agency agreement
1a. Trilateral
agreement
permitting the CM to
take control over the
borrower’s
warehouse

37. Ware-
house
A collateral
manager
“wraps” the
warehouse with
professional
management,
improved
logistics and
grading, and
full insurance
coverage.
Physical
infrastructure
A collateral manager
accepts liability for the
continued presence of
(90%) of the stocks. As
banks normally only
finance up to 80% of the
stock value, this makes
bank lending safe… as
long as the collateral
manager has the means
to meet his obligations.
To make a borrower’s warehouse as safe as its
own vault, the bank uses a collateral manager…

38. Staff of the collateral
manager (CM) takes
control over the
warehouse at the
borrower’s premises.
No commodities are
allowed to enter or
leave without their
permission. The CM
reports to the bank on
the quantity and quality
of the paddy/rice in the
warehouse, and on this
basis, the bank
provides credit to the
borrower.
Ware-
house
Bank
Borrower
3. Deposit
commodities in
the warehouse…
5… and get
an ‘easy’
loan
Collateral
manager
4. Reports
2. Control
1. Agency agreement

39. Alternatively, there may
be warehousing
companies in the country
which store commodities
for third parties (“public
warehouses”). If the bank
trusts this public
warehouse, it can give
loans against the security
of any goods deposited by
anyone … all depositors
become potential
borrowers.
Ware-
house(s)
Bank
Borrower 1
1. Master agreement
Borrower 2 Borrower
3

40. For each borrower, the
warehouse weighs and
tests the paddy/rice
deposited, and issues
corresponding
“warehouse receipts”.
Against this collateral,
the bank provides loans.
The goods remained
blocked in the warehouse
until the bank authorizes
their release.
Ware-
house(s)
Bank
Borrower
2. Deposit
commodities in
the warehouse…
5.… and get
an ‘easy’ loan
1. Master agreement
3. Warehouse
receipts
4. “Blocks” the
goods in the
bank’s name

41. It is possible to finance the inventory in a borrower’s own
warehouse without using a collateral manager. But this is risky. It
should only be done:
- For reputable clients
- As part of a value chain financing that covers a larger part of
the value chain
- With a proper monitoring system in place, with the bank
having access to all the paperwork that accompanies the
purchase, processing and sale of the stock
- With periodical checking by an independent monitoring
company.

42. Warehouse
Processor,
trader
Collateral
manager
Collateral
Management
Agreement:
Full control
Collateral management – borrower’s warehouse
controlled by a 3rd party. What’s the scope?
Can be done if a
processor’s/trader’s
warehouse is physically
separate from the processing
equipment, or a trader’s
distribution space
But the problem: This only works is
you use a suitable collateral manager:
- domain expertise
- electronic backing for his activities
- access to suitable insurance.
Otherwise, whatever you call it, you
have just a monitoring arrangement,
without any effective risk transfer to
a third party.
Works for
the bank !

43. The big success story in India, a collateral
manager operating public warehouses
Collateral managers (NBHC, NCMSL) have taken over control of
private warehouses, and operates them as public warehouses,
open to a large variety of depositors.
NBHC arranges credits for several
dozen banks, under master
agreements in which it acts as a
bank’s agent. In many cases, NBHC
originates the deal: a farmer or a
trader deposits goods in a NBHC
warehouse, and if the quality is OK,
NBHC staff then arrange a loan from
one of the banks from which it has
a mandate. The funds arrive in the
client’s account the next day…

44. The Indian model streamlines
the warehouse receipt finance
process
Prospective clients can apply
online, and the process after
that is easy, and transaction
costs low.
One result is that warehouse
receipt finance becomes feasible
even for small loans. Eg, from
2007 to 2011, NBHC arranged
more than 100,000 warehouse
receipt financing loans for
farmers, starting as small as
US$ 500. Loan distribution is
often through smart card.

45. Risk management in case of collateral
management
Warehouse
Borrower
Financier
Collateral
manager
Reporting,
incl. on
prices
Control
Loan up to 75% of the initial
value of the collateral
(higher with hedging)
Borrower pays top-up
margin (in cash or extra
stocks) to ensure bank
margin stays above 5%
Deposit
Pledge,
guarantees
Insurance
Theft, natural
hazards

46. Warehouse receipt finance for the
export supply chain
Trader
Processor
Port
warehouse
International
buyer
Farmers
Bank
Credit
support
company
Full
control

47. The situation in Cameroon
6 collateral managers with HQ in Douala. All handle imported
and exported commodities (cocoa, coffee, cotton, rubber, rice),
but not locally produced commodities.
Only 2 of them are active outside of cities/ports.
All banks work with these collateral managers.
Several donor-supported initiatives in the past:
• Northern Cameroon, seeds and inputs for cotton farmers
(IsDB, SODECOTON, Credit du Sahel, Cotton Producers Assoc.
• IFAD & Government, Projet d’appui au développement de la
microfinance rural (PADMIR)
• CAMCCUL (microfinance network) funding cocoa and coffee.
• ONCC: negotiated with a private equity fund a 30 mln $
revolving line of credit, to be channelled through MFIs and
banks to finance coffee and cocoa, using warehouse receipts.

48. Legal framework: OHADA. Requires registration of pledges in
order to establish bank’s security.
But OHADA does not include regulation on warehouses or
collateral managers… As already recommended years ago,
Cameroon should draft a proper warehouse receipt law.
It would also help if there is a commodity exchange: exchange
users are bound by the exchange’s rules and, in case of
contractual disputes, its arbitration panels, which helps give
security to financiers.
As to cassava: PIDMA, according to value chain stakeholders,
should have a component to develop “warrantage” for processed
cassava products. But not everyone agrees it’s feasible.

49. Anchor finance
Starting point: an organized buyer (eg., Guiness) who
wants to procure specific kinds of cassava.
Elaborate these plans: what quantities, from where?
Identify who is able to supply the cassava.
Verify that they can do so profitably, and (probably) put
in place a technical assistance scheme to improve
farmers’ profitability.
Get contracts signed. Start to make finance flow to
where it is needed. This can include both working capital
finance and equipment finance (e.g., for the rapid
processing into intermediate products close to the field).

50. cassava flour,
fermented flour,
Garri
attiéké,
starch
tapioca
Cassava
So, whether you can get access to value
chain finance depends on how organized is
the market into which you sell:
Bakeries
Industry

51. Commodity
Volume Value
Status Haircut Credit available
Upcountry,
cassava
Upcountry,
starch
City WH
Receivables
50%
30%
10%
3%
TOTAL
60
600
800
1000
An example of a value chain financing for an integrated
processor (controlling some fields of its own)
* 5 tons of cassava is processed into 1 ton of starch

52. Do farmers need to remain “just” farmers in a value chain
structure? No. In Europe, Japan and the USA farmers have
moved both upstream (inputs, equipment) and downstream
(processing, distribution, banking).
So in principle, farmers could set up a cassava processing plant.
Problem: banks may not trust the farmers’ ability to manage
such a plant.
Possible solution: a corporative structure. For example:
Total finance needed for the processing plant: 100.
Farmers’ own contribution: 5.
Loan to farmers to buy equity: 35. Farmers will reimburse this
through deductions from their deliveries.
Bank-controlled vehicle: 60. With an agreement to sell the full
60 to farmers, through deductions, once farmers have repaid
their loan. Meanwhile, the bank controls the plant, and can
appoint and supervise its own managers. By the time the
farmers have majority control, they are used to the professional
management…

53. Supermarket
chain (UK)
Contract farming
scheme
Farmers
Long-term
contract
Forward
contracts
Dam
Irrigation,
electricity
Local
pension
funds
Long-term
finance
Escrow
account
Payments
Debt service (hard
currency)
Payment after water &
electricity charges
Surplus
Export of flowers,
fruits & vegetables
In principle, as long as one has the right buyer and a good
control over the production process, farmers can even attract
long-term finance from institutional investors.

54. But farmers have to keep in mind that value chain structures
are long-term win-win structures. They cannot walk away
from a supply market just because the price on the open
market is a few percent higher, or because they think they
have something better to do with their time than to harvest the
cassava as promised.
This has gone wrong very often, and corporates as well as
financiers want to have a high level of confidence that
farmers are serious and in the business for the long term.
This can be facilitated by a proper deal structuring, e.g., not
have forward prices that are entirely fixed, and an equity stake
of farmers in the processing plant.