Karen LOSSE started by defining rural finance compared to agricultural finance and to microfinance. She highlighted that the reasons for lack of access to rural finance can be found in the rural/agricultural (demand) sector and the financial sector (supply). The policy level is key to improve rural and agricultural finance. She referred to the upcoming presentations of Judith Frickenstein and Erick Sile.
On the supply side, Losse continued, providers know too little about potential clients in the agricultural sector. Providers see this sector as too risky. There is a strong case for providing better data on this potential client segment (creditworthiness, soil quality, price development, weather data, etc.). Alternative collateral, such as warehouse receipts, as well as better credit information would improve the providers' security to provide loans to the agricultural sector. Also, conventional loan products have to be improved. One way of doing this is to use new technologies, including digital products.
On the demand side, agricultural sector actors are very diverse. Smallholder farmers outside value chains have different needs than smallholders in loose value chains or bigger farmers in value chains. The latter need SME type loan products whereas the former might need savings and insurance. It is key to make clear differentiations and then support agricultural sector actors accordingly. This support does not always have to be via the financial system. Strengthening farmers associations in improving their productivity is often a pre-requisite for finance.
In closing, Losse mentioned that in order to improve agricultural and rural finance, the financial system has to be strengthened to become more inclusive and to serve the entire value chain. Furthermore, new technologies provide an opportunity and can significantly accelerate access to rural finance.
The session continued with Judith FRICKENSTEIN, who explained the background of Making Finance Work For Africa (MFW4A). The MFW4A Partnership is a G8 initiative launched in October 2007, aimed to:
The MFW4A process on agricultural finance resulted in the Kampala Principles, which is a set of eleven policy recommendations. The Kampala Principles recognize the pressing need for financial services in the agriculture sectors in Africa, hence demanding special attention. Erick SILE continued the presentation on MFW4A, by presenting several principles and recommendations to strengthen policy-making, legal and regulatory frameworks, and to close the knowledge gaps related to agricultural finance. The Kampala Principles will be incorporated in the Comprehensive Africa Agriculture Development Programme (CAADP).
Juliette DAVID presented HORUS' approach on how to help financial institutions to take up the challenge of serving agricultural markets. From a financial institution's (FI) perspective, serving agriculture is a challenge, because of the higher risk compared to other sectors, complex seasonal patterns, and agricultural techniques required. It is also difficult to make it profitable due to higher transaction costs. FIs therefore need support to take up the challenge. However, David noted that each context requires a different model, which she illustrated with the value chain approach and technical support to FIs. The value chain approach is a model involving different stakeholders, with a risk-sharing mechanism and technical support at different levels. This approach allows FIs to limit costs and risks, while serving large numbers of farmers. Technical support to FIs, another approach to assist FIs, creates capacities within the FIs to address agricultural markets' various needs. This allows FIs to control their risk, while offering services adapted to the diverse needs of agricultural clients.
David then continued with the example of the value chain approach: Advans Cote d'Ivoire small farmers cocoa credit program. In 2012, Advans decided to become the financial partner of the CLP project, funded by PROPARCO and IDH and to provide input credit (phytosanitary treatments and fertilizers) to farmers through their cooperatives. David continued by showing the integrated mechanism used to control flows and risks, involving all actors in the value chain. It has resulted in 9,000 farmers funded, EUR 900,000 credit by 60 cooperatives since 2012. The repayment rate is 100% at cooperative level and 96% at farmer level. David concluded her presentation with the following lessons learnt for the Advans Cote d'Ivoire small farmers cocoa credit program. Value chain finance proved a good entry point to cater to the small cocoa farmers' diversified needs. She also stressed the importance of evolutive risk-sharing mechanisms involving all parties and the need for external funding for the different partners. However, a difficulty arose from cash payments and lack of banking infrastructure, as the program needed to capture payment flows between cooperatives and producers.
Bert-Jan OTTENS of Blue Rhino Consult presented on behalf of Miriam Cherogony of the Rural Finance Knowledge Management Partnership (KMP). The objective of KMP is to strengthen IFAD's engagement in rural financial service delivery through knowledge sharing and direct technical support. The presentation identified gaps in agri-value chain finance training, and how these can be bridged. Ottens explained that the key recommendation of many workshops on value chain finance is the need to build the capacity of all value chain actors. Financial service providers, technical providers and farmers have to work together to make the value chain more effective. Ottens summarized the issues and challenges which can be expected in value chain finance, mentioning amongst others the inadequate human resource capacity within the FIs, the absence of contextualized training programs, and disaggregated information limiting decision-making in agricultural lending practice.
The presentation continued addressing some of the gaps, stressing the limited adoption of the value chain approach and the potential of adopting the value chain analysis as a service. Additionally, capacity building of all actors in the value chain should create deeper understanding of the respective roles and interests of each actor in the chain. A second gap identified by KMP is the lack of skills concerning enterprise risk analysis and management, which can be countered through additional training in risk management and insurance. The third gap mentioned by KMP concerns the need to address and learn more from best practices, and replicate these in agri-value chain finance training. The last gap stressed the importance of an enabling environment for agri-value chain finance. The financial sector can address this problem by expanding the policy environment for agricultural finance to also cover emerging financial products and technologies. Ottens concluded by stressing the importance of best practice manuals and case studies to support the training process to farmers and MFIs, as well as the need for a knowledge management e-hub for agricultural finance training, research and standardised lending instruments.