7. Domestic Bank Financing for Agriculture Local / Domestic Banks are reluctant to lend to their agricultural sectors Country Agricultural Share of GDP (%) Bank Lending to Agriculture (%) Burundi 34.9% 10.7% Kenya 27.9% 6.4% Malawi 37.8% 15.2% PNG 34% 4.5% Uganda 32.7% 6.8% Zambia 18.5% 9.3%
19. Existing Mechanisms and Tools for Agri-Lending Coffee Coop / SME Warehouse Coffee Transported Warehouse Receipt Bank Credit
20.
21. Contract Based Lending – Socially Oriented Lending 1.order 2.credit 3.delivery 4.payment 5. Payment (minus loan & interest) Buyer (1) Places order with Producer Org Social Lender (2) Provides credit based on order volume and value Producer (3) Delivers coffee to Buyer Buyer (4) Pays full value to Social lender Social Lender (5) Pays order value minus loan amount and interest to Producer Org
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35. Consumer Driven Guarantee Fund Coffee Roasters Consumers Investors FAST Guarantee Service SME Lenders (including Lending Buyers) Coffee Buyers / Importers Gtee Fee Gtee Payment Order Coffee Trade Finance Outstanding payment $ investment
36.
37.
38.
Hinweis der Redaktion
Success in the marketplace is all about timing, and producer finance is effective in the degree that it enables more flexibility to respond to market opportunities and needs.
Higher Lending Default Rates Few sustainable SME’s have either the skills or the tools available to adequately mitigate price and weather risk Price shocks – common in the coffee industry - have often resulted in significant lending default by coffee traders Weather shocks – common in coffee producing countries – can often destroy crops / reduce yields, resulting in lending defaults Price and weather shocks are occasionally followed by government led “debt forgiveness programs” leaving the banks with bad debts Banks perceive urban sector lending (personal lending and commercial / industrial lending) to be a better bet Lack of Bank Ag. Expertise Banks may not have in-depth understanding of the agricultural markets Banks may not have specific understanding of the sustainable sector agricultural markets and be unable to understand the difference between specialty / sustainable and convention coffee sectors Lack of understanding results in inappropriate lending due diligence processes that unfairly rate and score agricultural enterprises applying for lending A misunderstanding of actual risk may result in higher fees, smaller facilities and greater collateral requirements for agricultural borrowers Perception that large enterprises are Best Sustainable enterprises are generally smaller in scale and size than conventional agricultural enterprises Cooperatives can be seen as “weaker” than large commercial agri-enterprises, and are often perceived by banks as having: less professional management weaker balance sheets less power and influence with their key buyers less security to offer a bank Less ability to manage price and weather shocks Even where local bank branch managers want to lend to smaller enterprises their due diligence / credit assessment processes discriminate against smaller enterprises NOTE THE ELEMENT OF TRUTH TO THIS BUT ALSO THE ELEMENT OF STEREOTYPING HERE. SMALLER SME’S DON’T NECESSARILY HAVE RIGHT BANKING LANGUAGE OR MANAGEMENT; BUT SUSTAINABLE SMES ACTUALLY DO HAVE ABOVE PAR MANAGEMENT SYSTEMS AND THIS IS PARTLY WHAT POINTS THE WAY FOR EXPANDING ACCESS TO CREDIT IN THE AREA Urban lending is Sexier Non agricultural lending takes a much larger share of bank lending than its GDP share of the economy Banks often assume that lending to urban clients is a better bet as: transaction costs are lower than those for rural clients – clients much geographically closer to the banks security/collateral in urban areas is far easier to take a charge over and way more realisable urban enterprises have professional managers who speak the same language of finance loan sizes can be more attractive to the banks Lack of Collateral for Lending All banks take security / collateral when lending with the aim of seizing and realizing the asset should the borrower default, however agricultural collateral can prove challenging: banks often find themselves unable to seize collateral from agricultural enterprises following default, even where they have a charge over the land or the asset barriers to seizing assets can be both “physical” or legal many sustainable SME’s don’t have good quality assets available to pledge as collateral or where they do have assets are unwilling / unable to pledge these assets agricultural assets can be hard to sell even if successfully seized With urban borrowers (both retail and commercial) banks find it easier to both secure and realize assets following a loan default. NEED TO FIND A WAY OF HIGHLIGHTING THE FACT THAT AGRICULTURAL SMES ARE NOT THE “EASIEST” BANKING CLIENTS TO DEAL WITH, BUT ONE OF FAST’S PROPOSITIONS IS THAT THE WHOLESALE REJECTION OF FINANCING TO SMES IS A BIT LIKE THROWING THE BABY OUT WITH THE BATHWATER. THERE ARE A LOT OF RELIABLE BORROWERS IN THAT SEGMENT — WHAT IS LACKING ARE THE TOOLS TO IDENTIFY WHEN AND WHERE THIS IS THE CASE.
Need to add comments on why and how these other systems or arrangements help address some of the challenges/issues facing local banks 9Don’t mention challenges of these institutions here; mention those on the next slide. -local intermediaries: know their clients very well; provide delivery services and “personalized” service; but for high interest -micro-finance: rely on social networks to reduce risk; cater to small borrowers, but no SME business financing -multi-national traders: know their clients; have business relationships with clients (can generate mutually supporting relationship) but are not lenders per se; may have limited access to free capital for lending; no infrastructure to distribute, manage due diligence -Importers/roasters: same profile as traders except, may not have direct relations with producers (making it still more difficult to manage due diligence and risk) -Socially oriented lenders: drawing of social investment; have lower pressures to demonstrate high returns: gives more felxibility in risk taking; can leverage “social capital” of sustainable enterprises in same way as micro-finance. challenges
Add data on the broader Sustainable Finance Gap 1.5 billion…. In our notes, but not on the slide…. Need to understand the basic assumptions regarding our calculations
Two points: Situation worse But it has raised awareness of the importance of finance as a key ingredient of sustainable trade Re: situation worse: The Financing Gap has worsened due to the recent gloab banking crisis / “credit crunch”: Local banks are withdrawing existing facilities from clients Local Banks are offering smaller facility sizes to their clients Multinational Traders are struggling to secure finance for their businesses and increasingly reluctant to offer financing packages to partners (especially the smaller / weakest clients) (Some) socially oriented lenders are reducing their growth in lending Interest rates for agricultural enterprises have not seen a reduction in their interest rates despite global reductions in central bank rates
Banks are clearly reluctant to lend sufficiently to the agricultural sector Lending that does occur is through the use of lending mechanisms and tools that enable agricultural lending whilst protecting the lender. Local domestic banks rely heavily on collateralized lending, especially warehouse based lending for the coffee sector. At times they will also consider providing finance through letters of credit. Socially oriented lenders will primarily rely on “relationships” based upon forward contracts agreed between producers and buyers.
A holistic program has been implemented to increase the provision of finance to the agricultural sector The program is led by the Association of Honduran Banks (AHIBA) reflecting the desire of the banks to increase their lending to the agricultural sector All key stakeholders national have bought in to the project: Local commercial banks Agricultural associations (including IHCAFE) The banking regulator There is a uniform desire to tackle the financing gap by identifying – and addressing – the barriers to agricultural lending The program is supported and part financed by the World Bank and the Inter American Development Bank ------- The program is a four year action plan for increasing financing for agriculture through: Improving the risk management of agricultural enterprises (coffee and other agricultural commodities) Improving the knowledge of banks in agricultural risk management Identifying barriers to lending in existing banking regulation and working with the regulators to overcome these barriers Introduction of pilot projects for improving financing to the agricultural sector In addition work is being undertaken (outside of the program) to examine the implementation of index-based weather insurance ---- Specific targets have been agreed by the Association of Honduran Bankers for improving financing for the agricultural sector including: All major banks trained in agricultural price risk management At least 100 agricultural enterprises trained in price risk management Training of banks in new methodologies for assessing lending for agricultural enterprises Identification of regulatory barriers to lending and ongoing work with the government to address identified barriers 10% increase in the number of agricultural enterprises receiving financing
Price risk management is a reason cited by banks for not lending to the coffee sector This barrier can be overcome by SME coffee traders developing their own risk management programs and practices Training in coffee sector price risk management is shortly to be made available by the World Bank’s Commodity Risk Management Group Rollout from 2H 2009 of an online comprehensive training course in price risk management for coffee sector SME’s CRMG is aiming to form relationships with NGO’s, training institutions and capacity building enterprises to enable them to adopt and utilize the course
Potential Size of Fund: Year 1 - $2.5 million capital $7.5 million guarantees Year 2 - $4.5 million capital $13.5 million guarantees Year 3 - $5.0 million capital $15.0 million guarantees Number of Beneficiaries (SME’s receiving guarantees): Year 1 – 35 SME’s Year 2 – 60 SME’s Year 3 – 70 SME’s ---- Possible Profile of beneficiaries of the guarantee fund: Smaller SME’s – cooperatives and associations with less than 1,500 members New entrants to the sustainable sector – less than four years of certification by a sustainable production program Lacking in finance to grow their businesses – unable to secure sufficient international or domestic finance to fulfil their market potential
![Presentation Overview ,[object Object],[object Object],[object Object],[object Object]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)