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calvin miller senior officer rural finance
Calvin Miller -Senior Officer, Rural Finance
  • Holder of M.S in Agricultural Economics, currently Senior Officer for Rural Finance in FAO, has over twenty-five years of worldwide experience in economic development, in the design, implementation and evaluation of financial services programs and institutions, production and marketing, and institutional development.
  • Has extensive experience in agricultural value chain development and finance for both national and international markets.
  • Has worked as the Country Manager of MEDA in Bolivia and carried out many international consultancies
  • Mr. Miller provided leadership and technical support for over 200 CARE micro and small enterprise, and agriculture and natural resource projects in over 40 countries.
  • He also founded and developed, MicroVest
perspectives of value chain finance in africa

Perspectives of Value Chain Finance in Africa

Agri Forum: Value Chain Finance Conference

Nairobi, Kenya 16 – 18 October, 2007

Calvin Miller

FAO Rural Finance Senior Officer

Rome, Italy

presentation profile
Presentation Profile
  • The changing agricultural scene
  • Using strategic alliances
  • Value chains as a business approach finance
  • Innovations
  • Addressing risk
  • Lessons and policies
an evolving agriculture supermarket vs subsistence farming with open markets and cell phones
An Evolving Agriculture:Supermarket vs Subsistence Farmingwith Open Markets and Cell Phones
  • Market integration and specification
  • Conglomeration of market leaders
  • Open trade with international y regional competition
  • Segmented demand with stringent standards and conditions
  • Instant access to information

But also,

  • Subsistence agriculture, food aid and HIV-AIDS
stages of agricultural finance
Agricultural Credit Era

(1950 a 1985)

Directed production credit

Subsidized credit

High transaction costs of lending

High loan losses

Government and donor refinanced lines of credit through agricultural banks and others

Informal family and trader finance for small farmers

Donor Microfinance Era

(1980 a 2000)

Rapid, small working capital loans

Group lending approaches

Focus on non-agricultural activities

Forces groups savings

Separation of financial services and business support services.

High cost of microfinance

Stages of Agricultural Finance
stages of agricultural finance cont
Commercialization of MFIs

(2000 to present)

Formal MFIs

Little subsidy

Multiple Products

Expansion and competition

New technologies

Interest by capital market investors and lenders

Value Chain Finance(2005 to present)

Strategic focus on market potential of businesses

Linkages among suppliers, producers & marketing companies

Growing importance of standards

Greater use of risk mitigating tools

Growing integration between banks and business

Growing use of new technologies.

Stages of Agricultural Finance (cont.)
some underlying challenges affecting rural finance
Some underlying challenges affecting rural finance

Demand

  • How to increase economic opportunities?
  • How to build farm management capacity?
  • How to mitigate risk?

Supply

  • How to cost-effectively introduce flexible and longer term loan products?
  • How to promote effective management?
  • How to mobilise support for sound financial markets?
slide9

Multiple Services; Multiple Providers

MFIs

CommercialBanks

Overdrafts/

Credit Lines

Transfer Payments

Marketing Companies

CreditUnions & SACCOS

Savings

Loans

Insurance

Insurance Companies

Inputs

Suppliers and Traders

Leasing

Family / Friends

Equipment Companies

2 financial linkages

MFIs

NGOs

Credit Unions

Village Banks

Agro-processors

Input Suppliers

Marketing Companies

Leasing Companies

Warehouse Operators

Supermarket Chains

Private Banks

State Banks

Postal Banks

Insurance Cos.

Non-bank financial institutions

Investment funds

Farmer Associations

Farmers / Rural Clients

2. Financial Linkages

Partnering for better access, services and efficiency

3 agricultural value chain finance

Collector/Traders

Farmers & Producer Groups

3. Agricultural Value Chain Finance
  • Linking finance with agriculture and agribusiness
  • Aligning and structuring finance with the chain

Medium and Large

Exporters and Wholesalers

Processors

Strategic engagement for common benefit

Input Suppliers

trader credit

Inputs Importer/ Wholesaler

Large Scale Trader

Input shopkeeper/ Small Scale Trader/

Farmer Organization

Bank

Trader Credit

Exporter/ Wholesaler

or Processor

Farmers

Key

Input sales

Trade credit

Trade / seasonal credit

Product sales

slide13

Value Chain Finance Flows

Enabling business & financial environment

Financial and Information flows

Inputs

Production

Processing

Distribution

Consumption

Physical flows

Finance and supporting services

4 technology innovation
4. Technology Innovation
  • Communication Technology -- M-PESA–Kenya; G-Cash--Philippines
    • Purchases & sales
    • Commodity prices
    • Money transfers
    • Payments
  • Point of Sale Access
  • ATM & Smart Cards

The Economist, 15/02/07

product and system innovation
Product and System Innovation
  • Risk management tools; futures, hedging
  • Warehouse receipts finance
  • Factoring y securitization
  • Contact farming and outgrower schemes
  • Facilitation Models (Ej. DrumNet)
  • Integrated Models (Ej. LA-FISE)
5 risk analysis incorporating new elements
5. Risk Analysis – Incorporating New Elements
  • Client /business capacity
  • Repayment capacity
  • Security coverage
  • Cash flow
  • Market growth and risk
  • Competitiveness

From supply-driven “how we lend” to client driven “how can we structure finance to address client needs and risks”

tools to mitigate market risks
Tools to Mitigate Market Risks
  • Use of futures and options
  • Warehouse receipts as well as warehouse storage capacity
  • Market information services
  • Contract farming
  • Insurance
  • Access to technical assistance

Some risk management tools are more practical for agro-industries and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.

slide18

6. Banks: New Perspective toward Agriculture

  • Banks should invest money & knowledge in the agribusiness
    • market trend knowledge
    • understanding of key risks
    • alliance and linkage opportunities

But

  • Bankers are not technical advisors

Helping farmers & agribusinesses achieve their goals

Business and Loan Counsel

Loans and Services

Consultation

Loan Analysis

reality new mitigants are required
Reality: New Mitigants are Required

Measures

Methodology

Price Risk

  • Use of market based
  • price instruments
  • Couple with Loan
  • Hedge own portfolio or Loan
  • Use microfinance institutions
  • Use international Banks and brokerage houses as partners

Crop/Weather Risk

  • Index based weather
  • insurance
  • Rely objectively on specific weather events
  • Compares yield to measurable, objective, correlated risk
  • Need conducive policy and regulatory environment
  • Use innovative
  • structures
  • Capture cash flows
  • Use “organized” intermediate agencies

Collateral Risk

TA providers play a key role in ‘importing’ innovative successful practices

government policies to support value chain finance
Government: Policies to Support Value Chain Finance
  • Business capacity building and market integration
  • Contract farming and out grower schemes
  • Technical capacity in market norms and standards
  • Commodity exchanges and active futures markets
  • Insurance innovation, data collection and initiation
  • Market information and access
  • Infrastructural investment
  • Product and service innovation and diversity
  • Technology adaptation and access
key factors for consideration
Key Factors for Consideration
  • market and industry
  • client and strategic partners
  • fund the chain at most strategic points
  • insure effective and transparent partnerships
  • innovate with new technologies and products
  • take advantage of the value chain
  • analyze and structure loans properly
  • offer timely, multiple and flexible financial services
  • focus on the client and business
  • Understanding
  • Administration
  • Risk
  • Service
slide22

FAO, Agricultural Department

www.fao.org/ag

  • Rural Finance Learning Centre
  • www.ruralfinance.org