By: Simacheche Dinde and Webby Mate

INNOVATIVE APPROACHES IN THE PROVISION OF RURAL FINANCE WITH EMPHASIS ON SMALLHOLDER PRODUCERS:THE CASE OF ZAMBIA By: Simacheche Dinde and Webby Mate

PRESENTATION OUTLINE This Presentation comprises: • Introduction • Objectives of the study • Methodology • Macroeconomic Environment • Structure of Zambia’s Financial System • Study Findings • Conclusion

INTRODUCTION • Size approximately 752,614 square kilometres of which 47% is arable land. • However, of this arable land, only 15 per cent is under cultivation mostly by small scale farmers. • Population is estimated at 10.3 million divided evenly between rural and urban areas. • Out of the total population, 45% or 4.6 million people depend on agriculture for subsistence. • Small-holder farmers (cultivating 5 to 10 hectares) are the majority in the agricultural sector and account for over 70% of production.

INTRODUCTION (continued) • Poverty in Zambia is high. • An estimated 73% of the population subsist on less than US $1 a day. • Poverty levels are higher in the rural areas at 83% compared to urban areas at 56%. • The high rural poverty has been attributed to a poorly functioning market for agricultural output, low productivity, low utilisation of agricultural inputs and ‘poor access to financial services’. • Provision of rural finance particularly to the smallholder farmers is therefore fundamental to promoting economic growth necessary for improving the standard of living of the majority of people in Zambia..

OBJECTIVES OF THE STUDY • This paper attempts to review the innovations in the provision of rural finance, particularly to smallholders in Zambia. • The study set to: • Obtain a sense of innovations relating to rural finance at policy level; • Review of rural finance providers operations (products, outreach, delivery methodologies and challenges) • To obtain an understanding of the extent to which the needs of clients were being met.

METHODOLOGY • The paper was largely informed by secondary sources. • Supplemented with primary data using focused group discussions and semi-structured interviews. • To collect data, the Government and Bank of Zambia documents were reviewed. • Some commercial banks, non-bank financial institutions, Association of microfinance institutions of Zambia, and some clients of rural finance providers were visited • Government and BoZ documents were reviewed to get a sense of the country’s policy direction. • A major limitation of this study was the confidentiality of information required.

MACROECONOMIC ENVIRONMENT • During the first decade after independence in 1964, Zambia was a prosperous country. • However, mainly due to external factors (oil price shocks and decline in copper prices) the country’s economy declined. • Table 1 in the next slide: Captures key macroeconomic and Social Indicators.

Table 1: Selected Key Macroeconomic and Social Indicators

FINANCIAL SYSTEM • Zambia’s formal financial system includes the Central Bank, 13 Commercial banks, 12 Non-Bank Financial Institutions (NBFIs) and about 50 Microfinance Institutions (MFIs). • Regulators are: • The Bank of Zambia • The Pensions and Insurance Authority (PIA); and • Securities and Exchange Commission (SEC). • Of the 50 MFIs only three are registered under the BFSA. 20 MFIs are affiliated to the Association of Micro Finance Institutions of Zambia (AMIZ). • Most NBFIs brought under supervisory ambit of BoZ in 2000 following amendment to the BFSA • This indicates that most of the NBFIs and MFIs in Zambia were operating in an unregulated environment

THE STUDY FINDINGS

BACKGROUND TO FINDINGS • The study established that until the early 1990s, rural finance did exist mainly in form of: • subsidised credit and input supply by the Government; and • Significant commercial banks’ credit through rural banches. • The unstable macroeconomic environment in the immediate post liberalisation period led to a decline in the provision of rural finance. • Most commercial banks closed their rural branches. • Specialist financial lending institutions that were established to provide rural finance (e.g. Lima Bank, Cooperative Bank, ZCF Finance Services, CUSA) were either placed under receivership or liquidation. • Those still existing have suffered from low capitalisation and lack of funds for onward lending. • Other types of institutions such as MFIs and out-grower schemes have emerged to provide financial services to the rural communities.

GOVERNMENT • The Government has identified agriculture as a major economic growth sector. • Seeks to promote a self-sustaining export-led agricultural sector that will ensure household income and food security. • Apart from attaining a stable macro-economic environment, the Government has put in place a number of incentives and programmes aimed at smallholder farmers. • These include: • matching grant fertiliser support programme; • The food security pack programme; • the opening up of agricultural blocks that would facilitate the development of out-grower schemes; • tax Incentives.

BANK OF ZAMBIA (BOZ) • Specific measures implemented by the BoZ in the recent past Include: • The conversion of statutory reserves of foreign currency deposits to US dollars; • Reduction of the statutory reserve ratio from 17.5% to 14% aimed at injecting more liquidity; • Introduction of the broad based interbank foreign exchange system; and • Coordinating the development of the ‘Financial Sector Development Plan (FSDP)’.

COMMERCIAL BANKS • Of the 13 commercial banks only 2 have a rural presence (ZANACO Bank with 12 rural branches and Finance Bank with 6). • Banks provide mainly credit and savings facilities. • At end 2003, the share of credit to the Agricultural sector was K350 billion or 25% of K1,401.1 billion total bank loans and advances. • Most credit went to medium to large scale farmers. • Most commercial banks savings facilities were unaffordable to smallholders due to high minimum balances at K750,000 equivalent to about US $150. • Exception - ZANACO (Min bal.K150,000 = US $30), - Finance Bank (K50,000 = US $10).

ZAMBIA NATIONAL COMMERCIAL BANK (ZANACO) • Largest indigenous and Govt. owned bank – 41 branches • Total loans/advances as at Dec. 2003 was K101.5 billion • Share of credit to agricultural sector - K19.5 billion or 19.2% • Historically, ZANACO has been involved in the following smallholder schemes: • A special loan fund for smallholder farmers the ‘Munda programme’. Programme was abandoned due to losses that were caused by a drought. • Animal Disease Control Fund, which was set-up by Government to contain animal disease outbreaks in the Southern Province. Set up as a revolving fund to assist farmers obtain loans for the procurement of medicaments for livestock. Programme abandoned due to poor loan repayments. • Zambia Agricultural Marketing, Processing and Infrastructure – Rural Credit Facility for Eastern Province – An ADB funded programme which commenced in 1999.

ZANACO - RURAL CREDIT FACILITY FOR EASTERN PROVINCE • ZANACO is administering the programme for the Ministry of Agriculture and Cooperatives. • Products - seasonal and short to medium term credit facilities to the rural poor through farmer groups for equipment and inputs. • As at 31 January 2004 a total of K17.4 billion had been disbursed. • Repayment stood at K6.2 billion. • Outreach - 1,083 farmer groups in all the 9 districts of the province. The programme has a cumulative total of 14,326 beneficiaries. • Benefits to clients – food security, improved incomes, improved social cohesion, among others.

ZANACO - RURAL CREDIT FACILITY FOR EASTERN PROVINCE • Constraints faced by the programme: • Adverse weather conditions, which have affected yields and this in turn has affected repayments • Inadequate markets for agricultural produce • Lack of appropriate storage facilities for unsold produce • Inadequate infrastructure for the programme, e.g. transport which hampers mobility • Inadequate farm extension services

NON-BANK FINANCIAL INSTITUTIONS (NBFIs)- National Savings and Credit Bank (NSCB)- Zambia National Building Society (ZNBS)

NATIONAL SAVINGS AND CREDIT BANK(NSCB) • NSCB was created in 1972 through a statute, with a mandate of providing financial services especially in rural areas using the post office network. • NSCB has 24 branches around the country - 11 in rural areas. • Services provided by NSCB include: • A variety of savings accounts with low minimum balances; • Credit facilities; • Money transfer; • Safe custody of valuables; • Invoice discounting; • Guarantees.

NSCB - SAVINGS AND CREDIT PORTFOLIO • NSCB’s had about 100,000 small savers account holders at end 2003 with a savings portfolio of K34 billion (equivalent to about US $7m). • NSCB lends to smallholder farmers • At the time of the study, total microfinance portfolio was K564 million. • Of this total, the agricultural portfolio was K177 million, or 31%. • NSCB intends to establish more rural branches through its rural banking strategy.

CONSTRAINTS FACED BY NSCB • High administrative costs • High loan recovery costs • Poor infrastructure in rural areas making it difficult to expand outreach • Limited skills in microfinance INNOVATIONS BY NSCB • Low minimum account balances • A variety of savings accounts for low income groups • Money transfer • Invoice discounting

ZAMBIA NATIONAL BUILDING SOCIETY (ZNBS) • ZNBS is a Govt. owned housing finance institution established to provide mortgages to the public. • Has 20 branches across the country. • Also offers savings products at low minimum balances. (at K100,000 equivalent to US $20). • In April 2003 ZNBS introduced a short term credit facility, in response to client demands. • - Range from K400,000 to K5 million. (US $80 to US $1,000) recoverable in 6 months. • The short term loans are unsecured but ZNBS takes an insurance cover at the borrower’s expense. • Most profitable among products offered by ZNBS.

MICROFINANCE INSTITUTIONS (MFIs) • MFIs are relatively new in Zambia - emerged in the mid 1990s. • At end 2003, there were 40-50 known microfinance service providers in Zambia. • AMIZ, the network of MFIs in Zambia has membership of 20 MFIs with an outreach of 60,000 active clients and, • Portfolio of approx. K20 billion = US $4 million. • Most MFIs in Zambia are NGOs and are largely concentrated in urban areas.

MFI PROFILE • MFIs are transforming into companies limited by guarantee • Others taken the form of financial cooperatives • The main service offered by MFIs is credit. • Forced savings are a condition for accessing credit • A few MFIs are involved in rural finance, with the main ones: • Micro Bankers Trust, • FINCA, • PRIDE, • Cetzam Opportunity Microfinance • Africa Housing Fund • Credit Management Services and • Zambezi Youth Organization

MFIs OUTREACH

AGRICULTURAL MARKETING COMPANIES (OUT-GROWER SCHEMES) • The provision of financial services by agricultural marketing companies has a long history in Zambia. • Previously existed as marketing boards providing financial services to commercial farmers. • Extended to indigenous small scale farmers over the years. • The liberalisation of the agricultural sector has made the role of marketing companies even more important. • The out-grower schemes continue to be major providers of rural finance. • The following are the key players:

1. DUNAVANT COTTON • A private company producing cotton and operating in 6 provinces. • Operations almost exclusively designed for small-holder farmers. • Has over 100,000 smallholder farmers under its out-grower scheme. • Dunavant uses a group lending methodology. • Farmers are mobilized in groups of 30-50 members, and each group elects a Leader who acts as the link person. • Dunavant enters into a contract with the Group Leader for disbursing inputs. • The Group Leader in turn on-lends to the group. • Each farmer pays a sum of K 1,500 or US $0.30 per bag of seed as commitment fee.

2. CLARK COTTON • A private company actively involved in contracting cotton farmers. • Outreach of about 2,000 farmers in the Eastern part of Zambia. • Farmers are supplied with seed, chemicals and packaging materials on credit. • Extension services are provided to the farmers as part of the package. • In return, the farmers are expected to sell their cotton to Clark Cotton and pay back loans.

3. CHEETAH OUT-GROWER SCHEME • Commenced operations in Zambia in 1993 as a marketing company for paprika. • In 2000, commenced an out-grower scheme with 400 smallholder farmers. • Since then, they have disbursed a total of K165 million (about US $33,000) reaching 5,000 smallholder farmers. • Employs group lending methodology through leader but enters into contracts with individual farmers. • Presently operates in 10 districts, in 5 Provinces.

3. AGRIFLORA ZAMBIA • A private company involved in the production of high value vegetables & flowers for the European market. • Has over 20,000 smallholder farmers on growing contracts. • Provides input loans to farmers which have to be repaid in a period of 120 days. • Smallholders paid within 40 days of delivery of produce. • Through linkages with irrigation equipment suppliers Agriflora has also facilitated support for small scale irrigation for its farmers. • Under this scheme, its farmers have accessed loans of up to US $7,600 each for a 10 acre plot.

4. OMNIA FERTILIZER ZAMBIA • Omnia Fertilizer begun operations in Zambia early 1990s. • In 1995, extended services to the smallholder sector. • Set up fertilizer sales depots in rural areas to assist small-scale farmers obtain fertilizer. • Introduced a barter system under which farmers obtained fertilizer loans and repaid in form of maize grain. • At the peak of its operations in 1996 Omnia was servicing some 50,000 smallholder farmers through a network of 150 depots country wide. • In 1997 the Government established a fertilizer assistance programme through the Food Reserve Agency (FRA) to compliment Omnia operations. • Government involvement in the fertilizer market has crowded out private sector initiatives

ZAMBIA AGRICULTURAL COMMODITY AGENCY (ZACA) • ZACA is a non-profit oversight agency for a warehouse receipt programme. • The overall objective of ZACA is to encourage the development of a network of privately operated certified warehouses around Zambia. • The warehouse receipt programme allows smallholder farmers to deposit their commodities with a certified warehouse and use the receipt issued to obtain loans from financial institutions using the grain as collateral.

COOPERATIVES • Cooperatives played an important role in rural finance until the mid 1990s when the sector collapsed together with the Cooperative Bank, and the Credit Unions and Savings Associations of Zambia (CUSA). • Due to the important role that cooperatives can play in provision of rural finance, Government is looking at ways to resuscitate the sector to enhance effectiveness

RECAP OF INNOVATIONS…IN THE PROVISION OF RURAL FINANCE SERVICES TO SMALLHOLDER PRODUCERS IN ZAMBIA

SUMMARY OF INNOVATIONS BY COMMERCIAL BANKS • Products • Short to medium term loan products in the Eastern Province by ZANACO; • Low account opening balances by ZANACO and Finance Bank; • Lending Methodology – ZANACO • Group lending to smallholder farmers; • No collateral for the loans; • ZANACO provides the loans in-kind, i.e. equipment or inputs. • Client satisfaction • Clients observed that the minimum balance for opening/maintaining accounts were unaffordable to low income groups; • The interest rates banks charge are too high.

SUMMARY OF INNOVATIONS BY NON-BANK FINANCIAL INSTITUTIONS • Innovations • A variety of savings accounts offered by NSCB • Low min account opening balances (K40,000 = US $8) • Money transfer services at NSCB • Simple account opening procedures • Short term loans for building society clients • Methodology - Financial services are on an individual basis. • Client Satisfaction – increase in new accounts

SUMMARY OF INNOVATIONS BY MFIs • Products • Short term loans in small amounts • Higher subsequent loan amounts per cycle • Salary based loans (consumer loans) • Forced savings • Microinsurance • Methodology • Group lending - self-selected groups with elected leaders • Forced savings • Client satisfaction • Better standard of living • Improved social image • Clients dissatisfied with forced savings

SUMMARY OF INNOVATIONS BY OUT-GROWER SCHEMES • Short-term input loans • Small loan amounts easy to pay with less difficulty • Group lending and its variants • Barter system – In-kind lending • Incentives for good loan recovery • No collateral required for the loans • Ready market for smallholder produce • Linkages to agricultural equipment credit suppliers • Warehouse receipt system • Training for smallholder farmers • Extension services

CHALLENGES IN THE PROVISION OF RURAL FINANCE IN ZAMBIA • Macroeconomic challenges Such as: • High interest rates; • Low financial intermediation; • Poor infrastructure in rural areas. • Lack of capacity to manage increasing outreach Such as: • Lack of management information systems among MFIs; • Inadequate operational / loan funds; • High client drop out rate among MFIs. • Poor credit discipline leading to low repayment rates; • High cost of delivery given the low population density in rural Zambia; • Lack of an appropriate regulatory framework, and, • Low entrepreneurship skills among clients.

CONCLUSION • High potential for growth in the rural areas. • Government commitment to creating an enabling environment i.e. improving infrastructure, provision of incentives, extension services etc. • Government and donor funded projects continue to be the main sources of subsidized funding. • Central bank developing an appropriate regulatory framework and addressing the provision of rural finance under the FSDP.

Conclusion… • Commercial banks view smallholder financing as too risky due to: • poor credit culture, • lower entrepreneurship skills among small scale farmers and, • high transaction costs which have combined to make rural financing unattractive to commercial financiers. • MFIs and agricultural marketing companies promoting out-grower schemes are emerging to fill the gap in the provision of smallholder/rural finance, by providing innovative products and delivery methodologies.

OUTLOOK • The results of the study indicate that there is a lot of potential for the development of this sector and specifically in directing the critically needed financial and other resources to agricultural smallholders. • Evidently the sector requires more than just credit in order to be fully efficient and operate at full capacity. • For Zambia, the role of rural finance in transforming the huge agricultural potential into an engine of economic growth can not be overemphasised.

Distinguished Ladies and Gentlemen WE THANK YOU

By: Simacheche Dinde and Webby Mate