Zegeye Teklu Access to Finance Coordinator

1. AGP-AMDe EXPANDING AGRICULTURAL FINANCE: ZegeyeTeklu Access to Finance Coordinator Hawassa December 8-9, 2012

2. ACDI/VOCA, Overview • US based international development organization • Currently manages more than 90 development projects in 40 + countries on; • Agribusiness Systems • Enterprise Development • Financial Services • Community Development • Food Security

3. AGP-AMDe, Ethiopia • - USAID, 2011-2016, $49.85m • Value chains: • Wheat • Maize • Sesame • Coffee • Honey • Chickpea Value Chain Competitiveness Access to Finance Increased investment and innovation Enabling Environment

4. Constraints Project Activities

5. ACDI/VOCA, Overview Cont. • Since 1997, ACDI/VOCA has been assisting Ethiopian cooperatives and Agribusiness Development, • Cooperative Union Project (CUP, 1998-1999), • Agricultural Cooperative Development in Ethiopia (ACE) 2000-2004, • Agricultural Marketing Development Program (AGP-AMDe) 2011-2016

6. Objectives of this presentation • Understand what agricultural Finance programs are being funded and under what terms • Discuss success stories and possible replication • Understand farmers’ and coops’ perspective on accessing finance – process, opportunities and challenges • Ideas for improving relations between cooperative and finance sectors

7. AGP-AMDe - Linking Farmers to Markets • Part of the presidential Feed the Future initiative in Ethiopia • Supports the Comprehensive African Agricultural Development Program (CAADP) framework • Key component of Ethiopia’s Agriculture Growth Program, or AGP • Implemented by ACDI/VOCA

8. AGP-AMDe - Linking Farmers to Markets • Value Chain Competitiveness • Access to Finance • Enabling Environment • Increased investment and innovation in: • Wheat • Maize • Sesame • Coffee • Chickpea

9. ACCESS TO FINANCE • Focus on improving: • Business Planning and Financial Analysis • New Financial Products and Inputs • Loans via MFI’s and Commercial Banks (Short Term) • Investment Facilitation (Long Term) • Market linkages • Information access and utilization • Credit Perception and transformation • Loans via MFI’s and Commercial Banks (Short Term) • Investment Facilitation (Long Term)

10. ACCESS TO FINANCE Cont. • Policy improvement (e.g. exemptions, incentives…) • Expansion of banks • Expansion of Cooperative Banks

11. History of Agricultural Lending Programs 1950s and 1960s… • Governments wanted to stimulate the adoption of new agricultural technologies, mostly targeting smallholder farmers • Donor-driven and government-sponsored credit programs were designed to include: • Specified beneficiaries • Specified agricultural commodities • Subsidized interest rates • What has changed?

12. Lessons learned • High financial transaction costs of serving dispersed and small farm households • Heterogeneity, seasonality, and duration of farming and non-farming loan needs • Profitability and risk of on-farm investments • Loan collateral • Need for training/informational needs of bank staff and farmer clients • Politically sensitive environment • Low loan repayment discipline

13. Unique Features/Requirements of Ag. Finance • Farmers need more financial services, not just credit for agricultural inputs and outputs • Financial institutions need diversified portfolios, not just agricultural loans • Transaction costs are too high for small holderfarmers • Political interventions can undermine publicly-owned institutions • Too much funding from donors and governments discourages banks from developing own resources (mobilizing deposits)

14. Ag Financing Today • Small holder farmers have limited purchasing power • Restrictive government policies eliminate international finance and private sector lending to agriculture • Agriculture lending is risky due to uncertainties in market structure • Cash flows are unpredictable, borrower collateral is limited • Agricultural value chains are vastly under financed • Banks focus on more attractive markets and larger borrowers • MFIs lend to small holder farmers – capacity is limited • SACCOS are underdeveloped and under-capacitated • Insurance sector in infant stage of development

15.  Exporters/Wholesalers Processors   Local Traders & Buyers   Producer Groups Farmers  Input Suppliers Financing from WITHIN the Value Chain • Advance payments (saving up now) for future purchases • Inputs purchased with promise of future payments • Embedded services integrated into cost Examples: • Cost of seedlings paid after harvest • TA provided at no direct cost • Delayed billing for fertilizer • Volume discounts • Buying on credit from wholesaler • All financing expenses and managing out growers are built into the price Value Chain Suppliers

16. Combining Financial Institutions with Value Chain Financing • Wholesale funding provided to value chain providers of finance • Use of contracts as collateral enhancement (combined with): • Triangulation of Payments • System of vouchers (automated or manual) • Storage of assets (warehouses) generates finance • Shared finance, shared risk between banks, buyers, and others

17. Current Experiences • 90% of lending is informal and not favorable for farmers: • Lenders: loans re-paid at harvest, high interest rates • Buyers: spot market cash purchase or storage service • Most loans are for short terms • Lenders focused on profits – not on providing good financial products • Pricing is not transparent – accounting is less efficient • Strong power relationships with large value chain lenders can be negative • Less than 10% of financing is through cooperatives • Business investments and output marketing • Cooperative development strategy – improve bankability and financial controls

18. Innovation and Risk Assessment Current Experiences, Cont. • Seasonality of agriculture • Covariant risk • Lack of: • contract enforcement mechanisms • registered credit history • collateral • insurance (e.g. crop insurance) • Geographic dispersion of clients • Low levels / poor: • economic activity • ag productivity • physical infrastructure (roads, communication, etc.) • human capital (illiteracy, health, etc.) • Policy and regulatory constraints (leasing, warehousing support systems etc) Coordination Tailored service delivery

19. The impact of these constraints on supply is… • High operating costs for the lender • High information costs for the lender • Higher real and perceived risk for the lender • Higher requirements bar for ag. sector, and coops in particular With all these constraints, it’s surprising anyone provides/receives agriculture finance at all – yet, they do!

20. Alternative ways of agricultural financing • There is significant credit constraints in the Economy, which has been further aggravated by the mandatory bond purchase Directive. hence, the need for promotion alternative financing that provide both working capital solutions and investment financing. • warehouse receipt financing, • equity financing, • leasing of agricultural equipment

21. Warehouse receipts system • The Proclamation to Provide for a Warehouse Receipts System No.372/2003 identifies the Ministry of Trade(MOT) as the implementing institution with the responsibility to regulate WRF operations and enactment of directives for matters that have not been covered in the Proclamation • In a parallel system, ECX has been given the mandate to operate and regulate the warehouses run by ECX. As such, the ECX is both regulating and operating the only functioning warehouse receipt system in the country

22. WRS Cont. • The introduction of the ECX warehouse receipt system paralyzed the MOT’s initial progress towards implementing the warehouse receipt system outlined in Proclamation No. 372/2003 • ECX intends to phase out its involvement in warehouse management • It is, therefore, high time to examine how the MOT’s already existing regulatory power to license third party warehouse operators can be implemented in order to broaden the geographical spread and diversity of commodities to make warehouse receipt financing more accessible

23. Agricultural equipment Leasing • Is a useful means of alternative for smallholders, cooperatives or medium level farmers with limited collateral and therefore restricted access to traditional credit • MOT issues licenses for capital goods leasing • According to several stakeholders, it was unclear for a period of time whether the MOT or the National Bank of Ethiopia (NBE) was the proper body to issue licenses for lease financing • This uncertainty held up the development of an innovative form of financing for the agricultural sector • However, this issue has now been settled and the MoT is currently developing what competency requirements lessors need to fulfill to qualify for a license. Once these requirements have been developed, the MoT will be able to issue licenses to companies wishing to provide lease financing arrangements on agricultural equipments

24. Agricultural equipment leasing • There seems to be some interest from larger commercial farmers to lease out their equipment when it is not in use; to date no foreign investors have according to the Ethiopian Investment Authority sought such an investment permit • some international investors were of the (misinformed) impression that leasing is an area reserved for domestic investors, and they had therefore not explored this financing mechanism • According to the Regulation on Investment Incentives and Investment Areas reserved for Domestic Investors No. 84/2003 the field of agricultural equipment leasing is open to foreign investment • Investors that own agricultural equipment and wish to lease out their equipment when they are not using it in their main business are allowed to do so, provided they seek a separate license for their new leasing business

25. Equity Financing • External funds raised from investors by selling shares in a company • Equity financing can be provided by another private company or a private equity fund • However, the Regulation prohibiting the participation of foreign entities in the financial sector is silent on whether foreign equity firms should be considered a financial service or not • Some observers perceive repatriation of profit and dividend to be challenging and might therefore be hesitant to invest in an Ethiopian company • Foreign direct investment can typically be repatriated in a timely manner as long as the investment was registered with the National Bank of Ethiopia

26. Thank You December 2012