By Obiora Madu Trade Development Consultant DG – African Centre for Supply Chain

1. THE CHALLENGES OF FINANCING SMALL FARMERS AND MSMES IN AFRICA:How Agricultural Value Chain Finance can be a Rescue By Obiora Madu Trade Development Consultant DG – African Centre for Supply Chain

2. OUTLINE • OPENING STATEMENTS • INTRODUCTION • MSME/SMALL FARMER CHALLENGES IN AFRICA • NEW PERSPECTIVES TO AGRICULTURE • AGRICULTURAL VALUE CHAIN & EVOLUTION OF AVCF FINANCING • VALUE CHAIN FINANCE FLOWS/MINIMUM STANDARDS • SMALL HOLDER FINANCING RISKS & MITIGANTS • THE IMPACT OF EXTERNAL SHOCKS • CASE STUDY – NIGERIA • CONCLUSIONS & RECOMENDATIONS

3. Opening Statements

4. AGRIC VALUE CHAIN Consumption Retailing Trading Processing Research Trading Communication Post-harvest handling Transportation Government Policies and Regulations Production Input supply Input supply Technical and business training services Financial Services Market Information and Intelligence Source: Adopted from Ferris (2007)

5. MAJOR CHALLENGES OF SMES IN AFRICA • Access to finance had been singled out as one of the major challenge impeding the survival and growth of start-up SMEs in Africa. • Incidence of multiplicity of regulatory agencies and taxes which has always resulted in high cost of doing business. • Corruption, lack of transparency, very high bureaucratic costs. • Poor or Missing Infrastructure: African agriculture generally suffers from major competitiveness constraints due to poor or missing infrastructure.

6. Challenges of Small Producers

7. “You can’t do today’s job with yesterday’s methods and be in business tomorrow" Anonymous

8. Dual Face of Agrifood Markets Enhanced Presence of Modern retailers Popularity of Traditional retail markets

9. UNPACKAGED LOCAL VEGETABLES & FRUIT 19 November 2012 NEPC / MULTIMIX

10. HANDLING OF BANANA IN NIGERIA 19 November 2012 NEPC / MULTIMIX

11. HANDLING OF BANANA IN PHILIPPINES & CAMEROON 19 November 2012 NEPC / MULTIMIX

12. Defining Value Chain Finance Value chain finance – financial products and services flowing to and/or through a VC to address the needs of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain. VCF Approach – to understand the value chain and its participant needs and structure finance and services to best address them. • Objectives: • Align and structure financial products to fit the chain • Reduce costs and risks of finance

13. VCF: Demand side Demand Needs of finance Input suppliers Seeds, fertilizers, pesticides, livestock feed, medicines, farm equipment Growers Farmers, dairy units, fisheries and other livestock growers Storage & warehousing Storage facilities for grains, fruits vegetables; cold chains & logistics Processors Processing plants, packaging facilities etc. Retailers & wholesalers Inventory, trading & marketing Exporters Pre & post-shipment commitments

14. 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.

15. MINIMUM STANDARDS & KPIs FOR SUCCESS • The provision of credit, savings, guarantees or insurance to or among value chain actors • The creation of strategic alliances through financing extended by a combination of value chain actors and financial institutions • The offering of tools/services to manage price, production or marketing risks • Design sustainable value chain finance interventions. • Facilitate information flow from the value chain to financial markets. • Design interventions with ‘integrated components’ that focus on increasing access to finance.

16. Impact on external factors onAgri-Value Chain Financing

17. (CASE STUDY - NIGERIA NIRSAL) Nigeria Incentive-based Risk Sharing System For Agricultural Lending NIRSAL ($500m assets to stimulate lending financial institutions) 1 5 1 2 3 4 5 • Insurance • Facility ($30m) • Risk • sharing • Facility ($300m) Technical assistance facility ($60m) Agricultural bank rating scheme ($100m) Bank incentive mechanism ($10m) Goal • Link insurance products to the loan provided by the banks to loan beneficiaries • Build the capacity of banks, micro-finance institutions • Build capacity of agricultural value chains • Expand financial inclusion • Rate banks according to their effectiveness of lending to agriculture. • Targeted incentives that move banks to a long term, strategic position and commitment to agricultural lending • Shares lending risks with banks (e.g. 50% loss incurred) Expand bank lending in agricultural value chains NIRSAL Objective Build long-term capacity Institutionalise incentives for agriculture lending De-risk agriculture finance value chain

18. Fixing the Broken Agri Chain Production Supply Chain Processing Marketing • Poor extension • Supply of inputs • Low productivity • Outdated farming • practices • High wastage • Lack of storage • Poor transportn. • Many • intermediaries • No assured • supply of inputs • Lack of • processing facility • Technology • Poor infrastructure • Lack of grading • No market • linkages Broken chain increases credit risk, increases cost of produce and limits credit flow

19. Questions