Financial Sector Development in Africa: Opportunities ... - World Bank

Financing Agriculture: Selected Approaches for the Engagement of Commercial Finance 95
the intermediary, their record of supply, the repayment history of any
previous credit, the general reputation and professionalism of the
producer/producer group, and other tangible and intangible factors. Ideally
the intermediary firm would share a proportion of the credit risk presented,
an arrangement that motivates compliance with the agreed policy
and good lending discretion. In this case, it can be very useful for the bank
to work collaboratively with the intermediary to develop a practical application
process, as often the intermediary will be aware of the very specific
factors that make a borrower a reliable source of repayment.
The intermediary firm can then process applications, passing the compliant
ones on to the bank for checking and quick approval for the release
of funds from the loan account. There are many systematic risk controls
that a bank can put in place to control risks that may be gradually eased
over time as intermediaries prove their reliability as “agents” of the bank
and improve their own risk management controls.
One of the simplest of these controls is to mandate that producers
receive payment for their produce in a dedicated account held with the
bank (a particularly easy arrangement in the case of supplier finance)
from which repayments can be automatically deducted. This also represents
a “cross sell” opportunity for the bank and a way of increasing the
formalization of producer financial activity. Studies have shown that
where producers receive payment into a bank account, they are more
likely to retain earnings over time.
Where it is more practical for the borrowing customer, it may be that
the account is held with a cooperating rural bank or credit union. The
rural bank or credit union may even be willing to underwrite a small
proportion of the credit line for its own customers, further deepening
understanding between producers and financial institutions. We believe it
is this type of practical integration between the agricultural and financial
sectors using what is essentially a very simple working capital product
that could yield great long-term benefits.
Credit enhancement for buyer and supplier finance. There is an opportunity
for the development community to catalyze or increase the growth
rate of such facilities by providing a credit enhancement product (for
example, a partial loan guarantee fund) that may improve the risk appetite
and/or pricing of commercial banks. Clearly all the caveats that apply to
such credit enhancements must apply—that is, it must be demand-driven,
be sustainable, and not create market or competitive distortions. Moreover,
the process of accessing the fund should be both simple and transparent.