Innovations in Rural and Agriculture Finance

More documents

Recommendations

Info

Innovations in Rural and Agriculture FinanceRural Banking in Africa: The Rabobank ApproachGerard van EmpelFor Food, Agriculture,and the EnvironmentFocus 18 • Brief 4 • July 2010Many people in the vast rural areas of Africa lack accessto financial services, and most commercial banks are notinterested in moving into these areas due to their low income levels,lack of scale economies, and poor infrastructure. Also, few banksactually understand the most common economic activity in ruralareas: agriculture.Consequently, the absence of financial institutions in ruralAfrica has often enticed governments to step in, particularly withstate-dominated banks focused on agriculture. Many of theseinitiatives have failed, however, because they were too bureaucratic,too policy oriented, too concentrated on risk to only one segmentof the population, or too weak in customer focus. In addition,clients considered these government-sponsored institutions to beinstruments that provided grants; hence, the banks suffered frompoor loan-recovery rates.While microfinance institutions have made some inroadsinto rural Africa with the financial backing of internationalnongovernmental organizations and other sponsors, theirsustainability is questionable. They tend to lack banking licenses andtherefore have a very limited product range, and they cannot affordmodern technology-based distribution systems.Key gaps in rural banking in AfricaOne of the most prominent gaps in developing banking services forrural Africa is poor infrastructure—for example, bad roads, erraticelectricity provision, and lack of communications systems—whichimpedes effective outreach to customers.The legal environment in these rural areas is also suspect.Insecure property rights—especially land titles in rural areas—limitany bank’s collateral options; combined with poor contractenforcementopportunities, this takes away a bank’s incentiveto provide credit, especially for long-term loans. Proper landregistration and enforceable mortgage systems are important issuesfor rural development.The inefficiency of markets is also a barrier to developingrural financial services. Agricultural value chains are often poorlyorganized, lacking in transparent pricing, and fragmented in primaryproduction—all of which results in high transaction costs. In manycases, the banking environment is distorted by stakeholders—including donors, governments, and development banks—who donot always regard agriculture as an economic activity, but ratheras a social problem. These stakeholders provide subsidized fundingto farmers or cooperatives, which means private banks often lacka level playing field. Poor financial literacy rates, especially amongsmall farmers, and a limited understanding of banking requirementsalso pose a problem.Rabo DevelopmentIn an effort to serve the financial needs of emerging markets anddeveloping countries, Rabo Development (RD) was created with amission similar to that of its parent organization, Rabobank, whichwas created by farmers in the Netherlands more than one hundredyears ago. In order to achieve its mission of providing access tofinancial services to those in rural areas of developing countries,RD participates in financial institutions and provides managementservices and technical assistance. It has made investments inTanzania, Zambia, Mozambique, Rwanda, Paraguay, Brazil, andChina. RD also works with cooperative “enterprises” and financialinstitutions that want to increase their own access to financialservices. While RD focuses on investments, Rabo InternationalAdvisory Services (RIAS) provides technical assistance. RIAS hasa 20-year history in consultancy services mainly to financialinstitutions and cooperatives in emerging markets.Rabo Development has made investments in some existingfinancial institutions with the objective to transform theseorganizations into leading banks with a rural orientation. Financialparticipation is limited to minority stakes (variation between10 and 45 percent); the majority of shares are locally owned, therebyretaining the status of a local bank. This allows customers to betteridentify themselves with the institution and appeals to national pride.Financial investment demands a shared vision of the futuredevelopment of an institution, so stakeholders should agree ona mission and business plan, which are likely to entail servicingnew customer segments, including rural clients (mainly farmers),and developing a broader product base. In order to assistimplementation, Rabo Development not only provides capital butalso management services, technical assistance, and representationon the board of directors. At present, Rabo Development has fourinvestments in banks in Africa, which have a total of more than3 million customers collectively.There is no standard recipe for exactly how capacity should bebuilt because it very much depends on each individual institution’sstage of development and the country concerned. In any case,however, special attention should be given to getting the productdistribution strategy of the institution right. To distinguish customersegments and develop their value propositions, it is pivotal toorganize an efficient outreach, using both physical channels (suchas branches) and virtual channels (such as ATMs, mobile banking,and Internet banking).Lessons learnedThese lessons have been learned by Rabo Development’s work indeveloping countries and emerging markets.• Banks with a rural orientation still need a strong urbanpresence, as most banking assets are concentrated in urbanareas. New distribution concepts, such as mobile banking andproducts, are also normally piloted in urban areas.• Banks need to service all client segments with the appropriatemix of products (including microloans) in order to effectivelyuse the branch network and establish a well-balanced portfolio,thereby reducing the concentration of risks.• Financial institutions that want to practice rural financeneed to be committed to this segment and need specializedknowledge-based departments, including agriculture and small
and medium enterprises (SMEs), in order to be effective tothese target groups. Political pressure has forced institutions insome countries to provide rural financial services, but, with nocommitment, results are poor.• Sufficient scale and market share is essential for banks with arural orientation.• Client linkage to corporate governance—for example, ruraland urban client shareholders or client panels—can positivelyinfluence performance and safeguard the rural mission ofan institution.• Clear client segmentation linked to products and distributionchannels is essential to effectively delivering products in therural environment.• Direct product distribution channels—including mobile-phonebanking, ATMs, and electronic point-of-sale devices—arebecoming increasingly important for rural finance delivery. Amodern and up-to-date IT system is crucial to these services.• Rural banks in Africa need to focus on both sides of the balancesheet (that is, offer an appropriate mix of savings and lendingproducts). Due to a lack of well-operating markets, they needto be largely self-financing.• Policy instruments based on risk or cost sharing can beeffective but need to be based on clear client segmentation.In cases of sufficient payment capacity, they can be usedto overcome the lack of enforceable collateral or to makethe credit itself more enforceable. Clients with insufficientpayment capacity can only be assisted through income-supportmechanisms, meaning grants not loans.The Rabobank approach to financing agricultureAmong the most important lessons Rabo Development haslearned about building sustainable agrifinance in Africa is thatsegmentation of farmers is essential. In general, a small group ofcommercial farmers is responsible for a large part of a country’sagriculture production and exports, and often these farmers arethe only ones with access to financial services. A large groupof subsistence farmers who lack sufficient repayment capacityfor bank loans resides at the bottom of the pyramid. The groupbetween the subsistence farmers and the commercial farmersconsists of both farmers of small cash-crops (for example, coffee,cotton, or cocoa) with a low annual marketable surplus and socalled“emergent” farmers. The latter group has the potential togrow into commercial farmers but lacks both the financing andfarm-management expertise.Financing small cash-crop farmers is only feasible througha supply-chain approach. These smallholders should be financedindirectly via contract farming with better-rated “off-takers” (orprocessors). Under such schemes, the farmer commits to supply100 percent of a particular crop to the off-taker, and the off-takercommits to buy 100 percent of the farmer’s product but pays thatmoney directly to the bank, thereby allowing a direct repayment.Under these structures, the repayment risk to the individual farmersis converted into performance risk to both the farmer and theoff-taker. In many cases, cooperatives can play a facilitating roleby being the counterpart of the off-taker and the borrower ofthe loan. A cross-liability system whereby the members guaranteeone another’s loans could provide extra comfort to the bank.Also, systems involving warehouse receipts can provide additionalfinancing to this target group; they have been used effectively bythe banks that Rabo Development has invested in.Emergent farmers justify an individual approach since theyhave the potential to develop into commercial or professionalfarmers with corresponding growth of financial services. Strictcriteria need to be established regarding minimum size, sufficiententrepreneurial spirit, basic understanding of business planning, andfarm-management skills. With a combination of financial servicesand technical support, these farmers stand a fair chance of success.Emergent farmers can be financed under the existing retailstructure of a particular bank, but the local branches involvedwould need to hire and train agrifinance specialists who understandfarming and have the ability to appreciate the particular risksassociated with it (including, among others, climatic, disease, andprice risks). It is essential to form alliances with other stakeholdersin the value chain who also have an interest in developing andinvesting in the farming sector (for example, farmers’ organizations,commodity exchanges, agri-input providers, and off-takers).The main obstacles to financing agriculture are unpredictableor erratic government behavior and interference in the agriculturalsector. This is especially the case in cash crops like coffee, whichare often important sources of hard currency, and in grains, ofwhich African countries are often net importers. In several coffeeexportingcountries, the coffee export is not free but ratherregulated through auctions with only a limited number of privateexporters licensed. In grains, prices are often regulated by thegovernment to safeguard food security. This comes often at theexpense of local farmers who are struggling to break even, and it isaggravated by relatively high transaction costs and the weak marketposition of African farmers.ConclusionThe Rabobank approach is strongly focused on the value chain, asultimately the farmer—who runs the price risk, to a large extent—will only be able to get a fair price when the whole chain operateseffectively. The success of agricultural development depends on thecreation of a large group of professional local farmers producinghigh volumes of marketable output at a consistent quality. This willhave a positive effect on reducing the transaction costs throughoutthe whole value chain. It is also imperative that all those involvedshare a common vision on development and contribute in effective,constructive, and committed ways. nSee more information at www.rabobank.com.Gerard van Empel (g.j.j.m.empel@rn.rabobank.nl) is general manager of Rabo International Advisory Services and director of Rabo Development.International Food PolicyResearch InstituteSupported sustainable solutions by the for CGIAR ending hunger and povertywww.ifpri.orgSupported by the CGIARwww.worldbank.orgCopyright © 2010 International Food Policy Research Institute and the World Bank. All rights reserved. Contact ifpri-copyright@cgiar.org or pubrights@worldbank.org for permission to republish.
Page 1 and 2: 2 0 2 018FOCUSInnovations in Rurala
Page 3 and 4: DOI: 10.2499/0896296687ISBN 10-digi
Page 5 and 6: available in most rural circumstanc
Page 7: shows that financially literate cli
Page 12 and 13: Innovations in Rural and Agricultur

Innovations in Rural and Agriculture Finance

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?