Calvin Miller - Senior Officer, Rural Finance

1. Calvin Miller -Senior Officer, Rural Finance • Holder of M.S in Agricultural Economics, currently Senior Officer for Rural Finance in FAO, has over twenty-five years of worldwide experience in economic development, in the design, implementation and evaluation of financial services programs and institutions, production and marketing, and institutional development. • Has extensive experience in agricultural value chain development and finance for both national and international markets. • Has worked as the Country Manager of MEDA in Bolivia and carried out many international consultancies • Mr. Miller provided leadership and technical support for over 200 CARE micro and small enterprise, and agriculture and natural resource projects in over 40 countries. • He also founded and developed, MicroVest

2. Perspectives of Value Chain Finance in Africa Agri Forum: Value Chain Finance Conference Nairobi, Kenya 16 – 18 October, 2007 Calvin Miller FAO Rural Finance Senior Officer Rome, Italy

3. Presentation Profile • The changing agricultural scene • Using strategic alliances • Value chains as a business approach finance • Innovations • Addressing risk • Lessons and policies

4. New Agriculture Driven by Dynamic Markets World Dev. Report: DeJanvry

5. An Evolving Agriculture:Supermarket vs Subsistence Farmingwith Open Markets and Cell Phones • Market integration and specification • Conglomeration of market leaders • Open trade with international y regional competition • Segmented demand with stringent standards and conditions • Instant access to information But also, • Subsistence agriculture, food aid and HIV-AIDS

6. Agricultural Credit Era (1950 a 1985) Directed production credit Subsidized credit High transaction costs of lending High loan losses Government and donor refinanced lines of credit through agricultural banks and others Informal family and trader finance for small farmers Donor Microfinance Era (1980 a 2000) Rapid, small working capital loans Group lending approaches Focus on non-agricultural activities Forces groups savings Separation of financial services and business support services. High cost of microfinance Stages of Agricultural Finance

7. Commercialization of MFIs (2000 to present) Formal MFIs Little subsidy Multiple Products Expansion and competition New technologies Interest by capital market investors and lenders Value Chain Finance(2005 to present) Strategic focus on market potential of businesses Linkages among suppliers, producers & marketing companies Growing importance of standards Greater use of risk mitigating tools Growing integration between banks and business Growing use of new technologies. Stages of Agricultural Finance (cont.)

8. Some underlying challenges affecting rural finance Demand • How to increase economic opportunities? • How to build farm management capacity? • How to mitigate risk? Supply • How to cost-effectively introduce flexible and longer term loan products? • How to promote effective management? • How to mobilise support for sound financial markets?

9. Multiple Services; Multiple Providers MFIs CommercialBanks Overdrafts/ Credit Lines Transfer Payments Marketing Companies CreditUnions & SACCOS Savings Loans Insurance Insurance Companies Inputs Suppliers and Traders Leasing Family / Friends Equipment Companies

10. MFIs NGOs Credit Unions Village Banks Agro-processors Input Suppliers Marketing Companies Leasing Companies Warehouse Operators Supermarket Chains Private Banks State Banks Postal Banks Insurance Cos. Non-bank financial institutions Investment funds Farmer Associations Farmers / Rural Clients 2. Financial Linkages Partnering for better access, services and efficiency

11. Collector/Traders Farmers & Producer Groups 3. Agricultural Value Chain Finance • Linking finance with agriculture and agribusiness • Aligning and structuring finance with the chain Medium and Large Exporters and Wholesalers Processors Strategic engagement for common benefit Input Suppliers

12. Inputs Importer/ Wholesaler Large Scale Trader Input shopkeeper/ Small Scale Trader/ Farmer Organization Bank Trader Credit Exporter/ Wholesaler or Processor Farmers Key Input sales Trade credit Trade / seasonal credit Product sales

13. Value Chain Finance Flows Enabling business & financial environment Financial and Information flows Inputs Production Processing Distribution Consumption Physical flows Finance and supporting services

14. 4. Technology Innovation • Communication Technology -- M-PESA–Kenya; G-Cash--Philippines • Purchases & sales • Commodity prices • Money transfers • Payments • Point of Sale Access • ATM & Smart Cards The Economist, 15/02/07

15. Product and System Innovation • Risk management tools; futures, hedging • Warehouse receipts finance • Factoring y securitization • Contact farming and outgrower schemes • Facilitation Models (Ej. DrumNet) • Integrated Models (Ej. LA-FISE)

16. 5. Risk Analysis – Incorporating New Elements • Client /business capacity • Repayment capacity • Security coverage • Cash flow • Market growth and risk • Competitiveness From supply-driven “how we lend” to client driven “how can we structure finance to address client needs and risks”

17. 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.

18. 6. Banks: New Perspective toward Agriculture • Banks should invest money & knowledge in the agribusiness • market trend knowledge • understanding of key risks • alliance and linkage opportunities But • Bankers are not technical advisors Helping farmers & agribusinesses achieve their goals Business and Loan Counsel Loans and Services Consultation Loan Analysis

19. Reality: New Mitigants are Required Measures Methodology Price Risk • Use of market based • price instruments • Couple with Loan • Hedge own portfolio or Loan • Use microfinance institutions • Use international Banks and brokerage houses as partners Crop/Weather Risk • Index based weather • insurance • Rely objectively on specific weather events • Compares yield to measurable, objective, correlated risk • Need conducive policy and regulatory environment • Use innovative • structures • Capture cash flows • Use “organized” intermediate agencies Collateral Risk TA providers play a key role in ‘importing’ innovative successful practices

20. Government: Policies to Support Value Chain Finance • Business capacity building and market integration • Contract farming and out grower schemes • Technical capacity in market norms and standards • Commodity exchanges and active futures markets • Insurance innovation, data collection and initiation • Market information and access • Infrastructural investment • Product and service innovation and diversity • Technology adaptation and access

21. Key Factors for Consideration • market and industry • client and strategic partners • fund the chain at most strategic points • insure effective and transparent partnerships • innovate with new technologies and products • take advantage of the value chain • analyze and structure loans properly • offer timely, multiple and flexible financial services • focus on the client and business • Understanding • Administration • Risk • Service

22. FAO, Agricultural Department www.fao.org/ag • Rural Finance Learning Centre • www.ruralfinance.org