Financing Options for Agricultural and Rural Development in Sub-Saharan Africa

1. Financing Options for Agricultural and Rural Development in Sub-Saharan Africa FEMI ADEBIYI/R&S CONSULTING LTD Organised by AFRACA

2. MD, NACRDB – Alh. BabaleUmaruGirei • Welcomed members • Highlighted AFRACA’s establishment in 1977 with membership cutting across 20 countries. • Underlined the great alignment between FGN’s 7-point Agenda and the theme of the Forum “Financing Options for Agricultural and Rural Development in Sub-Saharan Africa”, especially since more than 2/3 of the Nigerian population are engaged in agriculture, contributing up to 40% of GDP • Reviewed some of FGN’s agric finance programmes, including commercial agric credit scheme with provisions for N200b ($1.33b) out of which N40b is earmarked for onlending to micro-credit beneficiaries • Review NACRDB’s programme – N38.b ($256.4m) disbursed so far through its 201 branches, out of which N28.9b (75.3%) went to micro-credit beneficiaries • Expressed optimism about positive interactions during the 2-day programme between major stakeholders FEMI ADEBIYI/R&S CONSULTING LTD

3. Chairman, AFRACA/MD Dar es Salaam Community Bank – Edmund P. Mkwawa • Importance of Agric – in economic growth & food security, smallholders more so, hence the need for special financing scheme to cater for their financing needs • Observed that poverty will continue to make the intervention of Banks and Micro finance Institution in agriculture urgent, as well as the need to give agriculture priority over every other thing • Stressed the need for new policies and multi-party efforts (beyond MNA) to transform agriculture and increase small-holder productivity in African countries • Appealed to participants to play advisory role with Governments on new steps of financing agriculture and rural development. FEMI ADEBIYI/R&S CONSULTING LTD

4. S/G AFRACA - RasmaneOuedraogo • Expressed gratitude to supporting parties – CBN, WB, FAO, IFAD • Affirmed the usefulness of this once-in-two years programme in improving the agric & rural finance environment, given the fact (according to the World Dev. Report 2008) that agric plays dominant role in poverty reduction • Focus must be on agricultural sector to achieve MDG1 • Need to establish LT funding options for agric & develop risk management strategies and products such as crop insurance • Progress in agric also requires concerted efforts, beyond financing • Listed the objectives of the Forum to include experience sharing, identification of future directions for agric finance and adoption of action plan for data collection an agric lending • Stated that the one-day Roundtable session organised jointly with FAO on Tuesday focused on necessary data collection on agric lending and will be reported during the two-day Forum FEMI ADEBIYI/R&S CONSULTING LTD

5. Gov CBN (Rep. - Alh. Suleiman Barau, DG ESSENTIAL Services) - Keynote • Agric – 20-30% GDP in Africa, 2% annual growth rate globally, cf 1.6% pop growth rate • Huge gap of up to $4b in agribusiness financing that must be met either by debts, equity or hybrid of the two • Dearth of funds to agric – driven by its long term requirements, high risks and the predominance of smallholders • Globalisation and international competition implies that more attention be paid to start-ups with innovative contents • More innovative financing options such as bonds, debentures, venture capital, business angels required in Africa to attract needed LT funding FEMI ADEBIYI/R&S CONSULTING LTD

6. Gov CBN - 2 • In Nigeria, commercial agricultural credit scheme has taken off with N200b, in addition to other initiatives such as the operations of NACRDB, ACGSF and NAIC • Sub-Saharan Africa, not uniform in features and challenges, but increasing poverty is common to all, unlike their Asian counterparts which grow improved varieties of crops, employ more fertilizer per hectare and cultivate more irrigated hectarage • S-S-A must raise a new generation of entrepreneurs to break out of the old practice and embrace new approaches to remain relevant • Apex banking institutions, governments and private investors in Africa should therefore form a coalition to change the financing landscape and re-position Africa’s agric FEMI ADEBIYI/R&S CONSULTING LTD

7. FMF Rep (Acct-Gen of Fed; Alh Ibrahim DANKWAMBO... Opening remarks • Commended AFRACA’s strong advocacy for innovation and reform of rural economies • Access to fin – an important element for farmers & rural low-income grps to unleash their potentials • Since agric- contributes 30% of GDP and 70% employment in S-S-A, and yet there are challenges of food crisis to contend with, he charged the Forum to tackle this year’s Theme rigorously • Also enumerated some of Nigeria’s agric financing programmes before declaring the Conference open FEMI ADEBIYI/R&S CONSULTING LTD

8. Presentation 1: Insurance Option (NAIC) - Mr. Akinyemi • Basis for Risks in agric, which prompted need for insurance: • The seasonal nature of production which is mainly rain-fed agriculture in developing countries • The dependence on biological processes and natural resources which leave producers subject to events beyond their control • Vulnerability of production to adverse weather conditions such as drought, flood, pests and diseases. • Commodity price volatility • Trade restrictions. • Many models of agricultural insurance methods are currently being applied in the developing countries. They include: • Multi-peril public sector crop insurance • Named-Peril Insurance policies • Rainfall-indexed Insurance • Livestock and Aqua-cultural Insurance policies • Index-based Insurance products • Input-based Insurance products FEMI ADEBIYI/R&S CONSULTING LTD

9. Presentation 1: Insurance Option (NAIC) • Some constraints to most agric insurance models: • Lack of quality information especially from weak national meteorological services and their weather observing network • Inadequate regulatory frameworks • Weak supervision • Lack of actuarial expertise • Lack of professional expertise in designing and monitoring agricultural insurance products • A mass of low income, dispersed clients, who may not be willing or able to pay actuarially sound premiums • The tendency of governments to undermine market development through inappropriate use of subsidies and disaster relief funds. • Poor risk management practices other than insurance for livestock and aquaculture FEMI ADEBIYI/R&S CONSULTING LTD

10. Presentation 1: Insurance Option (NAIC) • NAIC- Est 1988 to protect Nigerian farmers thru indemnity to keep farmers in biz when there is crop and l/s disaster • Started with cover for 4 products – rice, maize, cattle and poultry, now expanded to cover all crops and livestock in Nigeria • Premium determined by the pure risk premium, the reserve premium and administrative loading, not determined actuarially because of inadequacies of available data • decided/fixed arbitrarily by govt, • Premium – 2.0% for crops., 2.5% for l/s and 1.5% for farm produce • 50% paid by farmer, balance paid by FG (75%) and State of farmer (25%) FEMI ADEBIYI/R&S CONSULTING LTD

11. Day 1-Presentation 1: Insurance Option (NAIC) • Gains – encourage bank lending; mitigate risk to farmers • Premium built into and deducted from bank loan; therefore pursue joint monitoring with banks • Loss assessment based on indemnity of cost of production • Achievements: coverage of all crops produced in Nigeria, including non-agric commercial purposes to stay afloat • Average annual risk exposure N4.55b in 2000, rising to N26.9b in 2004; averaging N20b per annum subsequently • Pyt of claims within 30days, over N1b settled as claims since establishment, benefitting more than 15m farmers FEMI ADEBIYI/R&S CONSULTING LTD

12. Day 1-Presentation 1: Insurance Option (NAIC) • The way forward requires finding answers to the following challenges facing the scheme: • Low penetration of the Nigerian Farming populace by the Scheme • Paucity of data for actuarial determination of important underwriting parameters such as crop yield and farming population • Lack of qualified personnel in the field of agricultural insurance • High moral hazard and adverse risk selection • Low participation of commercial banks in agricultural finance • Inadequate agricultural infrastructures especially inadequate number of veterinary personnel • Undue interference from the Government • Lack of interest from insurance companies in the Scheme • Difficulty in designing new agricultural insurance products. FEMI ADEBIYI/R&S CONSULTING LTD

13. Day1: Pres.2: Managing Risk in Financing Agric (Renate Kloeppingertodd of the World Bank) • Failed agric fin. attempts: large agric dev banks; subsidised interest rates, loan forgiveness, down-playing of savings, one-off actions, expensive guarantee programmes, etc • Recent attempts – est. of private commercial institutions; sustainable access to financial services; managing risks; smart subsidies; value chain-based lending; etc • Experts mtg in 2009 in SA came up with 14 findings alluding to the fact that agricultural financing is viable if supported by: • Sound risk mgt at multiple levels • Good banking practices combined with KYC • Insurance within an overall risk mgt strategy • Mutual beneficial partnerships (i.e. value-chain based – for risk and benefit sharing) • Aggregation of clients (associations/grps. to reduce transaction costs) • Innovative forms of collateral and collateral substitutes • Financial literacy education – for both staff and clients of FIs FEMI ADEBIYI/R&S CONSULTING LTD

14. Renate - 2 • Reported a study of credit risk assessment & mgt, involving a survey of a sample of 17 institutions (12 CBs, DFIs and MFIs) in 7 countries of Africa and Asia • Risk Assessment techniques for small loans: rule of thumb + experience + outsourcing; and for large tickets – traditional financial ratios; few/minor use of biometrics, credit bureau and credit rating • Risk Management techniques - Use of collateral substitutes; Diversified portfolio (agric with others); bundled crop insurance, bundled credit-life insurance • risk-based pricing for large and small loans • Innovations: Biometric tools to uniquely identify borrowers; Parametric credit assessment - partially outsourced in some cases, Tripartite lending arrangements – produce buyer, lender and borrower; Provision of fee-based agricultural and business advisory services FEMI ADEBIYI/R&S CONSULTING LTD

15. Concluding, Renate... • Lending to small farmers at scale requires: • Non-traditional credit assessment systems • Use of collateral substitutes • Multi-level diversification is key to credit risk management at the portfolio level • Successful agricultural lenders have domain expertise in agriculture at multiple levels FEMI ADEBIYI/R&S CONSULTING LTD

16. LAPO – Risk Management in Lending to Smallholders & Agribusiness (David E. Osamediame) • Smallholders still dominant in agric – food production, employment,, etc • Constrained by finance. Risk being the reason • Risk – possibility or chance of a loss • Risk mgt: objective to increase fin. products and losses to farmers • Risk factors: natural factors, infrastructural related, low population density hindering business vol. and heightening monitoring costs; nature of funded activities – requiring LT fundings; political interference in agric lending with collateral damage for privately motivated lending; weak capacity of rural borrowers; credit risks (loan delinquency arising from a variety of factors); portfolio risks, etc FEMI ADEBIYI/R&S CONSULTING LTD

17. Risk mgt strategy • Serial disbursement – disbursement of approved loans in instalment • Modified instalment repayment schedule, allowing heavy repayment at harvest and partial payments from off-farm sources • Establishment of branches near clients • Insurance cover • Supplementary services for small holders – hand-holding supports • Effective credit policies – effective assessment of capacity of client, effective loan monitoring • Effective portfolio and delinquency management procedures • Clear portfolio diversification policy – set limits for portfolio concentration on geographical, size and activity basis • Lending institutions to device innovative approach FEMI ADEBIYI/R&S CONSULTING LTD

18. Questions/Comments of Session 1 • Many different questions/comments were raised by participants on the presentations, covering issues such as: • how to handle risks related to bumper harvests, • Clarification request on what ‘mutually beneficial relationships in agric financing’ mean • available risk cover for climate change and global warming; • data and capacity gaps in NAIC’s presentation & whether the Corporation has a cover for large scale farmers • lack of competitiveness of Nigerian agric vis-a-vis Asia; • strenuous banking processes in Nigeria; • other forms of guarantee to secure microcredit loans - in addition to market and price related risk guarantee; • what NAIC is doing to provide credit insurance • Introduction of cross guarantees and mechanisation to reduce loan default and increase productivity/international competitiveness • Need for appropriate and stable policy • Need to disseminate info. through channels such as churches and mosques, in addition to traditional media channels FEMI ADEBIYI/R&S CONSULTING LTD

19. Some of the Responses by the Speakers • NAIC currently has no scheme for climate change and is working to enhance capacity and business coverage. The corporation also currently runs an indemnity scheme for clients, but no credit insurance cover. • Mutually beneficial partnership – refers to extension of benefits to participants along the value chain • Risk management for bumper harvest would include creation of storage facilities for traditional commodities and processing/value-addition for perishables • Provision of infrastructure is key to improving productivity • There is a need to develop the informal financial intermediaries to address the gaps and challenges between the bankers and the farmers FEMI ADEBIYI/R&S CONSULTING LTD

20. Session 2: Paper 1- Renate on Framework for Increasing Investment in Agribusiness and Agro-Industry • Agriculture Finance Support Facility (AGRIFIN) – a new WB product • Vision: Significantly increase access to financial services for smallholder farmers in Africa and Asia • More specifically – increase outreach and deepen impact of financial services to farmers • Rationale - The provision of financial services for smallholder farmers and other rural entrepreneurs (currently underserved) is a profitable business for financial institutions • Goal – to avoid “missing middle” FEMI ADEBIYI/R&S CONSULTING LTD

21. Renate - AGRIFIN • Strategy Employed by AGRIFIN • Matching grants & capacity enhancement (BDS) - studies, conferences, seminars, etc; grants to retail FIs and market facilitators • The grant cycle starts with EOI, concept note and full proposal preparation to the signing of agreement, project implementation and project evaluation • Dealing with demand side issues such as enhancing the access of farmers • Supply side: stimulating FIs to lend, bearing in mind issues such as high perception of risks vis-a-vis real risks, high transaction costs, limited acceptable collaterals • In view of various interests already showed , the WB is confident that AGRIFIN is a well timed initiative • In the discussions that followed, it was agreed that African countries need to do everything possible to take advantage of AGRIFIN FEMI ADEBIYI/R&S CONSULTING LTD

22. Session 2 paper 2 Calvin Miller – Framework for increasing Investment in Agribusiness and Agro-industry: the HLCD-3A • High-level Conference on the Development of Agribusiness and Agro-industries in Africa (HLCD-3A) – organised by multi-parties including organs of AU and UN • Endorsed by African Heads of State and Government (HOS) as a programme for the promotion of agribusiness and agro-industries development • Led to the launching of the African Agribusiness and Agro-industries Development Initiative (3ADI) • The HOS agreed an Action Plan on the 3ADI to plug the huge funding/investment needed for agribusiness and agro-industries gap of about $15b per annum (to 2050) - from domestic, regional & international financial systems FEMI ADEBIYI/R&S CONSULTING LTD

23. Session 2 paper 2 Calvin Miller – 2 • The goal of the 3ADI is to have an agricultural sector in Africa which, by the year 2020, is made up of highly productive & profitable agricultural value chains, utilising national/natural resources • 3ADI will support an investment programme that will significantly increase proportion of agricultural produce in Africa that is transformed into differentiated high-value products • It involves the creation of an agribusiness and agro-industry financial facility designed to complement and act in synergy with the existing financial services and facilities • Four essential areas of support for agribusiness & agro-industry development: • Enabling policies & public goods; • Value chain skills & technologies; • Post-production institutions & services; • Reinforced financing & risk mitigation mechanisms FEMI ADEBIYI/R&S CONSULTING LTD

24. Session 2 paper 2 Calvin Miller – 3 • Expected Results: • Domestic food staples in Africa, roughly a US$50 billion industry, will double by 2015; • Growing potential of domestic agri-food markets in Africa, fuelled by rapid urbanization & income growth; • Increased trade in domestic & cross-border markets alone expected to reach US$30 billion by 2030; • Focus is consistent with priorities identified & pursued by African organizations and policy makers • Public-private cooperation for implementation, management and oversight FEMI ADEBIYI/R&S CONSULTING LTD

25. Session 2, Paper 3: Financial Modalities and Facility for Increasing Investment in Agric and Agro Industry business - Mr. Patrick Kormawa • Building on Calvin’s paper • Hinted of strong prospects for Agric Investment with the following measures: • US president Barack Obama’s request to the Congress to double financial support for agricultural development • EU’s pledge of €1bn towards African agriculture. • NEPAD’s CAADP initiative • African Governments allocating 10% of national budgets to the sector, with the aim of achieving 6% annual growth. • The G8 nations’ recent announcement that they will double development assistance for Africa to $25bn a year by 2010 • Improved investment climate in several African countries FEMI ADEBIYI/R&S CONSULTING LTD

26. Session 2, Paper 3: Financial Modalities and Facility for Increasing Investment in Agric and Agro Industry business - Mr. Patrick Kormawa • Identified the following financing channels: • Private - equity, debts from institutional and commercial investors; with national, regional and sectoral scope, and with attention paid to the three main risks banks face in lending to agribusiness - Credit, liquidity, and interest rate • Public – with national governments, DFIs, UN Agencies, and Donors as major players providing funding in the form of loans and grants for technical assistance, and infrastructure (creating a clement business environment) FEMI ADEBIYI/R&S CONSULTING LTD

27. Mr. Patrick Kormawa- 2 • Public-Private Partnerships - Strategic focus on private sector investment with public sector assistance • A cluster of funds envisaged, one targeting MSMEs, another LEs, but both having equity and risk sharing components • He concluded with procedure for selecting fund managers and timelines for implementation action • The target launch for first bidding is nine months from March 2010 • He threw the following issues to the participants for inputs into the programme formulation process • Financing of agribusiness value chain • Fund structure • Regional/national-level funds • Governance • Implementation FEMI ADEBIYI/R&S CONSULTING LTD

28. Session 2: Discussions/Comments • Discrimination against Nigeria’s primary commodities in overseas markets – the reason is historical • The place of instability and uncertainty for potential private investors in this financing programme • Better to focus this facility on both downstream and mid-stream of the value chain • Small farmers are the ultimate beneficiaries of these financing initiatives, including floating of bonds • Uniqueness of each country (especially state of infrastructure) should be considered in resolving challenges and issues in the agricultural development • African producers must target their products to meet consumer needs in the market place FEMI ADEBIYI/R&S CONSULTING LTD