Agricultural Finance Support Facility An Initiative supported by the Bill and Melinda Gates Foundation

1. The World Bank Agricultural Finance Support FacilityAn Initiative supported by the Bill and Melinda Gates Foundation Samuel Munzele Maimbo Harare, ZIMBABWE

2. Increase access to financing for agriculture, particularly for smallholder farmers and for other rural entrepreneurs • Generate knowledge and facilitate learning about profitable models of rural and agricultural financing AFSF : Objectives

3. Co-finance initiatives by financial institutions in developing countries. • Matching grants to financial institutions for technical advise, staff capacity building, new technology, etc. • No credit lines or guarantees • Grantee commitment for human and financial resources • Grants ranging between $500,000 and $ 1million • 15-20 grants over 3 years • At least 50% of the grants in Sub-Saharan Africa; remaining in Asia and North Africa • Organize learning activities • Annual conferences, Study tours, Seminars, and Publications • For grantees, WB staff, and other sector stakeholders Strategy: Grants and learning

4. Supporting local regulated financial institutions. • Evidence • History • Justin Lin” local banks ” • Supporting Institutional Development • Liquidity not the binding constraint • Justified target of grant funding Cofinancing Strategy: Rationale

5. Consolidating available information • Existing information on demand, supply, and access not easily available – need for ‘Doing business’ style information on access. • Working with DEC and IFC Advisory • Facilitating new data generation on Access • Strengthening on-going survey work on A2F and Agriculture • Strengthening sector-specific supply data • Working with FSP, DEC and DFID. • Peer Learning • Practitioner centric Learning Strategy: Rationale

6. Of the over 1 billion smallholder farmers and other rural entrepreneurs worldwide, most have little access to financial services… • less than 5% in most of Sub-Saharan Africa • …Constraining their ability to manage their own financial resources optimally, get external financing, and manage their risks effectively… • …Resulting in inability to make productivity enhancing investments that can increase incomes and reduce vulnerability to shocks. Why AFSF? The Demand Side Problem

7. Globally, very few financial institutions have lending for agriculture as a business line • Provision of financial services in rural areas less profitable compared to provision in urban areas because lower density of economic activity • Financing of agriculture further constrained by unique and covariant risks such as weather and pests, and limitations of land as a collateral • Finally, perceptions of extend of risks often higher than real extend because of inadequate domain knowledge Why AFSF? The Supply Side Problem

8. Yet, several profitable examples of agricultural and rural finance from all parts of the world • In Small countries (Armenia , Kyrgyz Republic) and Large countries (India, Thailand) • By private institutions (ACBA, Armenia and Equity Bank, Kenya) and public institutions (Public Commercial Banks in India, BAAC Thailand) • By full service institutions (Commercial banks and development banks) and limited service institutions (Independent finance companies and in-house departments/companies of Supply chain companies The Conundrum

9. Commercial institutions – covering costs / making profits, general good business practices • Mostly full service financial institutions - offering other financial services (deposits, payments, etc) in addition to loans. • Agricultural Domain Knowledge – both at loan officer level and managerial level What characterizes the profitable examples?Institutional Characteristics

10. Diversification in the overall portfolio • across rural and urban • across agricultural and non-agricultural • Diversification within agricultural portfolio • across client’s scale of operations • across geographic regions • across crops What characterizes the profitable examples?Key Business Practices - Diversification

11. Traditional systems for larger loans • Cash flow and balance sheet analysis • Well collateralized • Risk-based pricing • Non-traditional systems for smaller loans • Parametric approach – crop and area based scales of finance • Alternative collaterals – evidence of land ownership rather than mortgage, group loans, in kind loans, etc What characterizes the profitable examples?Key Business Practices – Agricultural Credit Risk Assessment and Management

12. Commercial bank downscaling to smallholder farmers • Commercial bank involved in small-holder agriculture developing new products – agriculture credit card. • Commercial bank involved in small-holder agriculture developing new products – developing mechanisms to identify, measure, and manage credit risk in agricultural portfolio. • Microfinance company/leasing finance company diversifying to agriculture. • Commodity exchange starting collateral management services for agricultural commodities. • Commercial credit bureau moving downscale and expanding into rural credit. • A land registry transforming from a paper-based system to e-records and is setting up systems for financial institutions to access the land e-records. Potential Co- financing Initiatives: Examples

13. Grant Cycle: Progression along cycle conditional

14. Financing for agriculture, particularly for smallholders, and other rural enterprises is a profitable business line in financial institutions. Vision of Success

15. Samuel Munzele Maimbo Sr. Finance and Private Sector Development SpecialistAfrica Finance and Private Sector Development DepartmentWorld Banksmaimbo@worldbank.org Contact Details Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg