Rural Finance Innovations

1. Rural Finance Innovations Gerhard Coetzee Director: Centre for Inclusive Banking in Africa 25 November 2010

2. Outline Rural finance – definitions Agricultural finance Rural finance A current study Initial conclusions Centre for Inclusive Banking in Africa

3. Rural Finance ≠ Lending or Agriculture Range of Clients Centre for Inclusive Banking in Africa

4. Rural Finance Objective – Rural and Inclusive Centre for Inclusive Banking in Africa

5. Rural Finance and Cost to Client Centre for Inclusive Banking in Africa

6. Determinants of Cost to Client If you do not know your client, you heap costs on the client Centre for Inclusive Banking in Africa

7. Agricultural finance: Limitations, not challenges • Supply side: Dispersed, low volumes, bad infrastructure, limited collateral or security, no specialised product offering, limited branch network, covariate risk • Demand side: Lack of property rights, security, lof ability to repay, bad planning, no or limited financial statements, cannot meet standard repayment schedules, complex to deal with, lack of initiative Centre for Inclusive Banking in Africa

8. Four ways to lower costs and risks Centre for Inclusive Banking in Africa

9. Agricultural Finance Innovations • Normal range for farmers with conventional title and conventional context • Recent “Innovations” towards better access (2005) • warehouse receipts • collateral securitization mechanisms • risk management products • supply chain finance • technology • “how innovative techniques can be used to overcome traditional barriers to providing financial services to agriculture by reducing either the risks associated with lending, the costs, or both” • Conventional thinking about private sector and state roles Centre for Inclusive Banking in Africa

10. Towards granularity Centre for Inclusive Banking in Africa

11. Proportion of Total Income From Cluster 1 2 3 4 5 6 7 8 Casual Employment .01 .02 .04 .00 .05 .00 .62 .00 Regular Employment .00 .01 .67 .00 .00 .00 .02 .00 Welfare Payments .00 .69 .09 .00 .02 .00 .03 .02 “Other” Sources .00 .00 .02 .87 .00 .00 .00 .00 Crop Sales .09 .06 .03 .02 .72 .78 .13 .15 Crops consumed .73 .05 .04 .03 .10 .11 .03 .16 Livestock Sales .05 .06 .05 .06 .05 .01 .07 .31 Livestock consumed .11 .08 .06 .03 .04 .00 .11 .35 Micro-enterprises .00 .02 .00 .00 .00 .09 .00 .01 Number in Cluster 5 42 55 4 16 3 11 17 Mean Annual Inc (R) 4636 13477 34717 11740 9213 114236 11083 4942 Herfindahl Index 0.73 0.59 0.57 0.82 0.74 0.82 0.53 0.58 Diversification or specialisation?

12. Income Level Dependence on Agricultural Activity Core Lending Product to Consider Assessment Approach for Lending Agricultural loans Activity based General purpose loans Household based Medium Agricultural loans? a) Interlocking b) Group Granularity provides better design Centre for Inclusive Banking in Africa

13. Rural Finance Innovations Technology and mobile phone banking Learning from microfinance Go beyond finance, e.g. market information Do not solve non-finance problems with finance Savings Transactions Insurance Lending Centre for Inclusive Banking in Africa

14. Technology ….it is not only about COST………….. (Education + Training) (Number of Services) (Access + Simplicity + Usability) * (Services Offered) * (Convenience + Relevance + Trust) (Compliance) (-1 ) (Total Price) (Scale) * * (Regulation + Risk) Most vivid example – M-Pesa ….but about creating a value proposition that delivers real value to the customer Centre for Inclusive Banking in Africa

15. Context Centre for Inclusive Banking in Africa

16. State of Rural Finance in southern Africa • Phase 1 of research project on rural finance • Understand enabling, disabling, demand, supply and models • Best practices in context and more pragmatic approaches • At regional and country level • Enhance where models, at macro, meso, micro level • Within overall theme: • Understand • Network • Communicate • FinMark Trust • Gerhard Coetzee, Charles Machethe, Vuyo Mahlati • www.microfinance.up.ac.za Centre for Inclusive Banking in Africa

17. Rural finance study initial findings In general little access and thus an area that needs focus Governments in all three countries working towards solutions Private sector missing in countries studied (except Zambia) Real research gaps A diversified portfolio that complements agricultural loans with other loan products Adapting practices Flexible, high-quality technical assistance Lenders should not assume that a loan product intended for agriculture will necessarily be used for agriculture There is substantial demand for savings by rural households The high cost of reaching rural clients remains an obstacle Farmer groups and associations Centre for Inclusive Banking in Africa

18. Concluding remarks Client centric – know your client (KYC) Understand the context Understand government policy objectives Understand challenges Design appropriate products and delivery systems Do not ignore international best practices Do not doggedly follow rhetoric on state/private Coordinate activities and focus Play to the strength of institutions Set targets, monitor and act Centre for Inclusive Banking in Africa