Peter Ndegwa – Head AgriBusiness, CoopBank AFRACA Expert Meeting Managing Risk in Financing Agriculture

1. Peter Ndegwa – Head AgriBusiness, CoopBankAFRACA Expert MeetingManaging Risk in Financing Agriculture 1 – 3 April, 2009 Jo’Burg, SA

2. Coop Bank • Publicly quoted company with a capital base of USD 0.2bn and asset base of about USD 1bn • Owned 63% by cooperative movement thru Coop Holdings Ltd and 27% by public at NSE • Has 54 branches and hopes to increase to 86 branches by end of year • Serves over 7m members and indirectly over 28m Kenyans

3. Coop Bank • We provide financial services to both cooperatives and corporates • Products include working capital loan, overdrafts, farm input loans +crop advance(coffee under Stabex facility by EU), dairy sector loans, school fees loan, • We are working on VC Financing, lending to SHGs(dairy) and CBSs(traders +artisans) thru seed capital from the bank and Guarantee mechanisms with ABD, AFD, • Sacco link- Visa branded cards that enables Saccos’ members access their funds at FOSAs- this is a multi-million Kes project to increase our footprint without opening more branches (brick +mortar) • Hope to be hooked up to 300 SACCOs by year end

4. A) Agribusiness- Value Chain Financing Potential Risks: • Fluctuations in market prices due to oversupply e.g. grains. This is mainly occasioned by farmers harvesting at the same time and illegal imports • Lack of market access due to weak structures and cartels, hence no cash inflows to repay the loans • Fluctuations in market demand for the produce • Failure by the buyer to pay for the delivered produce; sometimes even the collapse of the buyer. Past experiences include sugar and coffee • Forgery of the delivery documents by borrowers e.g. crop advances • Diversion of the loan to uses other than the ones applied for

5. Cont’d • Side selling (breach of supply contract) in order to evade loan repayment • Vagaries of weather, poor weather forecasting (early warning systems) and lack weather-index insurance measures • Lack of insurance of cover for crops and animals • Destruction / encroachment of water catchment areas posing risks to environment hence affecting rain patterns • Poor/bad cooperative governance • Poor record-keeping and MIS reports

6. Commonly adopted risk mgt measures Loan applications must be supported by the following; • Tri-partite agreement involving the borrower, buyer of the produce and Cooperative Bank to safeguard the market and remittances • Delivery statement indicating the date of delivery, quantities, grade and its net value in Kenya shillings certified by the buyer in case of crop advances • Proof of steady cash flows for the last 2 seasons and over the loan period • Written instructions by the borrower to the buyer to channel proceeds to his/her/their account at Coop Bank • Proof of net payments received for the enterprises in the last season and the expected net payment the new season • Account(s) with Coop Bank to channel disbursement and loan repayments

7. Cont’d… • Certified copies of the formal identification documents e.g. national ID card/PIN/ Certificate of incorporation of the borrower and buyer • Letter of undertaking by the buyer to honor remittance instructions • Collateral e.g. Chattel mortgage, debentures, land title deeds and guarantee or their combination • Audited accounts for the last three years or for the period in existence if less than 3 years • Registration/ trading certificates • Evaluation report on credibility, ownership and liquidity of the buyer • Call report by the CRO/CRM on physical verification of the deliveries and existence of the borrower

8. Measures of Risk Monitoring • Reports: Used by CMD, Branch Managers and CRMs/CROs. They include; • Daily Arrears reports, showing outstanding amounts/days. Tolerable limits for PAR shall be 5% and 90 days past due. • Monthly procedures compliance report, prepared by the CRMs ascertaining adherence to approved guidelines. • Early Alert meetings with Credit Administration Division (CMD) • Regular meetings with clients to assess business

9. B) Savings and Credit Cooperatives Societies- SACCOs Risks Associated with Saccos • Lack of loan repayment ability- loss of members, parent company winding up • Misappropriation of funds by the officials • Misallocation of funds by the officials Mitigating the risks • Proper verification of the parent company i.e. to establish its reputation • Proper and full appraisal, looking at all aspects • Ensure proper record keeping • Education of members and officials • Ensure proper internal controls and procedures are in place

10. Cont’d… • How long has the SACCO been in existence • Where it derives its membership • The stability of the membership against the employer (parent company). • The stability and experience of management • Identify the products they are offering to the members and the terms of such products. • Identify if they have any credit policy/ procedure and their adequacy • Identify problem areas such as loan backlogs, establish their extent and reasons

11. Cont’d… • Look at issues that are or may affect the employer and hence impact on the SACCO • Ensure that the check-off (monthly remittances) are regular

12. Thank You Asante!