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MANAGING RISK IN FINANCING AGRICULTURE

MANAGING RISK IN FINANCING AGRICULTURE. ‘ Managing Risk in Financing Agriculture ’ M. Malick NDIAYE, Director of Credit and Branches Senegalese Agricultural Development Bank (CNCAS). Johannesburg, 1st -3rd April 2009. OUTLINE. OUTLINE - SENEGAL : BRIEF REVIEW

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MANAGING RISK IN FINANCING AGRICULTURE

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  1. MANAGING RISK IN FINANCING AGRICULTURE ‘Managing Risk in Financing Agriculture’ M. Malick NDIAYE, Director of Credit and Branches Senegalese Agricultural Development Bank (CNCAS) Johannesburg, 1st -3rd April 2009

  2. OUTLINE OUTLINE • - SENEGAL : BRIEF REVIEW • - AGRICULTURAL CREDIT SYSTEMS • - CNCAS’s APPROACHES ON RISK MANAGEMENT • - RESULTS AND CONSTRAINTS • - LESSONS LEARNT • - CHALLENGES FOR FUTURE ?

  3. Senegal : Small developing country • Senegal : West african country in Sahel region • Superficie : 196 000 km square, • Population : 11 milions ( +60% live in rural area, 52% are women ) • GDP : 5 000 billions FCFA (1 FCA = 655,957 Euros # fixed rate) • Average annual growth rate : 5 - 6% • Income per capita : less than 600 $US (SN=PMA) • Large share of informal sector in the economy • Member of regional and subregional organisations : ECOWAS, UEMOA • Current characteristics of agriculture • Low productivity of main productions (peanuts, cotton, rice, vegetables ); • Contribution of primary sector on GDP : 15-17% ; • Domestic markets are not well organised ; • Low revenues for producers and large way of poverty ; • But, keep good contribution to the economic growth and poverty reduction.

  4. Agricultural Credit systems in Senegal : historical evolution • Two different periods : • First period : 1960 to 1980 • Public extension and credit services providers by SODEVA and BNDS • In 70’s : Senegal had been faced a very difficult macroeconomical situation • PASA : Agricultural Adjustment Programme Sector (IMF & World Bank) • All agricultural extensive services were dissolved (SODEVA, ONCAD) • Second period : 1980 to 2008 • 1984 : CNCAS is created in a particular context • Started activities with two branches : Matam and Dakar • Last 20 years : CNCAS’s network is growing fast : 20 branches in 2008 • CNCAS is a young financial institution becoming leader in rural financing. • 1980’s : MFIs emerging systems in our country • 2000 : Commercial banks try to be interested in rural area (competition).

  5. A BRIEF ON CNCAS • FCFA 2 300 millions Shareholder’s Capital • 209 Employees • FCFA 7 230 millions in Revenues • FCFA 539 millions in Net Income • FCFA 106 000 millions in Total Assets • CNCAS is at the 8th place in national market banking and the fisrt in rural market financing • 20 Branches in different locations ( see country map below) • 13 Banking correspondant (USA, Europe and Africa).

  6. CNCAS NETWORK

  7. Agricultural credit systems : history and context • In the begining context (Even now) ? • Mobilize savings as a source of loanable funds. • How to access to market as source of refinance ? • Competitive rates of interest on deposits and loans ? • How to have our loans repaid and make profit ? • How to manage our risks through portfolio diversification ?

  8. Agricultural credit systems : Major risks • What kind of major risks we face ? • Large informal financial system, • Lack of collateral and high risk for investments, • Profitable investment opportunities are not directly available, • Rural sector is very fragile : unorganized, not sustainable, • Clients have a poor credit history or none. These difficulties explain why • Commercial banks were (are-even now) not in rural area.

  9. Agricultural credit systems : major risk identified • Risks at crop production level - Weather risk : drought, flooding (climate change) - Specific riks : diseases, cricket and bird invasion • Market risks -Price risk -Price volatility creates incertitude about the possibility of obtaining enough value from the sales of products to cover production costs. - Confidence risk - Consumers are increasingly demanding. Beyong the aspects of quality which are generally well managed by food industry, consumers are raising new concerns about food safety.

  10. FINANCING SUPPLY CHAIN MODEL : TOMATO PRODUCTION International, domestic markets Fertilizers, seed entreprises traders Bank Lender & financials services provider (CNCAS) Loan Charing risk, information Information on programme Financial services Payments through account Small farmers/tomato production (CNCFTI) Tomato Processing Company (SOCAS) Crop production Production contract Collateral fund 50/50

  11. APPROACHES DEVELOPED ? • Financial services proposal • Principle : Flexibility instead of rigid criteria • Account deposit for individual and group farmers • Loans for group farmers (social group solidarity) • Special conditions of financial contracts (interest rate, low deposit mobilization) • Non-financial sercices • Training rural populations particularly farmers and leaders. • Intensive participation of CNCAS’s team in meetings, trade exhibitions, annual reports organised by farmers associations and local development Projects. • To be active member of some farmer’s organisations • CGER (Farmers management center) • To be partner of the government (implementation policy sector, fund raising for agriculture, impact of subsidies on rural credit)

  12. RESULTS

  13. Bank/ consumers International market C O M M 0 D I T I E S LC Off shore Loans Off shore bank Pool local bank CNCAS Repayment local bank CNCAS Collateral management Loan Agreement (CMA) SGS/ACE/COTECNA Inspection Companies Industries (processing, stock) SUNEOR Quality/quantity goods Payment Traders Logistic transport Loans Payment Loans for inputs Small farmer producers (peanuts)

  14. CONSTRAINTS • CONSTRAINTS • Dependence on government support (subsidies programs) • Committement of Processing Companies is determinant in terms of visibility and getting easily loans and input (seeds and fertilizers) and selling their productions. • Absence of suitable collateral for farmers • High risk of default associated with small operations • Markets fragmentation (low volume of crop production)

  15. LESSONS LEARNT • RISK MANAGEMENT HAS BECOME ONE OF THE MAIN CONCERNS OF OUR AGRICULTURAL PRODUCERS • Technical risks of production tend to be increasingly controlled thanks to science and technology. Other types of risk have grown in importance in recent years (price volatility, quality requirements). • PUBLIC INTERVENTIONS ONLY ARE NOT SUFFICIENT AND POLICIES SECTOR MUST BE MORE EFFICIENT • Among relevant formal financial sector (Central bank, commercial banks, insurance companies), only Agricultural Banks are actively engaged in providing credit to farmers (Support from the government and/or external donors).

  16. CHALLENGERS FOR FUTURE ? • USING MODERN FINANCIAL INSTRUMENTS IS NECESSARY Commodities in stock are a safe collateral, at least if the stock are safely managed by a credit institute or an independant warehouse operator. • Crop collateral : small farmers can create crop collateral together for non-perishable produce in proper conditions under joint control with a credit society. • Warehouse receipts : this gives banks enough comfort to finance transactions, and producers to get engaged in inter-seasonal storage to take advantage of seasonal price changes. Support regional project on Commodities Stock Exchange in West African Union.

  17. CHALLENGERS FOR FUTURE ? • PROMOTING AGRICULTURAL INSURANCE COMPANY INITIATIVE • CNAAS : recently created in PPP approach (shareholders capital = 35% public sector 65% private insurance companies). • Challenge “Design an alternative, efficient and cost-effective crop failure insurance program that can be easily reinsured and distributed to individual farmers : small, medium and large”. • ‘A new way in CIMA area’ : first experience in W&C Africa • Operational mechanisms (partenership and products) • Index crop or livestock insurance as collateral to lenders • A pilote is structured with World bank and parteners • Place of microinsurance and reinsurance ?

  18. Developing a program - Identifysignificant farmer exposure to weather - Quantifythe impact of adverse weather on their revenues - Structurea contract that pays out when adverse weather occurs • Executecontract in optimal form to reinsure the risk in the international markets. (Sustainability of agricultural insurance products) Donors have large opportunities to support this new initiative.

  19. THE END THANK YOU

  20. OTHER USEFUL INFORMATIONS LIST OF ACRONYMS CNCAS : Caisse Nationale de Crédit Agricole du Sénégal SODEFITEX : Société de Développement et des Fibres Textiles CNCFTI : Comité National de Concertation de la Filière Tomate Industrielle SAED : Société d’Aménagement et d’Exploitation des terres du Delta et du Falémé SOCAS : Société des Conserves Alimentaires du Sénégal CNIA : Comité National Interprofessionnel de l’Arachide ANCAR : Agence Nationale de Conseil Agricole et Rural SUNEOR : Société Nationale des Oléagineux du Sénégal CNAAS : Compagnie Nationale d’Assurance Agricole du Sénégal Website cncas : http//www.cncas.sn

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