Presentation on theme: "Calvin Miller - Senior Officer, Rural Finance Holder of M.S in Agricultural Economics, currently Senior Officer for Rural Finance in FAO, has over twenty-five."— Presentation transcript:
Calvin Miller - Senior Officer, Rural Finance Holder of M.S in Agricultural Economics, currently Senior Officer for Rural Finance in FAO, has over twenty-five years of worldwide experience in economic development, in the design, implementation and evaluation of financial services programs and institutions, production and marketing, and institutional development. Has extensive experience in agricultural value chain development and finance for both national and international markets. Has worked as the Country Manager of MEDA in Bolivia and carried out many international consultancies Mr. Miller provided leadership and technical support for over 200 CARE micro and small enterprise, and agriculture and natural resource projects in over 40 countries. He also founded and developed, MicroVest
Perspectives of Value Chain Finance in Africa Agri Forum: Value Chain Finance Conference Nairobi, Kenya 16 – 18 October, 2007 Calvin Miller FAO Rural Finance Senior Officer Rome, Italy
Presentation Profile 1. The changing agricultural scene 2. Using strategic alliances 3. Value chains as a business approach finance 4. Innovations 5. Addressing risk 6. Lessons and policies
New Agriculture Driven by Dynamic Markets World Dev. Report: DeJanvry
1.An Evolving Agriculture: Supermarket vs Subsistence Farming with Open Markets and Cell Phones Market integration and specification Market integration and specification Conglomeration of market leaders Conglomeration of market leaders Open trade with international y regional competition Open trade with international y regional competition Segmented demand with stringent standards and conditions Segmented demand with stringent standards and conditions Instant access to information Instant access to information But also, Subsistence agriculture, food aid and HIV-AIDS Subsistence agriculture, food aid and HIV-AIDS
Stages of Agricultural Finance Agricultural Credit Era (1950 a 1985) Directed production credit Directed production credit Subsidized credit Subsidized credit High transaction costs of lending High transaction costs of lending High loan losses High loan losses Government and donor refinanced lines of credit through agricultural banks and others Government and donor refinanced lines of credit through agricultural banks and others Informal family and trader finance for small farmers Informal family and trader finance for small farmers Donor Microfinance Era (1980 a 2000) Rapid, small working capital loans Group lending approaches Focus on non-agricultural activities Forces groups savings Separation of financial services and business support services. High cost of microfinance
Stages of Agricultural Finance (cont.) Commercialization of MFIs (2000 to present) Formal MFIs Formal MFIs Little subsidy Little subsidy Multiple Products Multiple Products Expansion and competition Expansion and competition New technologies New technologies Interest by capital market investors and lenders Interest by capital market investors and lenders Value Chain Finance (2005 to present) Strategic focus on market potential of businesses Linkages among suppliers, producers & marketing companies Growing importance of standards Greater use of risk mitigating tools Growing integration between banks and business Growing use of new technologies.
Some underlying challenges affecting rural finance Demand How to increase economic opportunities? How to increase economic opportunities? How to build farm management capacity? How to build farm management capacity? How to mitigate risk? How to mitigate risk?Supply How to cost-effectively introduce flexible and longer term loan products? How to cost-effectively introduce flexible and longer term loan products? How to promote effective management? How to promote effective management? How to mobilise support for sound financial markets? How to mobilise support for sound financial markets?
2. Financial Linkages Private Banks State Banks Postal Banks Insurance Cos. Non-bank financial institutions Investment funds MFIs NGOs Credit Unions Village Banks Agro-processors Input Suppliers Marketing Companies Leasing Companies Warehouse Operators Supermarket Chains Farmers / Rural Clients Farmer Associations Partnering for better access, services and efficiency
3. Agricultural Value Chain Finance Linking finance with agriculture and agribusiness Linking finance with agriculture and agribusiness Aligning and structuring finance with the chain Aligning and structuring finance with the chain Processors Input Suppliers Farmers & Producer Groups Medium and Large Exporters and Wholesalers Collector/Traders Strategic engagement for common benefit
Trader Credit Large Scale Trader Inputs Importer/ Wholesaler Input shopkeeper/ Small Scale Trader/ Farmer Organization Bank Farmers Trade creditTrade / seasonal credit Key Product sales Input sales Exporter/ Wholesaler or Processor
Processing Financial and Information flows Physical flows Inputs Enabling business & financial environment Production Distribution Finance and supporting services Value Chain Finance Flows Consumption
4. Technology Innovation The Economist, 15/02/07 Communication Technology -- M-PESA–Kenya; G-Cash--Philippines Purchases & sales Purchases & sales Commodity prices Commodity prices Money transfers Money transfers Payments Payments Point of Sale Access ATM & Smart Cards
Product and System Innovation Risk management tools; futures, hedging Risk management tools; futures, hedging Warehouse receipts finance Warehouse receipts finance Factoring y securitization Factoring y securitization Contact farming and outgrower schemes Contact farming and outgrower schemes Facilitation Models (Ej. DrumNet) Integrated Models (Ej. LA-FISE)
5. Risk Analysis – Incorporating New Elements Client /business capacity Client /business capacity Repayment capacity Repayment capacity Security coverage Security coverage Cash flow Cash flow Market growth and risk Market growth and risk Competitiveness Competitiveness From supply-driven how we lend to client driven how can we structure finance to address client needs and risks
Tools to Mitigate Market Risks Use of futures and options Use of futures and options Warehouse receipts as well as warehouse storage capacity Warehouse receipts as well as warehouse storage capacity Market information services Market information services Contract farming Contract farming Insurance Insurance Access to technical assistance Access to technical assistance Some risk management tools are more practical for agro- industries and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.
6. Banks: New Perspective toward Agriculture Consultation Loans and Services Loan Analysis Business and Loan Counsel Helping farmers & agribusinesses achieve their goals Banks should invest money & knowledge in the agribusiness Banks should invest money & knowledge in the agribusiness market trend knowledge market trend knowledge understanding of key risks understanding of key risks alliance and linkage opportunities alliance and linkage opportunitiesBut Bankers are not technical advisors Bankers are not technical advisors
Reality: New Mitigants are Required Price Risk Use of market based price instruments price instruments Couple with Loan Hedge own portfolio or Loan Hedge own portfolio or Loan Use microfinance institutions Use microfinance institutions Use international Banks and brokerage houses as partners Use international Banks and brokerage houses as partners MeasuresMethodology Crop/Weather Risk Index based weather Index based weather insurance insurance Rely objectively on specific weather events Compares yield to measurable, objective, correlated risk Compares yield to measurable, objective, correlated risk Need conducive policy and regulatory environment Need conducive policy and regulatory environment Use innovative Use innovative structures structures Capture cash flows Use organized intermediate agencies Use organized intermediate agencies Collateral Risk TA providers play a key role in importing innovative successful practices
Government: Policies to Support Value Chain Finance Business capacity building and market integration Business capacity building and market integration Contract farming and out grower schemes Contract farming and out grower schemes Technical capacity in market norms and standards Technical capacity in market norms and standards Commodity exchanges and active futures markets Commodity exchanges and active futures markets Insurance innovation, data collection and initiation Insurance innovation, data collection and initiation Market information and access Market information and access Infrastructural investment Infrastructural investment Product and service innovation and diversity Product and service innovation and diversity Technology adaptation and access Technology adaptation and access
Key Factors for Consideration Understanding Understanding Administration Administration Risk Risk Service Service market and industry market and industry client and strategic partners client and strategic partners fund the chain at most strategic points fund the chain at most strategic points insure effective and transparent partnerships insure effective and transparent partnerships innovate with new technologies and products innovate with new technologies and products take advantage of the value chain take advantage of the value chain analyze and structure loans properly analyze and structure loans properly offer timely, multiple and flexible financial services offer timely, multiple and flexible financial services focus on the client and business focus on the client and business
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