Making Agriculture Finance a Profitable Business Nwanze Okidegbe Consultant 17 th AFRACA General Assembly Kinshasa, Democratic Republic of Congo November 24, The World Bank

Background Millinium Development Goal 1 (Poverty and Hunger) and Food Security cannot be achieved without agriculture Agriculture is engine of growth for many economies in Africa and major source of employment Agriculture is the main source of foreign exchange Agriculture Finance is profitable for many banks in Armenia, Kyrgyz Republic, Thailand, etc, it can also be profitable for African banks 2

Understanding Agriculture Sector Key Players: - Subsistence Farmers - Smallholder Farmers - Medium-scale farmers - Large-scale farmers - Agribusiness/food systems (SMEs and large enterprises) 3

Understanding Agriculture Sector Continued…. Major Agriculture Financing Needs: - Short-term loans (inputs, agric. Trade, storage, etc) - Term loans (tractors, harvesters, processing equipment, tree crops, irrigation schemes, trucks, etc.) 4

Understanding Agriculture Sector Continued…. Agriculture Financing Challenges: - Risks ( weather, post harvest losses, pests, etc) - Policies ( price controls, subsidies, etc) - Bankable Collaterals - Lack of access to markets - low agric. Productivity of small-scale farms 5

Fundamentals for Making Goods Ag. Loans Sound Appraisal Sound Institutional Capacity Control of Operating Cost Risk Management 6

Sound Appraisal of Agriculture Loans Careful assessment of ability to repay Risk assessment Assessment of collateral or collateral substitutes Market assessment Assessment of policy and legal framework 7

Sound Institutional Capacity Staffing and training Good agriculture lending policies and guidelines Effective supervision and monitoring Management oversight Internal controls-checks and balances 8

Reduction of Operating Costs Group lending for smallholder farmer Mobile banking Trade-based lending/repayment system Lending through producer cooperatives Out sourcing arrangements 9

Risk Management Loan diversification within agriculture portfolio ( across crops, regions and scale of operations) Effective risk mitigation plan Use of crop and drought insurance Risk-based pricing, especially for small loans Use of biometrics to identify borrowers Use of credit-risk sharing arrangements among produce buyer, lender and borrower 10

World Bank Initiative: Agriculture Finance Support Facility Vision- Significantly increased access to financial services for smallholder farmers in Africa and Asia Objective- Demonstrate that the provision of financial services for smallholder farmers and other rural entrepreneurs is a profitable business for banks Activities- Provide matching grants for capacity building and facilitate knowledge creation and learning 11

Why AgriFin ? Globally, few financial institutions have lending for agriculture as a business line Provision of financial services in rural areas costs more compared to provision in urban areas because lower density of economic activity Financing of agriculture further constrained by unique and covariant risk such as weather and pests, and limitations of land as a collateral Finally, perceptions of risk often higher than actual because of inadequate domain knowledge 12