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Calvin Miller - Senior Officer, Rural Finance

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Presentation on theme: "Calvin Miller - Senior Officer, Rural Finance"— Presentation transcript:

1 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

2 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

3 Presentation Profile The changing agricultural scene
Using strategic alliances Value chains as a business approach finance Innovations Addressing risk Lessons and policies

4 New Agriculture Driven by Dynamic Markets
World Dev. Report: DeJanvry

5 An Evolving Agriculture: Supermarket vs Subsistence Farming with Open Markets and Cell Phones
Market integration and specification Conglomeration of market leaders Open trade with international y regional competition Segmented demand with stringent standards and conditions Instant access to information But also, Subsistence agriculture, food aid and HIV-AIDS La fuerte entrada de los supermercados

6 Stages of Agricultural Finance
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 Agricultural Credit Era (1950 a 1985) Directed production credit Subsidized credit High transaction costs of lending High loan losses Government and donor refinanced lines of credit through agricultural banks and others Informal family and trader finance for small farmers

7 Stages of Agricultural Finance (cont.)
Commercialization of MFIs (2000 to present) Formal MFIs Little subsidy Multiple Products Expansion and competition New technologies 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. Many banks, finance companies and MFIs are adapting their credit methodologies and adopting technologies to help them configure products that are adequate, efficient and profitable. Other organizations are seeing their traditional agricultural portfolios become standardized, and have diversified their portfolio risk across crops and products. This workshop will explore new trends in agricultural credit methodologies and risk diversification strategies that MFIs are applying and how this is shaping their overall growth strategies.

8 Some underlying challenges affecting rural finance
Demand How to increase economic opportunities? How to build farm management capacity? How to mitigate risk? Supply How to cost-effectively introduce flexible and longer term loan products? How to promote effective management? How to mobilise support for sound financial markets? How to increase economic opportunities for the rural poor? How to build management capacity – of rural entrepreneurs to use finance effectively? How to mitigate risk – production and price risk in agriculture? How to cost-effectively introduce more flexible and longer term loan products? How to lower costs and promote effective management – of diverse rural Financial Institutions? How to mobilise support – for sound interventions in financial markets and not ones based on political expediency?

9 Multiple Services; Multiple Providers
MFIs Commercial Banks Overdrafts/ Credit Lines Transfer Payments Marketing Companies Credit Unions & SACCOS Savings Loans Insurance Insurance Companies Different institutions and businesses provide differing but overlapping services and products – each is competitive in some areas and less so in others; Hence, stategic alliance linkages offer increased efficiency and competitiveness. Inputs Suppliers and Traders Leasing Family / Friends Equipment Companies

10 Non-bank financial institutions Farmers / Rural Clients
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

11 3. Agricultural Value Chain Finance
Linking finance with agriculture and agribusiness Aligning and structuring finance with the chain Medium and Large Exporters and Wholesalers Processors Collector/Traders Farmers & Producer Groups Strategic engagement for common benefit Input Suppliers

12 Inputs Importer/ Wholesaler Input shopkeeper/ Small Scale Trader/
Trader Credit Bank Large Scale Trader Inputs Importer/ Wholesaler Input shopkeeper/ Small Scale Trader/ Farmer Organization Exporter/ Wholesaler or Processor Farmers Key Input sales Trade credit Trade / seasonal credit Product sales

13 Value Chain Finance Flows
Enabling business & financial environment Financial and Information flows Inputs Production Processing Distribution Consumption Physical flows Finance and supporting services

14 4. Technology Innovation
Communication Technology M-PESA–Kenya; G-Cash--Philippines Purchases & sales Commodity prices Money transfers Payments Point of Sale Access ATM & Smart Cards The Economist, 15/02/07

15 Product and System Innovation
Risk management tools; futures, hedging Warehouse receipts finance Factoring y securitization Contact farming and outgrower schemes Facilitation Models (Ej. DrumNet) Integrated Models (Ej. LA-FISE)

16 5. Risk Analysis – Incorporating New Elements
Client /business capacity Repayment capacity Security coverage Cash flow Market growth and risk Competitiveness Estabilidad • Capacidad empresarial • Conducta de repago • Reputación en la comunidad From supply-driven “how we lend” to client driven “how can we structure finance to address client needs and risks”

17 Tools to Mitigate Market Risks
Use of futures and options Warehouse receipts as well as warehouse storage capacity Market information services Contract farming Insurance 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.

18 6. Banks: New Perspective toward Agriculture
Banks should invest money & knowledge in the agribusiness market trend knowledge understanding of key risks alliance and linkage opportunities But Bankers are not technical advisors Helping farmers & agribusinesses achieve their goals Business and Loan Counsel Loans and Services Consultation Loan Analysis

19 Reality: New Mitigants are Required
Measures Methodology Price Risk Use of market based price instruments Couple with Loan Hedge own portfolio or Loan Use microfinance institutions Use international Banks and brokerage houses as partners Crop/Weather Risk Index based weather insurance Rely objectively on specific weather events Compares yield to measurable, objective, correlated risk Need conducive policy and regulatory environment Use innovative structures Capture cash flows Use “organized” intermediate agencies Collateral Risk TA providers play a key role in ‘importing’ innovative successful practices

20 Government: Policies to Support Value Chain Finance
Business capacity building and market integration Contract farming and out grower schemes Technical capacity in market norms and standards Commodity exchanges and active futures markets Insurance innovation, data collection and initiation Market information and access Infrastructural investment Product and service innovation and diversity Technology adaptation and access Producer capacity building – Farmer field schools Organization and business capacity building Support contract farming – contract compliance; negotiation; client protection

21 Key Factors for Consideration
market and industry client and strategic partners fund the chain at most strategic points insure effective and transparent partnerships innovate with new technologies and products take advantage of the value chain analyze and structure loans properly offer timely, multiple and flexible financial services focus on the client and business Understanding Administration Risk Service El negocio financiero es un negocio de la información y conocimiento La estructura y plazos deberá ser reflejo de la cadena; el análisis y evaluación en función de la eficiencia y competitividad de la cadena y los actores Se debe tener formatos adecuados de analizar la información del cliente en forma completa y rápida y tener analistas que entiendan la problemática del agricultor El banco puede ser banca como asesor de información y hasta eslabones de contactos para los clientes, como por ejemplo con eslabones con proveedores, empresas compradores y fuentes de información de riesgos e oportunidades. Además, se requiere servicios eficientes, a tiempo y en condiciones adecuados

22 FAO, Agricultural Department
Rural Finance Learning Centre

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