1. Supply Chain Financing: Scope for Rural Finance Interventions Rural Finance in Afghanistan and the Challenge of the Opium Economy Kabul, Dec 13-14, 2004 Douglas Pearce Head, Financial Sector Team Department for International Development (DFID), UK

2. Supply Chain Financing Globally = the Principal Source of Credit for Agricultural Production 50% of the rural popn. in El Salvador that accesses credit, does so from wholesaler, retailers, processors Leading companies in Southern Africa provided $91m in credit to 530,000 households 2001-2003 Kenya Tea Devt. Agency: 400,000 small farmers in fertilizer credit scheme, disbursing $15m annually 270,000 smallholders received input credit from tobacco & cotton companies in Mozambique 2002/03

3. Supply Chain Finance/Agribusiness Credit: Principal Mechanisms Contract Farming and Outgrower Schemes Buyer (trader, processor, wholesaler, exporter…) provides inputs on credit, linked to purchase. Trader/Supplier Credit Inputs on credit, or Advances during growing season for range of uses (in cash or in kind) Inputs on Credit Produce

4. Examples of Supply Chain Financing Hortifruti, Costa Rica [Contract Farming] Specialist wholesaler for supermarket chain Technical assistance & information, calendar of production, financing etc to pool of growers Aim = to ensure quality, quantity, and timing Salaam, Afghanistan (trader advances) Trader gives advance payment as loan against future delivery of agreed amount of crop (e.g. opium) Aim = to secure supply, and to reduce price risk for trader Inputs on Credit Produce

5. Characteristics of Supply Chain Financing/ Agribusiness Credit Credit linked to supply or purchase transactions Primarily input credit (seasonal credit or short-term advances), not financing for other uses Credit alongside inputs, advice, market access Interest rates not always applied Delinquency & default can be a problem (side-selling) If traders have too much market power, can abuse position

6. Can we build on Supply Chain Finance to extend Rural Finance? Agribusiness credit has key advantages to offer: Outreach Client Knowledge Reduced Risk And has deficiencies that merit interventions: Narrow Product Range Scale of credit operations limited by access to credit, technical know-how, market linkages etc Side-selling Access for smaller and more marginal farmers can be limited Abuses of market power (unfavourable terms, indebtedness leading to loss of land)

7. Possible Donor Interventions 1. Facilitate the entry of financial institutions Support the development of brokers/agents Assist traders/processors to set-up finance companies Small Farmer Associations 2. Assist Traders/Processors to learn from microfinance: Upgrading client-monitoring systems Sub-contract lending activities, leaving scope for other types of loans? Adopting microfinance techniques 3. Improve the enabling environment for rural finance

8. Linkage Model: Broker or Loan Service Agent Specialist intermediaries that can lower the risk and cost of dealing with small farmers Loan service agents (for agri- business or financial institutions) Brokers, that link farmers to financing [NB have to face thorny question of working with rural hawala dealers] Inputs Loan Produce Selection & Monitoring Broker or Service Agent Repayments Fees or

9. Trader/Processor Finance Companies Processors or wholesalers can set-up finance companies to conduct credit operations Better-placed to improve and widen credit products and increase efficiency and scale Credit Facility Produce Inputs

10. Small Farmer Associations Donor support to specialized agencies that promote market-oriented associations Associations can increase scale of production reduce costs for lenders facilitate TA and input provision Increase bargaining power of small farmers $ InputsProduce

11. Positive Policy & Enabling Environment Critical Credit bureau Instruments to reduce default risk Collateral registration procedures/warehousing facilities Transport and communications infrastructure Market access and functioning supply chains are critical for viability of alternative crops

12. Opium-related Indebtedness – Additional Options Use community mechanisms e.g. jirga, to negotiate debt restructuring, with additional loan/grant (re-)financing in severe cases Loans or grants for buying back mortgaged land/assets? [NB need to monitor loan use, as money is fungible] Remittances (from seasonal or longer-term migrants) also a key source of funds to break cycle and support alternative activities

13. For Donor Interventions to be effective Build capacity of existing and potential traders/processors or agents, rather than creating new institutions [Also NGOs as facilitators, not as market players] Grant and technical assistance should be timebound, transparent, and open to >1 trader/processor/agent Financial institutions better able to finance traders/processors, agents, or farmer associations, rather than individual small farmers Better understanding & monitoring of financial flows needed Dont subsidize loans/inputs to farmers – undermines financial sector/agricultural markets Interventions should increase competition