The design and delivery of effective agri-microfinance
Much of the world population must subsist on only $2 a day, and many among them are smallholder farming families. Although these small farmers would benefit from microfinance assistance, they have unique needs that are subject to factors such as fluctuating food prices and the agricultural cycle, with these geographical influences varying from one area to another. This can make the successful design and delivery of agri-microfinance more challenging.This panel session, moderated by Mr. Graham MacMillan, Senior Program Officer of Financial Inclusion at the Citi Foundation, looked at the delivery channels, products, and/or business models that need to be developed to address the risks and cash flows of agriculture – and addressed what’s working and what is not in the realm of agricultural finance. The panel also addressed how best client needs can be translated into feasible products, as well as the design of appropriate client assessment techniques.Mr. Graham MacMillan, Senior Program Officer of Financial Inclusion at the Citi Foundation, introduced the panelists, praising their expertise and the wide geographic reach of their work.The purposes of today’s session will focus largely on small land-holding farmers who grow crops as an element of their revenue or for subsistence, said Mr MacMillan, most of whom are unorganized. The session will also take a close look at these farmers household finance needs, and the specific inputs that they require – including seasonality, engagement through delivery systems, and other needs.First to speak was Ms. Laura Goldman, Project Manager at Dalberg Global Development Advisors, who spoke about reaching smallholders by means of direct-to-farmer finance. The Initiative for Smallholder Finance commissioned the research that Ms. Goldman cited, creating a report that looked at world demand described five pathways for closing the gap between supply and demand.The Initiative for Smallholder Finance now works towards closing the gap in a time-bound three-year effort. Dalberg led research with the initiative into the realm of Direct to Farmer finance, which involved work with experts and other institutions that specialize in the area.What were the key learnings from this landscape work? Ms. Goldman described three key challenges: meeting smallholders unique and often highly seasonal cash flows, managing risks that are associated with lending to smallholder farms (such as a lack of knowledge and price risks), and problems associated with financial products and services to smallholder farmers, such as high cost and infrastructure challenges. In addition, MFIs operating in this sector often find it hard to locate staffers who have both rural and agriculture expertise.Some less common approaches include asset-based financing, and some commitment savings products. Milagro is an example of commitment savings, allowing villagers to buy scratch-off cards that go to a future input purchase. A second approach is bundling credit with insurance and savings – and emerging examples of providers bundling agricultural insurance with their credit products.Outside of insurance, some providers now are requiring mandatory savings accounts as a form of collateral or risk protection for farmers. Access to support services is also of great import, with some providers offering them in house, while others work with partners. Groups remain more common that individual lending, said Ms. Goldman.Dalberg has identified four business model archetypes, said Ms. Goldman. The first is “Build and Integrate,” developed to serve smallholder or subsistence approach in a very integrated, hands-on and field-based way. “This translates into a deep understanding of smallholder needs, and also results in a small farmer to officer ratio,” she said, cutting down on recruitment problems. She cited the OneAfrica project in East Africa as an example. These often require philanthropic support.The Build and Partner model takes a field-based approach to financial services, but unlike the first, partners with outside organizations to deliver agronomic training. This results in higher client to officer ratios, and also makes it more financially sustainable. Juhudi Kilimo in Kenya is an example of this model, said Ms. Goldman.The third is Leverage and Network, in which providers serving other segments move towards working with an agricultural client base. They use existing resources and put them towards smallholder lending, often with a branch-based approach. They are more commercially oriented and again rely on partners to deliver agronomic services. Commercial pressures present a particular challenge to scale. Opportunity International represents this model, using data and low-cost delivery channels to serve clients.The last is Extend and Mobilize, in which existing community lenders extend their product and services lines to meet agricultural needs. Member savings are deployed for credit products, and the approach to agricultural support is often delivered by individual community members. Constraints on scaling are often internal, including a reliance on a member saving pool andHow to close the gap? Ms. Goldman called for a deeper understanding of each business model, allowing them to be better linked to their client base. She also called for more knowledge sharing, as well as additional innovation in the space that could help overcome these scaling challenges.Next to speak was Mr. Conor Smith, Manager at Proximity Designs in Myanmar, who described the market there as “very, very new – only a few years old.”“In the past three to five years, there have been significant reforms in Myanmar – socially, economically, and now financially,” said Mr. Smith. The Asian nation is Southeat Asia’s poorest and 62 percent earn less than $5 a day, he said, and financial needs become even more dire in the rural population, who comprise over half the population. The nation has a high demand for microfinance but suffers from an extremely low supply, with 62 percent of the population with no access whatsoever. Myanmar’s government bank is large but moves very slowly, forcing people in the direction of informal money-lenders.Proximity Designs was founded in 2004. “It’s really focused on human centered products, designing what they need,” said Mr. Smith, including solar energy and irrigation products. It has developed a distribution network that can reach 80 percent of Myanmar’s population and has grown quickly, serving over 200,000 unique customers to date. “It’s an unparalleled distribution network that we currently have,” he said.The company got into microfinance after Cyclone Nargis devastated Myanmar’s agriculture in 2010, with cash liquidity services operating as one aspect of relief efforts. Their first product was specific to the rice market and operated on their cycles at about $150 per loan, with high payment rates.In 2012, microfinance became a regulated industry in Myanmar, and the company was awarded a license to start its own business unit, Proximity Finance. It has expanded from 10,000 in 2012 to 21,000 customers in 2013, with 27,000 planned for 2014. “In doing so we’re really focusing on diversification of our portfolio,” said Mr. Smith, moving from the Delta region to the north of the nation. The portfolio is sustainable and growing.Diversification is three fold for Proximity Designs, said Mr. Smith, incorporating geographic diversification, diversification of products and services, and the services component – moving into offering not just credit, but also savings, insurance, and even payments. This will require a regulatory framework that is both practical and sustainable. New products include an “On the Move” loan for people who wish to relocate.The second focus for Proximity Designs is institution building, which will include building several branch offices and hiring staff, or moving it from Proximity Designs to Proximity Finance. Capacity building will then become very important, as the Myanmar microfinance sector begins to grow.“Ultimately, we think we’re in a unique position in a unique market,” said Mr. Smith, citing Proximity Designs decade of experience, the newness and size of the market, and other factors. Ultimately, the company aspires to be Myanmar’s leading provider of rural financial services, with comprehensive financial solutions.Next to speak was Mr. Yi Jiang, Environmental Economist at the East Asia Department of the Asian Development Bank (ADB), who discussed the bank’s experience in the Chinese Agri-Microfinance sector. ADB works across numerous sectors in China, with agricultural sector priorities including rural land and environmental protection, rural renewable energy development, rural social and microfinance services, and SME finance which will help people enhance their rural livelihood opportunities.Mr. Jiang described ADB’s financial intermediation loans, abbreviated to FIF. ADB lends to the government, the government lends loan proceeds to financial intermediations, and finally, the FI lends to the sub-borrower – usually from the private sector. “Compared to many other ADB projects, the sub-borrowers in this case are small and need financing for the short term – 1 to 5 years,” he said.ADB has sovereign terms while lending to the government, usually 25 years with a 5 year grace period, while the interest rate is currently around one percent. The government lends to FI’s at the same cost of raising funds locally, while FI lends to sub-borrowers at market-based terms, taking on their credit risk.What are ADB’s eligibility criteria for FIs? They must be solid, have good governance, good corporate strategy, economy in decisions, and most importantly, a commitment to ADB’s safeguard environments. The bank sets up environmental and social management assistants with these FIs, says Mr. Jiang, helping ensure sub-projects financed by these loans meet ADB’s social end environmental requirements.Mr. Jiang is currently working on the Gansu Featured Agricultural and Financial Services System Development Project, addressing this particularly poor region of China, with 88 percent living in rural areas. The average farmers net income is only about $500, 42 percent of the national average, with land holdings that average less than 200 meters.“Traditionally the crop is mainly grain, but farmers are now moving towards medicinal and edible plants,” he said, a shift that was happening slowly, while livestock husbandry has high potential in the project area. Players include local commercial banks, the Bank of China, the Bank of Lanzhou, and the Bank of Gansu, as well as emerging microfinance institutions.What are the challenges in the Gansu project area? Small farmers need external assistance to grow their crops, but they have low skills and low capacity to get their crops to market – requiring more help from agricultural enterprises and cooperative markets. They must deal with agricultural risk, and they also lack financial resources and access to credit, said Mr. Jiang.The ADB fund has lent $100 million to the project, with another $100 million from the government of China. Sixty-two percent of funds are onlent to sub-borrowers, 27 percent are relent to RSFPs (rural financial service providers), while 15 percent are devoted to capacity building. The fund flow thus moves from ADB, to the government, to FI’s, and from there to sub borrowers and RSFPs. Funds also flow from RSFP’s to sub-borrowers, said Mr. Jiang.Finally, the government has created a fund with the interest revenues it creates, which it will use to strengthen capacity and increase the creditworthiness of its targeted sub-borrowers, said Mr. Jiang.Last to speak was Mr. Mitch (Tomas) Gomez, Governing Board Member at the Agricultural Guarantee Fund Pool (AGFP), Philippines. Bank lending in the Philippines was limited to farmers who held title to their lands in the past, with land used as collateral – excluding farmers who did not hold their land or who benefited from a land reform program but had yet to get title.AGFP developed agree-microfinance products for tenant farmers, with 60 percent of loan amortized weekly, and 40 percent bullet payments at harvest. This still excluded small tenant farmers without weekly cash flow.The state then created the Agricultural Guarantee Fund Pool (AGFP), a state credit guarantee program which encourages private lending to small farmers. An all-risk guarantee (except lender fraud), the maximum loan is capped at USD $20,000, while the average loan is about $800, about one hectarte of farmland. The guarantee covers 85 percent of principle, with the lender taking risk for the rest. A 2 percent guarantee fee is paid by the lender.Eligible partners are banks, MFIs, NBFC, Coops and so forth, with a 20 percent risk weight on assets. The AGFP is separate from and complementary to crop insurance, said Mr. Gomez.Target end-borrowers of the fund are tenant farmers who don’t own or hold title to their land, and possess less than 7 hectares, said Mr. Gomez. The eligible crops are rice, corn, vegetables, fruit, and other cash crops, while poultry, swine, goats, and cattle are also included, as well as fishermen and fish ponds.“Traditionally farmers in the Philippines get their credit from informal sources – and they definitely charge much more,” said Mr. Gomez of the program benefits. Farmers enjoy the flexibility to grow what they would like and sell their goods to anyone at any price, as well as lower interest rates, and access to other services.“The fund has been growing,” said Mr. Gomez, from 6 million at its 2008 start to 123 million at the end of last year. The number of farmers benefited rose from less than 4,000 in 2008 to 108,000 in 2013, and while claims are increasing, there are recoveries. The guaranteed payment, said Mr. Gomez, does not eliminate the loan liability of the farmer.To be sustainable, the fees must be 3 percent more, while banks and MFIs are particularly active in the program. The fund is also underutilized, operating at only 47 percent of capacity – highlighting a need for more partners, whose numbers are actually diminishing. “This tells us even rural banks that want to help small farmers don’t have the skills or competencies to lend to this sector,” said Mr. Gomez.Finally, Mr. Gomez stressed that while credit guarantee works, the guarantee itself is not enough. As a bank owner, Mr. Gomez found that after his bank rushed out a loan product without doing proper research and with lax production design or a pilot, it went poorly: sans a deliberate product design approach, it led to initial losses and a drop in guarantee partners.“Fortunately, about three or four years ago at GM Bank, we were the benefit of an assistance program on developing loan products for small farmers” said Mr. Gomez, through Access Advisory services, allowing them to improve their offerings with better market research design, pilots, and better distribution and loan approval.Mr. MacMillan than addressed questions to the panelists, asking Ms. Goldman how many of these smallholders actually would like to expand. “In certain cases, credit isn’t going to be the answer, at least initially,” said Ms. Goldman, describing commitment savings plans as an interesting solution – allowing creditees to accumulate savings and then “graduate.”What is the cost of all of these schemes, and what is the cost of serving these clients – and is it commercially viable?“Yes, we do believe it is commercially viable – that’s the short answer,” said Mr. Smith, referring to Proximity Designs considerable experience and its usage of 5 to 10 leveraged community members in its processes, using them to determine if community members are credit-worthy individuals.“Putting forward a lot of money into research and development makes it harder for us to keep our costs down,” said Mr. Smith, noting that they are not actually taking that cost on themselves, but are supported by philanthropic investments.“Providing financial support to small landholders is a very challenging scene,” said Mr. Jiang, describing the traditional system of direct, subsidized loans. He cited the FIL model, the beauty of which is its ability to remove subsidy from the market by allowing the intermediary to take the full risk of the borrow, introducing a market-based approach.We also encourage them to lend at the market rate, and government has to accept that if they want to go that way,” said Mr.Jiang. Intermediaries make the final decisions, while ADB sets a certain scope of borrowers so that they may serve an area with particularly high need.“We expect the loan proceeds of this project to be lent to borrowers at similar rates,” said Mr. Jiang, who said his organization’s models have revealed potentially high return. “I feel increasingly confident we can work it out.”“In the Philippines, there’s very little state-landing directly to farmers. That’s been gone for 20 years,” said Mr. Gomez, which prompted the creation of the guarantee fund. The fund has helped accelerate his bank’s ability to identify clients, the guarantee allowing them to enter the market more swiftly and with more confidence.“All state guarantee programs have to end anyway, when the money runs dry,” said Mr. Gomez. “We are increasingly confident that once the credit guarantees are taken out, we can still look for more clients but with a different approach – but certainly the clients we already have now, we will continue to serve them.”“It is commercially viable for us because it has to be,” said Mr. Gomez. “Otherwise, we kill the product.”Source - http://www.microfinancefocus.com/
