Getting Started: Perspectives on Financial Services in Agriculture-led Food Security

I think the way public services are organized in the management food security needs completing. Despite budgetary constraints, in [url=http://www.inchirierimasini.info/bucuresti] Bucharest [/url] there are many institutions involved in food safety. For better management of limited financial resources, authorities must
clearly complete the responsibilities of each institution and eliminate duplicity and overlapping responsibilities. One way to achieve this is to create a single authority for food safety.

Women Food Farmers are the most important producers and are virtually ignored by conventional microfinance because they need long, seasonal loans at low interest rates.
The Hunger Project (THP) began pioneering a solution to this problem in 1999 (seehttp://www.thp.org/what_we_do/key_initiatives/microfinance/overview) with a program now serving women farmers in 8 countries of sub-Saharan Africa, in more than 2,200 villages organized as 114 clusters (epicenters).

The goal is to establish government recognized, women-owned rural banks (or credit unions) at the village cluster level (what we call "epicenters").
The keys to this programs success are that it is embedded in an integrated, capacity-building strategy not only for the individual women but for the community: the epicenter ensures women have access to health care, food-processing machinery, literacy training, agricultural training on the epicenter demonstration farm, and food banks for price-stabilization.

The program starts as a direct-credit operation with a mandatory savings component for several years - training purely-volunteer village and epicenter loan committees - up to the point when the women meet the standards for a rural bank. At this point, their bank can legally recycle savings into more loans. To date, 20 rural banks have reached this stage of self-reliant operations.

THP continues to learn more, and is committed to both improving and scaling-up this methodology.
- John Coonrod, Vice President, The Hunger Project

Hi everyone,

First may I thank the organizers and those who are contributing to this discussion. In 1983, we observed that credit for cultivation as well as for hiring equipment on credit was able to transcend communities from being poor to become not-poor. Since then we have been designing, implementing and evaluating projects related to MicroEnterprise development and access to MicroFinance for rural enterprises including agriculture. However, we came to realize that MicroFinance institutions (MFIs) and banks were excluding the Ultra Economically Poor (UEP) from having access to loans as they did not have plots/addresses, an identity card, an occupation/ideas and lacked guarantors etc. They were branded as the non-entrepreneurial poor and considered un-bankable. This disheartened us a great deal and we started carrying out research to analyze the root causes and seek strategies and methodologies to serve the UEP as they were the most destitute. The research revealed that the UEP were unable to access financial services as they were living in remote rural, conflict and post conflict areas as MFIs/banks were hesitant to open branches and provide credit + services. The reasons some who even had land (or could rent land) and remained UEP was due to the lack of able bodied persons/youth to work the land as they had either been killed/traumatized, did not like agriculture as it was not "fashionable" or migrated from the area due to lack of work and insecurity. Some families were hesitant to take loans as they lacked knowledge of the best practices to increase harvests, the manner they could combat climate change and market their produce. Some who were living in conflict and post conflict zones were hesitant to invest human capital in agricultural production as they were being given handouts, feared the resurgence of conflict and pillage by unemployed ex-combatants and child soldiers. This was also preventing them from even organizing SHG (Self-Help Groups) to have access to little funds to re-start their lives as they were suspicious of each other. Some who had been affected by war were vegetating on past hurts and their misery. Some could not invest their human capital to develop agriculture as they had to look for food or items such as firewood/bamboo to sell in order to buy food.  

In 1997, we came across the Women’s bank in Sri Lanka - http://www.slwb.org/web2/ that had overcome the challenges of providing access to financial services to the UEP. We studied and started adopting their methodology in areas where refugees lived and in normal settings. Given below are our responses to the questions of day one focused on the UEP who live or plan to live in remote rural or post conflict areas:    

1.            From your experience, where are financial services needed across different dimensions of agriculture development?

Funds/loans for payment of security or to be coached in community policing techniques in remote rural/post conflict areas if not provided by the government; to purchase and register land; to purchase food, medicines and pay school fees until the harvest; to purchase seeds/seedlings, hand tools and other materials such as fertilizer, pesticides, fencing and watering cans; to pay for labor for clearing land, cultivation and harvesting; to hire mechanized equipment to prepare/contour the land and install drip irrigation (to combat climate change); to construct housing (if UEP need to resettle), silos and warehouses for storing food; and to transport produce to markets.    

2.            What types of agricultural challenges are financial service initiatives well targeted to address and what are some of the types of financial services to address them?

Our experience is that existing MFIs or banks are not willing to provide access to financial services to the UEP living in remote rural and post conflict areas directly. In order to entice the UEP to invest their resources/capital, develop sustainable agriculture and have lasting impact, we have found that financial services should be provided to producer groups. In order that this becomes a reality rapidly (among the UEP that are vegetating) we suggest the following: first carry out sessions to visualize that everyone has some talent/strength that can be identified and transformed into a marketable profession (stressing that no one needs to remain poor and need to change their mindsets to set aside differences and past hurts) or be a link in an agricultural value chain, and the manner investing in agriculture has rapid returns when the following are carried out:  a) facilitate the establishing of either savings and investment groups (S&I) or value chain associations (VCAs). b) Coaching the S&I/VCAs to nominate trustworthy persons possessing leadership traits to be elected as office bearers to establish Producer Organizations (POs) and register them as either cooperatives or associations, c) coaching to keep accurate accounts and internal audits d) carry out an external audit after six months e) coach the POs to open accounts and access loans from either mainstream MFIs/banks or if they are unwilling, establish financial services units within the POs (with different boards of management and at least three paid staff) f) consolidate the savings of the S&I/VCA groups and apply for loans/grants matched to savings. g) produce and market (a community shop can be established to facilitate marketing and also stock essential items, seeds and tools to be given on credit for the next cultivating season)        

3.         Finally, what special considerations are there for these financial services working with small holders and in the rural context?

We have found that in order to entice MFIs and main stream banks to either open branches or serve the UEP, who are small holders or living in rural areas, it was necessary that we subsidize their interventions by offering incentives such as: a) transport b) payment of administrative costs and salaries of staff until costs can be covered by the interest to be earned c) a secure building and providing security in villages when financial transactions are being carried out.

Some MFIs/Banks we researched informed us that they would be willing to serve the UEP if they had land to offer as collateral or a guarantee fund was deposited.

4.      Risk: The Women’s bank of Sri Lanka has developed a “breadwinner” insurance scheme for all types of loans which works in the following manner: the family pays a one time premium of around $50. The family receives $500 in case of disablement/death of the breadwinner. Families can deposit additional $50 if they wish and receive additional sums. For agriculture they minimize the risk by coaching farmers on best practices. If there is a case of drought or flooding, a second loan is provided to continue cultivation. The interest on the first loan is wavered and the loan is rescheduled.     

Some of the above suggestions were outlined in an online discussion on MicroLinks related to “Value Chains for Vulnerable Populations” from 28th to 30 April 2009. They can be read at: http://www.microlinks.org/ev.php?ID=38470_201&ID2=DO_DISCUSSIONPOST_LIST

Thank you again for an excellent discussion,

Sunimal M. Alles

Consultant, Conflict prevention and Livelihoods,

MATCOS,

Sri Lanka

Skype: sunimal.alles

Hello everyone!

I focus on the first question for today. Farmers often find it difficult to access long term loans to establish new plantations or for replanting old ones. In Nepal, we see this in the case of some perennial cash crops (for example Tea and Large Cardamom) where there are waiting periods of a 4-5 years for the first harvests (and for cash income to enable loan repayment). Banks financing agriculture usually hesitate to get into this type of lending. Micro finance loans are generally too small and repayment terms also do not suit this type of borrowing. To overcome this problem, the central bank in Nepal provides refinancing facilities to banks who lend long term to farmers growing selected crops. There are interest subsisidies but no guarantees.  

I was wondering if there are other ideas/experiences regarding long term loans for plantation establishment or replanting. 

Best,

Bhushan

Working with the some of the farming community in Bangladesh I found seasonal agricultural loans very useful. This is when the farmers could delay the payment with little interest for the first months. Although these loans were not offered by as many banks the ones which did offer it definitely got enough applicants.  If these kinds of seasonal loans can be offered by more financial institutions it could change much of the picture. Especially for the dairy industry, since it’s one of the most struggling one in the case of Bangladesh.  The idea of a seasonal loan for dairy farmers would help them take things to the next level.  At the moment that’s completely nonexistent.

 Best,

 Iffat Nawaz

International Resources Group

Congratulations to the organizers for facilitating these discussions !!

I would like to know whether there are any acknowledged standards, case studies, best practices (web-links) related to today's theme " Perspectives on Financial Services in Agriculture-led Food Security" . I am particularly interested in the microfinance examples of products and services related to the support of agriculture-led food security. How would a such project/program be structured ? What are its main components / subcomponents ? What are the drivers ? What are the failure risk factors ?

Thanks !

Kind regards,

George Staicu
Banking and microfinance consultant
Bucharest, Romania

(Originally posted by Mary Miller)

I become concerned when it is proposed that the government take initiatives that I think are better handled by the private sector, e.g., the government starting farms. One important question is, what should we expect out of government? I mostly want government to provide a good enabling environment for private business, including farmers, to operate - a good example from the discussion below would be for the central bank to provide simplified requirements for smallholder farmers to meet re Know Your Customer standards, so that KYC provisions do not become a constraint to financial institutions in serving smallholder farmers. Another area where government support seems appropriate is in research and outreach to farmers, as suggested by another participant in this discussion. We do need to be realistic, however, concerning what governments can do on a sustainable basis, and services such as insurance may be prohibitively expensive.

Mary

Thanks Muhhamad for your salient points and sharing your experiences. I wanted to call out some of your comments to the group and highlight some of your questions raised and maybe bring us back to some things others have iterated as well.

You mention the need for financial services to go beyond credit, which is one tool of many such as the voluntary savings initiatives you mention and that others seem to be identifying as well, insurance products, risk mitigation products etc.

The importance of innovating and developing local context solutions and best practices is an interesting one. It would be interesting to hear others respond to some of your suggestions about facilitators of success and how the translate in other contexts.

I would pose to you and the group, what are the barriers to innovation and what catylzes and supports innovation? How can initiatives ensure and support the need to innovate and adapt to changing financial and ag landscapes? 

Best,

Meaghan

Thanks to the organizers for conducting this exchange of ideas.

There seems to be disagreement in the development community about the current and future role of MFIs in serving agriculture.  The typical view is that MFIs tend to be concentrated in rural and peri-urban areas and their rigid lending technology is not well suited to farmers with seasonal cash flows.

The alternative view is that MFIs are already serving many farm clients and new technologies and innovations will make it easier to make more flexible loans with variable repayment schedules.  The costs of communication are also falling dramatically.  These developments along with increased competition will drive down interest rates to levels more attractive to farmers, and this will push out the frontier of MFI agricultural lending.  MFIs serving poorer segments may be better equipped than other dinancial institutions to contribute to food security.

What evidence exists to support either view?  What view is most likely to predominate in the future?  What MFIs best provide evidence of what the future will look like?

Dick

Sheryl mentions that ag insurance runs into time-consuming bureacracies in Guatemala. I recall success stories with insurance in Kenya. Any other experiences about what can make it successful/viable?

In our P4P projects in Guatemala with small farmers producing maize and black beans, three types and periods for financial assistance are requiered:

1. Resources for inputs during planting and early growing season, including seed, fertilizer, agro chemicals, and in some cases, land rental and labor. The length of time this funding is needed depends on the region, from six to ten months.
2. Marketing: WFP purchases the product from the farmers' organizations, which in turn must procure the maize or beans from the members.  The members have invested in harvest and transportation costs (labor, sheller rental, transport). The organization is usually responsible for transport, cleanning, drying, storage and bagging of the product.  Credit is needed for this short period, usually two months or less, so that the organization can make payment (partial or full) to the members so they can cover their immediate costs, and to cover the cost of the services acquired by the organization.
3. Infrastructure: Many of the organizations have requested/obtained credit for infrastructure such as irrigation systems, drying patios, bean cleaners and polishers, storage facilities (family silos/ogranization silos). This credit is longer-term, three to five years.

Agricultural insurance, needed especially for point 1, is not commonly used in Guatemala by the small farmers. Although available and partially subsidized by the Government, it is expensive for the small farmers and difficult to obtain (much burocracy, may take up to 6 months to obtain).

Another problem related to financial services is the cost, which ranges from 4.5% annually for government irrigation projects to 120% annually from private lenders.  Small farmers have problems with collateral since the process for land titles for the small farmers is very slow. Most of the credits available from the banks and microfinance organizations are in the 18 to 30% annual range.

Regards,

Sheryl

Hello,
1. From my little experience, i believe financial services is needed in all the categories of the agriculture sector. some of these categories are crops production, animal production, fruit and tree production, storge, packaging and distribtution. for example in the crop, tree and fruit production the farmer will need credit in order to clear the land, plant and harvesting of produce. henece credit facility will be needed by the farmer in order to cultivate on a large scale. this in the long run will help reduce subsistence farming in most developing countries like Ghana and some West African countries.

Another crucial sector where finance is needed is the storage of produce in order to reduce post harvest losses. In most developing countries agriculture is mostly seasonal, that is prices of commodties are very low when there is good harvest, and prices rises when there is off season. this is because there are know storage facilities to store these produce are not available. in order to curb these problems in the agriculture sector, financial services must ensure that some of these challenges are brought the barest minimum to enhance self sufficiency in food production.

2. Some of the challenges financial services are facing are

• High cost of borrowing (Interest rates)Macro and micro-economic instability (mostly in Developing countries)
• Collateral and security
• Short loan duration (between 6-12 months)

3. Solutions
For me i think in developing countries like Ghana where about 60-65% of the population are in to agriculture and agribusiness, there must be a clear cut policy by the government in order to shift from the subsistence to the commercial farming. some of the things to look at are:

• Interest rates on agriculture
• Loan duration should be extended in order to enable farmers payback at a flexible rate.
• there must also be incentives in a form of inputs to people who wants to go in to agriculture.

Thank you,

Henry