Chain. Hans BOGAARD, Rabobank. Value Chain Finance and the - PowerPoint PPT Presentation

Brussels Development Briefing n.35 Revolutionising finance for agri-value chains 5 March 2014 http://brusselsbriefings.net Value Chain Finance and the Importance of Understanding the Value Chain. Hans BOGAARD, Rabobank.

Value Chain Finance … and the importance of understanding the value chain Value Chain Financing Conference Brussels Hans Bogaard - Rabo Development

Content I Rabobank & agriculture – background II Agri Finance Issues III Agri Finance Approach – based on lessons learned IV Value Chain Finance Concepts V Cases 3

1 Rabobank & Agriculture - background

Rabobank – Cooperative bank with agricultural roots History • Cooperative founded in 1898 to provide Dutch farmers access to financial provider Today Financial services provider based on a cooperative organisation principle (136 member banks in NL) • 10 million customers around the world (excl. customers of partner banks) • Operating in 47 countries • NL: all finanze, all markets (Retail, wholesale banking, asset management, leasing and real estate), • Internationally: F&A • Proposition throughout the supply chain. Trade and distribution Farming Collection/ logistics processing Retail 5

Rabobank Development and partner banks Instruments Partner bank countries Rabo Development’s mission is:  to improve financial services in rural areas in developing countries Minority participations in local banks  – Currently 8 partner banks of which 5 in Africa, 1 in Brazil, 1 in Paraguay and 1 in China Besides partner banks, strategic relationships in following  countries: – Ethiopia, Kenya, Cameroon, Nigeria, Botswana, India, China and Peru Short overview Capital investments  Paragua Mozambiqu Tanzani Brazil Rwanda Zambia China y e a Management and advisory services (RIAS):  – To the partner banks – To external parties, incl. Rabobank F&A clients Topics:  – e.g. rural banking, cooperative development, agricultural value chain development, warehouse receipt financing… 6 8

Results in agri financing African partner banks (mid- 2013) Zambia - Zanaco Rwanda – Banque Populaire du Rwanda (BPR) Voted “Best bank of Zambia” by Euromoney (2012) Voted “best agribusiness bank 2013” by Ministry of Agriculture   Market leader in F&A corporate financing Implementation World Bank program by RIAS:   in 2 years USD 18 mln of new farmer loans booked reaching +/- 30,000 Financing some 70 “emerging farmers”  small farmers Financing 10,000+ smallholders via 39 District Associations  Reducing of credit turnaround times for farmers via credit score card  system Financing of +/- 500 dairy farmers via 4 milk cooperatives   Various capacity building projects focused on cooperatives in rice, tea, coffee, dairy etc Tanzania - NMB A growing presence in the corporate sector  Voted “Best bank of Tanzania” by Euromoney and the Banker (2013)  One of the leaders in F&A corporate financing (traders and processors)  Uganda – DFCU Financing of +/- 300,000 smallholders (500 coops) via “contract farming”  and Warehouse Receipts Financing (rice, barley, tea, coffee, cashew, etc.) Top 5 bank of Uganda  Financing large group of Agro Dealers  Ambitious growth plans in agri sector   Developing financing to “emerging farmers” in beans, dairy, rice, seeds, etc Mozambique - Banco Terra Financing +/- 1000 sugar cane farmers via 4 sugar associations (Maragra)  A growing presence in the agro corporate sector  7 9

BPR, voted as “Best Agri Bank of Rwanda 2013” 8 10

Agribusiness Advisory Services Agribusiness Advisory Agri finance Capacity External Capacity Building Building Agri Knowledge Emerging Farmers Value chain mapping management Programs Agri Finance Credit & Risk Value chain finance Organization management projects Agri Finance Training / Cooperative capacity Value chain financing Cases building Legal & Regulatory  Agri credit tools & Agri commodity issues templates finance/WHR finance Cooperative Governance  Capitalization policies  Financial management  Cooperative financing Agri Project Finance Member communication  Bankability  Farmer portfolio Guarantee/ restructuring Risk Sharing Schemes 9 11

2 Agri Finance Issues

Agri Finance enabling environment Legal & regulatory framework Contract enforceability  Land ownership  Value chain organisation  Pledge systems Input supply Import regulations Collateral availability   Cooperative system Land  Agri policies   VC linkages WHR systems Commodity     Integration Cooperative laws stocks/WHRs  Information Guarantees   Traceability Cash savings   Retail/fresh market  Infrastructure Agri finance Roads  Capital markets Tenor Power   Long-term funding  (Cold) storage  Interest rate  Hedging  Irrigation  Supply/demand  Ports  Skill level  Farmers Business culture Coops Corruption   Government support SMEs Contract performance   framework Banks Cooperation   Education  Ministries   Research Extension services  Guarantee instruments  Subsidies  11 17

Main obstacles for access to finance in agriculture Farm level Institutional level Lack of economies of scale Unpredictable government policies   Rain fed, vulnerable to weather risk Political intervention in agri markets   Infrastructure/transport Lack of supporting legislation (e.g. warehouse receipt laws, contract   enforcement) Lack of affordable inputs  Low penetration of machinery  Bank level Low prices post-harvest  Lack of understanding of agriculture markets   Lack of collateral/land title/capital Large distance between bank branch and farmers  Lack of financial documentation  Mismatch in financial products and sector needs  Lack of skills  High perceived risk in financing agriculture  Lack of understanding bank requirements  Lack of long-term funding  Weak cooperatives  12 18

3 Agri Finance Approach

Different financing approach for different agri segments Relationship driven, individual approach, USD based lending, short & medium/long tenors  WHR financing, pre-export financing  Large farmers & agribusiness Retail approach with an “ agri twist”, local currency lending, involve service providers for technical  Medium size farmer assistance to farmers, local currency loans, short/medium tenors (emerging) & farmber organisations Dedicated cooperative financing products  Value chain finance, forge forward linkages, tri-partite agreements, technical assistance  Commercial smallholder needs, local currency loans, short tenors Joint liability groups, credit scoring, use savings as cash collateral,  Semi commercial smallholder current/saving accounts 14 19

Lessons learned in agri financing  Approach agriculture as a business and not as a social sector  Knowledge is key so invest in agri sector knowledge and systems  Segment the market in sectors and customer segments and adjust your financing approach accordingly  Focus on payment capacity , collateral and guarantees comes second  State owned Agri banks don’t work (too many debt write -offs & recapitalisation)  Commercial banks with rural stakeholders seem appropriate model  Be close to your customer, e.g. via rural branch network  Be careful with going down market (e.g. smallholders) too fast  Capacity building (e.g. of coops) can enhance the bank’s risk management  Work closely with traders and processers since they know the reliable suppliers 15 20

Align products with the risks and needs in the VC • Lack of collateral • Lack of scale • Lack of scale • Price risk • Price risk • Lack of skills • Lack of skills/management • Lack of commodity exchange • Skills • Lack of collateral/title • Lack of capitalization • Logistics/storage • Drought/floods • Corporate governance • Performance risk Risks • Cash crops: side selling • Post-harvest handling • Skills • Food crops: government • Lack of WHR system • Raw material supply • Side selling • Access to markets interference • Price risk • Government export/import bans AGRO dealers ` FARMERS COOPS TRADERS & PROCESSORS Credit Products • Agro dealer • Outgrower schemes • WHR financing • Pre-export finance • Input financing • Collection finance • Pre-import finance schemes • Save-for-loan schemes • Input finance • Collection finance • Investment finance • Pre-export finance • WHR finance • Farmer credit score cards • Investment finance • Investment finance Saving products, payment solutions, distribution (physical and virtual -> mobile) 16

4 Value Chain Finance Concepts

Value Chain Financing (VCF) • VCF – finance models based on transaction streams and relationships in the supply chain • VCF assesses the payment capacity of the farmer/coop by looking at his delivery record rather than his credit record • Collateral is still important but could be lower if performance record is strong, contracts exist • Tri-partite agreement is basis for VCF structure • VCF creates a win-win for the farmer, the processor and the bank Rabo Development 18