Agricultural finance

Agricultural Finance and Agricultural Insurance

As part of National Financial Inclusion Agendas

Panos Varangis
Juan Buchenau
Toshiaki Ono

Agriculture finance team, GFCLT

FCI GP
Agenda
• What is agriculture finance and why is it important?

• How can Governments and Central Banks support agriculture finance in

an effective manner?
What is agriculture finance and why is it
important?
Agriculture is significant in developing countries
▪ Globally 3.1 billion people live in rural areas
▪ Developing countries have large populations
engaged in agriculture - 41% in total with
regional variability:
✓ 55% in Sub-Saharan Africa
✓ 47% in South Asia
✓ 39% in East Asia
✓ 25% in North Africa
✓ 21% in Central Asia
✓ 16% in Latin America/Caribbean

▪ Agriculture employs 1.3 billion people globally,

of which 97% are in developing countries
▪ 450 million are smallholder households
▪ Demand for finance globally exceeds $400 billion
annually just for working capital
Key Features of the Agricultural Sector
Client features ✓ Significant informality and lack of information
✓ High concentration of poverty
✓ Large number of very small production units many of which produce for
subsistence
✓ Very heterogeneous production units (crops, technologies, profitability)

Sector structure ✓ High importance of value chains (key to access to technology, markets,
credit)
✓ High relevance of some key large international and/or regional companies
in certain value chains
Economics ✓ Significant geographic dispersion and distances, remote areas
✓ Substantial seasonality in income and expenditures
✓ High covariant risks (production, prices)

External ✓ High importance of Political Economy: politically sensitive sector

environment ✓ Significant environmental and social issues (also gender and youth)
✓ Key role of structural changes as countries develop (e.g. move out of the
sector, diversify, change production structures, concentration)
Question: What percentage of smallholder
farmers are estimated to sell their products to
secured markets in tight value chains?

• Less than 10%

• About 1/3

• About 50%

• More than 80%

Outlook for Agricultural Commodities

▪ Demand side
✓ Increase of population in emerging markets
✓ Rising middle class and increasing
urbanization
✓ Change in diets towards higher value foods,
like meats, edible oils and fruits and
vegetables
✓ Commodities as an investment vehicle

▪ Supply side
✓ Arable land coming under pressure
✓ Climate change affects production---higher
production volatility and uncertainty
✓ Aging of farmer population---rise in the
average age of a farmer
… with increasing climatic uncertainties

CLIMATE CHANGE 2013 – The physical Science Basis. Summary for Policymakers – Working group
contribution to the fifth assessment report of the intergovernmental panel on climate change
The expected benefits from Agricultural Finance

✓ Increasing production and growing income of farms and

agricultural SMEs through access to better technologies and
commercialization

✓ Increasing financial inclusion in rural areas and the

agricultural sector; increasing access to finance through
formal financial institutions

✓ Increasing resilience (risk management capacity) through

climate smart production, risk diversification and access to
financial tools (e.g. savings, insurance, contingent credit etc…)

✓ Smoothing the transition of non-commercial farmers out of

agriculture and facilitating the consolidation of farms, assets
and production (financing structural change)
Mapping Agricultural Finance

• Range of Clients
✓ Farmers, SME agribusiness, farmer organizations, etc.

• Range of Financial Instruments (or financial products)

• Range of Institutions:
✓ Financial and Non-financial, private and public

• Range of Public Policies and Enabling Environment

What are the various segments among farmers?
Noncommercial Commercial Commercial
smallholders smallholders in smallholders in
loose value chains tight value chains
Population estimates 300 million smallholders 165 million smallholders 35 million smallholders
1.5 billion people in 825 million people in 175 million people in
households households households
Land size estimates No land or less than one One to two hectares At least two hectares
hectare
General crop mix Staple crops Staple crops Cash crops
Some cash crops Relatively few staple crops

Engagement with markets Very little, if any, Reliable surplus of staple Cash crops sold in regional
engagement with any crops sold through relatively or export markets through
markets as a seller of food informal, local markets contract farming

Indicative importance of Low Medium High

agri-income in total
income
Source: CGAP

Financial needs
to support growth , • Crop loans tied to
• Commitment savings agriculture cycle
resilience and smooth the • Flexible cash-flow based loans
transition out of • Investment loans
• Investment loans • Leasing/factoring
agriculture • Catastrophic insurance • Value Chain Finance
• Payment systems • Warehouse Receipts
• Commercial insurance
• Commodity exchanges
 What are some of the financial products?

Agri Input
Farmers Traders Processors Retailers
Dealer

Pre-Harvest Warehouse
Financing Trade Finance
Finance

• Financial Institutions are reluctant to participate in the early stages of supply chains

• Risks generally decrease as chains move forward

What are the various institutions supplying
agriculture finance?
▪ Private banks
▪ State Banks and agriculture funds (second-tier)
▪ Cooperatives:
✓ financial cooperatives
✓ agricultural cooperatives
Wide ▪ Microfinance Institutions (MFIs)
Variety of
players ▪ Finance companies
✓ leasing companies, non-bank financial institutions, factoring
▪ Value Chain providers:
✓ Input suppliers
✓ Processors
✓ Aggregators
✓ Traders
▪ Informal credit sources:
✓ e.g. family, local money lenders, village level funds, etc.
Question: Who are the largest finance providers
for smallholders in the developing countries?

• Agribusiness companies (inputs providers and buyers

etc.)

• Governments and public programs

• Commercial banks

• Microfinance institutions

• Informal and community based financial institutions

Sources of finance for agriculture

Sources of Finance Market shares

Formal Financial Institutions US$ 14 billion p.a. or 25%

Value Chain Actors US$ 17 billion p.a. or 30%

Informal and Community Based US$ 25 billion p.a. or 45%

Financial Institutions

Source: Dalberg (2016)

Estimated Demand: US$400-450 billion p.a.

Lending by formal financial institutions

Sources Estimated annual % of total

disbursements in
US$ billion
State/Agri banks 9 64.3%
MFIs 3 21.4%
Commercial banks 1 7.2%
Social lenders 0.4 3%
NGOs 0.03 0.2%

Source: Dalberg (2016)

How can Governments and Central Banks
support agriculture finance in an effective
manner?
 Range of public policies affecting agricultural
finance
Financing and
Legal and regulatory framework Capacity building
incentives
• Lending quotas (priority sector lending) • Public banks and • Supply and demand side
• Interest rate caps second-tier funds capacity-building
• Regulation of bank branch expansion • Lines of credit • TA to farmers
• Prudential regulations impacting • Matching grants • TA to Financial Institutions
agricultural lending (ex: cash-flow • Subsidies (interest rate, • Financial literacy
based loans) cash collateral) programs
• Warehouse receipt financing • TA to farmers and agri
frameworks and other relevant finance MSMEs to develop
services bankable projects
• Alternative dispute mechanisms for
contract farming

Financial Infrastructure
Risk Management
and Data
• Financial infrastructure (e.g. • Partial Credit Guarantees
credit bureaus, moveable • Catastrophic risk coverage
collateral registries) • Support to commercial
• Agriculture data (e.g. yield, agricultural insurance
weather, price etc...) • Support to price risk
management
• Loan restructuring programs
Global trends around agricultural finance policy reforms

• Clarify the objectives of the agricultural finance policies

✓ usually within the context of agricultural development and financial
sector development

• Rationalize costs by better targeting beneficiaries and

activities that warrant public sector support.

• Focus policies on “levers” rather than direct

interventions by the public sector to provide credit.
✓ Risk management in 3 key risk areas: production, market, credit
✓ Reduce costs for financial institutions doing business in
agriculture, particularly small holder farmers
✓ Create an improved enabling environment for financing
agriculture by focusing on stimulating both the demand and supply
side
Successful public policies have the following features

Tailored to level of development

of the financial and agricultural sectors

Link to agricultural
Private sector leverage sector policies and
priorities

Cater to the needs of various segments of agricultural clients:

✓ Agribusiness MSMEs, commercial farmers, subsistence
farmers, etc.
The World Bank’s agrifinance diagnostic tool helps
governments define strategies aiming to strengthen
agrifinance markets, by:

A. Carrying out a detailed diagnostic of demand and supply for

agrifinance services as well as of existing public (and private)
policies / programs

B. Proposing a comprehensive action plan and coordination

mechanisms to:
A. Reform public policies and institutions so that they do not distort
markets;
B. Implement market-friendly regulations and policies; and
C. Strengthen suppliers and users of financial services

The diagnostic and action plan can be an important contribution to the

National Financial Inclusion Strategy. (e.g. In Sudan, the diagnostic
study is conducted to support the NFIS development)
Thank you!

Questions?