innovative financing of agriculture a case study of …...innovative financing of agriculture a case...

Innovative Financing of AgricultureA case study of Zambia

Agriculture Sector Dialogue Phase III

Joshua Madida Nyoni

Munhamo Chisvo

Kigali, Rwanda, 4-5 December 2014

Purpose of case study

• To describe two cases of Innovative Financing of

Agriculture in Zambia

• Identify salient features that make the two models

succeed or not succeed

• To provide information to participants that will enable

them to work through a real-life problem and address it

• To propose at least 3 questions that should be debated

and discussed at the Dialogue

2A case study of Zambia

What is innovative financing?

• New models that are not widely used yet

• Adaptation of existing models in a developing country

context

• Downscaling models for smallholder farmers


SOURCES OF FINANCE: SMALLHOLDER FARMERS IN ZAMBIA


Munda/Lima Facility

• Name of project: Munda (Lima) Scheme

• First season: 2008/9 (expanded to Lima in 2010)

• Model: Direct smallholder lending

• Finance approach: Cash collateral collected through District Farming Associations

• Risk focus: Farmer

• Environment: Low productivity in agriculture and weak business environment

• Financial institution: Zanaco


Zanaco

DFA

Farmer Group A

Farmer Group C

Farmer Group B

F1 F3 F4F2 F1 F3 F4F2 F1 F3 F4F2

Payment of farmers for produce through DFAs

Management Fee of $100 per Farmer Group

Crop delivery to sell and pay loan

Farmer who is a member of a Farmer GroupF1

MUNDA/LIMA FACILITY

Input Supplier

Agro-processor

Inputs

delivered

to farmers

in groups

Produce

sold to agro-

processors

Management fee Cash collateral 50%

Loan disbursement Loan repayment

Management fee

Munda/Lima Facility …/3

Summary of Performance in 2011/12

• Disbursement: USD4 million

• Reach: 25 DFAs with 4,026 participating farmers

• Hectorage: 10,088 ha

• Maize yield: Increased from 1.5 MT to 3 MT per ha

• Yield increase: Use of hybrid seeds, fertilizers, and adoption of Conservation Agriculture

• Loan repayment rate: 99%


Strengths

• Interest rate is 11%, competitive

• It is subsidized (it is 5% below base rate)• DFA pays $100 only per group of 160-200 farmers as

management fee to the bank, no further collateral

• Food Reserve Agency early setting of maize price as an incentive for farmers to produce maize for food security

• Low default rate of 1%

8


A case study of Zambia

Challenges

• Heavy dependency on Zambian Farmers Union

organisational ability through DFAs

• Relies on crop diversification

Potential for expansion

• Approach graduates farmers to bankable clients with a

track record

• The experience gained by farmer reduces the fear of

borrowing

• Agricultural land is not the constraint

9



Questions for Dialogue

• Can farmer organisation reduce the risk of lending to

small scale farmers such that banks lend with reduced

collateral?

• How should national farmer unions be supported to

better organise smallholder farmers for agricultural

credit?

• How do we ensure that models of innovative financing

of agriculture do not subsidize inefficiencies and create

a dependency syndrome?


Zambia Emerging Farmer Project (ZEPF)

• Name of Project: Zanaco Emerging Farmer Project

• First season: Pilot in 2009

• Model: Emerging farmer financing

• Finance approach: Emerging farm business finance

• Risk focus: Farmer

• Environment: Low productivity in agriculture and weak business environment

• Financial institution: Zanaco, International Finance Cooperation and Rabo Development (Dutch Bank)

• Technical assistance to farmers: Private sector players


ZEFP…/2

Main Features• Farmers with at least 3 year track record

• Proven or identifiable enterprise in the farmer

• Adequate equity (threshold?)

• Minimum farm size of between 5 – 100 ha

• Working capital plus investment finance

• Technical assistance:• Fertiliser companies and agricultural line companies (Omnia Fertiliser Co.)• Agri-chemical companies (like Cropserve)• Farmers Associations (like the Poultry Association)• Cooperatives, Dairy Processing Companies (Parmalat, Afgri)• Crop Insurance companies (Zamace- the Agri-Commodity Exchange); and• Business Training Consultancy Firms


IFC Rabobank

Zanaco

ZNFU

Private Sector Companies:

PS1 Omnia Fertilizer Company

PS2 Crop-serve

PS3 Poultry Association

PS4 Dairy Companies (Parmalat, Afgri)

PS5 Crop Insurance companies (Zamace- the Agri-Commodity Exchange)

PS6 Business Training Consultancy Firms

PS1 PS3CroPS2vie

PS6PS5PS4

Contractual relationship with

Private Sector Extension

Services Providers

F1 F3 F4 F7F5 F6F2 F8 F9 Fn

Farmers:

Farmer 1

Technical advice

F1

Loan

Repayment

Farmers

ZEFP …/4

Summary of Performance as of 31 December 2011

• Disbursement: USD4.5 million

• Reach: 123 farmers

• Loan size: USD2,000 – 12,000

• Enterprises: Sugar, rice, maize, piggery, dairy, poultry


ZEFP …/5

Strengths

• Portfolio diversified to include value chain financing in sectors with strong market linkages

• Adequate and timely access to finance

• Adequate and timely access to technical assistance which was made available by ZNFU/Rabobank and IFC

• Customers able to run their farms as businesses

• Availability of skilled agricultural staff that were hired and trained especially for the new tasks taken by the Bank


ZEFP – Results Achieved …/6

16

Financed

Agric.

Sector

Yield before

interventio

n

Yield after

intervention

2008/09

Yield after

intervention

2009/10

Yield after

intervention

2010/11

Dairy10 l

/cow/day

12,5 l /cow/day 16 l /cow/day 17.2 l

/cow/day

Poultry75% peak

production

80% peak

production

90% peak

production

93% peak

production

Maize 2.38tons/ha 5.2 tons/ha 5.8tons/ha 4.9tons/ha


ZEFP …/7

Challenges• Not all emergent farmers belong to ZNFU or other

associations which give them exposure to other group activities

• The cost of agri-finance capacity building has to be shared between willing partners yet this is not always available

Potential for scale-up• The level of support to individual farmers is much higher in

this model than in the first one, making the potential for expansion relatively limited in terms of farmer numbers to be covered.

• The high yield increases have been confirmed to be large enough at the prevailing producer prices to enable those involved to repay their loans

• The level of technical assistance required to achieve the high returns is high


Questions for Dialogue

• What are the critical elements for success of innovative

financing models?

• What are the main roles that governments should play

to support innovative financing of agriculture?

• Do our governments have the needed capacities to

support innovative financing of agriculture? How can

these capacities be built?


Issues for Reflection

• Policy unpredictability and crowding out of private

sector

• Inadequate farmer management information

• Inadequate farmer training

• Farmer fear of approaching formal banking sector

• Crop marketing challenges

• PSTAD and value chain approaches


Thank you

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