Making Risk-Sharing Models Work with

Farmers, Agribusiness and Financial Institutions

FAO Ford Foundation IFAD

International Conference on Rural Finance Research:

Moving Results into Policies and Practice

Theme 2, Session III: Institutions for Expanding Outreach of Financial Products and Services in Rural Areas

Presentation by Bettina Wittlinger, ACCION InternationalMarch 20, 2007

Presentation Outline

• Research Objective and Methodology

• Risk-sharing Models

• Replication

• Key Achievements and Findings

• Future Research Areas

Research Objective and Methodology

Industry Learning

Multi-organizational Learning

Individual Organizational

Learning

Practitioner-led Research Methodology

Competitive, Thematic Small Grants Program

Implementation + Learning

Process-oriented

Industry-focused

Research Stages

1. Assessing the Market

3. Implementing Solutions

2. Forming Strategic Alliances/Partnerships

4. Developing Exit or Replication Strategies

Research Objective

To develop and pilot-test risk-sharing models between farmers, agribusinesses and financial institutions to increase farmers’ access to markets and financial and non-financial services.

Indian farmers migrating from villages after the monsoon in search of job opportunities.

Risk-Sharing Models

Risk-Sharing Models at a Glance

Model Institutions Actors

Model 1Market Facilitator Partners with

Bank to Develop Credit Franchisee Model

IDE India

Commercial bankEquipment dealers

Model 2Market Facilitator Links Buy-

Back Arrangements as Guarantee for Drip Irrigation

IDE India

BankSugarcane factoryFarmer

Model 3Financial Institution Creates

Risk-Sharing Model with a Trust Fund to Finance Red Pepper

Farmers

Caja Nor Peru

CNPExporterInput suppliersFarmers

Model 4Financial Institution Uses Buyer

Contract as Guarantee for Soybean Farmers

ACCION/El Comercio (Paraguay)

El ComercioStorage providersFarmers

Model 1: Credit Franchisee

Bank Scales-Up Rural Credit Outreach

FARMERS Receive credit from Dealer to purchase drip irrigation

MARKET FACILITATORFacilitator to ICICIFacilitates Dealers in becoming credit franchisee

DEALERS Credit is Leveraged by ICICI

I D E I

EID PARRYSUGARCANE FACTORY

FARMERS

BANKS

DEALERS

Farmers register land

with sugarcane Factory

Dealers supply drip equipment to Farmers on

receipt of money from

Bank

Factory pays farmers after

deducting loan installments due

to banks

Farmers present letter

from Factory to Bank and bank

lends to Farmer through

Dealer.

6

2

5

4

3

1

Model 2: Buy Back Arrangements as Guarantee

Farmer sells sugarcane to Factory

I D E I

Models 1 and 2:Challenges & Lessons learned

• Defining realistic goals• Investing in demonstration plots• Keeping your principles &

negotiating hard

I D E I

• Structuring a win-win scenario• Defining clear roles• Designing the loan product & operations• Negotiating incentive schemes

MFI - CNP

Input suppliers

Buyers/Processors

TRUST FUND

Farmers

Network Manager

Model 3: Risk-Sharing Trust-Fund CAJA NOR PERU

Model 3: Composition of Trust Fund

CAJA NOR PERU

TRUST FUND RISK SHARING PERCENTAGES

Agribusiness supply irrigation

systems $12,075 ; 10%

MFI (Caja Nor Peru) $50,424; 42%

Agribusiness Buyer

(CAMPOSOL) $15,439 ; 13%

Agribusiness supply fertilizers and pesticides $41,299 ; 35%

Programmed: $ 111,086 Real : $ 119,237

Model 3:Challenges & Lessons learned• Developing role of network manager

• Providing sufficient, quality technical assistance

• Selecting the Value Chain

• Dealing with external factors

• Generating commitment from agribusinesses

CAJA NOR PERU

Model 4: Buyer Contracts as Guarantee

BANKS

EL COMERCIO

BANKS

EL COMERCIO

BANKS

EL COMERCIO Personal Savings

Small farmers

Landlords

Cooperatives, Farmer Associations

Medium and large size Farmers

Transport Companies

Small transporters

SILO (SMALL, MEDIUM AND LARGE SIZE)

Medium /Large Scale Exporters

Local Processors (oil & byproducts)

Local Consumers

El ComercioMFI, Finance companies,

Banks

Large scale input suppliers

In kind credit & Training, paid by harvest (contract farming)

Cash credit Credit in Kind

International Market Local Market

Model 4 – Buyer Contracts as Guarantee

Rural Branch – El ComercioSilo

Farmer

Model 4: Results

369 360239

1991

38 102 1251062

7

12

10

0

500

1000

1500

2000

2500

Dec 2003 Dec 2004 Dec 2005 Dec 2006

0

2

4

6

8

10

12

14

Number of small loans Number or medium loans

Number of Strategic Alliances

Portfolio at risk - less than 3%

Replication

Replication – Experience from Model 4

Attributes for potential silos• Extensive experience in the

region• Relationship with farmers and

agribusinesses• Good references from

agribusinesses • Financially viable and stable• Commitment to small farmers

& El Comercio

EL Comercio replicated the soy – silo risk-sharing modelwith tobacco, cotton and sesame

Value Chain Selection• How similar is the value chain to the soy value chain?• Does El Comercio staff members have existing knowledge about

the region?

Attributes for small farmers

• Diversification of income (required in weaker value chains)•Farming experience

Key Achievements and and Findings

Risk-sharing models – Key Achievements

Model Description

Model Achievements

Advantages DisadvantagesLower

Price Risk for

Farmer

Enhance Production

Quality

Guarantee for

Repayment

Lower Cost for

Financial Institutio

n

Model 1: franchisee model

No goalThrough Drip irrigation

No goalGuarantee offered by Franchisee

Potential for scale where drip dealers are located

High investment in training, internal control

Model 2:Buy-back arrangements as guarantee for drip irrigation

-access to markets- agrees on price

Through Drip irrigation

Agreement

Recovery delegated

Potential for scale where buy-back arrangements are present

Existing debts could prevent farmer from accessing credit

Model 3:Risk-sharing model with a trust

-access to markets- agrees on price

Network manager: missing technical expertise

Buyer did not cover losses incurred after pilot

CNP covered losses

Risk-sharing will be helpful to farmers

Develop an entrepreneurial network manager

Model 4:buyer contract as guarantee

-access to markets

- agrees on price

Through Technical assistance by silo

Contract used as guarantee

Transaction costs, recovery delegated

Scale and replication is possible in other value chains.

Also possible to replicate in weaker value chains

Risk-sharing Models: Key Findings

1. Analysis & Mapping of Value chains is critical to form risk-sharing models

2. Developing the profile each potential partner is crucial

3. Gaining commitment from all stakeholders & structuring operational details requires time & investment

4. Dynamic & organized value chains offer more possibilities, but are not

required5. Market facilitators can be

catalysts for linking farmers to formal

financial institutions

6. Pilot-testing should be done

before replication

Areas for Further Research• Developing a value chain

analysis tool for financial institutions

• Validating a decision making matrix for financial institutions and market facilitators

• Measuring of impact on

financial institutions and farmers

• Further examining the role of market facilitators

• Further studying risk-sharing arrangements in weaker value chains

High

VOLUME

Low

Buyers Matrix Model for Farmers

Need of technical assistance

Agreement with producer or farmer to avoid selling

Throw out Find more or

new markets

Low QUALITY High

Thank you

CAJA NOR PERU

I D E I