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Scaling up Access to Finance for Agricultural Smes Policy Review and Recommendations Scaling Up Access to Finance for Agricultural SMEs Policy Review and Recommendations OCTOBER 2011 © INTERNATIONAL FINANCE CORPORATION 2011. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly, and when the reproduction is for educational and non-commercial purposes, without a fee, subject to such attributions and notices as we may reasonably require. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The contents of this work are intended for general informational purposes only and are not intended to constitute legal, securities, or investment advice, an opinion regarding the appropriateness of any investment, or a solicitation of any type. IFC or its affiliates may have an investment in, provide other advice or services to, or otherwise have a financial interest in, certain of the companies and parties (including named herein). All other queries on rights and licenses, including subsidiary rights, should be addressed to IFC’s Corporate Relations Department, 2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433. International Finance Corporation is an international organization established by Articles of Agreement among its member countries, and a member of the World Bank Group. All names, logos and trademarks are the property of IFC and you may not use any of such materials for any purpose without the express written consent of IFC. Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. SCALING UP ACCess TO FINANCE for AGRICULTURAL SMEs | POLICY REVIEW AND RECommendaTIONS 1 Table of Contents List of Abbreviations 2 Acknowledgements 3 Introduction 5 Executive Summary 6 CHAPTER 1 Agricultural SME Finance in Context 12 1.1 Definitions and Segmentation 12 1.2 Basic Challenges in Agricultural Finance 18 1.3 Changing Paradigms in Agricultural Finance 19 CHAPTER 2 Policies, Regulatory Framework, and Government Support 21 2.1 Developing Country Specific Diagnostics and Strategies 21 2.2 Developing a Supportive Legal and Regulatory Framework 22 2.3 Designing Effective Government Support Mechanisms 32 CHAPTER 3 Financial Infrastructure and Data 44 3.1 Strengthening the Financial Infrastructure 44 3.2 Building Consistent and Reliable Data Sources 49 CHAPTER 4 Capacity Building of Agricultural Finance Institutions and Their Clients 53 4.1 Building Capacity of Financial Institutions 54 4.2 Building Capacity of Value Chains 56 4.3 Building Capacity of Farmers and Farmer Organizations 58 4.4 Innovative Instruments and Delivery Mechanisms 61 CHAPTER 5 Conclusion 73 ANNEX I Grants to the Poor 75 ANNEX II Smart Subsidies and the Question of Fertilizer Subsidies 77 Bibliography 78 2 GLOBAL PARTNERSHIP for FINANCIAL INCLUSION List of Abbreviations AFD Agence Française de Développement IFAD International Fund for Agricultural Development AFI Alliance for Financial Inclusion IFC International Finance Corporation AFRACA African Rural and Agricultural Credit Association IFRS International Financial Reporting Standards AGRA Alliance for a Green Revolution in Agriculture KfW Kreditanstalt für Wiederaufbau ATM Automated Teller Machine LSMS-ISA Living Standards Measurement Study-Integrated Surveys on BMZ German Federal Ministry for Agriculture Economic Cooperation and Development MDG Millennium Development Goal CABFIN Capacity Building for Rural Financial MFI Micro Finance Institution Institutions MFW4A Making Finance Work for Africa CBRO Community-Based and NBFI Non-Bank Financial Institutions Resource-Oriented Organization NGO Non-Governmental Organization CECAM Caisses d’Epargne et de Crédit Agricole Mutuels PCG Partial Credit Guarantee CGAP Consultative Group to Assist the Poor POS Point Of Sale DFI Development Finance Institution PPP Public-Private Partnership DLL De Lage Landen RIAS Rabo International Advisory Services FAO Food and Agriculture Organization RSF Risk Sharing Facility of the United Nations SME Small and Medium Enterprise Farmer-Based Organization FBO UNCDF United Nations Capital Development GIZ Gesellschaft für Internationale Fund Zusammenarbeit (formerly GTZ) VCF Value Chain Finance Global Partnership for Financial GPFI WFP World Food Programme Inclusion WRMS Weather Risk Management Services GTZ Gesellschaft für Technische Zusammenarbeit SCALING UP ACCess TO FINANCE for AGRICULTURAL SMEs | POLICY REVIEW AND RECommendaTIONS 3 Acknowledgements International Finance Corporation (IFC) is the lead technical advisor to the G-20 Global Partnership for Financial Inclusion’s (GPFI) SME Finance Sub-Group. This report was produced by IFC on behalf of the GPFI. The GPFI is the main platform for implementation of the G-20 Financial Inclusion Action Plan. The group engages partners from G-20 and non-G-20 countries, private sector, civil society, and others. It is chaired by the G-20 troika countries, currently Korea, France, and Mexico. The GPFI is supported by three implementing partners: the Alliance for Financial Inclusion (AFI), the Consultative Group to Assist the Poor (CGAP), and International Finance Corporation (IFC). www.gpfi.org The report “Scaling Up Access to Agricultural SME Finance: Policy Review and Recommendations” was developed under the overall guidance of Peer Stein (IFC) and Susanne Dorasil (BMZ). The working group team for the report, led by Ghada Teima (IFC) and Roland Gross (GIZ), comprised Heather Miller (IFC), Achim Deuchert (GIZ), and Susanne Schellhardt (GIZ). Panayotis Varangis (IFC) provided technical expert advice to the working group. This report has been a collaborative effort with contributions from individuals at the following organizations: Agence Française de Développement (AFD), Alliance for a Green Revolution in Agriculture (AGRA), German Federal Ministry for Economic Cooperation and Development (BMZ), the Food and Agriculture Organization of the United Nations (FAO), Gesellschaft für Internationale Zusammenarbeit (GIZ), the International Fund for Agricultural Development (IFAD), Kreditanstalt für Wiederaufbau (KfW), Making Finance Work for Africa (MFW4A), Rabo International Advisory Services (RIAS), Stanbic Bank, Technoserve, United Nations Capital Development Fund (UNCDF), and World Bank. The team would like to thank the World Bank-IFC internal peer reviewers: Rolf Behrndt, Gary Reusche, Bradford Roberts, Ernest Bethe, Damien Shiels, Ulrich Hess, Marc Sadler, Ajai Nair, and Diego Arias, as well as GIZ internal peer reviewer, Ariane Riemann. Last, but not least, this work was completed under the leadership of the co-chairs of the G-20 SME Finance Sub-Group: Susanne Dorasil (Germany), Anuradha Bajaj (United Kingdom), Ayşen Kulakoglu (Turkey), and Christopher Grewe (United States). 4 GLOBAL PARTNERSHIP for FINANCIAL INCLUSION This background report relies heavily on the following initiatives and papers, for which we extend special gratitude to the authors: ■ Rural and Agricultural Finance: Trends, Issues and Challenges. Hoellinger, Frank. GIZ (2011 - forthcoming); ■ Policy Support to Agricultural Finance in Africa. Roberts, Richard A.J. Paper prepared for the Making Finance Work for Africa Conference “Zipping Finance and Farming” (June 29-30 2011); ■ Managing Risk in Financing Agriculture. Proceedings of the Expert Meeting Convened and Co-Sponsored by African Rural and Agricultural Credit Association (AFRACA), FAO, The Land Bank of South Africa, and the World Bank (April 1-3, 2009); ■ Subsidies as an Instrument in Agriculture Finance. Meyer, Richard L. Joint Discussion Paper of the Capacity Building for Rural Financial Institutions (CABFIN) international network, including World Bank, BMZ, FAO, GIZ, IFAD, and UNCDF (2011); and ■ Stocktaking Background Study on Agricultural SME Finance, RIAS on behalf of IFC. SCALING UP ACCess TO FINANCE for AGRICULTURAL SMEs | POLICY REVIEW AND RECommendaTIONS 5 Introduction The objective of the G-20 Work Stream on Agricultural Finance is to identify appropriate approaches to assess or reduce the main risks and costs that inhibit access to financial services in the agriculture sector in developing countries. Strengthening the productivity and capacities of agricultural small and medium enterprises (SMEs) and farmers through enhanced access to finance is at the core of this sub-group’s focus. This work stream will contribute to and generate synergies with other pillars of the G-20 development agenda, particularly the pillars on food security and private investment and job creation. Based on a global stocktaking exercise, this report derives guidelines
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