SCALING UP AGRICULTURAL FINANCE

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1 SCALING UP AGRICULTURAL FINANCE Can Small Scale farmers be financed on commercial basis by a Financial Institution? The Case of KCB BANK RWANDA LTD

2 Presentation profile 1. Rwanda s Agricultural scene 2. Agricultural Lending 3. Value Chains as a business approach to finance 4. Addressing farmer issues 5. Success stories

3 o Rwanda s Agriculture Sector Highlights About 79% of land classified as Agricultural o More than 80% population engaged in Agriculture o o o o Agriculture accounts for a third of Rwanda s GDP The sector meets 90% of the national food needs Sector generates more than 50% of the country s export revenues National average holding of 0.76ha: Small holder farms

4 Sector Highlights: The future Agriculture is expected to grow from 5.8% to 8.5% p.a. by People living under primarily agriculture sector expected to reduce from 34% to 25% with focus on agro processing Agricultural exports expected to increase in average from 19.2% to 28% p.a. and imports to be maintained at 17% average growth

5 Sector Highlights: Government Initiatives Agricultural Policy: Strategic Plan for Agricultural Transformation Currently at Phase III ( ) with 4 programs. Agriculture and Animal Resource Intensification Research and Technology Transfer, Advisory Services and professionalism of farming Institutional Development & Agricultural Cross-Cutting Issues Value Chain Development and Private Sector Investment Soil Erosion Control Irrigation and Water Management Agricultural Mechanization Soil Fertility and Management Agricultural Inputs Development Nutrition and Household Vulnerability Research and Technology Transfer in Agricultural sector Extension and Proximity Services for Producers Farmer Cooperatives and Organizations Institutional Capacity Building Agricultural Communication, Statistical Systems, M&E and Management Information Systems Private Sector Investment Promotion Development of Priority Value Chains Agriculture finance Market oriented infrastructure

6 Some factors favoring agricultural lending in Rwanda o Government initiatives: Policy and Strategy on Agricultural Finance Agricultural Guarantee Funds Post Harvest Infrastructures Irrigation and Mechanization Initiatives o New markets to explore Large % of population in Agriculture Sector

7 Some factors favoring agricultural lending Private ownership of land in Rwanda (contd.) Large % of Agricultural Land to total land Two seasons (A & B) per year for food crops and season C on irrigated land

8 Some factors affecting agricultural lending in Rwanda o Smallholder farmers implying low scale of production o Weather related risks o Quality constraints o High transaction costs o Lack of strong collateral for smallholder farmers o Lack of succession plans o Side selling culture o Lack of storage facilities o Lack of Technology for small scale farmers (Irrigation system) o Price fluctuations o Lack of records (Management issues): lack of financial information, no credit history

9 KCB Business Model : Agricultural value chain financing o Partnering with different actors within the value chain: Agricultural inputs suppliers, Agricultural Insurance Providers, Technical Support Providers (technical assistance, quality assessment), Processors and buyers among others

10 KCB Business Model : Agricultural value chain financing (cont d) o Promoting Innovation in Agricultural Finance: Agricultural Insurance Cover, Inventory Credit Facility among others o Reducing Agribusiness loan applications Turn Around Time (TAT) to 24 hours decision. o Applying Banking Standards: KYC, Credit files, reporting to Credit Reference Bureau (CRB), among others

11 KCB Business Model : Agricultural value chain financing (cont d) o Putting in place an Agribusiness Unit and recruiting staff with Agribusiness expertise o Training of all staff involved in lending on Agricultural Lending model

12 Agricultural Lending to small farmers KCB Business Model workflow Agriculture financial need assessment Risk assessment and mitigation measures Partnership formation Product development

13 The key is to identify the supply chains & integration with a large number of producers o Agricultural inputs suppliers: work with companies which supply seeds, fertilizers pesticides to farmers: the loan for purchasing these inputs are directly paid to the suppliers o Identifying farmers under cooperatives : based on the level of management, crops, season, infrastructures available, experience

14 The key is to identify the supply chains & integration with a large number of producers o Identifying services providers: Insurance companies, technical support provider, quality assessor, among others o Identifying the buyers of the produce: Specialized buyers at local level (Government, Private Processors, World Food Program among others)

15 Solving the small scale farmer s issues

16 Solving farmers issues (contd.)

17 Client Assessment Legally registered; Farm Management and/ or Cooperative Management; Experience in Agricultural operations (minimum 2 seasons) Experience in banking and lending Clean CRB report Improved and certified agricultural inputs use Market availability and price fluctuation consideration Competitive advantage of the value chain and cooperative

18 Client Assessment (cont.) Operating margins and cash flow consideration; Agricultural knowledge capacity of management and technical team; Farm productivity compared to the national average within the value chain; Postharvest handling and storage knowledge and availability of the storage infrastructures; Collateral and second source of repayment;

19 Loan approval and monitoring process Loan approval process: Collection of required documents from client (Done by branch) Loan analysis by agribusiness banker and recommendation by branch manager Risk assessment by credit analyst and recommendation for approval Approval of the facility at different level depending on the loan limit

20 Loan approval and monitoring process (Cont.) Post approval process: Legal documentation (offer letter/ loan contract drafting) Security Registration process; Disbursement of the loan by disbursement unit; Monitoring process : Dairy monitoring of loan performance by RM; Monthly reporting on loan portfolio performance; Post disbursement regular visit of the farm/ business;

21 Portfolio Performance Increase of loan portfolio from Rwf 200 M (USD 270,000) to Rwf 1.5 Bn (USD2M) per season for small farmers with target of Rwf 3 Bn (USD4M) per season in 2016; NPL ratio of 1.75% (less than Central Bank of Rwanda NPL ratio recommendation of 5% ) Migration of portfolio to bad debt of 0.01% per season

22 KCB Bank Rwanda success stories o 28,263 smallholder farmers have received loans from KCB under the model in Maize, beans, rice, soybeans, Irish potatoes value chains. o 10 partnerships in place: IFC, AFR, IFDC, RDO, BDF, RWARRI, SPARK RWANDA, CHAI, MINAGRI, UAP Insurance. o 5 Loans products designed: agricultural inputs financing, Inventory credit facility, Contract finance, Invoice discounting and investment loan facility

23 KCB Bank Rwanda success stories o KCBR is the first commercial bank to introduce Inventory credit facility in Rwandan market. o KCBR is the first commercial bank to introduce agricultural insurance on the Rwandan market

24 The Model creates value to all stakeholders o KCBR smallholder farmers loans increased from Rwf 200 M to Rwf 1.5 Bn per season in 2014 (1 USD / 750 Rwf). o The side selling has reduced and farmers are now supplying harvest to cooperatives. o 61 Cooperatives have been linked to the formal markets o Cooperatives started building their own storage facilities due to the increase of sales and profit.

25 The Model creates value to all stakeholders (contd.) o Farmers are assured of access to markets: MINAGRI, WFP, local specialized buyers o Farmers start doing agriculture as business on commercial basis o Farmers gained more knowledge from service providers: Quality of harvest improved, post harvest losses reduced o The financial records are available to the users o Farmers are now insured

26 Summary of key lessons learned Developing new products and services that better meet farmers needs is important: The Bank needs to have specific products targeting agricultural value chain operators as agriculture related businesses have their own specificity Having services and products for agricultural clients is important, but not sufficient to acquire new clients: Adequate training of staff is critical to enable them to sell loan products to agricultural clients effectively Address issues quickly to meet customer expectation (dealing with seasonal business)

27 Summary of key lessons learned Lending to smallholder farmers needs intervention and support from different stakeholders The bank does not enough technical and financial capacity to mitigate all involved risks in smallholders farmers financing and the support from stakeholders as risk mitigation service providers are critical. Bank senior level commitment is key of agricultural finance success Having agricultural lending strategy, policy and budget allocation is key for agricultural lending initiative success; Government intervention and commitment to support agricultural sector is very important Government willing to promote agricultural value chain finance and the investments done in agricultural somehow reduced the risks to lend to the farmers

28 SHOWCASE: RWANDA FARMER FINANCING FACILITY Farmer financing facility with KCB Rwanda in support of local farmer cooperatives that will supply maize and soybeans to the DSM plant through Off-take arrangements. Off-taker 8. Payment Final Buyers 7. Maize, Soy Beans 2. Risk Sharing Facility Credit Line 8. Payment to Collection Account 6. Maize, Soy Beans Government of Rwanda 1. Origination 9. Repayment Selected 11 Farmer Cooperatives Sponsor KCB Rwanda Partner Bank IFC Portfolio Client 3. Loans 5. Technical Assistance Advisory Services 3. Direct Payment 4. Input (Seeds, Fertilizer) Advisory Services 3. Direct Payment Input Suppliers Rwanda Development Organization 28 UAP Rwanda Crop Insurance IFC Portfolio Client Rwanda Agricultural Board Rwanda Cooperative Agency

29 YES! Small Scale farmers can be financed on commercial basis by a financial institution?

30 THANK YOU George Odhiambo Head of Business Development & Client Services KCB BANK RWANDA LTD A subsidiary of KCB BANK GROUP

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