Microfinance for Smallholder Farms (MF4ShF) Concept Note Hervé Busschaert

Transcription

1 Microfinance for Smallholder Farms (MF4ShF) Concept Note Hervé Busschaert

2 4 INTRODUCTION CHAPTER 1. INSTRUMENTAL ROLE OF MICROFINANCE FOR SMALL- SCALE AGRICULTURE INVESTMENT CHARACTERISTICS OF SMALL- SCALE AGRICULTURE 1.2 IMPACT OF MICROFINANCE IN RURAL DEVELOPMENT 1.3 MICROFINANCE TO SUPPORT SMALLHOLDER FARMS (SHF), PRECONDITIONS 1.3 MICROFINANCE FOR SHF, IMPLEMENTATION CHAPTER 2. MICROFINANCE FOR SHF AND RURAL DEVELOPMENT OPPORTUNITIES FOR THE EUROPEAN COMMISSION BASIC PRINCIPLES 2.2 REGIONAL TRUST MODEL 2.4 THE STRUCTURE: 2.5 FINANCIAL INSTRUMENTS: BLENDING PLUS 2.6 DESCRIPTION OF THE SET UP FOR THE TWO INSTRUMENTS: TRUST FUND OR BLENDING PLUS CONCLUSION 18 2

3 This Concept Note sets out the rationale for the European Commission (EC) to include microfinance within its programming for development. It is aimed primarily at Commission staff in Brussels and in Delegations, but it is hoped that it will be of interest to a wider group of partners and stakeholders. It discusses the concept of microfinance for agriculture investment in small farms (MF4SHF), presents the mechanism to create high and long- term impact in family farms and justify the need for a dedicated development tool to move millions of small farmers from subsistence to commercial sustainable farming. The proposed new development tools are blending plus and inclusive trust funds for smallholder farms. 3

4 Introduction Around 80 percent of agricultural holdings in sub- Saharan Africa and 88 percent of those in developing countries in Asia measure less than 2 hectares1. There are some 500 million smallholder farms worldwide; more than 2 billion people depend on them for their livelihoods. These small farms produce about 80 per cent of the food consumed in Asia and sub- Saharan Africa2. These small- scale producers are the active poor that can barely make a living, and are subject to food insecurity. The European commission, as other donors have a long experience of supporting agriculture production, but it seems that despite government and donor efforts for more than 60 years of intervention subsistence farming is still prevailing over commercial agriculture. However experiences exist where farmers are rooted out of poverty, are empowered and actively contribute to the creation of wealth. This Concept note capitalizes on those experiences and identifies some policy implications for donors to develop microfinance for smallholder farmers. While interesting initiatives to promote smallholder farmers exist based on a value chain approach, the scaling up as well as the sustainability of these initiatives has represented an enormous challenge. In particular continuous funding of agriculture production is key to long- term impact. Grant funds cannot form the basis of agriculture development, but grants can facilitate the access to private finance. This concept note argues that small- scale agricultural production in an enabling environment and with adequate support is a profitable business that can sustain itself particularly in a well- structured value chain approach, including microfinance. With 2014 declared by the UN the International year for family farming, public attention will raise and donors are expected to respond to the initiative and to contribute to family farming support. In this framework, microfinance is key to capital access and long term sustainability. After more than 30 years of experience, the microfinance sector has reached a clear degree of maturity. The sector has expanded and now serves more than 200 million clients all over the world. While mainly present in urban areas, microfinance providers expand their outreach to rural areas and activities, including agricultural production. Through new technology (electronic money) and the variety of microfinance products (savings, remittances, insurance, social/solidarity transfers, etc.), microfinance has already well expanded its outreach in rural areas. High credit risk still puts a brake on the availability of agricultural credit. However, adequate support to smallholder enables to reduce the risks substantially and, properly integrated to a value chain approach, microfinance for agricultural production has a tremendous potential. 1 Investing in smallholder agriculture for food security. A report by The High Level Panel of Experts on Food Security and Nutrition, June Smallholders can feed the world. View point, Dr Kanayo F. Nwanze, President of the International Fund for Agricultural Development, February 2011, IFAD. 4

5 There are clear linkages between food production at small scale as a problem and microfinance as a solution to that problem. Food production is a multidimensional problem, and microfinance encompasses a multidimensional response. The purpose of this Concept Note is to promote the use of microfinance by the EC/EU in order to make the distribution of its foreign aid and public resources towards the most vulnerable part of rural populations more efficient and effective. The Note looks to build a better understanding of the actual and potential roles of microfinance in addressing food production at smallholder level, and the logic supporting microfinance within the value chain approach. It attempts to guide decision- makers on the appropriate responses. It is argued in this Concept Note that under certain circumstances, described in chapter 1, microfinance can play an instrumental role in moving smallholder farming (SHF) from subsistence to commercial farming. Because strategies are better when actionable recommendations are included, chapter 2 proposes innovative tools ( blending- plus and dedicated trust fund) which the Commission and other donors could engage in, to support microfinance value chains in favour of smallholder farms. 5

6 Chapter 1. Instrumental role of microfinance for small- scale agriculture investment The problem is not giving some money at some rate and getting it back. But rather how can you improve the capability of the borrower to pay back and improve his or her living conditions? 1.1 Characteristics of small- scale agriculture Agriculture is highly dependent on the local conditions: availability of and access to good land, soil, water, climate and market. Similarly, market and access to markets vary from one region to another. In agriculture, there are different crops, short duration (wheat, rice vegetable), long duration (tea, coffee, coco), perishable (fruits), non- perishable (rice), some are seasonal (onions), some are not (banana). All these would require different microfinance products and diversified and tailor- made approaches. Because of these characteristics, actions at micro level are more appropriate. However all producers are subject to common production conditions in particular, weather. This means that when climate affects one producer, who cannot pay, most probably no other farmer in the area can pay. Therefore the group guarantee, an efficient feature in microfinance, is to be considered carefully. While the group loan can indeed ease the borrower selection phase, and ensure peer pressure to invest and pay as agreed, in the event of weather challenge or epidemics, the whole group will be similarly affected. Indeed, if one crop fails for one farmer, there is a strong probability that it will fail for many other neighbouring farmers. Therefore agricultural microfinance product needs to be covered for mass default by providing risk- mitigating products such as micro insurance, a sustainable system for loan rescheduling, possibilities for urgency funds or top up finance mechanisms. The size of the loan is also an important characteristic of agriculture finance. In Jamaica, an investment of 300 euro was necessary to grow onions on 1 ha, in Ghana where inputs are subsidized 70 euro would be needed for 1 ha of maize, while it costs 100 euro per ha to plant maize in Kenya. These amounts represent a substantial part of the annual income. An estimated order of magnitude of initial crop investment is of around 20% of yearly net income of rural families. So it is clear that if the crop fails, there is no possibility for the grower to pay back the loan. He lost his income and has no other way to gather the amount of the loan lost. Because of the important level of risk, growers tend to stick with what they know rather than venture in potentially high return but risky investments. It is also a tremendous responsibility for any stakeholder, donor or MFI, because there is an important risk of having the beneficiary worse off after the intervention, which is not in line with the do no harm client protection commitment. The lack of bargaining power is also one key characteristic of agriculture at small scale. When you have a 1 hectare farms, you do not have bargaining power. Farmers need to be organised in groups and integrated in a conducive production system. They also need bargaining power to sell their crop and organise the access to urban markets, which can be sometimes challenging. 6

7 During the rainy season, i.e. planting season, many rural land is sealed off from inputs (seeds, fertilisers) markets. Access to knowledge and training is another challenge. Farmers need to move from one level of technology to another, and thus change crop, change practices, make innovative investments. Access to knowledge is key to substantially increase yield. As witnessed in Kenya, Ghana and Jamaica, it is not exceptional to increase yield by a factor of three. But improving yield means availability of and access to technical assistance, extension services and inputs: seeds and fertilizers. To complicate matters, the lack of access to finance is also a key characteristic of agriculture finance. While many NGO microfinance initiatives take place in villages, the scaling up has always been an issue. Finance is the key to sustainability but remains broadly unavailable. A holistic approach, tackling all these issues at the same time is mandatory to empower farmers and to enable them to escape poverty. Multiple positive experiences exist, among them initiatives funded under the ACP EU microfinance programme. We need to capitalise on these experiences. 1.2 Impact of microfinance in rural development The debate on the issue microfinance s impact on poor people life is on- going. Discussing the impact of microfinance in rural areas is even more challenging. However, anecdotal positive experiences are numerous as can be documented for example in the ACP/EU microfinance programme. They reveal the paramount importance of linking microfinance and small farmers with organizations implementing access to facilitation. This coordination component is a key pre- condition for the proper functioning of the whole chain, and as far as microcredits are concerned, an acceptable repayment rate. On the basis of selected cases in the ACP EU programme, we can say that the coordination component is more important than a well- designed financial product, low interest rate, weather or local authorities interventions. Actually the technical organization enables to maximise the efficiency of all other components, such as the design of the financial product, the participation of key partners such as insurers, the awareness and capacity building of growers association as well as local authorities. The coordinator also has a clear advocacy and partnership building role. 7

8 Concrete practice from Ghana. The model followed by Concern Universal in Kumasi (Ghana) to support small farmers in maize production can be schematised as follows: Input providers Seeds, pesticides, fertilisers Better yields Advice+subsid y Opportunity International, MFI Total Return on Investment for the farmer per 2 Acre: 520/(166)=3,13 Ministry of Agriculture Payments secured Opportunity: repayment rate from 80% to 90%. Improved re- Payments. Reduced monitoring costs Off- taker: easy access to predictable and qualitative maize at market price Savings Maize at 20% premium Off- taker Farmer Groups Wholesale Reduced transaction costs + improved quality Concern Universal does not appear on the graph, because it is everywhere, interacting with the MFI (Opportunity international), the microfinance clients (Farmer groups), the input providers selling seeds and pesticides, and the off- taker buying the maize in bulk ensuring access to market and a good price. Setting up the scheme required hard work in understanding and defining the economic rationale, the nature of partnerships and sharing of risks between stakeholders. The synergy between chain actors and supporters is positive. In this win- win scheme, the Ministry of Food and Agriculture (MoFA), with support from the project (fuel + training), is able to spread good practices on maize farming leading to a substantial 100% to 200% yield in production (4 bags to 8/12 bags per acre). Smallholder farmers have an increased and more reliable access to inputs, mainly fertilisers, thanks to Opportunity International s 8 months credit at 23% p.a, and supply by reliable input providers. They have guaranteed market access through an off- taker who buys 60% of the total production at market (+ 20%) price. The off- 8

9 taker pays the bank, instead of the farmers, easing the collection of loans for the bank, and further improving the bankability of the farmers. 40% of the production remains with the producer for direct selling, savings or consumption. So far around 500 farmers have benefited from the project. As in many projects, things can be improved in areas such as enhanced timing of the input, of the credit, of the collection of savings, better conditions from the off- taker, greening of the value chain, inclusion of storage facilities and improved sustainable intensification. Inclusion of weather- index- based insurances and market insurance would also substantially reduces the disproportionate risk born by the grower with a credit amounting to 25% of annual revenues. The project is looking into credit insurances, as one option, but it takes time, longer than a normal project duration (3/4 years). The lack of medium term or long term perspective is a substantial problem in rural value chains. Partnerships are built on ad- hoc opportunities, and donors act as facilitators. The value chain finance as it stands works well: it is market based and clearly shows the potential of value chain initiatives. It also shows that need for support and coordination never ends and questions the exit strategy. 1.3 Microfinance to support Smallholder Farms (SHF), preconditions There are different models to increase agricultural production. Reinforcing existing agriculture sectors (filières agricoles), or promoting private agribusiness investments provide a complementary approach to smallholder value chains. They are based on the supply chain approach where increased margins are realised by integrating the different production steps. Most often these initiatives are based on production for exports because the risk of side selling is reduced. There is a large consensus that family farming is key to alleviating hunger and poverty, and has the potential to drastically reduce malnutrition in particular for staple food. With many sectors and actors competing for public resources, it is not clear what priority is given to small farmers. The recognition of the key role of small farmers is both a justification as well as a precondition to engage in MF4SHF. Very often the recognition is clearly argued in policy papers (IFAD, FAO, WB, EC), but in practice both national governments and donors do not consistently allocate the necessary resources to smallholder agriculture in the framework of food security, poverty alleviation and long term support strategy. Microfinance to smallholders without appropriate support is not feasible. It is essential in particular to increase the yield in production in order to make a return on the investment. On the basis of documented experiences from initiatives funded via the ACP/EU microfinance programme, tripling the production level by applying adequate level of pesticides, adequate timing and good agricultural practices is achievable. This reinforces the conviction that the smallholder farms value chain approach needs strong implementing partners, a transparent relationship where the benefits of working together are shared. Opportunities and risks need to be correctly assessed and managed. 9

10 Increased yield for farmers, reduced transactions costs for microfinance institutions, input suppliers and off- takers, and indeed a strong value chain governance are the key elements of success. This precondition cannot be achieved without strong donor support, in a facilitation role. A second precondition is the engagement of microfinance institutions (MFIs) and technical expertise. The outreach of microfinance in rural areas is still limited. Lessons are learned, best practices identified and technology is rapidly changing the landscape (mobile phone technology). However MFIs are still cautious to have customers that live hours away from the city, in regions with limited aces through unsafe rural roads, who speak different languages The availability of technical expertise is also very often a problem, leading to the impossibility of creating value chain initiatives. Microfinance and technical expertise (to exert the role of facilitator) are the pillars for successful value chain finance. These preconditions need to be assessed carefully in the selection and launch of MF4SHF initiatives. 1.3 Microfinance for SHF, Implementation Many financial institutions take the limited approach that the risk of credit default lies with the creditor. From a donor perspective the risk lies with the smallholders (in line with the do no harm principle). Apart from getting poorer in the event of failed agricultural production, the credit default will lead to losing the access to credit, as well as the social network upon which the credit is often built. The implication is that guarantees are important to engage MFI in funding agriculture. However, they could actually be counterproductive if no support is given to farmers. It is widely believed that agricultural production does not yield sufficient returns and that interest subsidy should be offered. We believe that the existence of interest subsidy will distort the market, and may explain partly the lack of credit availability for agricultural farming. The credit component does not need to be subsidised, because in the value chain approach the financial yield for the farmers is sufficient. The farmers may well be able to pay nominal interest rate of up to 30%. The financial institutions Credit Risk Policy guidelines need to be adapted to ensure that agricultural loans are extended only on the basis of a clear small farmers value chain approach led by professionals. As MF4SHF becomes more efficient, interest rates will decline. Even if the credit officer has an agricultural background, or if the MFI is a rural cooperative, the credit should not be granted if the grower is not properly counselled. The negative impact of failed loans in rural areas is important because the average size of loans is high, and clients are particularly poor. Everything has to be put in place to reduce risk (inputs, market price, market access, value chain, weather), for which professional advice is needed for a given period of time. 10

11 The implementation modality should be based on a parallel set up: A grant component dedicated to support the capacities of the small farmers, and a financial component dedicated to provide financial services at market rates. As observed in the case of Ghana, there are no romantic expectations from the growers. It is essential to implement strong control in terms of ensuring that the credit is directed towards productive activities, close monitoring of the production cycle, and straightforward arrangements to ease the credit collection. 11

12 Chapter 2. Microfinance for SHF and rural development Opportunities for the European Commission 2.1 Basic principles The proposed approach focuses on a tool that reduces the risk of production loss, increases the yield of the agricultural production and increases the efficiency in the value chain. For the above reasons, it is more important to ensure that agricultural investment gives a return to the small grower first, rather than focusing on the secondary, yet important question of the financial intermediary. In fact it is only by solving the first issue, that you sustainably solve the second one. MF4SHF initiatives should rest on two pillars: the support to the small farmers and the support to financial inclusion. The support to the smallholders is based on the traditional regal role of the State, or its sovereign right to promote infrastructure and institutions at the service of its citizens. While (re)building extension services is a traditional approach to capacitate growers, today the state can also rely on farmers associations, non- governmental organisations and other private partners. The quickly changing environment can be better harnessed by establishing partnerships and collaborations between actors. Very often governments favour agribusiness approaches where the Small Farmer is often marginalised and in the hands of big companies. The role of the state is then limited to create an enabling environment supporting private investments, giving access to land and water. In line with their own policies, Donor initiatives should focus on an alternative business model where the small farmer is at the core, and food security the main objective. Direct support to farmers should tackle overall organisation, training and empowerment issues. As described in Chapter 1, facilitation activities are the main driver, together with the respect for market price mechanisms for assets, inputs and financial services. Indeed, we promote market- oriented agriculture. The rationale is that the value chain approach increases the value added created in the system. This value needs to be fairly shared among the actors ensuring full ownership. As a rule of thumb for evaluating the financial need, a working coordinated system such as the one described above in Ghana will have the grant support to farmers equal the amount of the loan. The second pillar, provision of credit, should not be subsidised. The credit risk is limited through the first pillar, and does not need to be further guaranteed. At the same time the financial product should protect the grower and include available insurance mechanisms such as weather index and market insurances because no donors could responsibly accept that the grower should bear all the cost of failure in particular in the case of external shocks. Even further, to cover cases of disaster, a food security mechanism could be put in place. A clear partnership with existing safety net programmes could be established. It is not sufficient to have close coordination between support to farmers and availability of credit. Both pillars need to work together. The justification is that an integrated approach to improved rural production cannot stand on its own in the long term, so access to credit (and to 12

13 other components of financial inclusion) needs to be part and parcel of the set- up. The credit component brings sustainability and enables to scale- up the initiative. Credit is essential for small farmers to graduate out of subsistence into commercial farming. Our view is that the tool to promote agricultural production needs to be reinvented. It should be specific for small famers, based on new technology, new microfinance products and benefit from new forms of collaboration now possible within the framework of the 2013 EC financial regulation. In particular the financial regulations foresees the possibility to create a legal structure (Trust or Investment funds) that would enable the initiative to combine private and public funds, grants and debt financing with outright investment. The legal registration enables the initiative to outlive the typical 3-4 years development framework that does not work in the agricultural context. As debt finance will be revolving, the entity is sustainable on its own. Independent institutions with flexible entry- exit mechanisms will enable public private partnerships, and civil society participation. This initiative would create an area of undisputable leadership for the European commission in the priority development area of agricultural development. In line with its mandate in a European context it could combine various European stakeholders. 2.2 Regional Trust model The Trust is a usual structure in development programmes. It is extensively used in particular to manage funds from different donors. It also offers a stable structure, legally established in a country and well articulated within the donors governing financial regulations. The latest changes in the European Commission financial regulation expand the potential for using this vehicle, enabling the Commission to initiate trust funds. This could trigger important regional European initiatives, bringing together various donors and private development partners. The possibility to combine European funds, and a strong visibility for the EC, are important elements of the trust fund. But more importantly it allows the creation of a specific instrument dedicated to supporting small farmers. 2.4 The structure: The proposed structure reflects the lessons learned presented in chapter 1. It moves away from the current EIB/EU private sector facility because the key concept moves from just collaboration to a fully dual- command structure. The registration of the fund enables its sustainability because of its revolving nature, freeing it from both the EIB procedures (due diligence, limited technical assistance) and the Commission s own rules related to revolving funds and final date of implementation (FDI). It enables to combine expertise from both institutions and opens the door to partnerships to reinforce current expertise on finance and rural development (including food security and climate change issues). 13

14 Board of trustees (National development banks, EC, EIB, KfW, DFID, AFD, Proparco etc.) Financial and administrative management. Staff hired by a legally registered Trust fund, complemented by High level expertise (TA consortium eg INCOFIN and GIZ) VCF (Value Chain Finance) Credit Division : Whole sale credit and equity to needed MFI at market rate. Capacity building of M FI (Credit rating, MIS, SMART campaign, knowledge creation) Working on the meso level.(new technologies) Regulatory environment. Selection of MFI to support on the basis of criteria s agreed upon in the Board of Trustees. Drafting and follow up VCD (Value Chain Development) Value chain division : Capacity building at macro (rural policies) and meso level (eg. association of national producer of Maize). Capacity building of rural self help groups. Training in agriculture management Transfer of technology. Establishments of contract with NGO, other civil society and private sector. Establishment of MoU with extension services, and other administrative bodies. The Board of Trustees will ensure the governance and the main policy direction including geographical areas and sectors to be supported. The everyday implementation could be carried out through a service contract with a strong accountability framework ensuring effectiveness and efficiency. Impact will be measured and monitored by external evaluators. One key impact indicator will be the catalyst role of the Trust fund to provide funds to small farmers as well as improve the financial status of the farmers. The process of implementation will start on the basis of discussion with MFI and cooperatives to identify good financial partners. In many ways the process would be similar to the one identified for the other possible development vehicle, Blending Plus. More information on the process can be found in 2.6 (functions). 14

15 2.5 Financial instruments: Blending Plus Blending is also well covered by the European Commission financial regulations. It is used currently in many sectors supporting financial inclusion in developing countries. Blending is a tool that combines EU grants with other public and private sector resources such as loans and equity in order to leverage additional non- grant financing. It is an approach where the Commission invests in junior tranches or equity tranches with a higher risk. Junior tranches take the first loan loss if they occur, reducing the risk for private investors. Possible risks linked to the concept of blending The key element remains the ownership of the support to farmers. As illustrated in the model followed in the Plant and Garden Agropark, in Jamaica, for the onion credit, ownership is more important than subsidized scheme: An example of a pure blending instrument: REGMIFA. Launched in May 2010, the Regional MSME Investment Fund for Sub- Saharan Africa SA, SICAV- SIF (REGMIFA) is a Luxemburg based investment fund seeking to foster economic development and prosperity in Sub- Saharan Africa essentially through the provision of local currency medium to long- term debt financing to financial institutions serving micro, small and medium sized enterprises. Complementary to the fund s investment activities, a dedicated Technical Assistance Facility focuses on technical support to client institutions. Initiated by the G8 Summit in Heiligendamm, REGMIFA is a Public- Private Partnership that combines funds from public and private investors, including KfW Entwicklungsbank (also acting as structuring agent), the German Federal Ministry for Economic Cooperation and Development (BMZ), the Spanish Ministry of Foreign Affairs (MAEC), the Spanish Agency for International Cooperation for Development (AECID), the Spanish Development Bank (ICO), the International Finance Company (IFC), the Belgian Investment Company for Developing Countries (BIO), the Development Bank of Austria (OeEB), the European Investment Bank (EIB), the French Development Agency (AFD), the French Investment and Promotions Company for Economic Cooperation (PROPARCO) and the Norwegian Microfinance Initiative (NMI). The Fund is managed by Symbiotics Asset Management SA, a specialized asset management company based in Geneva. 15

16 This fund does not tackle the needs of agriculture finance. Only 8% of its loans is related to agriculture, most of it in trading. The REGMIFA has a TA facility that committed over 6 million, for over 90 million million in investments. This fund is not geared to promote small- scale agriculture. The TA focuses on the needs of the MFIs. As explained earlier, a substantial Value Chain Development leg would be needed. Funding agriculture without a proper value chain approach is too risky. This is demonstrated by an experience conducted recently in Jamaica by the Inter- American Development Bank and the Jamaican Development Bank (see box beside). Despite important investments (irrigation), provision of seeds through credit, farmers training and taking into account market access, the agropark in Saint Thomas is a failure. The total debt of the 66 farmers is now 217,800 USD, booked in St Thomas Credit Union (STCU). The credit union and the farmers are ultimately the two victims of this initiative. STCU will now ask for the 50% guarantee negotiated with the Development Bank of Jamaica/IADB against the agreement to lend at 10% interest rate over three months despite an expected return on investment for the grower of 200 to 300%. Indeed 10% is well below the market rate, which in Jamaica is at 1% a week, possibly higher for rural finance. The key element would have been to ensure a proper value chain approach, not a subsidised scheme. Creating ownership requires a professional work at grass- root level. The role of facilitator has to be carefully crafted in an agreement between the Investment vehicle and the NGO or any other institution entrusted to implement the project. As shown in the Jamaican example, successful agricultural finance is not about favourable credit terms, or instruments to cover credit default, or even massive investment; it is about working patiently on the value chain, and crafting sensible partnerships. Blending is an important element of the EC cooperation toolbox. As mentioned above, it is strategic for private sector actors to access credit, and the guarantee can persuade MFI to engage in rural finance. But agricultural support requires a dedicated instrument that we call blending plus. As already stated, professional support of the farmers is the last but most important ingredient of a series of good farmer practices. These include empowerment, close collaboration with the MFI, the input suppliers and the buyers, as well as fair distribution of benefits among the actors relative to the risk taken. Microfinance for rural development needs a global approach, where all the stakeholders are involved and professionally assisted in value chain set up. Blending, that implies the handing over of EC public funds to a financial organization, needs to be complemented by the area of expertise of the Commission that is improving small holder farms production and food security. The Commission and the financial organization do have new possibilities to combine their expertise since 2013, with the implementation of the new financial regulation broadening the competencies of the Commission to set up Trust funds and engage in blending. 16

17 2.6 Description of the set up for the two instruments: Trust Fund or Blending plus In both cases the legal framework is strongly grounded within the Financial Regulation. The legitimacy is based on the need to equip the Commission with adequate tools to carry out its policies. Those are well detailed in different Communications to the Council and the European Parliament in particular on Food Security (2010), Resilience (2012) and the Agenda for Change (2012). The evidence upon which these policies are based forms a body that clearly point towards the need to support small farmers. It is advisable to start with a regional perspective. That would enable to diversify risk, which would be positive for the financial investors (credit division). Large overall scale would also encourage the provision of insurance on the different operations. On the Value chain side, it would be an advantage to specialise on a selected number of crops or animals recurrent in the region and instrumental to improve regional food security. An early definition of the region would facilitate establishing the board member of the initiative. National development banks and National rural development ministries are natural candidates. Both blending and trust are open to public and private investors who would form the tail of the board. The civil society should also be represented, bearing in mind that NGOs will tend to be major beneficiaries of the programme, so possible conflict of interest should be avoided. The two pillars work together following the basic principles of separation of duties and joint responsibility. The process will start on the basis of discussions between the Value Chain Finance department and MFI/cooperatives to identify good financial partners. These partners should cover areas such as savings, credit and insurance. Special support could be given to develop adequate financial products, or to provide technical assistance to ensure the financial institutions are fit to play their role. Once a Memorandum of Understanding is signed, the credit institutions will select the groups they wish to work with, in close cooperation with the Value Chain Development department. Once the group has been identified, the second leg of the programme will be put into action and adequately support the group. The Value Chain Development department is in charge of creating the synergies, working with local partners from the civil society, private sector and government. Once the possible synergies have been identified and tested, the credit leg can start. The programme will also address upstream issues, in particular tackling regulatory and institutional limitations to expanding financial access. On the other side the introduction of financial literacy training would also be a stepping- stone towards empowering small farmer groups. Funding will be separated in two channels: debt finance and grants, with each director responsible for fund raising. Management of two different type of funding is not new in initiatives such as REGMIFA or microfinance trust funds. Modalities can be adapted. 17

18 Conclusion 2014 has been declared by the UN the International Year of Family Farming. This will raise public attention on the contribution of family farming to poverty reduction. This also encourages the Donors to set up specific supportive policies. The European commission itself has embarked on major investments in rural sector development for the period , but the detailed strategy still seems to be at an early stage. It is therefore important for the ACP/EU MICROFINANCE programme to present some proposal to feed the on- going debate. The feasibility of the proposed options is real. The Commission already has an important experience in blending, so blending plus could be swiftly established. A dedicated instrument for rural development would be an efficient tool to graduate poor households out of poverty. The proposed dedicated instruments, Blending Plus or Trust Fund, if proven effective, could also be adapted to other challenging sectors were family business still makes sense. 18

19 ACP/EU Microfinance is a programme of the ACP Secretariat funded by the European Union through the 10th EDF and implemented by a Programme Management Unit led by DAI Europe, in consortium with ATC Consultants and Triple Jump. This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union nor that of the ACP Secretariat. 19