IFC and Agri-Finance. Creating Opportunity Where It s Needed Most

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Rodger Harris
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1 IFC and Creating Opportunity Where It s Needed Most

2 Agriculture remains an important activity in emerging markets IMPORTANCE OF AGRICULTURE as major source of livelihood 75% of poor people in developing countries live in rural areas 2.1 billion live on less than $2 a day. Agriculture is a source of livelihood for 86% of rural people - Jobs to 1.3 billion small holders and landless workers 2.5 billion households of the developing world population are involved in agriculture with low access to finance 2

Agriculture is a source of livelihood for 86% of rural people - Jobs to 1.

3 Agri-finance: a key global challenge LACK OF ACCESS TO FINANCE to adopt efficient technologies and efficient resource allocation India: in 2 states 87% of marginal farmers surveyed had no access to formal credit; only 49% of small farmers have access to institutional finance. Rural Nicaragua, Honduras and Peru: 40% of all agricultural producers are credit constrained. CEU: nearly 50% of smallholders in five countries report financial constraints as the major barrier to growth and expansion of their enterprises. Africa: less than 1% of commercial lending goes to agriculture. 3

Rural Nicaragua, Honduras and Peru: 40% of all agricultural producers are credit constrained.

4 Financial Institutions Reluctant to Participate in first Stages of agriculture supply chains Risk generally decreases as chain moves forward Financial Institution 4

5 Why Financial Institutions do not finance agribusiness high risk profile AGRICULTURE SECTOR FEATURES Cost to serve - Rural financing involves higher transaction costs than in urban areas Seasonality and loan term structure - frequently long gestation periods from planting/livestock birth to harvest/slaughter Farming heterogeneity & lack of information range of farm and non-farm income can make the assessment of loan suitability more complex AGRICULTURE SECTOR RISKS Production and yield risks uncertainty due to natural hazards (weather, pests etc.) Market and price risk fluctuations in price, particularly where markets are likely to be imperfect and information may be lacking Risk of loan collateral limitations local farmers may lack land title or land value may be low 5

income can make the assessment of loan suitability more complex AGRICULTURE SECTOR RISKS Production and yield risks uncertainty due to natural hazards (weather, pests etc.

6 A portfolio of 69 Projects at IFC 6

7 IFC Agri-finance Advisory Approach SME Banking Supply Chain Linkages Microfinance Farmer Training Leasing Insurance Crosscutting expertise in financial products Agri - Business Finance Agri sector specific knowledge Ag Productivity Eco standards Sustainable Energy Finance IFC Financial Markets Wholesaling IFC Real Sector Water Doing Agri Business Financial Institution 7

Finance Agri sector specific knowledge Ag Productivity Eco standards Sustainable Energy

8 IFC promotes and integrated approach to agricultural development Market Access (trader - processor) Technical Assistance & Access to Technology (agribusiness firm/ Financial Institution) 8

9 Through a combination of services, farmers receive multiple direct and indirect benefits Market Access (trader - processor) Price risk mitigation Better access to markets/prices Higher-value products Income smoothing Insurance Long-term assets Technical Assistance & Access to Technology Better practices Improved quality Higher yields (agribusiness firm/ Financial Institution) 9

Higher-value products Income smoothing Insurance Long-term assets Technical Assistance &

10 Supply chain finance differs from traditional agriculture lending Area Lending KYC Credit Risk Risk Mitigation Client Type Capacity Building Traditional Lending Asset Based Relationship Banking Traditional Assessment, needs sufficient client information Careful client selection; insurance / hedging Large commercial farmers Clients are knowledgeable Supply Chain Finance Cash flow based; contracts Supply Chain Improved systems for risk assessment; info through supply chain Portfolio diversification; Risk sharing, insurance / hedging Smaller commercial farmers Associations of farmers Additional knowledge on technical and financial topics needed 10

farmers Clients are knowledgeable Supply Chain Finance Cash flow based; contracts Supply Chain Improved systems for risk assessment; info through supply chain

11 Agriculture supply chain finance integrates multiple actors BUYER / CORPORATE Supply Chain Financing includes multiple options for financing and contractual relationships Loan Repayment INPUT SUPPLIER Delivery of goods FINANCIAL INSTITUTION Risk sharing THIRD PARTY (DONOR) Inputs provided to farmer, based on loan from FI (+TA) Pre-finance harvest Disbursement to supplier (=> loan to farmer) FARMER Financial Intermediation Technical Assistance Technical assistance can be delivered by the FI, the buyer or supplier 11

THIRD PARTY (DONOR) Inputs provided to farmer, based on loan from FI (+TA) Pre-finance harvest Disbursement to supplier (=> loan

12 Business Models in 12

13 Business Models in Example 1 PRE-HARVEST LOANS REACHING FARMERS THROUGH MFI / BANK Assisting MFIs/Banks in reaching underserved farmers IFC AS to Bank: - New Lending products - Risk management - Policies / procedures Buyer / Trader Harvest Payment IFC AS to Farmers: - Productivity - Standards - Business practices IFC Bank Loan Farmers 13 Loan Repayment

products - Risk management - Policies / procedures Buyer / Trader Harvest Payment IFC AS

14 Business Models in Example 2 PRE-HARVEST LOANS REACHING FARMERS THROUGH MFI / BANK (with IS) Leveraging synergies across IFC investment and advisory services IFC Advisory to Bank: - Risk management - Lending products - Policies / procedures Agribusiness / Buyer Crop Payment IFC Advisory to Agribusiness / Buyer and Farmers: - Productivity - Standards - Business practices IFC Credit line / Risk sharing Bank Pre-harvest loan Farmers 14 Loan repayment

- Policies / procedures Agribusiness / Buyer Crop Payment IFC Advisory to Agribusiness / Buyer and Farmers: -

15 Business Models in Example 3 PRE-HARVEST LOAN TO GROWERS INCLUDING INPUT SUPPLIERS IN SCF Leveraging synergies across IFC investment and advisory services IFC Advisory to Bank: - Risk management - Lending products - Policies / procedures Input Supplier Funds Agribusiness / Buyer Crop Payment IFC Advisory to Agribusiness / Buyer and Farmers: - Productivity - Standards - Business practices IFC Credit line Bank Pre-harvest loan Farmers 15 Loan repayment

/ procedures Input Supplier Funds Agribusiness / Buyer Crop Payment IFC Advisory to Agribusiness / Buyer and

16 Business Models in Example 4 WAREHOUSE RECEIPTS REDUCING PAYMENT LAG Allowing Farmers to Capitalize on Production earlier in the Cycle Buyer / Trader Produce Repayment Bank IFC AS to Warehouse/Bank: - Risk management - Lending products - Policies / procedures IFC AS to Farmers: Receipt Finance - Productivity - Standards - Business practices IFC Warehouse Harvest Produce Farmers 16 Warehouse Receipt

Risk management - Lending products - Policies / procedures IFC AS to Farmers: Receipt Finance -

17 Business Models in Example 5 LOANS AS PREPAYMENTS WORKING DIRECTLY THROUGH SUPPLY CHAIN Allowing Farmers to Finance Pre-Harvest Expenses through future Sales Consumer Food & Beverage firm IFC AS to Farmers: - Productivity - Standards - Business practices IFC Credit line Buyer / Trader Harvest Produce Farmers IFC AS to Buyer/Trader: - Risk management - Policies / procedures 17 Pre-harvest Loans

to Farmers: - Productivity - Standards - Business practices IFC Credit line Buyer / Trader Harvest

18 Business Models in Example 6 LOANS AS PREPAYMENTS WORKING DIRECTLY THROUGH SUPPLY CHAIN Allowing Farmers to Finance Pre-Harvest Expenses through future Sales IFC AS to Input Supplier: - Risk management - Policies / procedures Buyer / Trader Produce IFC AS to Farmers: - Productivity - Standards - Business practices IFC Project Finance Input Supplier Farm Inputs/ Machinery Farmers 18 Repayment

management - Policies / procedures Buyer / Trader Produce IFC AS to Farmers: - Productivity -

19 IFC s Offering Financial Institutions / Agribusiness firms Assistance to FIs Impact Diagnostic of FI capabilities to lend to the agriculture sector Marketing strategy to approach lead firms and farmers Assessment of potential opportunities with clients Assist in development of new financial products, policies and procedures (mainly in credit) Screening/credit scoring models Training for loan officers in farm/agribusiness assessments Increased client base Improved loan performance Expansion of product portfolio Increase in capital base Improved control on financial performance Enhanced skill set loan officers 19

policies and procedures (mainly in credit) Screening/credit scoring models Training for loan officers in farm/agribusiness assessments Increased client

20 IFC s Offering Financial Institutions / Agribusiness firms Market Outreach & Pipeline Development Impact Scoping studies to assess opportunities and risks Develop risk mitigation and coping strategies Client/Farmer training in financial literacy Improved strategic decisionmaking Improved business continuity and risk management Clients/farmers prepare to become better clients for financial institutions 20

strategies Client/Farmer training in financial literacy Improved strategic decisionmaking Improved

21 IFC s Offering Farmers & Agribusiness Firms Technical Assistance to Farmers Workshops & Training sessions on Sustainable Practices Assistance in obtaining certification Knowledge and training on improving farm productivity Facilitation of enhancing input provision Assessments of best local practice implementation Impact evaluation studies of sustainability, productivity programs Impact Improved farm practices, sustainable use of farm land Improved access to markets through certified products Improved farm margins through certification premiums Increase in farm productivity, net income Improved effectiveness of outreach activities Improved farmer loyalty More stable supply chain 21

22 Annex IFC Services 22

23 IFC Services Investment Services Loans Equity Trade finance Syndications Securitized finance Client risk management services Advisory Services Four business lines: Access to finance Sustainable Business Investment Climate Public-Private Partnerships Treasury services Liquidity management 23

24 IFC s value proposition in agri-finance Global agribusiness knowledge combined with financial market capabilities Access to finance project delivery capabilities: Global KM with field management capacity Ability to combine Investment & Advisory Services IFC/WB convening power: the enabling environment 24

IFC S INVOLVEMENT IN COFFEE A PRESENTATION TO THE ICO LONDON, SEPTEMBER 2014

IFC S INVOLVEMENT IN COFFEE A PRESENTATION TO THE ICO LONDON, SEPTEMBER 2014 1 IFC CREATES OPPORTUNITY AND IMPROVES LIVES BY PROMOTING PRIVATE SECTOR DEVELOPMENT IN EMERGING MARKETS IFC: established in