Value Chain Finance Concepts, O pportun ties & Ch a enges

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1 Value Chain Finance Concepts, Opportunities i & Challenges Christophe Cordonnier, Yerevan, June 19

2 Agenda Introduction of Trainers & Topic Value Chain Finance: Concepts, Opportunities & Challenges International best practice examples from Turkey & Tajikistan Coffee Break Value Chain Finance in Action Construct your own value chain Wrap-up & Conclusions F r a n k f u r t S c h o o l. d e Source: Nin-Pratt et al

3 Value Chain Finance Inputs $ Farmer Save for loans, outgrower schemes, emerging farmer programs Coops Input financing, raw material collection financing, WHR financing, coop capacity building Processors Working capital, WHR finance, trade & $ $ $ commodity finance Traders $ $ $ Working Capital & Asset Finance Financial Institution F r a n k f u r t S c h o o l. d e 3

4 Overview of Value Chain Finance Instruments Instrument Input financing Receivables financing Physical asset collateralization Risk mitigation products Financial enhancements Examples Trader credit, Input supplier credit Trade receivables finance, Factoring Warehouse receipts, Financial lease Insurance, Forward contracts, Futures Securitization instruments, Loan guarantees F r a n k f u r t S c h o o l. d e 4

5 Contract Farming Have high transaction costs and face high risks on agricultural market BANK Loan Three-party Agreement - share the risks / share the costs - Are unbankable but have financial needs Have a strong relationship with one processor PRODUCER (MILKING COW FARMER) PROCESSOR (MILK DAIRY) Very interested in producers development Have a good knowledge of rural clients can make recommendation for good eligible clients can carry part of the loan-risk (co-signer) Have relationships with the banking sector can reduce the transaction costs (repayments) F r a n k f u r t S c h o o l. d e 5

6 Outgrower Schemes Loan NUCLEUS FARM BANK Products Inputs, Technology Loan PRODUCER (Outgrower) PRODUCER (Outgrower) PRODUCER (Outgrower) F r a n k f u r t S c h o o l. d e 6

7 Warehouse Receipts PRODUCER Repays at maturity when he has sold the goods Receives a loan from the bank BANK Can access the goods and sell them in case of loan default Warehouse F r a n k f u r t S c h o o l. d e 7

8 Agricultural Insurance Increasingly common, but still at an early stage of development Mostly index based, but only limited historical data available Diversification as an important factor for those within a chain, as well as for their lenders F r a n k f u r t S c h o o l. d e 8

9 Conclusion No one size fits it all solution Solutions need to be localized based on commodities, types of farms, types of value chains, legal environment Bundling credit into a broader array of financial and non-financial services for farmers has a greater impact For financial institutions value chain finance can establish new markets, reduce risk and lower transaction costs F r a n k f u r t S c h o o l. d e 9

10 Thank you for your attention! Christophe Cordonnier Senior Bank Advisor Frankfurt School of Finance & Management F r a n k f u r t S c h o o l. d e 10

11 Turkey MSME Finance Facility Lessons Learned on VCF Erdal Kocoglu, Yerevan, June 19

12 VCF Implementation Experience in Turkey Motivation for Establishing a VCF Scheme Agricultural production is neither controlled nor coordinated in Turkey. There is no link between the agricultural industry and the agricultural producers which results in under or over supply of some crops. Government subsidies do not help either. Agriculture sector in Turkey is still under-financed (the share of agriculture in total GDP is 7.9% while the share of agricultural loans among total loans is only 3.5%). Collateral is a major problem among agricultural producers limiting their access to bank finance. In the absence of banks, processing companies (financed by banks) started to act as a lender which increased the financing costs of agricultural producers. Increased competition in SME sector directed Turkish commercial banks to the agriculture sector. Innovative products / schemes need to be developed to be able to compete with the monopoly of state-owned Ziraat Bank. F r a n k f u r t S c h o o l. d e 12

13 VCF Scheme in Bafra, Samsun VEGETABLE PRODUCERS UNION CONTRACT RED PEPPER PRODUCERS Price, quality conditions, input support (fertilizer, chemicals, seed), payment schedule & conditions, technical support BAFIRA: PROCESSING COMPANY BANK TARSIM: INSURANCE FRANKFURT SCHOOL: TA PROVIDER F r a n k f u r t S c h o o l. d e 13

14 Recommendations for Bankers Test the concept with a limited number of producers during the first season and check whether or not the parties respect to their contractual obligations. Upon successful implementation, the numbers will increase automatically in the upcoming seasons. Ensure that you have a sufficient mechanism to estimate yield and expenses of producers (price is already defined through contract). Legal procedures might take quite some time at the first instance. Be quick and don t miss the agricultural season. Try to include an agricultural cooperative or a union into the VCF scheme to decrease operational costs. F r a n k f u r t S c h o o l. d e 14

15 Recommendations for Bankers - continued Be objective and try to align needs and wishes of all parties involved. Trytoconvincetheproducers the to sign a contract sufficient to cover their expenses and encourage them to find the best deals with other business partners. Try to get the processing company as a guarantor. No matter you are lending to the producers or the company, define a credit limit for the processing company. Monitor the scheme closely during the contract signing period (first price settlements in the market and afterwards, harvesting period and before the new agricultural season begins). F r a n k f u r t S c h o o l. d e 15

16 Agricultural Loan Evaluation System ALES Financial Institutions (Banks, MFIs, etc.) Why ALES? ALES helps opening up the agricultural finance market to financial institutions and increases farmers access to finance; ALES allows to assess loan applications of farmers efficiently, to quickly determine the credit risk of farmers based on gross margins and to reject loan applications from non-profitable farms (cost reduction for financial institutions); ALES provides an efficient and standardized scoring tool for loan officers with little or no knowledge on agriculture; ALES is a tailor-made solution specific for the region and the financial institution concerned and thus needs to be fed with local information and up-dated regularly. Implemented in Turkey, Tajikistan, Senegal Sustainability Credit Bureau of Turkey (KKB) access to all FIs F r a n k f u r t S c h o o l. d e 16

17 Agricultural Credit Card Bank defines the card limit and distributes to the farmer. 2. Farmer purchases inputs from the input suppliers. 3. Bank pays to the suppliers. 4. Farmer repays to the bank after harvest. Fits perfectly to the VCF scheme. Allows agricultural producers to purchase agricultural inputs: gasoline, fertilizer, pesticides, seed, seedling etc. Offers an interest-free period and the maturity is adjusted based on the harvest time of the producers. Usually works in a closed circuit system and does not operate on other banks POS/ATMs (the card s working pricinciple is usually defined on the bank s POS and not on the card itself). Depending on the banks risk appetite, cash withdrawal could be possible as well (i.e. for paying wages to laborers) F r a n k f u r t S c h o o l. d e 17

18 Thank you for your attention! Erdal Kocoglu Project Manager Frankfurt School of Finance & Management F r a n k f u r t S c h o o l. d e 18

19 BACK - UP F r a n k f u r t S c h o o l. d e 19

20 In summary: ALES Benefits o o o Quick solution for agricultural loan assessment, reducing time spent on loan evaluation The tool can assess various loan requests on working capital and investment (i.e. machinery and equipment) It covers several activities of the crop production, animal husbandry, aquaculture, chicken farming, apiculture o o o o o o o o Ideal for farmers and / or agricultural enterprises involved in various agricultural activities to help structure their payment schedule and better determine their repayment capacity Provides a separate loan decision for each loan product and sets a general limit for the applicant Filters and eliminates non-profitable agricultural activities (reducing costs & risks) Provides recommendations on maturity and loan repayment schedule for each activity In line with the banking system and risk approach of financial institutions (Banks & MFIs). The tool does not only assess the agronomic risk but also the bank indebtedness (consumer & commercial) Loan decision is based on various criteria: fixed assets & working capital, income, loan request and guarantor Provides the chance to react immediately to any changes or events in the respective market Tailor-made for each financial i institution, can easily be incorporated into the financial i institution s internal scoring system. F r a n k f u r t S c h o o l. d e 20

21 In summary:. and ALES Challenges o Requires human resources and investments for regional data collection o Need for expansion on functions, such as to check and control the collateral provided and to include cash flow projections (FS experts are working on it) o Need for a professional IT partner if it needs to be integrated into the bank s internal IT system F r a n k f u r t S c h o o l. d e 21

22 Agricultural Credit Card Cost of interest-free period is covered through the commission paid by the suppliers. In some cases, the banks get no commission from the supplier but instead ask them to block the payment in their deposit account until the end of interest-free period. The bank should adhere to an appropriate lending mechanism to determine the working capital need of producers. If the card is open for cash withdrawal, two different limits should be set: overall limit and cash limit. Active marketing and establishment of POS at agricultural input suppliers is a must for the efficiency of the card. Although the farmer pays during the harvest period, you should send periodic (i.e. quarterly) notifications to the client showing the transactions and reminding the repayment date. The card limit should be defined for one season and renewed each year depending on the repayment performance and production of the farmer. F r a n k f u r t S c h o o l. d e 22

23 Value Chain Finance in the Frame of the TjikA Tajik Agriculture Finance Framework k(taff) Christophe Cordonnier, Yerevan, June 19

24 Agricultural Background Tajikistan (2007): Tajikistan is a small, open, landlocked economy with a narrow economic base dominated by the production of aluminium, cotton and electricity. Agriculture is a major component of the economy with 24% of GDP, 66% of employment and 26% of exports. Almost 2/3 of the population of 6.4 million people depend on agriculture for their livelihoods. Cotton makes a critical contribution to both the agricultural sector and the national economy, accounting for 60% of agricultural output, supporting 75% of the rural population, and using 45% of irrigated arable land. Cotton sub-sector growth was much lower after civil war ( ) than growth in other crops and livestock production, due to low productivity, low on-farm profitability and excessive debt. Cotton is a major drag on agricultural sector development! F r a n k f u r t S c h o o l. d e 24

25 Tajik Agricultural Finance Framework (TAFF) Introduction TAFF I was launched in 11/2007 by EBRD to support the restructuring and diversification of Tajik agriculture, including the cotton sector TAFF II (02/ /2013) focused on enhancing the competitiveness of the Tajik agricultural sector and the capacity of the private sector as a whole and is financed by the EU. Divided into three pillars: Agricultural Lending, Value Chain Development, Diversification and Promotion of agri-products Involved eight local Partner Financial Institutions (PFIs), four banks and four MFIs, disbursed funds of over 70 million USD to more than 10,000 borrowers PFIs receive from EBRD Funds for on-lending and Technical lassistance (TA) F r a n k f u r t S c h o o l. d e 25

26 TAFF Why Value Chain Finance (VCF) in Tajikistan? Rationale for TAFF I: Many farmers work with less than 5 ha and thus remain economically vulnerable due to: Lack of resources (incl. finance) Lack of know-how Poor access to processors and markets Rationale for TAFF II: The agricultural sector requires specific financial products going beyond individual loans to small-scale farmers to further increase their access to finance Benefits of strengthening the ties between value chain stakeholders are manifold: Farmers benefit from improved production, reliable off-takers and favorably priced finance Off-takers build a stronger and more loyal client base F r a n k f u r t S c h o o l. d e 26

27 TAFF Value Chain Finance PFIs provide loans according to production cycle and by applying individual client assessment (financial analysis, ALES, thorough character assessment) Agro business processor/international commodity trader working under procurement contracts with farms provides the financing bank with its corporate guarantee or with the off-take contract Farmer agrees to pay for the technical assistance provided by Technical Assistance Groups (TAGs launched in 2011) to substantially increase yields and adhere to Better Cotton Initiative standards Production is sold to the agro business processor/international trader under fair conditions with the farmer receiving his money timely and in cash F r a n k f u r t S c h o o l. d e 27

28 Value Chain Finance Approach PFIs Facilitate access to seasonal loans TA Providers Supporting the development of a service oriented and selfsustainable TA structure (TAG) Input Suppliers Integrate input suppliers, mechanization contractors and buyers into the concept Traders Transparent and fair off take contracts for cotton F r a n k f u r t S c h o o l. d e 28

29 TAFF Value Chain Finance Benefits from VCF that t arise for PFIs: PFIs benefit from establishing a stronger and more reliable client base under VCF Lower costs and lower risks for PFIs, as off-takers take over client screening and work only with the least risky clients Off-take contracts and corporate guarantees can serve as a collateral for the banks when lending to the farmers Thorough client assessment leads to high quality portfolio (PAR > 30 days + restructured loans: 1.12% of the total portfolio) F r a n k f u r t S c h o o l. d e 29

30 TAFF Value Chain Finance Results Farmer Participation Finance Technical Assistance Off takers 2,025 farms with a total of 22,671 ha of cotton all over the country participated Repayments of loans occurred faster and at higher rates compared to non VCF clients 22 TAGs established, yields were 25% higher than the average due to individual services provided to farmers, Better Cotton Initiative (BCI) agronomic production principles were included in training curriculum About 60% of farmers participating in the VCF scheme delivered their cotton to the off taker compared to only 40% of non VCF participants i t Capacity Building TAGs increased the access of farmers to inputs, Creation of a TAG cooperative (Sarob) and informal cooperatives of machinery (TAMS) based on the French experience F r a n k f u r t S c h o o l. d e 30

31 Thank you for your attention! Christophe Cordonnier Senior Bank Advisor Frankfurt School of Finance & Management F r a n k f u r t S c h o o l. d e 31

32 Coffee Break 15 Minutes

33 Group exercise

34 Please find the full presentation on the EFSE homepage / Events EFSE Annual Meeting EFSE Annual Meeting

35 Thank you! Versorgungsfonds des Versorgungsfonds des Ministeriums der Finanzen Land Brandenburg

36 We kindly invite you for lunch in the restaurant, t please follow the signs