SMALLHOLDERS FARMERS FINANCING : CHALLENGES & OPPORTUNITIES

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1 SMALLHOLDERS FARMERS FINANCING : CHALLENGES & OPPORTUNITIES Presented By: FINBANK BURUNDI Page 1

2 Outline Burundi Coffee Sector: Key Fact Sheet Coffee Value Chain From the seed to the cup Bank Coffee Value Chain: Current financing structure Coffee Value Chain: Current financing needs Smallholder Financing: Opportunities Smallholder Financing: Challenges Smallholder Financing: Value proposition Recommendations Page 2

3 Burundi Coffee Sector Coffee is one of the most important cash crops in Burundi, providing more than 86% of export earnings, making up 11% of GDP (Gross Domestic Product) and bringing revenue to approximately 590,000 small farmers. The coffee industry is a strategic sector in Burundi; Coffee is one of the key pillars of Burundi s exports and supports approximately 600,000 households, or about 4 million rural Burundians; The coffee production is dominated by smallholder production, which generally occurs on plots of less than 2 hectares and is characterized by low yields, poor linkages and little or no access to finance. Page 3

4 Burundi Coffee Sector Key Factsheet The total coffee production varies between 10,000 and 25,000 MT per annum. This is against a potential production of 35MT per annum. The total land area covered by Coffee plantations is estimated at 45,000 hectares which is roughly 1.6% of Burundi s total land area. The total number of Coffee trees is estimated to be 120 Million trees with an average of 2,666 trees per hectare. All the cultivated area is dominated by individual low yield, resource poor smallholder farmers with an average yield rate ranging from Kg/ Tree, against a global standard average yield of 2.2 kg/tree. Burundi s coffee sector fertilizer annual provision is around 1,000 MT of fertilizer per campaign against a fertilizer requirement of 12,000 MT per campaign. Page 4

5 Burundi Coffee Sector Key Factsheet Cont d Key Conversion Rates: 5/1 from cherries to Green Coffee 78% Conversion from fully washed to Green Coffee 76% from washed parchment to Green Coffee There are around 190 Washing Stations: 98 are owned by farmers cooperatives and private companies. 92 still under state ownership and managed by SOGESTAL. The Government has discontinued fixing producer prices and guaranteeing coffee financing. Although Burundian coffee s global market share is small; below 1%, the quality of coffee is highly rated and highly demanded by Roasters. Page 5

6 Coffee Value Chain From the seed to the cup Producers ACF.; FA; CENAC Murima w Isangi CG) Washing Stations Growers Cooperatives; BUCAFE; WEBCOR Milling Stations SODECO; BUCAFE; BUDECA;COFICO; CBC; WEBCOR; CIVCA INTERCAFE ARFIC Exporters COCOCA ( Confederation of Coffee Cooperatives) ABEC ( Association of Coffee Exporters) Page 6

7 Coffee value chain: Current Financing Structure Supplier credit from coffee farmers to washing stations owners; Social financing and microfinance remain the main source of funding for smallholder producers; Commercial Banks provides targeted financing to coffee exporters but the lower chain is still considered less attractive to commercial banks due to long turnover periods and the inherent high credit risk associated to that segment. Page 7

8 Coffee Value Chain Current Financial needs Financial Needs Producers ACF.; FA; CENAC Murima w Isangi CG Cherry Advance Loans Washing Stations Growers Cooperatives; BUCAFE; WEBCOR Working Capital Asset Finance Milling Stations SODECO; BUCAFE; BUDECA;COFICO; CBC; WEBCOR; CIVCA No financial need at this stage Exporters COCOCA ( Confederation of Coffee Cooperatives) ABEC ( Association of Coffee Exporters) Invoice Discount Facility Page 8

9 Coffee Value Chain : Current Financial Needs Cont d Different Value chain segments require different types of financing: Smallholder farmers require some bridge finance to cover the gap between harvest and payment from Washing Stations owners; Washing Stations are the most in need of external finance as: Working Capital for the purchase of cherries; Asset Finance for the acquisition or upgrade of equipment. Exporters need Invoice Discount Facilities while they wait for payment from offshore buyers; The sub-sector of producers and washing stations is in need of approximately US $ 20 Million to meet its credit demand. Page 9

10 Smallholder Financing : opportunities Smallholder farmers present clear opportunities for lenders, especially those that have constituted into cooperatives and those that own washing stations; Access to finance would result in improved cash flow for financials institutions following the increase in coffee production and quality; Affordability of inputs to enhance the soil productivity resulting in better yields; Improved processing methods through better equipments. Page 10

11 Smallholders Financing: challenges Low repayment capacity due to low and unpredictable production Inadequacy of collateral to funding requirements: The inability to pledge land as collateral due to the lack of registered property rights. Counterparty Risk: Lack of certainty regarding counterparty performance Dispersed and remote location of farmers. Governance issues among associations or cooperatives Long operating cycle: cherry picking starts in March while exportations start in August. Page 11

12 Smallholders Financing: Value Proposition Sub-Sector Facility Type Recommended Intervention Security/Collateral Farmers BridgeFinance/Term Loan Develop partnerships with social lenders and Microfinance. Facilitate the outreach of MFI and financial cooperatives to enlarge their area of coverage Land Produce Washing Stations Working Capital for the purchase of cherries Asset Finance Commercial Banks to provide finance Buyer Credit Pledge of Assets Inventory Finance Warehouse Receipt System ( WRS) Milling Stations No financial needs Exporters Invoice Discount Facility Commercial Banks Property Mortgage Lien on Stock The provision of lending through the COCOCA (Consortium of Coffee Growers Coperatives) seems the less riskier for Lenders Page 12

13 Recommendations Smallholder farmers to continue to constitute themselves into cooperatives in order to secure funding; The Government to encourage the registration of property rights so that land can be pledged as security for borrowings. Insurance Companies to develop crop insurance products, which should be an additional security for smallholders borrowings. The Government to promote the development of Cooperative Finances; Provision of lending by Financial Institutions under the following securities: Inventory under collateral management agreement; Warehouse Receipt Systems. The Government to regulate Warehouse Receipt Agency, that can be custodians of collateralized stocks; Page 13

14 Thank You Page 14

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