Financial services

 

The Programme Financial Services contains two main elements: supporting (micro)finance sector, and developing financial instruments.

For Microfinance in Africa, ICCO's programme is carried out jointly with Oikocredit and the (Dutch) RABO bank, under the name Terrafina. The annual report 2007 is attached here

 

A current discussion is on Rural Finance, specific rural adaptatioons to the primarily urban based microfinance history, and financial services roles in rural economic development initiatives.

 

See these two powerpoints produced by Terrafina on "Value Chain Finance":

- informing Terrafina policy

- presenting the issue for AgriProFocus

 

Furthermore, the Dutch Network of Developmental NGOs with a Microfinance Programme, MicroNed, did a study on rural finance.

 

Finally, in the past few months a draft report has become available on financial services and ICCO's support, in the context of removing bottlenecks in Value Chains we also support.

 

Below we give you the executive summary, and we provide a link to the full draft here

 

In October 2007, a discussion was held on capacity building for microfinance organisations, based on an evaluation of the capacity building efforts of some ICCO partners in Kyrgizstan.

The evaluation report is attached

 

Since early 2008 a study is being carried out into the area of "Microfinance in Emergency Situations".

The Terms of Reference can be found on the research wiki. On a special page MFinES a number of documents on Microfinance in Emergencies has been deposited

 

One of the issues we focus on in Financial Services is Social Performance Monitoring

 

 

 

 

DESK STUDY ON LINKING RURAL FINANCIAL SERVICES TO PRODUCERS IN THE CONTEXT OF A VALUE CHAIN (DRAFT)

 

 

Executive summary

This desk study looks into the link between value chains and finance, benefitting rural producers. It examines the characteristics of value chain operators, financial services, and financiers. Finance may be provided among value chain operators themselves. Alternatively, it may be provided by external, specialised financiers. The study examines both types of financiers. In lack of a clear and widely accepted definition, finance among value chain operators is described in this study as ‘embedded finance within the value chain’.

 

Information gap

The study found hardly any information on embedded finance within the value chain. Information on the demand for finance among value chain operators, and on the financial sector did not seem to be systematically gathered. It is recommended that ICCO maps the financial landscape surrounding the value chain, including the demand and (embedded) supply of finance. For various reasons, exchange of information between ICCO experts also seems to leave some room for improvement.

 

Donor strategy

When ICCO develops a strategy to link value chains to finance, it is essential to consider how the strategy contributes to sustainability of financial and non-financial services. ICCO may also examine the strategy’s expected impact on the existing supply of finance (as there may be a risk that ICCO’s intervention ‘crowds out’ existing financial services). The timing of linking value chains to finance is important. It is recommended to consider the (future) demand for finance early on, so that linkages can be created in a timely and systematic way.

 

Modalities for linking value chains to finance

The study found three modalities to link value chains to finance:

• Modality A: Finance by value chain operators;  

• Modality B: Finance by specialised financial service providers that evolved out of a value chain actor;

• Modality C: Finance by specialised financial service providers which linked up with value chain a operator.

There is not one-best solution to creating such links. The study found that each of these modalities can be sustainable.  Each modality has its advantages and its challenges. The choice of a modality was in some cases based on lack of alternatives: as there were no appropriate financiers active in the region, some value chain operators (initially) engaged in finance themselves (Modality A). An important advantage of finance by value chain operators (Modality A) and MFIs that evolve out of a value chain operator (Modality B), is that they are familiar with the value chain. This enables them to tailor their services to their clients’ needs. MFIs that evolve from a value chain operator should become autonomous organisations. This usually requires quite some effort to establish their new role and organisational structure. These organisations also need to enlarge their portfolio, for improved sustainability and reduced dependency on the mother organisation. Working with external financiers (Modality B and C) requires good cooperation agreements and risk mitigation measures, as several parties are involved. MFIs that operate under Modality C also need to become familiar with the value chain and the specific characteristics and financial needs of its operators.

 

Sustainability

Sustainability typically requires some degree of cross-subsidization (e.g. between finance in agriculture and trade). Financiers therefore need to diversify their portfolio. Donors should develop an exit strategy, in working towards sustainability. The role of subsidies is also important in this discussion. Working towards a sustainable value chain requires building a commercial attitude. Subsidies are counterproductive in this respect. They also distort the financial sector (e.g. by affecting the repayment mentality). Unfortunately, distortions through subsidies have been repeatedly mentioned in these case studies. Approaches among (donor) agencies vary: some donors try to create a commercial, lending and repayment mentality, others give services and money away for free, or at highly subsidized rates.

 

Supply and demand of finance

Cash flow loans are the most common financial service to value chain operators. They are typically used by operators (marketing companies, cooperative umbrella organisations, processors) for buying produce from their members. These loans are largely provided by external financiers. To a lesser extent, they are provided by large buyers as embedded finance within the value chain. Cash flow loans are also provided to producers, for productive purposes. Loans for inputs to producers are also quite common. In these cases they are mostly prevalent as cash loans, yet there are also a few examples of in-kind loans for inputs. Loans for asset investments are less common. The same holds for savings services. It should be noted, that savings may be more common on the ground, and that information on these services is lacking at the ICCO level. Finally, leasing was only found in one case.

Cash flow loans are not only the most common service. The unmet demand for this service is also  highest. These loans are in demand among marketing organisations, processing and trading companies. They require funds for buying produce and for paying suppliers in cash, upon delivery of goods. There is also some unmet demand for in-kind loans for inputs (among producers groups) and for loans for asset investments (among producers groups and a cooperative union). The study also identified some unmet demand for ‘ flexible’ finance, i.e. a kind of ‘overdraft facility’, to match the use of credit to the actual trade volumes (instead of being tied to a predetermined loan amount and loan period).

 

ICCO instruments

The cases reflect the whole spectrum of ICCO’s instruments for financing MFIs and producers- / trading companies, i.e. seed capital grants, guarantees, subordinated loans and equity investments. However, guarantees and seed capital grants are the most common instruments found in this study.

 

Gender issues

The study found some gender information, yet most of it is related to either the value chain or the financial services. There is no specific information on linking finance to value chains, and the positive or negative impact on the social position of women. The choice of the value chain determines to a large extent a programme’s potential impact on women.  Within an existing value chain, traditional divisions of labour between men and women may not easily be changed. By choosing a value chain which is dominated by women, the programme may be able to work towards achieving better results for women. Some partners underlined the importance of targeted activities to empower women. Finally, the fair trade system also sets out some gender-criteria.

 

 

Side-selling and risk mitigation

Breaches of contract between producers and  value chain operators are quite common. Side-selling was mentioned in several cases as an important issue. Side-selling occurs when a producer, who obtained pre-harvest credit against the security of a delivery agreement to a value chain operator (for example a marketing company),  sells to a another trader who offers a higher price. It enables these producers to default on their loans. In that case, both the marketing activities and the lending scheme of the value chain operator is affected. Cash payments to farmers have been mentioned in the study as a way to reduce side-selling, as it enables chain operators (as part of a wider strategy) to compete with other traders, who also pay in cash upon receipt of produce. Yet it is noted that providing stable markets is key to success, as this will address the underlying problem of side-selling.

 

For a different perspective on rural finance, see (a.o.)

World Bank (2007) Providing Financial Services in Rural Areas, A Fresh Look at Financial Cooperatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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