Financing coffee farmers

in Ethiopia: challenges and opportunities

Bastin, A. - Matteucci, N.

Lux Development (Luxembourg) –

Marche Polytechnic University (Italy)

FAO Conference on Rural Finance Research

19-21 March 2007

Overview on Ethiopia

• Ethiopia: one of the poorest countries: ranks 170 out of 177, UN-HDR (2006)

• Recent GDP & GDP/N recovery (mid-90’)

• Volatile & unbalanced export

• Coffee on total export: from 63% (1995) to 37% (2004), mainly due to price shocks since 1999

• Coffee crisis: huge impact on a small-scale agriculture; low access to rural communities

•Many farmers, traders, cooperatives bankrupted

•The pervasive (nation-wide) impact of the crisis

.

Big agricultural potential in a poverty trap

• Agricultural potential; 84% of population is rural • Lack of infrastructure: transport, TLC, health, etc.• Natural calamities (drought) in some areas,

recent conflicts• Poor agricultural practices and lack of surplus,

difficult to mobilize• High quality, organic coffee VS poor value chain• No traditional finance for the poor• Which role for a “sustainable” Microfinance ?

(Morduch,1999)• Which credit, saving and risk management

instruments ? (Dercon, 2002)

.

A survey to fill the informative gap

• No detailed evidence on financial services for Ethiopian coffee farmers

• Only 1 million the outreach of MFI (end of 2004), out of 70 mill. - 84% rural

• Our survey on Jimma Zone, coffee-oriented (Oromia, largest Regional State); Summer 2005

• Interview of 120 coffee farmers(random sampling)• Complemented by focus group discussions• Further interviews with financial providers, etc.

Jimma Zone in Ethiopia

Background Statistics

Mean Std. Dev. Median Min. Max.

Age (years) 46 10.7 45 25 73

Family Size (n.) 7.2 2.8 7 2 14

Working people (n.)

5.4 2.3 5 0 14

House - road distance (Km.)

2 2.3 1 0 12

House - market distance (Km.)

4.7 4 5 0 15

Land size (Ha) 1.2 0.8 1 0.56 5.5

Coffee size (Ha) 0.6 0.5 0.5 0.07 3.2

First activity income (%)

70.7 13.8 70 40 100

1) Coffee price volatility: 85%2) Coffee Disease: 55%3) Lack of access to loans: 47%

Risk Management instruments:1) Activity diversification (other crop, animal

fattening): 45% 2) Coffee differentiation (organic) : 42%………5) Commercial credit: 14%

Risk management VS risk coping strategy, cf. Dercon, 2002

Main risks perceived

Access to FS (loans) (64% of sample)

Source of loan:

Frequ. (%)

Mean

(Birr) - [$]

Coeff.

Variat.

(%)

Min.

Amount

(Birr)

Max.

Amount

(Birr)

Friends 16.2 294 [34] 116 60 1,250

Traders 8.8 145 [17] 71 60 300

Money lenders

8.8 193 [22] 69 60 400

Cooperativ. 32.3 115 [13] 30 42 200

MFIMFI 33.833.8 905 [105]905 [105] 2727 445445 1,5001,500

Total 100 330 [38] 52 133 730

Duration and cost of loans by source

SourceDuration (months)

Min - Max

Annual interest rate (%)

Min - Max

Friends 2 12 0 120

Traders 5 8 200 660

Money lenders

5 7 120 171

Cooperat. 3 6 0 0

MFIMFI 66 1212 11.511.5 11.511.5

1) Consumption (food, clothing, education, house

construction): 53%2) Other productions (trading, animal fattening,

other crops) 32%3) Coffee Inputs: 14%

Remember: MFI loans in the sample are only for production

Use of Loans

1) Inappropriate terms (grace period, duration, etc.): 37%

2) No problem: 29%

3) Small amount: 20%

4) High interest rate: 14%

Main problem with loans

FS demand and financial GAP

Mean

(Birr)

Mean

($)

Min Max Coeff. Var.

(%)

DEMAND(Birr)

2,458 284 100 20,000 155

GAP(Birr)

2,105 243 0 20,000 185

GAP %(unweighted

average)

86

(58)

- 0 100 -

• Saving products: 64 %• Loans: 25 %• Saving and loans: 10 %

• However, SP mostly unavailable in rural areas (saving “in kind”)

• SP as a partial substitute for risk management products (insurance) (F)

• SP could extend the outreach of MFI (I)

Most useful (potential) FS product

Conclusions

• Huge loan gap. Moreover, 1/3 credit is informal: costly and subsistence-oriented

• MFIs: 1° provider (1/3 sample). It offers the best conditions. Limited outreach.

• MFI loans as enablers of risk management strategies !!!

• Further evidence needed on “financial” cooperatives

• Clear demand for saving products

• Product Innovations from MFI required:

1) Better tailored production loans (possibly also consumption loans)

2) Saving products for rural communities

3) Increase the outreach of MFI • Training in finance for operators in rural

communities (also for cooperatives)• Rural Banks?

Policy recommendations