Embed Size (px)
Citation preview
Partnerships to unlock growth in smallholder financeThe MasterCard Foundation Rural and Agricultural Finance Learning Lab
6 Mar 2017 Dakar, Senegal
Introduction to the Rural and Agricultural Finance Learning Lab
• The MasterCard Foundation engaged GDI and Dalberg to design and manage the Rural and Agricultural Finance Learning Lab from 2015 to 2021
• The Lab fosters knowledge creation and sharing that leads to better financial solutions provided to more smallholder farmers
• We provide guidance, conduct research, share knowledge, and connect partners
• Key research themes include smallholder finance business models, ecosystems, and impact.
• Supports innovative ideas, organizations, and initiatives that can create large-scale change
• Launched the Initiative for Smallholder Finance
• A strategy advisory firm dedicated to global development and innovation
• Expertise in access to finance and agricultural development, and ICT4D
We want to talk about doubling growth in the smallholder finance sector
• Inflection Point sizes the smallholder finance market, reframes the sector, recommends a systems approach, and issues a call to action
• Better together explores “last mile business partnerships” as a potential key to unlocking growth and reaching new markets
But first…
Name: Organization:
MotivationMotivationWhy is your organization interested in serving smallholders?Pourquoi votre organisation est interess de servir les petits producteurs?
Secret weapon(s) Armes SecretesWhat strengths do you have in serving smallholders that are attractive to other organizations?Quelles forces avez-vous en supportant les petits producteurs qui sont attractifs aux autres organisations?
Achilles heel(s)Talon d’AchillesWhat are your limitations – where might you need a partner in order to succeed?Quelles sont vos limites - Ou avez vous besoins de partenaires pour avoir du succes?
Exercise: Partnering to serve smallholders
Inflection Point: Unlocking growth in the era of smallholder finance
Financial needs and disbursements(USD Bn)1
61.0000000000069
0
16%
2%12%
23%
98%
57%
31.0000000000035
2%
ST agri needs2
~3 ~4 ~1
Non-agri needs
100%
LT agri needs3
12%5%
1% 8%
83%99%
61%
31.0000000000035
~8 ~3
Non-agri needs
1%
ST agri needs2
~8
LT agri needs3
Financial needs and disbursements(USD Bn)1
~2 million ~16 million ~30 million
Financial needs and disbursements(USD Bn)1
Current financing for smallholders in Africa meets 20% ($7B) of the $33B need across 50M farms
Value chain actors
Non-agri needs
~3
1%
~3
99%
ST agri needs2
31%
69%
Commercial smallholder famers in tight value chains
Commercial smallholder farmers in loose value chains
#farmers
Formal financial
institutions Informal / community
-based financial
institutions
Noncommercial smallholder farmers
1. Excludes Middle East and North Africa. Includes financing to producer groups by state banks and commercial banks; 2. ST agri needs refers to short term financing needs of less than a year (typically for inputs, harvest and export); 3. LT agri needs refers to long term financing needs of more than one year (typically for renovation or equipment). Notes: Commercial banks and social lenders disbursements counted toward smallholders in tight value chains; state bank financing distribution in proportion to farmer segment needs; MFI agri lending included in loose value chains; MFI non-agri lending distributed in proportion to farmer segment need; High touch NGOs included under subsistence. Informal / community-based allocated in proportion to non-agri needs.
Farmers also need insurance, savings and payments solutions
1. Weighted averages based on countries with large scale microinsurance schemes, so numbers represent an upper bound.Source: Findex World Bank Database; The Financial Inclusion Insights Program, “Financial inclusion insights tracker surveys,” Intermedia, 2014/15; Expert interviews.
8999
12
98
0
20
40
60
80
100
2
Sub-Saharan Africa
100
South Asia
100
Latin America
100
1
Mobile money penetration(% of rural adults, 2014)
87 89 88
1211130
20
40
60
80
100 100
Sub-Saharan Africa
Latin America
100
South Asia
100
Formal savings account penetration(% of rural adults, 2014)
9480
200
20
40
60
80
100
6
100
Sub-Saharan Africa
100
South and
Southeast Asia
Agri insurance penetration1
(% of smallholders, 2015)
In Africa $3B in lending comes from value chain actors versus $2B from formal financial institutions
1. Excludes China, Central Asia, Middle East and North Africa, and Eastern Europe. Includes financing to producer groups by state banks and commercial banks. Includes agri and non-agri lending. Source: ISF Briefing 1, “Local bank financing for smallholder farmers,” Oct. 2013; Rural and Agricultural Finance Learning Lab Smallholder Financial Solutions Database; annual reports; expert interviews; Dalberg analysis.
Smallholder lending in South and Southeast Asia, Sub-Saharan Africa and LATAM by source(Annual disbursements $USD Bn)1
56
0
10
20
30
40
50
60
Total lending Lending by informal /
community based financial institutions
25
Lending by value chain actors
17
Lending by formal financial institutions
14
**See report for full breakdown of lending
Asia
SSALatAm
SSA($bn) ~2 ~3 ~2 ~7
South and Southeast Asia
Sub-Saharan Africa
Latin America
Formal lending growth rate of 7%, while encouraging, needs to double (14%) to meet half the need by 2025
1. Excludes China, Central Asia, Middle East and North Africa, and Eastern Europe. 2.CAGR assumptions: state bank market participant projections of ~8.5%, value chain actors in line crop production projections: 3.1% export crops, 2.3% non-export crops; MFIs market participant projections of ~13.90%; commercial banks in line with projected growth of retail banking: ~15% in Sub-Saharan Africa, ~14% in South and Southeast Asia, ~13% in Latin America; social lenders market participant projections of ~15%; high touch NGOs in line with 2010-2015 growth of ~30-35%. Sources: expert interviews; FAO crop production projections; World Bank, McKinsey and BMI retail banking projections, annual reports
Commercial banks
~1
Social lenders
~0.4
High touch NGOs
~0.1
Value chain actors
2.5
MFIs
~43
Total smallholder
need for finance
~210
Demand not met by
FIs and VCAs
~167
Lending by formal FIs and VCAs
2020E
~3~5
Lending by formal FIs and VCAs
today
~31
State banks
CAGR ~7%2
Estimated portfolio growth 2015-2020
Growth projections for smallholder lending by source 2015-2020 (Annual disbursements, USD billion)1
Demand partially served through informal and community-based financial institutions
White spaces in agri-insurance, mobile payments, market access for loose value chains, non-commercial farmers
FINANCIAL SERVICE PROVIDERS (Incl. VCAs)
SMALLHOLDER FARMERS
CAPITAL PROVIDERS / FUNDERS
MARKET ACTORSThree key groups of market
participants
STATUS QUOThree key barriers currently
limit sector growth
ENVISIONED FUTURE STATEThree key areas of activity
unlock progress
Limited and mismatched capital availability
Low business model sustainability
Shortfall of demand relative to need
Market cannot clear
Market cannot clear
Smart subsidy unlocks new and better-matched sources
of capital
Progressive partnerships increase risk-adjusted
business model returns
Customer centric product design drives demand and
usage
System effects: improvements at one level of the industry have a positive effect on other levels
Market clears
Market clears
To unlock this growth, we need concerted action that addresses barriers across all levels of the industry
See report for full breakdown of current state of the industry and major barriers
The three action areas are supported by key enablers
PROGRESSIVE PARTNERSHIPSCUSTOMER CENTRICITY SMART SUBSIDY
TECHNOLOGY
TRANSPARENCY
Enab
lers
• Improved information gathering and sharing
• Continued digitization of data collection and service provision
• Reform of policies that affect smallholder finance provisionPOLICY
1 2 3
Sub-Saharan Africa is particularly well positioned to unlock growth (1/2)
Hungry financial
institutions
Extensive penetration and use of
mobile phones &
money
• Strong interest from financial institutions to penetrate smallholder finance market (Africa accounts for >50% of total bank lending measured)
• Willingness to partner with value chain actors and informal financial institutions (which currently provide 80% of finance)
• Use of digital technology is a game in changer in providing financial services that are competitive in its cost, ease of access and reliability
• Leading countries well positioned for all digital tools (mobile deposit, disbursement & payment; credit profiling and mobile-enabled agent banking)
• Less mature or nascent mobile ecosystems must overcome challenges but indicate huge potential given high penetration of SIM cards (e.g. +80% in Nigeria, ~90% in Ghana)
• Brokering of relationships between suitable partners
• High partnership set-up costs
• Developing the right systems and tools
• Increasing financial and technological literacy, particularly to up/cross sell higher value added financial services
Key strengths Key challenges
Sub-Saharan Africa is particularly well positioned to unlock growth (2/2)
Improving ecosystem
• Renewed focus by government on agriculture and commercialization of smallholder farmers increases availability of externally-subsidized enablers (e.g. provision of high quality inputs by governments, public extension services or farmer aggregation)
• Increased investment in regional trade corridors to foster markets integration and increase demand for local produce/ financial services, while decreasing farmer vulnerability and risk
• Alignment between investment & greatest need segment
• Subject to political agendas
• Mid-long term time span
Key strengths Key challenges
Increased interest
from capital providers in
blended finance
• High concentration of actors experimenting with blended finance approaches (e.g. AATIF impact investment, FRP matching grants, guarantees from Rabobank Fdn, MCE Social Capital, or Root Capital direct blended investments.)
• Potential to catalyze additional capital through demonstration effects and opportunities to replicate success stories (including public leveraging 1-5x private capital)
• Transparency on subsidy effectiveness
• Design and structure of blended instruments suited to smallholder finance
Progressive partnerships for smallholder finance
Change in cost bearing responsibility
NGO / Public agency
Farmer aggregation
Technical assistance
Loan origination and collection
R&D and other back office
Market access
Cost of capital
Value chain actor Financial institution
Farm
er su
ppor
tFi
nanc
ing
Financing moves off value chain actor balance sheet
Leverages existing value chain actor-farmer interactions
NGO/ public agency supports financial institutions and agri-product development and system building
Guaranteed through buyer participation
Buyer has incentive to train farmers to increase production quality and volume
Close relationship also lowers risk for the fin. institution
ILLUSTRATIVE
NGO / public agency supports value chain actor with farmer aggregation
In Inflection Point, we called for “progressive partnerships” that share cost and risk to achieve financial sustainability
Now we are studying last mile partnerships forged by agribusiness (value chain actor) or ag-focused technology players – 4 FRP winners – with financial institutions; initial insights on motivation and process
Motivation: why would last mile firms seek to partner with FIs?
Top line (revenue) motivations• Improved farmer productivity (especially for off-takers)• Increased sales volumes over existing infrastructure (for input
providers/tech platforms)• Opportunities for rollout of new financial products• Increased farmer loyalty because of expanded offering
Reducing costs and risks• Reduced balance sheet pressure (for VCAs already lending)• Reduced administration costs (for lenders)• Lower transaction costs• Piggy-back on technology investment
What is the value proposition for financial institutions? A framework for how last mile partners reduce cost/risk
Product development includes advising FIs on (i) how and when a product should be delivered, (ii) what products are needed and (iii) developing products, including provision of technical expertise Source: Stakeholder interviews, Dalberg analysis
Last mile firms offer…Customer
acquisitionProduct
distribution / collection
Product development*
Credit risk management
Farmer aggregationGroup farmers together to ease promotion/delivery of services
Access to market/off-takingProvide a guaranteed market, ensuring farmers have income
Technical assistance Provide training e.g. agronomic practices, financial literacy etc.
Interface with farmersAct as “feet on the ground” and handle farmer interactions
Know-Your-Customer (Data)Collect farmer data, e.g. income, farm size, expenditure
Areas of FI cost reduction Areas of FI risk reduction
Key: Does not contribute Somewhat contributes Strongly contributes
Biopartenaire provides bundled productivity solution motivated by cocoa supply; wants to outsource lending
Model and motivation: • Provide extension and inputs
(facilitated by credit) cost-neutrally to increase farmer productivity to secure quality cocoa supply
• Move direct farmer lending (and related risks) from balance sheet, leverage Advans’ branchless banking system to reach farmers
Potential success factors:• Work with MFI given motivation and
reach, high-level strategic buy-in• Flexible MOU for experimentation, start
w/savings product• Support of IFC risk-sharing agreement
for current lending
Biopartenaire current partnership model for saving product
Savings
Advans provides farmers with a savings product and a mobile channel for deposits
Farmer groups - each farmer group has a village coordinator who acts as a distribution point for inputs
Biopartenaire provides Advans with a customer base for their savings product
Biopartenaire sustainability department
Biopartenaire provides credit,using the savings as collateral
Source: Biopartenaire documentation, field visit with Biopartenaire team, interviews with current and potential Biopartenaire partners, Dalberg analysis
Kifiya has built an agent and payments infrastructure and wants to increase transaction volumes and product sales
*As noted earlier, Kifiya is foremost a technology platform provider. They are currently developing agriculture focused products and partnerships in order to increase the volume of transactions through their platform
Kifiya partnership model
Farmers
Kifiya platform
Multi-purpose cooperatives (contains Kifiya agent)
Provide extension support, inputs, finance products etc.
One-stop-shop for MPC to facilitate transactions
Insurance Lending(7 MFIs)
Transit companies
Utility companies
Model and motivation: • Wants partners to deliver financial
services at scale by leveraging its DFS infrastructure (fees and commissions)
• Looking for insurance companies to underwrite risk and scale up the micro-insurance product they developed for farmers
Potential success factors:• FI partners motivated by customer
acquisition and government incentives• Best-in-class micro-insurance product
design (100x more precise satellite data, 60% cost savings in delivery)
Prep-eez has found strong interest but its pioneering model and data goals require FIs to think outside the box
Opportunity and motivation: • Wealth of farmer data (KYC, etc.) offered to
multiple FIs for developing new products, and platform for delivering them
• Position as input seller/off-taker aligns Prep-eez with goal of increasing farmer purchasing power and productivity
Challenges:• FIs motivated by market share, but need
internal approvals across departments, some more risk-averse than others
• FIs have never worked with this kind of alternative data before so lack certainty on product design and business model
• High interest rate environment dampens farmer demand for credit
Envisioned partnership model
Other Prepeez BUs
Prepeez platform
Insurance
(under negotiation)
Credit and saving
(under negotiation)
Farmers
Farm and farmer data
Extension support
Purchase produce
Access farmer profiles
Access farmer profiles
Provide inputs
Source: Dalberg analysis and interviews
Examples of partnership and opportunities in Senegal include private and public sector
Future potentialCNCAS extensive branch and agency infrastructure a potential foundation for additional financial services in cooperation with private sector partners?
Manobi’s technology platform provides farmer data, training and marketing, all of which are potentially useful for financial institutions
Rice value chain partnershipVital partnered with CNCAS to take on farmer input loans and increase total lending (This contract farming + warehouse receiptingm model also enabled lending from BNDE and PAMECAS)
Takeaways for more successful partnerships
• Find partners who are strongly motivated to serve smallholders
• Last mile partners need to learn ”bank speak” and make the business case
• Transparency about interests and objectives – small zone of possible agreement
• Structured communications, but flexible agreements – give room to experiment
• Facilitators can help – short-term guarantees, technical assistance, technology platforms
Preview of the afternoon
We believe action is needed in three core areas, supported by key enablers
PROGRESSIVE PARTNERSHIPSCUSTOMER CENTRICITY SMART SUBSIDY
TECHNOLOGY
TRANSPARENCY
Enab
lers
• Improved information gathering and sharing
• Continued digitization of data collection and service provision
• Reform of policies that affect smallholder finance provisionPOLICY
1 2 3
This afternoon we’ll look at the role of agribusiness partners and digitalization as a potential game changer
PROGRESSIVE PARTNERSHIPS
14:30 Agribusiness as channel for markets and
finance, and partner to FIs
TECHNOLOGY
Enab
lers
16:15 How can digital tools enable smallholder finance? Learning Lab, KCB, Mercy Corps, OI
AgDevCo, ECA,GADC, Learning Lab
Q&A
Backup
Nine existing and emerging models meet different farmer finance needs
1. Significant portion used for agriculture purposes even if not specifically targeted or customized to meet agricultural needs; 2. Have more recently started offering some long-term financing; 3. Not shown: national safety nets, e.g., food reserves, national health insurance, etc. 4. Refers to bank and non-bank microfinance institutions; 5. Some buyers have more recently started offering some long-term finance to increase farmer mechanization. 5. Includes input suppliers, buyers and outgrower schemes, farmer orgs and warehouses.
4.Trade finance loans for producer groups by social lenders2
2bShort-term loans, saving accounts and microinsurance by MFIs
5.Short-term loans and saving accounts by informal nstitutions1
3. Working capital loans directly by state banks
1. (In-kind) inputs on credit directly by value chain actors5
2a Working capital loans directly by MFIs4
6.Working capital loans by comm.banks via value chain actors5
8. Agri-insurance
9. Mobile-based payments and other financial solutions
7. Input loans by high touch NGOs (often bundled w/other services)
Purchasing inputs, labor
PurchasingAssets,
upgradingInfra-
structure, crops
Accessingmarkets
Mitigating agri-
culturalrisk
Smooth-ing
expend-itures & buildingassets
Makingpayments
Mitigatinggeneral
“life”risk3
Smallholder segments
1
2a
3
4
5
2b
Non-commercial smallholders
Commercialsmallholders in tight value chains
Commercialsmallholders in loose value chains
6
7
8
9
Smallholder finance models based on smallholder segments and needs
Established models Emerging models (Not comprehensive)
Model
ECA Mozambique faces an uphill climb thanks to social and political unrest, and an underdeveloped mobile ecosystem
*CDM is a subsidiary of SABMillerSource: ECA documentation, interviews with current ECA partners, Dalberg analysis
ECA
Initially envisioned partnership model
Loan facility Mobile payments
Farmers
ECA deducts input loan payments after harvest, and pays farmers (currently pay cash but working towards mobile payments)
Annual loan to ECA
ECA
ECA buys and distributes inputs
to farmers
Off-taker purchases
(under negotiation)
Payments solution for ECA farmers
Purchase maize from ECA
Opportunity and motivation: • Outgrower scheme with close relationships with
smallholders cultivated over time, and links to large buyer demand
• Mobile payments can increase efficiency of operations and reduce cash risks
Challenges:• Underdeveloped mobile money ecosystem (liquidity
challenges for agents) and connectivity issues• Banking sector generally not interested in
smallholder market• Social and political unrest threatening off-taker
agreements and general operations
