Financement de la chaîne de valeur et gestion des risques

Forum Regional sur le Manioc en Afrique CentraleYaoundé, 6-9 décembre 2016

Lamon Rutten

Situation  % of firms

identifying access to

finance as a major

constraint

% of firms with a bank loan/line of

credit

Proportion of loans

requiring collateral

Value of collateral

needed (% of loan amount)

% of firms using bank

loans to finance investments

Sub-Saharan Africa

42 24 79 171 18

Cameroon 55 30 83 213 31CAR 46 26 84 233 25Chad 47 21 75 136 4Congo DR 39 9 72 152 7Rep. Congo 45 13 68 47 8Gabon 30 9 53 N.A. 6Source: IFC, Access to Finance, 2014

SME access to bank finance

On the other hand, agricultural finance in 2015 accounted for 14.9% of total bank credits, as compared to 7.6% in 2011.

Capital market

Banks

Farmers Processors Traders Service providers

Need to place money at a reasonable rateGovern-

ment borrowingBench-

mark

Need investment and working capital at a rate that permits them to improve revenues/profits

Risks; tenor mismatches

Why doesn’t money flow to

agriculture?

Forms of agricultural finance

Traditional finance:

Loans based on client risk assessment

Micro-finance:

Loans based on social links

Value chain finance:

Loans based on economic links

Secured finance

Unsecured finance

Structured finance

Long-term

finance

Medium-term

finance

Shortterm

finance

Bank

Client

Unsecured finance

1. Due diligence,

2. Loan Hope you get your money back

If the client does not reimburse, then the bank can start recovery procedures. In case of bankruptcy of the client, the bank is just one of the creditors, without any preferential access to the client’s assets.

Loan can have conditions, eg., maintenance of profit ratios, no secured loans from others

Who can get unsecured finance?

• People/companies with a good track record

• Those with good and stable revenues

• Those with good connections (high-risk for bank…)

• Those able to borrow if an organization is forced to lend under a political mandate

• Those with good business plans and good stories• Venture capital finance (eg., MITFUND)• Crowdfunding on the internet (if you can combine

economic and social/environmental impact)

Small farmers are therefore not good candidates for unsecured finance…

Efforts to give them such finance have in the past only led to large losses for the government and a lot of corruption.

But at the same time, small farmers generally do not have the security that banks need. Banks also know that farmers who operate on a subsistence basis have a lot of financial pressures… and in practice, seizing collateral in case of late payment often does not make any sense.

The best possibilities is to engage in finance schemes that raise farmers’ profitability and revenues, and reduce their risks (with insurance and contracts with buyers). That’s value chain finance, linking smallholders to large buyers.

Bank

Client

Secured finance

Loan GroupEquip-ment

Guaran-tor

Real estate Pay-

ment

If all goes well…

Bank retains ownership

Member-ship

Client meets criteria

Partial repay-ment

Full repay-ment

Registra-tion of collateral

User rightsOwner

Equipment finance (leasing)

Possible for both new and second-hand items. For new items, the financier is directly invoiced by the vendor, and resells with deferred payment terms to the client.

Operating versus financial lease

Normally, upfront deposit required (say 10-20%; can be more for equipment with very limited secondhand market; period normally from 1 to 5 years). Payments can be structured to reflect buyer’s expected cashflow (eg. growth, seasonality).

The only security is on the equipment that is financed. In case of loan default, the financier takes the equipment back, without any need to have recourse to a court first.

It is essential that the financier can have a clear title, which means that he has to be able to register the security.

The collateral that banks habitually accept as collateral leaves much potential collateral unutilized. The general situation in developing countries with respect to SME lending:

Source: IFC, Access to finance, 2014

One consequence: long-term assets used for working capital finance

Long-term assets (land, real estate)

Long-term investment finance

Equipment, machinery

Medium-term (5-7 years) finance, leasing

Crops, stocks, receivables

Revolving working capital finance

How it should be:

Equip-ment

Recei-vables

Bank

Client

To properly use movable collateral one needs a proper legal framework, and it is very useful to have a web-based centralized electronic collateral registry. This permits financiers to ensure they have first claim on collateral. A World Bank project to create such a registry started in Cameroon in April 2016.

Collateral registry

Goods in warehouse

A few words on microfinance

Microfinance can be unsecured, secured (by group guarantees) or structured (value chain finance). Using joint liability groups a the main lending instrument has been the most common among MFIs.

While this is suitable for the typical microfinance one finds in cities and small towns, it is not suited for agriculture:

- With its stress on regular group meetings and regular repayments of small amounts, it has high operating cost. This leads to interest rates that are too high for agriculture.

- Agriculture needs a fairly big loan at the start, then many months of nothing, then, after harvest, reimbursement…

- Group lending may reduce credit risk, but it does nothing to reduce performance risk (ie., to improve the profitability/revenues of farmers)

In India, one of the largest rural MFIs is BASIX. It’s active in 25,000 villages, and has lent to more than a million people. It had started in 1996, and in 2001, it was widely seen as a very successful MFI. But then, its management did an evaluation of its operations…

Findings: It wasn’t that successful at all. About 52% of its clients showed increased incomes, but 23% showed income declines. Reasons:

1. unmanaged risk;2. low productivity; and3. unfavorable terms in input and output market transactions.

BASIX decided to turn from joint liability groups (secured finance) to structured finance, in which it directly addressed all three problems.

Risk management: among others:- Insurance (life, sickness, even weather insurance)- Active risk mitigation: if you borrow from BASIX to buy a

milk cow, BASIX will help you chose the cow, and veterinarian services are included in the package.

Productivity improvement: BASIX set up its own extension agency, training some 1,000 people to provide extension services: soil-testing, integrated pest management, field surveillance, linking farmers with the proper input markets, health checkups of animals, livestock vaccination, training on use of feed and fodder and better dairying practices. Farmers pay an annual fee of around US$ 10.

Improving bargaining power in input and output markets:

BASIX started promoting contract farming schemes. Not all worked – mostly because of problems with the buyers (who were not sufficiently organized). But many did, eg., in potatoes, cotton, dairy. Eg in dairy, BASIX worked on the whole value chain, enabling farmers to invest in the first part of the chain (reception points with cooling centers).

In cotton:

Bank

Client

Value chain finance

Input provider Offtaker

Payment Repayment

Inputs Produce

Pre-harvest Post-harvestSeedlings, fencing

Producer Processor

End-buyer

Warehouse

Supplier of improved varieties

Goods can be owned by producer,

processor or end-buyer…

Warehouse receipt finance

Payment of supplier,

reimbursed once

processor pays

Factoring

Factoring

Working capital finance, based on total of inventories (under collateral management) and

receivables

Value chain finance can cover all or parts of the value chain.

Value chain finance is revolving finance that scales itself automatically to the (seasonal) needs of the business (as long as certain covenants are met)

(because the credit line is linked to the movable assets in the client’s business operations).

If goods become more expensive, automatically, the credit line increases.

(But the bank will consider price risk, so in the absence of a commodity exchange, the value of crops will remain much discounted).

(CTA recently finished a report on the potential for a regional commodity exchange in Central Africa, concluding it is feasible as long as government are willing to set up a proper licensing regime and then get out of the way)

Value chain finance tackles directly the main constraints that hinder finance from flowing to agriculture:

Risks; tenor mismatches

Need investment and working capital at a rate that permits them to improve revenues/profits

Bank

Agricultural sector

Collaboration with value chain partners makes it possible to improve productivity and revenues

Reduced risks, permitting

lower interest rates and

higher loans

Why reduced risk?

Because the bank replaces

Credit risk

by

Performance risk.

Unwillingness to pay

Inability to pay

If the financing is structured properly, as long as the client performs normally in the value chain (i.e., the goods arrive with the intended buyer), the bank will get its money back.

Value chain finance starts on the demand side. The starting point cannot be: farmers produce X, they have to find a buyer.

Difference between a subsistence farmer and a commercial farmer: the first tries to sell what he produces, the second tries to produce what he can sell.

Ideally, buyers tap into an already known market. Eg., to supply cassava flour to bakeries.

Successful schemes have relied on the private sector, with governments in a supportive role and occasionally as a catalyst; and often, donor agencies’ involvement, to provide technical assistance to farmers so that they can raise their productivity and revenues.

Technical assistance can also cover the capacity-building needs of offtakers and banks.

Bank

Client

Using the value chain for financing

Input provider Offtaker

Payment Repayment

Inputs Produce

Ware house

Confirmed invoice

FactoringWarehouse

receipt finance

Deposit

Invoice discounting/factoring

A small seller delivers to a larger buyer, who is well-known to the banks.

The buyer only will pay in 60 days, but confirms that the goods have been delivered. I.e., the seller has a receivable.

The seller can now discount his receivable(s) with a bank or a specialized financing company. He gets finance at an interest rate that corresponds to the risk of his buyer.

In practice, factoring schemes nowadays normally work on electronic software, in which invoices are created and confirmed.

Financiers have to understand well how exactly to manage this product, otherwise there are large fraud risks.

Accounts ReceivableFinancing

Legal Capacity to

SecureAccounts

Receivable

Credit Framework to

ManageAccounts receivable

loans

Good documentation with capacity to

collectAccounts receivable

Cameroon adopted the legal framework in 2014

Have banks already set up the necessary internal procedures? Do they have competition from non-bank financing houses?

Is there already a good electronic invoicing platform used widely by Cameroonian SMEs?

For factoring to take off, certain conditions need to be met.

How do you open a factoring account with a financier?

First, you provide information: • Financial Statements (multiple periods)• Accounts Receivable summary ledger, with listing of

creditors (buyers)• Inventory summary schedule

Then, the bank will go through the following process:• Analyse accounts• Calculate average accounts due• Calculate average inventory on hand• Evaluate pool of buyers, and load their details• Determine acceptable lending level• Set loan covenants• Set up reporting criteria to monitor (easiest in case of an

electronic invoicing system).• Give clients an internet account.

A common form of factoring is Invoice Discounting. Characteristics:

Assignment of all receivablesNon-disclosed or disclosedClient does own collectionBuyers proceeds banked direct to bank/lender’s account Reconcile account balances at each drawdown and periodicallyOngoing reviews/field auditsRecourse to client in case of borrower default.

Financing is for 60-90% of the invoice value. The client needs to have good accounting systems, and a well-diversified client base.

What’s the operational process?• Invoice batch sent weekly by client to bank• Reports listing what the client processed that week• All debtor payments must come to the client’s account at the

factoring bank• Client can view the bank account through the internet• Concentration issues are checked (i.e., overly important clients)• Debtor ageing is reviewed (are clients paying late?)• Calculate the “Available Funds” based on approved balance of

accounts due (at chosen funding ratio).• Client can execute drawdowns any day• Buyers (creditors) reviewed monthly to check ageing and for

signs of problem)• Bi-monthly reviews performed at the client’s premises. The

reviews will focus on the client’s internal processes.

If the client’s processes are weak, then the bank is likely to insist on non-recourse (or full-service) factoring. This is somewhat more expensive, but the bank will take care of the full process of debt recovery from buyers, and will take all the risks related to late payment or non-payment by buyers.

In practice, this is the most suitable form of factoring for most SMEs.

Invoices are still issued by the client, and have to be issued properly (this will be checked from time to time by the bank). All receivables are assigned to the bank, and the bank directly interacts with the buyers.

Financing is 50-90% of the invoice value. Cash received is often retained for a number of days.

Banks can also do single-invoice discounting.

Warehouse receipt finance is a game-changer for agriculture

France: overcoming mid-19th century social tensions (revolution!) coming from the gap between fast urban growth and lagging agriculture

US agriculture: enabling the development of late 19th/early 20th century agri-processing industry

Globally: leveling the playing field by creating a farmer- and SME-friendly financing instrument

… and a robust instrument, that can be used in very difficult environments (in Africa, warehouse receipt finance has even worked while civil wars were going on).

The concept: turn agri-commodities into gold

Vault

Bank

Borrower

Deposit gold in bank vault … and get

an ‘easy’ loan

Implies that the banks knows it’s gold

So why not extend this mechanism to (processed) cassava and other commodities…

“Vault”

Bank

Borrower

Deposit cassava in bank “vault”…

… and get an ‘easy’ loan

The bank needs to know the commodity’s value

What’s a good bank “vault” for agri-commodities?

“Vault”

Bank

Borrower

Critical issue: the relationship between the bank and its “commodity vault”

How can a bank effectively extend its “vault” to include warehouses suitable for storing agri-commodities?

Affordable Safe

Post-harvest finance (crops in warehouse)

In bank’s own

warehouse

In independent warehouse (“public

warehouse”)

In borrower’s warehouse,

managed by:

Independent collateral manager (“field warehouse”

or “collateral management”)

Borrowing corporate(“private

warehouse”)

Farmers (warrantage)

Different possible relationships between the bank and its “vault”…

One possibility is for the bank to create a warehousing subsidiary, which sets up its own warehousing network. This has been done in Latin America and Turkey. But is this really part of a bank’s core business? Moreover, does it make sense for a warehousing network just to serve the needs of one single bank?

Ware-house(s)

Bank

Borrower

Warehousing subsidiary

1. Deposit commodities in the warehouse…

2… and get an ‘easy’ loan

Another option is to use the borrower’s own warehouse. But for this warehouse to give (almost) as much security as a bank’s own vault, the bank needs to take over its control. It does so using the services of an independent, financially sound collateral manager (CM) which will act as its agent in controlling the warehouse.

Ware-house

Bank

Borrower

Collateral manager

2. Control

1b. Agency agreement

1a. Trilateral agreement permitting the CM to take control over the borrower’s warehouse

Ware-house

A collateral manager

“wraps” the warehouse with

professional management,

improved logistics and

grading, and full insurance

coverage.

Physical infrastructure

A collateral manager accepts liability for the continued presence of (90%) of the stocks. As banks normally only finance up to 80% of the stock value, this makes bank lending safe… as long as the collateral manager has the means to meet his obligations.

To make a borrower’s warehouse as safe as its own vault, the bank uses a collateral manager…

Staff of the collateral manager (CM) takes control over the warehouse at the borrower’s premises. No commodities are allowed to enter or leave without their permission. The CM reports to the bank on the quantity and quality of the paddy/rice in the warehouse, and on this basis, the bank provides credit to the borrower.

Ware-house

Bank

Borrower

3. Deposit commodities in the warehouse…

5… and get an ‘easy’ loan

Collateral manager

4. Reports

2. Control

1. Agency agreement

Alternatively, there may be warehousing companies in the country which store commodities for third parties (“public warehouses”). If the bank trusts this public warehouse, it can give loans against the security of any goods deposited by anyone … all depositors become potential borrowers.

Ware-house(s) Bank

Borrower 1

1. Master agreement

Borrower 2 Borrower 3

For each borrower, the warehouse weighs and tests the paddy/rice deposited, and issues corresponding “warehouse receipts”. Against this collateral, the bank provides loans. The goods remained blocked in the warehouse until the bank authorizes their release.

Ware-house(s) Bank

Borrower

2. Deposit commodities in the warehouse… 5.… and get

an ‘easy’ loan

1. Master agreement

3. Warehouse receipts

4. “Blocks” the goods in the bank’s name

It is possible to finance the inventory in a borrower’s own warehouse without using a collateral manager. But this is risky. It should only be done:

- For reputable clients- As part of a value chain financing that covers a larger part of

the value chain- With a proper monitoring system in place, with the bank

having access to all the paperwork that accompanies the purchase, processing and sale of the stock

- With periodical checking by an independent monitoring company.

Warehouse

Processor, trader

Collateral manager

Collateral Management Agreement: Full control

Collateral management – borrower’s warehouse controlled by a 3rd party. What’s the scope?

Can be done if a processor’s/trader’s warehouse is physically separate from the processing equipment, or a trader’s distribution space

But the problem: This only works is you use a suitable collateral manager:- domain expertise- electronic backing for his activities- access to suitable insurance.Otherwise, whatever you call it, you have just a monitoring arrangement, without any effective risk transfer to a third party.

Works for the bank !

The big success story in India, a collateral manager operating public warehousesCollateral managers (NBHC, NCMSL) have taken over control of private warehouses, and operates them as public warehouses, open to a large variety of depositors.

NBHC arranges credits for several dozen banks, under master agreements in which it acts as a bank’s agent. In many cases, NBHC originates the deal: a farmer or a trader deposits goods in a NBHC warehouse, and if the quality is OK, NBHC staff then arrange a loan from one of the banks from which it has a mandate. The funds arrive in the client’s account the next day…

The Indian model streamlines the warehouse receipt finance process

Prospective clients can apply online, and the process after that is easy, and transaction costs low.

One result is that warehouse receipt finance becomes feasible even for small loans. Eg, from 2007 to 2011, NBHC arranged more than 100,000 warehouse receipt financing loans for farmers, starting as small as US$ 500. Loan distribution is often through smart card.

Risk management in case of collateral management

Warehouse

Borrower

Financier

Collateral manager

Reporting, incl. on prices

Control

Loan up to 75% of the initial value of the collateral (higher with hedging)

Borrower pays top-up margin (in cash or extra stocks) to ensure bank margin stays above 5%

Deposit

Pledge, guarantees

Insurance

Theft, natural hazards

Warehouse receipt finance for the export supply chain

Trader

Processor

Port warehouse

International buyer

Farmers

BankCredit

support company

Full control

The situation in Cameroon6 collateral managers with HQ in Douala. All handle imported and exported commodities (cocoa, coffee, cotton, rubber, rice), but not locally produced commodities.

Only 2 of them are active outside of cities/ports.

All banks work with these collateral managers.

Several donor-supported initiatives in the past:• Northern Cameroon, seeds and inputs for cotton farmers

(IsDB, SODECOTON, Credit du Sahel, Cotton Producers Assoc.• IFAD & Government, Projet d’appui au développement de la

microfinance rural (PADMIR)• CAMCCUL (microfinance network) funding cocoa and coffee.• ONCC: negotiated with a private equity fund a 30 mln $

revolving line of credit, to be channelled through MFIs and banks to finance coffee and cocoa, using warehouse receipts.

Legal framework: OHADA. Requires registration of pledges in order to establish bank’s security.

But OHADA does not include regulation on warehouses or collateral managers… As already recommended years ago, Cameroon should draft a proper warehouse receipt law.

It would also help if there is a commodity exchange: exchange users are bound by the exchange’s rules and, in case of contractual disputes, its arbitration panels, which helps give security to financiers.

As to cassava: PIDMA, according to value chain stakeholders, should have a component to develop “warrantage” for processed cassava products. But not everyone agrees it’s feasible.

Anchor finance

Starting point: an organized buyer (eg., Guiness) who wants to procure specific kinds of cassava.

Elaborate these plans: what quantities, from where?

Identify who is able to supply the cassava.

Verify that they can do so profitably, and (probably) put in place a technical assistance scheme to improve farmers’ profitability.

Get contracts signed. Start to make finance flow to where it is needed. This can include both working capital finance and equipment finance (e.g., for the rapid processing into intermediate products close to the field).

cassava flour, fermented flour,

Garri

attiéké,

starch

tapioca

Cassava

So, whether you can get access to value chain finance depends on how organized is the market into which you sell:

Bakeries

Industry

CommodityVolume Value

Status Haircut Credit available

Upcountry, cassavaUpcountry, starchCity WHReceivables

50%

30%

10% 3%

TOTAL

60

600

8001000

An example of a value chain financing for an integrated processor (controlling some fields of its own)

* 5 tons of cassava is processed into 1 ton of starch

Do farmers need to remain “just” farmers in a value chain structure? No. In Europe, Japan and the USA farmers have moved both upstream (inputs, equipment) and downstream (processing, distribution, banking).

So in principle, farmers could set up a cassava processing plant. Problem: banks may not trust the farmers’ ability to manage such a plant.

Possible solution: a corporative structure. For example:

Total finance needed for the processing plant: 100.Farmers’ own contribution: 5. Loan to farmers to buy equity: 35. Farmers will reimburse this through deductions from their deliveries.Bank-controlled vehicle: 60. With an agreement to sell the full 60 to farmers, through deductions, once farmers have repaid their loan. Meanwhile, the bank controls the plant, and can appoint and supervise its own managers. By the time the farmers have majority control, they are used to the professional management…

Supermarket chain (UK)

Contract farming scheme

Farmers

Long-term contract

Forward contracts

Dam

Irrigation, electricity

Local pension fundsLong-term

finance

EscrowaccountPayments

Debt service (hard currency)

Payment after water & electricity charges

Surplus

Export of flowers, fruits & vegetables

In principle, as long as one has the right buyer and a good control over the production process, farmers can even attract long-term finance from institutional investors.

But farmers have to keep in mind that value chain structures are long-term win-win structures. They cannot walk away from a supply market just because the price on the open market is a few percent higher, or because they think they have something better to do with their time than to harvest the cassava as promised.

This has gone wrong very often, and corporates as well as financiers want to have a high level of confidence that farmers are serious and in the business for the long term.

This can be facilitated by a proper deal structuring, e.g., not have forward prices that are entirely fixed, and an equity stake of farmers in the processing plant.