Thansk to BFP for this lively discussion. You will be pleased to know that we will be sharing the event video shortly for the people who cannot make it to the event so that they can watch the debate and join the discussion. This is a great platform to share the learnings and also successes. Thanks for all the contributors..
Thanks for your question Ekanath -
We are not providing a credit guarantee as this would in effect be introducing a subsidy into the system, and also potentially moral hazard into the thinking of the lender.
Smallholder farmers are widely seen as high risk by financial institutions, and this risk perception is contributing to high interest rates. The best thing we can do is by educating the farmer and helping the lender design the correct products for smallholder farmer's business and cashflow we can help both sides to understand the other and reduce the risk of lending – this then should then lead to lower interest rates. Demonstrating that credit products can be commercially viable for smallholder farmers - we hope will encourage more companies into the market – introducing more competition and also reducing interest rates.
The loans are largely utilised for investment in high value dry season irrigated production of fruit and vegetables which is more profitable in Zambia than most rain-fed production. Use of irrigation also reduces the weather related risk, from rain failure in particular. This example shows that smallholder farmers operate profitably using microfinance credit and remain profitable.
I hope this answers your question.
'How can we harness out-grower schemes to increase the availability of affordable finance for smallholder farmers?' My contribution is very much inspired by a discussion on Agricultural Finance in November 2012 in Ghana, initiated by CNFA, with collaboration from SNV Netherlands Development Organization.
On the first topic: to what extent is finance a barrier to successful outgrower schemes? Failure to provide appropriate credit to smallholder farmers who are members of cooperatives or farmer based organizations will only exerbate the decline of cash crop farming. If smallholder producers are able to access better credit terms from financial institutions along with prompt payment by off-takers, they would be able to acquire the right amount of input needed for yield increase.
Second topic: challenges and scaling of outgrower schemes: Conditions (interest, repayment, collateral) of the credit package have to be based on thorough analysis of the whole commodity value chain and cash flow of the farmers, including proper monitoring of the credit by the lending institutions. For this to happen, banks capacities to engage with small holders need to be strengthened. In addition, farmers and their organizations need to increase the quality of the business plans that are presented to the banks.
Third: example of innovative financing models: some outgrower models in Ghana have been very successful. Success factors were, among others: zoning and close monitoring of farmers; leave responsibility for marketing of produce to off-takers/aggregators who have the skills; market intelligence of specific commodity value chains; farmer commitment to credit obligations comes from ensuring market and prompt payment for produce; sufficient agronomist/extension staff to support farmers; ensure the right type of inputs to the agro-ecological zones characteristics
Fourth: roles of stakeholders;
Donors/development partners have to take into account the particular crop calendar and rhythm; and could support risk mitigation schems like crop insurance
Financial institutions: loan conditions need to suit for specific commodity; staff need to be sufficiently equipped and capable for evaluating feasibility of business plans and monitoring of loans; information sharing on credit
It will be good if we able to blend affordable finance and non financial services together with quality inputs , irrigation technologies, storage facilties and transportation infrastructure , Energy source for local value addition as well a strong social capital base .