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Rural Finance

Yesterday Today - Tomorrow

Breakout Group Finance for Food Global Donor Platform for Rural Development Roland Gross (Deutsche Gesellschaft fr Internationale Zusammenarbeit (GIZ) GmbH) January 2013

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1. 2. 3. 4. 5. 6. 7. Introduction Old and New Paradigms in Rural Finance Emerging Approaches and Services in Rural Finance Potential Role of Partners Examples from German Development Cooperation Impact Measurement in Rural Finance Further Readings

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1. Introduction - Recent Trends in Rural Development

Increasing demand for food/ agricultural products due to:
Growing population Migration to urban centres Emerging urban middle class with changing consumption patterns Growing demand for biofuels

Increase in private sector investments into international value chains in agriculture and forestry
Due to increasing demand and prices for agricultural commodities as well as liberalization of agricultural trade in the last decades

Reduction of transaction cost for doing business due to availably of IT technologies also in rural areas

Emerging opportunities for FI and businesses in rural areas

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1. Introduction - Different Categories of Rural Clients

500 mill. smallholder agricultural dependent households with different financial needs
300 mill. subsistence households (savings, health& life insurance) 165 mill. commercial households in loose value chains (small loans, savings, health& life insurance, payment services) 35 mill. commercial households in tight value chains (loans, crop insurance, payment services)

Commercial SME farmers, traders or processors

Widely underserved by commercial banks, due to High transaction cost (small loans, remote locations, bad infrastructure) High risk (production, marketing, price etc., lack of collateral) Financial products needed: loans, crop insurance, leasing

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1. Introduction - Rural Finance and Related Areas

Rural finance: Provision of financial services to households and enterprises in rural areas
Loans and savings Payments and money transfers Insurances

Urban Finance

Rural Finance

Agricultural Finance

Agricultural finance: Provision of financial services for agricultural production mostly in rural areas Microfinance: Provision of financial services to poor people in urban and to a lesser extent in rural areas

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2. Old and New Paradigms in Rural Finance

60s to 80s: Lage d or of agricultural development banks
Provision of financial services mainly by national development banks Investments in Green Revolution technologies (HYV seeds, pesticides etc.) Interest rate caps, lending targets for sectors/commodities set by government Lack of appropriate risk management, lending technologies and governance structures in development banks Frequent interference by politics

90s: Liberalization and emergence of microfinance

Closure of many state development banks in the course of structural adjustment/ privatization Pioneers of microfinance extent banking services to until then unbanked people (Grameen, ACCION)
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2. Old and New Paradigms in Rural Finance - The Microfinance Revolution

90s/2000: Microfinance institutions start providing banking services to poor people
Innovative lending technologies and improved risk management Financial intermediation was hoped to foster economic development and reduce poverty

But limited impact in rural areas:

Financial products were not flexible enough for the needs of the rural population and interest rates were high for some loan purposes, part. agricultural production loans Activities of microfinance institutions and commercial banks remained concentrated in high-potential urban areas and on trade activities, outreach to rural areas was limited Other financial products than loans, i.e. savings or insurance often neglected by MFIs

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3. Emerging Approaches and Services in Rural Finance

Diversification of existing financial services
Loans, deposits, insurance, trade loans, money transfers and remittances Adaption to the needs of rural and agricultural borrowers

Development of innovative financial services with private sector companies

Value chain finance, warehouse receipts

Access to international investment funds and private investors

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3. Emerging Approaches and Services in Rural Finance Different Actors Serving Different Clients
Providers of informal finance services
Traders, processors etc.

Microfinance institutions
Professional member based financial services (cooperatives, village banks, etc.) New information technologies reduce transaction costs and increase outreach of service

State Banks
Serving different groups of clients according to political objectives

Commercial banks
Due to increased commercial activities in rural areas Development of products specifically designed for rural borrowers

National and multinational agribusiness companies

Providing capital for complex modernisation projects and agricultural machinery

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3. Emerging Approaches and Services in Rural Finance - Other Success Factors for a Modern Rural Finance Approach
Conducive legal and regulatory framework
Both for financial institutions and rural enterpriese

Finance combined with business development services (loan plus)

Practical/ technical support for agricultural producers (introducing best practices in production, transport, storage, processing etc.) Linking farmers to markets (e.g. by supporting inclusive business models, contract farming etc.)

Provision of financial services via modern technologies

Reduction of transaction costs and information gap can lower interest rates Availability of financial services in remote areas

Take a undogmatic view on subsides

Subsidies legitimate for institution building, R&D, piloting of products Particular subsidised instruments proven to be useful (guarantee mechanisms) Interest rate subsidisation only within clearly defined limits politically risky

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4. Potential Role of Partners

Governments to implement consistent rural finance policies
Balancing out the interests of finance and real sector policies Providing an adequate regulatory framework for the financial sector Using smart subsidies for infrastructure and institutions with development tasks

Private sector to take investments

Large scale investments that increase productivity in agricultural production

Development partners to provide capacity building

On various levels: policy, institutions, banks, entrepreneurs/producers Knowledge management Recent multi-donor initiatives:

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5. Examples from German Development Cooperation

Rural financial institutions programme India (GIZ-TC)
Working with self-help groups and cooperatives Focussing on institution building and financial literacy Reaching almost 100 mill. members

Financial systems development programme Uganda (GIZ TC)

Supported introduction of new MF law Supported establishment of credit bureau Supports introduction of new financial products via MFIs and cooperatives


Regional Fund for investment into agricultural value chains Fund can be used for refinancing, equity TA component for capacity building for FIs and agricultural producers

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6. Impact Measurement in Rural Finance

Impact can be measured on different levels
Macro/ political level Institutional level Household level

Impact can have different dimensions

Income/ employment Health/ education Empowerment

Various methods to measure impacts

RCT Qualitative measures

Results from specific studies difficult to generalise

Setting difficult to compare

But impact measurement helps to improve financial services

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7. Further Readings
Agricultural Finance Trends, Issues and Challenges (BMZ/GIZ, Dr. Frank Hllinger, 2011) [link] Scaling Up Access to Finance for Agricultural SMEs - Policy Review and Recommendations (GPFI/IFC, 2011) [link] Subsidies as an Instrument in Agriculture Finance: A Review (The World Bank et al., Richard L. Meyer, 2011) [link] Agricultural Value Chain Finance - Tools and Lessons (Calvin Miller and Linda Jones, 2010) IFAD Decision Tools for Rural Finance (IFAD, 2010) [link] Policy Brief on Agricultural Finance in Africa (AU, GIZ, BMZ, MFW4A, 2012) [link] KfW Symposium 2010: Finance for Food - New Agricultural and Rural Finance [link] Agricultural Finance Revisited (FAO & GTZ), 1998 [link] Making the most of agricultural investment (IFAD, FAO, Sonja Vermeulen and Lorenzo Cotula, 2010) [link]. Competitive African Cotton Initiative (COMPACI) Background document (DEG, GIZ, Aid by trade Foundation, Cotton Made in Africa, 2012) [link]
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Example: Promoting Competitiveness of Diversified Cocoa Smallholdings in Nigeria, Cameroon, Ghana, Cte dIvoire
Implemented by GIZ on behalf of BMZ with co-funding of World Cocoa Foundation (WCF) a component of the Cocoa Livelihoods Program (CLP) and the Bill & Melinda Gates Foundation. Farmer Business School (FBS) modules tackle access to financial services plus cost-profit calculations for cocoa and food crops (maize and cassava), farm management for food security and balanced diet, professional organization. Impacts: 38 to 62% of the surveyed farmers - according to the country have opened saving accounts and constitute the collaterals to access loans. Farmers (72% women) respond to loans with high adoption rates of improved techniques as technical and entrepreneurship training are preconditions for access and partnerships with input suppliers are part of the innovation to ensure supply of quality inputs. Reimbursement of the loan is beyond 96%. FBS farmers have more than doubled their annual income from non-cocoa products (regional average: 230 USD per household; Nigeria: 414 USD per household, i.e. 436 % increase over baseline). De-risked financial products for cocoa and maize: The loans cover the financing of certified seeds of improved varieties, approved chemical inputs, technical and business skills training and GPS measurement of farm plots. For more information see:
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