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AFRICA AGRICULTURAL VALUE CHAIN FINANCING

3rd AFRACA Agribanks forum

Synthesis report

Prepared by; Mumbi Kimathi

Mbita Mary Nandazi Calvin Miller

Dorothy Nduku K. Kipsang

April 2008

A forum organized by:

African Rural and Agricultural Credit Association (AFRACA) &

Food and Agriculture Organization (FAO) of the United Nations

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Africa Agricultural Value chain financing Synthesis Report

Table of Contents Table of Contents .....................................................................................................................................................................2

List of Figures ...........................................................................................................................................................................3

List of Tables ............................................................................................................................................................................3

List of Acronyms ......................................................................................................................................................................4

1.0 OVERVIEW ....................................................................................................................................................................5

2.0 BACKGROUND AND RATIONALE .................................................................................................................................6

2.1 Organizing partners.......................................................................................................................................................6

2.2 Africa Agricultural Value Chain Financing.................................................................................................................7

3.0 SESSION PROCEEDINGS ...............................................................................................................................................8

3.1 Opening Session......................................................................................................................................................8

3.2 Setting the stage – for financing along the supply chain......................................................................................10

4.0 FINANCE IN THE CONTEXT OF AGRICULTURE AND RURAL DEVELOPMENT .......................................................11

4.1 Historical Overview, Financial Trends .............................................................................................................13

4.2 “Infrastructure and opportunities in relation to Markets” ...........................................................................14

5.0 VALUE CHAIN AND FINANCING MODELS .................................................................................................................14

5.1 Concepts of value chain and value chain analysis..........................................................................................15

5.2a. Private Agribusiness finance and marketing’ ......................................................................................................15

5.2b. Case Study: Tanzania coffee industry (KILICAFE) ...................................................................16

5.3 Private finance model: ACTIS Africa Agribusiness Fund...............................................................................17

5.4 Bank benefits and challenges in value chain Financing; Case of Ghana. ...................................................18

5.5 Experiences from Mali .........................................................................................................................................18

5.6 Role of SACCO Networks in Value Chain Financing ........................................................................................18

5.6.1 Lessons from Tanzania and West Africa .....................................................................18

5.6.2 Role of SACCO Networks in Value Chain Financing, Lessons from Kenya experience of Co-operative Bank of Kenya ...................................................................................................................20

5.7 Strategic partnership for financing – Equity bank experience .....................................................................20

5.8 Value chain financing model and vision for Value Chain Financing in Africa .........................21

5.9 Mainstreaming Small Holder Farmers into the World Economy – Using Farmer Ownership Model ........22

6.0 ADDRESSING CAPACITY AND COMPETITIVENESS ISSUES FOR PARTICIPATION IN VALUE CHAINS AND FINANCE ....................................................................................................................................................................................22

6.1 Small-scale farmer capacity and competitiveness .........................................................................................22

6.2 Client experiences ...............................................................................................................................................23

6.3 Safety, quality standards in relation to local and export markets .............................................................23

7.0 POLICY ON AGRIBANKS: ADDRESSING POLICY ISSUES ..........................................................................................24

7.1 World Bank Perspectives .....................................................................................................................................24

7.2 The Fiscal sector discusses tax policies and concessions. ............................................................................24

7.3 Roles of Central Banks ........................................................................................................................................24

7.4 Policy Perspectives from Central bank of Kenya ............................................................................................25

7.5 Challenges of Central Banks in the region.......................................................................................................25

7.6 Main Policies in Agribanks ..................................................................................................................................25

7.7 Agriculture is the mainstay of Nigeria’s majority ..........................................................................................26

8.0 COMMODITIES EXCHANGE AND RISK MITIGATION .................................................................................................26

8.1 Risk Mitigation Strategies ...................................................................................................................................26

8.2 Options for raising capital for agriculture .......................................................................................................27

8.3 Addressing risks through commodity management ........................................................................................28

9.0 OPEN DIALOGUE – EXPERIENCE AND TRENDS........................................................................................................28

9.1 Standard Chartered Bank’s experience shared ...............................................................................................28

9.2 Field Experiences; Lessons learnt in value chain financing..........................................................................29

10.0 INNOVATIONS, SUCCESS STORIES AND WHAT CAN BE REPLICATED IN AFRICA ................................................29

10.1 Value chain finance innovations and experiences ..........................................................................................29

10.2 Financing Smallholder farmers ..........................................................................................................................30

10.3 Smallholder commercialization based on ‘Commercial Village Approach .................................................31

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10.4 M-PESA money transfer technology...................................................................................................................32

11.0 EFFECTIVE WAYS OF REACHING SMALL SCALE FARMERS.....................................................................................32

11.1 Experience of Fédération Caisse Populaire du Burkina .................................................................................32

11.2 Value chain financing ..........................................................................................................................................33

11.3 Integrated approach to reaching small-scale farmers in Zambia ................................................................33

11.4 What has worked – lessons from the field, ......................................................................................................34

12.0 CLOSING SESSION ......................................................................................................................................................35

12.1 Summary Conclusions and recommendations of the 3rd Agribanks AFRACA Forum..................................35

12.2 Call to Action ........................................................................................................................................................36

12.3 Reactions by participants ...................................................................................................................................37

12.4 Reactions by Workshop Hosts and organizers..................................................................................................37

12.5 Final Remarks, AFRACA Secretary General, Mary Nandazi............................................................................38

12.6 Final Remarks, Deputy Governor, Central Bank of Kenya .............................................................................38

12.7 Vote of Thanks; ....................................................................................................................................................38

13.0 ANNEXES .....................................................................................................................................................................39

Annex 1: Speech by Hon. Vice President, Mr. Moody Awori ..............................................................39

Annex 2: Speech by Omurembe Iyadi, Managing Director, AFC ..........................................................40

Annex 3: What is a value chain? By Calvin Miller, FAO ....................................................................42

14: 0 APPENDIXES....................................................................................................................................................................i

Appendix 1: Photo Album .......................................................................................................i Appendix 2: 3rd AFRACA Agribanks forum programme .................................................................... ii Appendix 3: Contacts ........................................................................................................... v

3.1: List of participants......................................................................................................... v

3.2: 3RD Agribanks Facilitator ................................................................................................. v

List of Figures Figure 1 Financial Access by region and gender............................................................................13 Figure 2: Technoserve's business model .....................................................................................16 Figure 3: Factoring model of Desjardins ....................................................................................19 Figure 4: below shows a typical Agricultural Value Chain ................................................................21 Figure 5: Supply Chain Management platform linking financial and non financial services for value chain actors....................................................................................................................................31 Figure 6 Care's approach ......................................................................................................33 Figure 7 ASP facilitation cycle ................................................................................................34 List of Tables Table 1 Agriculture's Large Share of Economic Activity in Some Developing Regions…………………………………………12 Table 2 Customized technical assistance diminished financial risk……………………………………………….……………………17

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List of Acronyms AFRACA - African Rural and Agricultural Credit Association Agribanks - Agricultural Banks ASE - African Securities Exchange Association AFC - Agricultural Finance Corporation AMCOS - Agricultural Marketing Co-operative Society ARUDESI - Africa Rural Development Support Initiative ASF – Settlement Trustees ATV - African Traditional Vegetables CDS - Central Deposit Sum CBK - Central Bank of Kenya CNCA - Caisse Nationale de Crédit Agricole CCK - Communication Commission of Kenya CBA - Commercial Bank of Africa CTA - Commodity Traders and Agri-business CGAP - Consultative Group Assisting Poor CAPEX - Capital Expenses DFI - Development Finance Institutions DID - Desjardins Development International EAP - East Asia and Pacific ERS - Economic Recovery Strategy EMG - Emerging Markets Group FAO - Food Agricultural Organization FCI - Farm Concern International FIPs - Farm Concern International Partnership FCPB - Federation Caisse Populaire du Burkina FPEAK - Fresh Produce Exporters Association of Kenya FAO - Food and Agriculture Organization GDP - Gross Domestic Product HCDA - Horticultural Crop Development Authority Hon - Honorable ICT - Information Communication Technology IFAD - International Fund for Agriculture Development IPOs - Initial Public Offers KBDS - Kenya Business Development Services KFA - Kenya Farmers Association KIPPRA - Kenya Institute for Public Policy Research & Analysis Kshs. - Kenya Shillings LAB - Land Agricultural Bank MRT - Marginal Rate of Transformation MENA - Middle East North Africa Region MFIs - Microfinance institutions (MFIs) MDGs - Millennium Development Goals NCPB - National Cereals and Produce Board NSE - Nairobi Stock Exchange QMS - Quality Management System SACCOS - Savings and Credit Cooperative Societies SME - Small and Medium Enterprise SMS - Short Messaging Services SME - Small and Medium Enterprise VCF - Value Chain Financing

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1.0 OVERVIEW Globalization of the world economy has an increasing demand on the market players both at the formalized markets as well as informal and traditional marketplace. Whilst, the increased investment levels and returns for the private sector cushions the private sector against dynamic market forces however, smallholder households are increasingly vulnerable with no risk cushion mechanism in place. Globalization has further evolved the world from fragmented economies to a unit trading bloc that offers enormous opportunities and eventually demands a significant financing intervention. Business competition across all players is inventible amidst emerging markets. However, weaker market players especially the rural farm families will be ‘pushed’ out of mainstream value chains, which is an emerging threat for Africa’s market players. Agri-businesses in Africa operate with scarce resources even in the midst of drastic growth of markets and have to make extreme good use of every resource to realize profits. However, business growth based on own financing is limited by availability of own funds whilst financial services access is a platform for product development, systematic business growth and business repositioning. Over time, enhanced access to financing for business growth will trigger real incomes that will increase substantially across many poor communities, value chain players and market players in Africa. Analysis of business challenges highlight a number of dimensions ranging from marketing, financial, human resource, legal among others though financial and marketing challenges are key drawback to business growth. Viable business opportunities aimed at offering cost effective services to the poor were assessed with participants focusing on interventions that expose them to minimal risk of poor business performance. Stabilizing pro-poor financial markets is a major task ahead of the financial service providers and Central Banks in Africa and Globally. The increasing urgency to evolving Africa’s agriculture to commercial agriculture results into a potential high demand for rural financial services however the Africa’s Marginal Rate of Transformation (MRT)1 is weak and requires an integrated approach to commercial agriculture. The 3rd AFRACA Agribanks forum focusing on Africa Agricultural Value Chain financing which was organized by African Rural and Agricultural Credit Association (AFRACA) and Food and Agriculture Organization (FAO) together with AFRACA members and partners was held from 16th to 18th October 2007 in Nairobi, was timely and drew the attention of all financial market players to a potential mass market comprising of non-bankable poor communities with valuable natural resources that have enormous monetary value. However, such communities though with high value and marketable resources lack access to financial services which otherwise would enhance a market-led approach, trigger a commercialization phase, enhance value addition, technology adoption, market access and business expansion among poor African communities. The multiplier effect for the injection of financial intermediation into weak value chains is enormous with communities’ purchasing power drastically increasing and eventually graduating from non-bankable communities to a bankable and credit worthy status. Strategic financial intermediation based on pro-poor financial innovations was the key focus of the 3rd AFRACA Agribanks Forum with various pro-poor financial and non-financial case studies being shared and extensively discussed for potential replication. In order to fully address the goals of the conference, important topics and themes were selected offering the participants a picture of the wider perspectives of Agricultural Value Chain Financing, and a detailed analysis of emerging opportunities and threats. The thoughts to the various session highlights are indicated in section 3.0.

1 The Marginal rate of Transformation (MRT) is the rate at which one product can be transformed or converted into another product by reallocating resources.

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2.0 BACKGROUND AND RATIONALE

2.1 Organizing partners

1. Africa Rural and Agricultural Credit Association (AFRACA) The African Rural and Agricultural Credit Association (AFRACA) is a Pan African Association of financial institutions which is involved in promoting provision of financial services to rural populations in Africa. AFRACA was founded in 1977 and registered under the Kenya NGO coordination Act in 1981. Its secretariat is based in Nairobi, Kenya with membership consisting of Central Banks, Commercial Banks, Agricultural Banks, Microfinance institutions (MFIs) and their networks. Currently AFRACA has 92 members spread across 29 African Countries. The mission of AFRACA is “to improve the rural finance environment through the promotion of appropriate policy framework and to support member institutions to provide sustainable quality financial services to the rural population”. AFRACA works in partnership with its members, research institutions and development partners to increase rural outreach and to improve provision of financial services through more appropriate banking practices and innovative financial products. AFRACA’s programme is supported by its members and IFAD and has specific activity-based relationships with various development organizations including Technical Centre for Agricultural and Rural Cooperation (CTA), DANIDA, FAO and USAID among others. www.afraca.org 2. Food and Agriculture Organization (FAO) The Food and Agriculture Organization of the United Nations (FAO) is devoted to agriculture and rural development through facilitation of knowledge and learning and assisting with appropriate policies, strategies and methodologies for strengthening agricultural support systems and the delivery of services, including finance, marketing and agribusiness. The African Value Chain Financing Forum is one of a series of regional conferences (Latin America, South Asia, Africa and South East Asia that they have been instrumental in ensuring success with quality experiences shared from a cross section of the practitioners. www.fao.org 3. Agricultural Finance Corporation (AFC) This was the official host of this AFRACA Forum. The Agricultural Finance Corporation (AFC) of Kenya is one of the still remaining government institutions set up in the 1970s to give loans for farming activities including small scale farmers. These were all supported by the World Bank group of Institutions. As a development financial institution charged with the responsibility of developing agriculture and contributing to food security, AFC is diversifying its financial services particularly in a highly competitive environment with an increased number of financial service providers in the domestic market and a dynamic emerging financial market. The management is using segmentation, specialization and an increased focus on sustainable financial services to move AFC forward. The institution continues to increase partnerships within the agricultural sector that will enhance its service delivery efficiency. As it responds to the efficiency challenges, AFC will be increasing its ICT capacity and further tie it’s strategy development to the Kenyan national 2030 vision. 4. DRUMNET DrumNet is a supply chain management platform linking the principal stakeholders along the agriculture supply chain, namely buyers and farmers, input suppliers and banks. DrumNet acts as the bridging mechanism through which all parties can interact to successfully and equitably fulfill their business objectives and share business risks. This has proved to one of the best innovative ways of ensuring effective financing for small-scale farmers. www.drumnet.org

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2.2 Africa Agricultural Value Chain Financing

The 3rd Agribanks forum with the theme, Africa Agricultural Value Chain Financing was organized by AFRACA and FAO in partnership and supported by AFC and DrumNet. It brought together over 160 participants from 35 countries. The participants consisted of decision makers of financial entities with activities in the Agricultural sector, agribusiness organizations and companies working in the Agricultural sector (promoters, producers, processors, exporters, marketers, and input suppliers), government authorities and other supporting international organizations. The main objective of the Forum was, “to enhance awareness on successful models and approaches for using the resources and linkages of the value chain to increase financial service provision and efficiency to rural producers, traders and agribusinesses Why Agricultural value chain finance? Rural areas are characterized by higher transaction costs for both the financial institutions and their clients, higher systemic risks, more volatile cash flows; as well as lower risk-bearing ability and higher vulnerability due to higher incidences as well wide spread and depth of poverty. In this case the demand for varied services from a variety of institutions is essential. For example; micro-insurance, savings services, remittance payment services, and credit may become relatively more important, whereas demand for loans for income generation (working capital as well as term loans) decreases. While a large majority of the poorest households in Africa are directly linked to agriculture in many ways, rural finance and in particular agricultural lending remains mostly an uncharted territory for development finance. This could be attributed to lack of infrastructure, distant and dysfunctional markets, inadequate farming and inappropriate techniques, volatile prices and unpredictable weather which make it more difficult for both lenders and farmers to succeed and move forward in this environment. This further isolates and leaves the small scale farmer unable to explore agriculture as a business option. Agriculture specifically has in the recent past received less financing mainly due to the risks related with it and the disintegrated financing (non financing of the value chain). However, there are still some institutions which have managed to keep up with the challenges. They have found innovative ways of financing Agriculture and they have made it their core business. It is therefore worthwhile learning from their experiences. Also, considering the limited access to financial services by small scale farmers and farmer groups, overtime they have come up with innovative ways of coping with the situation. This has forced them to be innovative and adapt to changing circumstances. It is on this basis that the Forum offered a good learning platform for institutions and farmers on options for expansion through application of appropriate approaches. From these experiences various institutions could adapt to facilitate implementation of similar approaches in their home countries. Presentations and discussions around this theme were expected to build better understanding of rural markets and agricultural financing risks thereof; especially financing along the value chain. Further discussions on the value chain would allow participants to take stock of success around this subject and explore successful strategies for financial and non financial institutions serving this sector; the strategies and product mix necessary for reaching this segment, as well as the risks faced by both small-scale farmers and the financial organizations serving them. The theme was further envisaged to advance key recommendations which when implemented would contribute to improved outreach, depth and breadth in provision of financial services to the Agricultural sector and more specifically targeting specific stages of the value chain. Specific objectives of the Forum The Forum was organized to meet the following objectives;

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• Increase the awareness and learning of key innovations for funding smallholders through non-bank financing using innovative approaches.

• Provide new ideas for development of innovative products that allow significant funding to reach various stages of the value chains in Africa.

• Explore ways to improve livelihoods of the rural people. The report is divided into various sections reflecting the format of the workshop. The following pages will share the summaries and deliberations of the forum. 3.0 SESSION PROCEEDINGS

3.1 Opening Session

The Opening Session facilitated by Nasieku Tarayia, of Agricultural Finance Corporation commenced with introductory remarks, the session’s focus was particularly on setting the stage by Calvin Miller of FAO and a Keynote address by the Vice President of the Republic of Kenya Hon. Moody Awori while a Welcome note and Welcome address of the Chief Guest was undertaken by Patrick Kinyori the AFC Board Chairman and Hon. Kipruto arap Kirwa, Minister for Agriculture respectively. The first day of the workshop coincided with the World Food Day which was recognized through ‘A world Food Day presentation’ as the first presentation by Susan Minae of FAO. The session was concluded with a vote of thanks by Mr. Traore Abdoul Rachid of Banque Commerciale du Burkina. World Food Day Highlights The World Food presentation by FAO was under the theme ‘The Right to Food; A Human Right’. The presentation highlighted some astonishing statistics of the number of people without access to food as a basic need;

• 854 million chronically hungry people; • 2 billion people suffer from micronutrient deficiencies, yet • 25 million children and 250 million adults are obese

The International Law recognizes; ‘The right of everyone to an adequate standard of living, including adequate food’ and ‘the fundamental right of everyone to be free from hunger.’2 Common Elements Food Security and Right to Food highlighted by FAO focus on: Every Human Being; Everywhere; Can Produce or Procure; Safe, Sufficient, Nutritious Food; Culturally Acceptable and For Active & Healthy Life. To address the growing need for right to food, FAO is mandated to ensure “...and thus ensuring humanity’s freedom from hunger”3 ; Rome Declaration on World Food Security reaffirms the right to food as per the World Food Summit of 1996 while in 2004 Guidelines were followed-up, adopted and decided. Speech Highlights: Vice President, Hon. Moody Awori The Vice President of the republic of Kenya, Hon. Moody Awori, who presided over the opening session, emphasized the recognition of the role played by the rural population and the need to particularly build the capacity of rural poor in access to technologies, markets, financing, infrastructure and further enhance the capacity of the rural populace to build food reserves. The Vice President drew attention to a special need of linking research, extension and the farmer which should be strengthened through value chain financing. He further revealed that the Government of Kenya is setting up financial system that seeks to include the rural and further offer agricultural specific financial services. It is thus important that financial policies aimed at

2 International Covenant on Economic, Social and Cultural Rights 156 State Parties 3 FAO Constitution since 1965

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enhancing agricultural financing are designed to integrate the rural poor. To achieve this, the Government is reviewing the Agricultural Finance Corporation under the ongoing ‘Financial Sector Restructuring Programme’ which will be a platform to reposition AFC in agricultural financing. The Vice President in his speech also highlighted the positive impact of the Agricultural revitalization programme on rural financing environment. Speech Highlights: AFC Managing Director, Mr. Iyadi Omurembe In his Welcome Remarks Mr. Iyadi appreciated the Vice President and Minister of Agriculture for support to AFC interventions and honoring the AFC request for the Vice President to preside over the opening session of the 3rd AFRACA Agribanks Forum. Mr. Iyadi affirmed that as a development financial institution charged with the responsibility of developing agriculture and contributing to food security, AFC is diversifying its financial services particularly in a highly competitive environment with increased number of financial service providers. Mr.Iyadi further highlighted the dynamics of the financial markets, segmentation, specialization and an increased focus on sustainable financial services. AFC continues to increase partnerships within the agricultural sector that will enhance its service delivery efficiency. To respond to the efficiency challenges, AFC will be increasing its ICT capacity and further tie it’s strategy development to the national’s 2030 vision. Welcome Note Highlights by Chairman AFC Board: Patrick Kinyori In his Welcome Note, Patrick Kinyori gave a brief history of AFC’s establishment in 1963 under an act of parliament and the institution’s continued focus on agricultural financing in Kenya. He noted that though political-oriented challenges have slowed down the efficiency of AFC, the institution has evolved financial services to an agricultural orientation and is benefiting from various Government agricultural initiatives aimed at streamlining rural development. The Value Chain Financing concept is a new platform to integrate rural producers and value chain players into the AFC financial system. Mr. Kinyori further concluded that agriculture financing, and the development of VCF4 partnerships specialization as key ‘forum issues’ was important for discussions as helpful and emerging opportunities for the Agricultural and rural sector. AFRACA Remarks Highlights: Secretary General, Mary Nandazi The Secretary General of AFRACA highlighted her appreciation to FAO, AFC and other partnering institutions for their support to a crucial topic ‘African Value chain financing’ which is an emerging topic for developing economies. Mary stressed that recognition of the role of smallholders in the agricultural sector creates a demand for financial sector to rethink pro-poor financial services and design value chain financing models that endeavor to enhance agricultural development. AFRACA is offering a platform for addressing key challenges facing its 166 participants from 39 countries and different disciplines and experiences. Beyond the financial service, AFRACA seeks to focus on interventions aimed at getting smallholders involved in profitable agriculture based enterprises; access to affordable financial services aimed at boosting farm-based initiative and further enhance financial product development. She noted that the Forum offered an interactive learning between members and non members and thereafter makes way for assessing concepts and models for scaling up. Highlights on Welcome Remarks by Member of Parliament & Minister for Agriculture, Hon. Kipruto arap Kirwa The Minister for Agriculture recognized the support of the Vice President to his Ministry and his increased participation in the various programmes, and interventions under the ministry. The Minister appreciated the workshop organizers, AFRACA and AFC highlighting the selection of a key theme through which financial services will be evolved to address agricultural needs. He referred to Government’s effort to enhance the capacity of AFC through increased portfolio currently estimated at Kshs. 7 Billion. The Government further supported the review of AFC’s lending rate down from 35% to 10% currently. If AFC’s financial services are to remain relevant to the agricultural sector, the Minister cautioned AFC to then remain simple, farmer friendly and timely. Vote of Thanks: Abdoul Rachid – Banque Commerciale du Burkina A vote of thanks by Abdoul Rachid was especially to the Vice President of the republic of Kenya, Hon. Moody Awori and the Minister for Agriculture, Hon Kipruto Arap Kirwa who had both spared time to preside over the

4 Value Chain Financing

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opening session of the 3rd AFRACA Agribanks forum. He further appreciated AFRACA and FAO in their efforts to promote Agri-Value Chain Financing and appreciated AFC, the co-hosting institution. Abdoul Rachid also appreciated the participants interest in the workshop theme, Africa value chain financing.

3.2 Setting the stage – for financing along the supply chain

By Calvin Miller, FAO

Highlights on setting the stage Setting the stage session by Calvin Miller, FAO was an important overview on the overall workshop’s focus. He said that Agricultural Value chain Financing is a key topic for the Sub-Saharan region and Calvin Miller in his speech particularly focused on: The changing agricultural scene; Using strategic alliances; Value chain financing as a business approach to finance; Innovations; Addressing risk and Lessons and policies. He pointed out that the main bottleneck in value chain financing is making financial services more accessible and affordable for rural agriculture. However, such financial services must operate within an environment where rural producers are producing for markets, growing in competitiveness, enhanced access to group financial services and partnerships established with value chain players. To tap emerging opportunities in Value Chain Financing, Calvin highlighted the need to address challenges that would inhibit the growth of African Value chain financing which include: a balance between demand and supply; emerging constraints from multiple services and multiple providers; finance linkages; linkages between financing and technology as well a comprehensive risk analysis. Value Chain financing concepts and approaches would best be adopted against a background of players understanding value chain, administration of a value chain appreciated; risk management concepts along the value chain developed and determined services along value chain. The ‘Setting the Stage’ session highlights the issues and directions in value chain development. This discussion focused on:

1. The changing agricultural scene 2. Using strategic alliances 3. Value chains as a business approach finance 4. Innovations 5. Addressing risk 6. Lessons and policies

Agricultural revolution is a new discussion that is beginning to take place with focus on a new agricultural scene driven by dynamic markets; it is a scenario that is witnessed in various countries. Agri-food systems worldwide are being transformed in unprecedented ways. Market integration and stringent specification of quality and timing of produce has never been so important however, farm production and distribution are rapidly evolving from the simple relationships and points of interaction of the past to the highly integrated linkages and closer alignments among business partners we witness today. Value chains are being promoted as the business development frameworks of choice in the agri-food sector. There is much more attention being paid to inter and intra-organizational efficiency in production, processing and logistics. There is also increased focus on marketing, product differentiation and product niche development and furthermore, the competition is now global: prices are less affected by local conditions, seasonality and markets. All these developments make a solid financing structure even more important than it has always been. Market competitiveness and market risks are becoming the drivers of financing decisions in the new agri-food systems. It was noted that the importance of agricultural finance has been a focus for many years. But, it has often failed. Instead there have been four stages of evolution since 1950 to 1985 which was known as Agricultural Finance, this directed production credit, Subsidized credit, high transaction costs of lending, high loan losses, government and donor refinanced lines of credit through agricultural banks and others, informal family and trader finance for small farmers. Donor Microfinance Era (1980 a 2000)where rapid, small working capital loans, group lending approaches, focus on non-agricultural activities, forces groups savings, separation of financial services and business support services, High cost of microfinance Commercialization of MFIs (2000 to present), Formal MFIs, Little subsidy, Multiple, Products, Expansion and competition, New technologies, Interest by capital market investors and lenders. Value Chain Finance (2005 to present) Strategic focus on market potential of businesses,

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Linkages among suppliers, producers & marketing companies, Growing importance of standards, Greater use of risk mitigating tools, Growing integration between banks and business, Growing use of new technologies. Governments and donors have realized that a majority of rural households in rural Africa effectively do not have access to agriculture and agribusiness finance. At the same time, business leaders in both finance and agriculture have come to realize that with the new innovations in communication technology, information management and business models, there is a wealth of new opportunities for them to profitably work together. Traditional adversarial relations can be replaced by a win-win situation where transaction costs and mutual risks are reduced. Can value chain finance begin to address some of these underlying issues? On the demand side, we all want to: a) increase economic opportunities; b) build farm management capacity; and c) mitigate risk? From the lender or supply side of financial services, we want to: a) cost-effectively introduce flexible and longer term loan products with manageable risk; b) promote effective management of our clients and ourselves; and c) build sound and appropriate financial markets? Value chains and value chain finance is about linkages. With the increased attention to value chains in the agri-food sector, the opportunities for utilization of the chain framework to promote and facilitate access to financial services became rather apparent. A value chain is often defined as sequence of value-adding activities in a supply chain – from production to consumption, through processing and commercialization. Value chains in agriculture can be thought of as a “farm to fork” set of processes and flows – from the inputs to production to processing, marketing and the consumer. Each segment of a chain has one or more backward and forward linkages. A chain is only as strong as its weakest link and hence the stronger the links, the more secure is the flow of products and services within chain. It is important to note that the benefit of value chain finance goes beyond that of the financial flows within the chain. Yes, it is about finance with agriculture and agribusiness within a chain but also about aligning and structuring finance with the chain or because of it. Simply being a part of a secure market chain makes one a better credit risk. 4.0 FINANCE IN THE CONTEXT OF AGRICULTURE AND RURAL DEVELOPMENT Overview: Financial Markets globally have been highly dynamic evolving from simple financial services to a highly segmented market with targeted branding from target markets ranging from business markets to rural markets with financial service providers developing markets that suit the dynamic needs of various market segments. While the functional market shares are limiting in terms of growth, the low incomes earners are the next target market currently categorized as an emerging market however, this is a target group operating under relatively high risk due to dysfunctional systems and predominantly an agricultural rain fed based system.

Globally, 1.2 billion people are extremely poor, surviving on less than $1 a day and three-quarters live in rural

areas. Poverty is predominantly a rural phenomenon and seems to affect more women. Extremely poor people

spend more than half of their income to obtain (or produce) staple foods, which account for more than two-

thirds of their caloric intake. Most of these people suffer from nutritional deficiencies, and many go hungry at

certain times of the year.

In recent years, development agencies and national governments have renewed their commitment to reducing poverty, hunger, and other human deprivations, as evidenced by the Millennium Development Goals (MDGs). Among other objectives, the MDGs aim to halve the proportion of people living on less than $1 a day by 2015 (from the starting level of 1990). That means cutting the share of extremely poor people in low- and middle-income countries from 28 percent to 14 percent. The MDGs also call for halving the proportion of people suffering from hunger by 2015.5

5 CGAP Occasional Paper No.11

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Agricultural finance has been one of the most prominent elements of the rural development strategies used by development agencies and national governments. But this financing has long been characterized by poor loan repayment rates and unsustainable subsidies. Accordingly, agricultural credit from some donors and multilateral development and rural development banks has dropped dramatically in recent decades and is now often considered too risky. Agriculture is now one of the main contributors to poverty reduction Analyzing Development Finance Institutions' Funding for Microfinance6 the 2006 edition of CGAP's annual survey reveals that;

• DFI investment in microfinance is growing fast and reached $2.5 billion in 2006--this represents an increase of 39% over 2005 survey data.

• DFI investments in LAC and ECA account for 81% of total investments. Investments in the East Asia and Pacific (EAP) and MENA regions increased by 109% and 86%, respectively. However, investment in Africa is stagnant (up 5% only from 2005).

Table 1: Agriculture's Large Share of Economic Activity in Some Developing Regions

Though, the World Bank has made commitments to stimulate Agriculture, Africa is notably omitted in the financial dynamics that characterize most of the economies globally. The slow development of the financial market in Africa is more pronounced in the Sub-Saharan Africa which is dominated by agrarian economies. However, the agro-industry in Sub-Saharan Africa is underdeveloped drastically increasing financial intermediation risks resulting in slowed investment. The decreasing number of an Economically active population is a challenge for financial market growth and product development for regions recording higher poverty incidence. However, increased focus on agricultural development and growth in Africa opens an opportunity for rural economic development. Informal financial services still dominates the financial markets A case of Kenya’s financial access

Financial services delivery mechanisms have not been modified sufficiently to integrate informal financial services which are accounting for 35.2% while 38.4% are completely excluded from financial services with both accounting for approximately 73.6% which is an indication of lack of financial deepening innovations. Women are noted to be much more responsive with 40.5% accessing informal financial systems. The roll out of pro-poor financial innovations is a major challenge ahead of every African Government,

6 Building Financial Systems for the poor, DFIs Micro Finanace Portfolio, 2006 Survey Results

Agriculture's Large Share of Economic Activity in Some Developing Regions (percentage of economically active population)

Region 1961 1980 2001

Africa 79 69 57

Asia 76 67 56

Eastern Europe 50 28 15

Latin America and Caribbean

48 34 19

Source: Buchenau, "Innovative Products and Adaptations for Rural Finance," 2003.

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Figure 1: Financial Access by region and gender

38.4% 37.4% 41.6% 37.5% 39.3%

35.2% 39.2%22.8% 29.5%

40.5%

7.5%8.5%

3.5%9.2%

5.9%

18.9%18.9%

32.0%23.8%

14.3%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Total Rural Urban Male Female

Excluded Informal Formal Others Formal

Source: Financial Access in Kenya, 2006 National Survey, FSD Kenya

Session Highlights

The session on Lessons learnt was chaired by Mr. Arfang Daffe, Managing Director of CNCA Senegal, and included a historical overview of financial trends and infrastructure in markets by James Nyoro of Egerton University Tegemeo Institute and Joseph Kibe, the Board Chairman of Horticultural Crop Development Authority, HCDA. This session on historical perspective offered the participants an overview of the trends of financial services in Kenya and how financial services have evolved over time to integrate smallholders in Kenya.

4.1 Historical Overview, Financial Trends

By James Nyoro, Egerton University, Tegemeo Institute

Financial Services in Kenya have evolved under various political and economic variables though with a myriad of challenges which include; Low productivity, Lack of working capital, Poor understanding, Poor linkages, High prices, Confusion between credit and financing, No sufficient finance and low participation of the private sector. Pre-independence financing mechanisms were characterized by large scale European agriculture, in 1930 a National Board, 1933- Land Agricultural Bank was established and 1947 commodity boards approach was initiated. The pre-independence era was denominated by leadership politics leading to several loans written-off over the period. Financing mechanisms developed during the Post-Independence era have mainly been ASF – Settlement Trustees, AFC – Born from Land Agricultural Bank (LAB), Cooperative societies, introduction of GMR and Banks. Interlinked cereal lending for farmers has also been operated under AFC, Kenya Farmers’ Association (KFA) and National Cereals and Produce Board (NCPB). Post-reform agricultural financing was characterized by price decontrols and Institutional reforms. Currently 5% of agricultural financing is accessed from commercial banks. Lessons drawn from the financial services mechanism that have evolved over several decades include;

o An increasing demand for Credit however there has not been sufficient credit service to meet the growing farming demand.

o Financial services being integrated into support services like access to markets alongside financial interventions.

o A balance between credit and financial services is required in the financial markets o Informal financial services being realized as a component are a component of the financial

markets in Kenya however, how to recognize such services is an existing dilemma.

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o Partnerships between the private and public sector are a key parameter for successful financial models.

o A strategy for financial pricing and risks is underdeveloped and ought to be developed further.

4.2 “Infrastructure and opportunities in relation to Markets”

By Mr. Joseph Kibe, Board Chair, Horticultural Crops Development Authority (HCDA) Africa has essentially lagged behind in market infrastructure than most of the continents with wholesale markets only dedicated to the capital cities and these often serve a combination of wholesale and retail marketing functions. Poor marketing Infrastructure is a major draw back to market development in Kenya with informal markets presenting a major bottleneck to development of agricultural value chain management. The deteriorating market status has partly resulted from poor market management, exclusion of key players like farmers and slow responsiveness to a critical need of expanded markets share for smallholders. To optimize Kenya’s market, there is a need to enhance the capacity of physical infrastructure, good management of the markets and the integration of other stakeholders. Financing/investments in market infrastructure in Kenya for agricultural produce exclusively seen as social development initiatives and all agricultural produce markets are owned and managed by local authorities. Private sector investment is a potential source of financing agricultural sub sectors at markets level of the value chains. 5.0 VALUE CHAIN AND FINANCING MODELS Overview: Financial services are increasingly targeted with a focus on specialized financial products for Business Markets, Value Chain Players, and Agribusiness enterprises among others with a special focus on the Africa’s agricultural sector. Value Chains play a vital role in creating a link between production/processing systems and target markets. However the efficiency of value chains is partly determined by accessibility and affordability of financial services. Value chain financing across various agricultural and non-agricultural products have lately received attention particularly aimed at ensuring stability of value chains (from producer–to-consumer) and further enhance the efficiency and increased capacity of various commodity chains. Over decades, Agricultural Value Chains have not been integrated in mainstream financial services successfully however, the recognition of the role of Agriculture in Agrarian economies has made Agricultural Value chains graduate into an emerging market for financial markets intermediation players. Value Chain and Financing models tested and implemented globally reveal that the mass market is actually at the bottom of the agricultural production pyramids and largely dominated by smallholders and poor farming communities. Financial Services and products targeting agro-systems and agro-value chains would have to put into consideration the role of the smallholder and further embed such services to a market-led production system. Financial Services Innovations in response to the emerging agricultural markets and value chains would only be successful within models that allow maximum interactions and integration of smallholders and factor in agricultural risks characterizing smallholder production systems. Smallholder institutional frameworks through producer groups is a key platform for smallholder interactions while value chains players offer an avenue for market-led value chains which is a key sustainability element. Producer Group leadership ordinarily would mobilize members to access financial services and further support their understanding of assuming risks within specific financial products. Session Highlights: Presentations and discussions under this session were facilitated by James Shikwati- Inter Region Economic Network and James Obama – Pride Tanzania. This session opened the floor to detail on models applied by various organizations, the success story and challenges faced through the implementation and an emphasis of what worked against the backdrop of the agricultural sector in those countries. The dimensions shared included approaches to value chain financing for agro-commodity chains, Private agribusiness finance and marketing, private finance model, Bank benefits and challenges in value chain financing, Role of SACCO Networks in Value

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Chain Financing, Experiences from Mali, Strategic partnership for financing and Value chain financing models for Africa.

5.1 Concepts of value chain and value chain analysis

By Mumbi Kimathi, Farm Concern International

Agricultural Value chain offers a platform for optimal levels of interaction between players and rural producers however, weak value chains decrease interaction opportunities and further weaken potential partnerships. The value chain approach is a concept that links raw materials, components and manufactured goods and further highlights the various transaction levels as good & services are moved to final consumers however, value chains are highly dynamic, ordinarily with several value addition levels. Status of market segments also determines the status of value chains and the eventual integration of smallholders. Key market segments that influence the nature of value chains developed include; Consumer markets, Business markets, Reseller market, Governments & Institutional markets and International markets While Africa is characterized by traditional markets, consideration for parameters aimed at triggering informal value chain development ought to be put in place. Typical Value chain discrimination has gradually pushed smallholders out of marketing systems creating urgency to integrate smallholders into marketing chains. Emerging threats in sub Saharan Africa are due to weak value chains, weak production systems and increased rural-urban migration which eventually leading to increased food prices. Sub Saharan Africa is facing enormous challenges from weak production systems and unstable value chains. Some threatening challenges include;

• Weak production systems that will eventually fail to support food chains in both rural and urban areas • Increased urbanization in Sub-Saharan • Africa demands stable rural production systems to support emerging food demands for priority products

e.g. roots & tubers, cereals, legumes, horticultural products etc. • Food prices would increase as result of weak food chains thus increased cost of Living which can lead to

increase poor neighborhoods in SSA.

5.2a. Private Agribusiness finance and marketing’

By Steve Harris, Technoserve Technoserve shared various Business models for enhancing small holder incomes through processing business, Supply business and out-grower models. A case of Malawi’s seed industry value chain in response to severe financing gaps in agribusiness in southern Africa which is characterized by asset finance needs and working capital needs. Reasons for lack of access to finances by start ups and early stage expansions have mainly been shortage of risk capital and Poor business management capacity. Remarks on the status of the agricultural financing included;

o Agriculture is key in Africa’s development o Lack of investments in the agricultural financing sector. o There is need for more equity i.e. participation by private sector should increase. o Growing need to Finance start ups and early expansion o Need for Technical assistance to financing requirements o Recommendation of a new agricultural financing fund

Why can’t agribusiness SMES get access to finance for start-ups and early stage expansions? Shortage of risk capital:

• Banks are committed to short-term, highly collateralised debt for young companies; • Banks have trouble understanding agribusiness; • Made worse by lack of equity and quasi-equity risk capital; • Especially noticeable in the agribusiness sector

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Poor business management capacity:

• Typical agribusiness SMEs lack know-how to manage their businesses efficiently; • They often lack appropriate governance, controls and discipline; • They often lack a detailed Business Plan; • All of which are potent barriers when looking to access finance.

According to The presenter, Mr. Harris, Technoserve has developed some Business models that enhance small farmer incomes as below: - Figure 2: Technoserve's business model

5.2b. Case Study: Tanzania coffee industry (KILICAFE)

By Carl Cervone (Technoserve) In Tanzania TechnoServe has been working with local and international financial institutions to design financial products that serve smallholder coffee farmers across the entire value chain. These products range from short-term input credit and sales pre-financing to multiyear loans used by farmers to invest in centralized processing facilities. Credit is guaranteed through a variety of innovative means, including private guarantee funds, warehouse receipts, forward sales to specialty coffee buyers. TechnoServe presented a the case of its work with KILICAFE, an organization it helped create, now owned by 9,000 smallholder farmers which markets over $3M of smallholder coffee per year.

TechnoServe’s Strategy aims to;

• Support service provider to provide marketing and financial linkages to groups

Small - scale farmers Agro - processing plant Regional and Export food

products market

Small - scale farmers Farmers are integrated into production, processing and marketing chain

Small - scale farmers Seed, fertilizer, technology

Supplier

Increased production

efficiency and farmer

income

2. Supply businesses: Improved seed, access to fertilizer and Production

technology

3. Outgrower model: Small farmers and nucleus business are interdependent

1. Processing businesses: Providing a stable market for farmers and adding value in - country

Nucleus Business Business usually contracts farmers as producers, supplying inputs, training, technical advice and point of sale

Cheaper food more readily

available

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• Identify and organize farmer groups with potential to produce quality • Assist groups to invest in improving quality and production

The strategy is thereafter followed by Financing arrangements which could either be Long term financing or Short term financing and the organization also enhances a systematic approach to Technical assistance versus financial risk. Table 2: Customized technical assistance diminished financial risk

Local bank for working capital

• Unconventional borrowing needs of client

• Didn’t understand business model, market risks, etc.

• Didn’t see coffee as full collateral

Significant initial support to bank and client securing collateral, developing business plan, monitoring performance and financials Minimal ongoing support once creditworthiness and strength of business model proven

Soft loan provider for CAPEX

• No presence on-the-ground

• Cautious of local risks, little experience in Africa

Looked to TNS for due diligence function Ongoing TNS operational assistance to ensure that loan is used properly until creditworthiness established

Exporter for working capital and CAPEX

• Commits client to future coffee deliveries (potentially restricting marketing options)

Saw TNS as honest broker Ongoing TNS operational assistance to ensure that volume and quality commitments met

5.3 Private finance model: ACTIS Africa Agribusiness Fund

By Paul Kavuma – ACTIS

ACTIS shared a private financing model which has been developed under a highly developed Investment criterion and based on a value chain approach and a current Agribusiness fund estimated at USD 92 million dollars with CDC. A critical success factor for ACTIS has been application of control positions. Challenges facing private sector equity in Africa are;

o Low management skills- Limited entrepreneurial/managerial talent with successful track record o Lack of access to critical Information- Requires rigorous due diligence, often using external

firms & industry experts o Pricing risk- Use of external experts to address, limited comparables o Debt availability-Depth of financial markets and cost of debt o Legal framework- Ability to exercise legal agreements o Exit risk-Capital redemption mechanisms and strategic buyer screening to assess exit prospects o Long term view- Agribusiness and forestry not wholly suited to closed end fund structure

Investment Strategy • To invest in equity and quasi-equity in the African Agribusiness sector: comprises activities related to

production and processing of, and services related to (i.e. inputs, logistics, distribution and marketing) biological products, plant or animal, whether for food or non-food purposes

• Investment type: mainly expansion capital in both new and existing investments and includes rehabilitation and buy-and-build

• Control - Control preferred but not exclusively • New investment focus:

– Low capital intensity, participation across value chain

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– No Greenfield start ups – Deal size will be US$4m to US$15m

• Follow-on investments: From US$1m • Exposure: Country: Max 50%; Sector - Max 33%

5.4 Bank benefits and challenges in value chain Financing; Case of Ghana.

By Martin Poku –Agricultural Development Bank, Ghana The agricultural sector value chain consists of: Primary Producers; Agro processors; Support Service Providers and Marketers. ADB Core functions have been on Agricultural value chain with an estimated portfolio of 94 million dollars since 2003 with objectives focused on out-grower program. The program design is based on the following pillars;

o inputs supply- not readily available o farmers to grow broilers 8wk o processor o retailers and consumers

Challenges facing the program include; high costs, inconsistent supply, lack of finance, equipment shortage/capacity reduction, competition of imports( some of which are cheap) and lack of bank involvement in the birds marketing. The experiences have enormous benefits from the implementation process which include; lessons learnt, database for clients established, bank’s increase in revenue and appropriate investments in food value chain. Other key lessons learnt that have enhanced the efficiency of service included close monitoring and need for partnerships between the public sector (government) and financing institutions.

5.5 Experiences from Mali

By David Dao- Kafo Jiginew

Identification of needs for target clientele has been the main entry point for KAFO with a focus of developing financial products that suit the dynamic needs of the various enterprises. Key factors considered when developing financial products include; quality, cost of financial services, sustainability as an important issue, enhanced access through group collateral and ensuring that financial interventions meet the needs of the farmers.

Highlights on conclusions: o Proximity to clients required consideration o Affordability a key factor to sustainability o Product availability or seasonality o Client needs assessment o Diversification from rural to urban areas?

5.6 Role of SACCO Networks in Value Chain Financing

There were two papers focusing on SACCOs in value chain financing. The summaries are as below.

5.6.1 Lessons from Tanzania and West Africa

By Yves Boily – Desjardins Development International (DID) The Role of SACCO has continually been recognized as a farmer owned system that can be equipped and evolved to avail a wider range of products to its members. Desjardins International Development International (DID) shared lessons learnt on a Warehouse Receipt Model successfully implemented in Oti, Madagascar and Dunduliza, Tanzania. Key success factors of the model include;

� Proximity to services

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� Financial support � From the field to the markets � SACCO / AMCOS7 synergy model � Factoring model � The model has enhanced the impact of SACCOS Value chains

SACCO proximity to small-scale farmers can give a better access to financial services and contribute to improve value chain finance performance and increased incomes of rural families. The slide below elaborates on the factoring model as presented:- Figure 3: Factoring model of Desjardins

Cotton company

SACCOSCotton growers’

groups

1

1 Inputs request & credit appraisal

2

2 Inputs delivery

3

3

3 Invoice transfer

5

4

4

5

6

6 Cotton delivery

7

7 Cotton payment

8

8

Loan recording

Invoice payment

Factoring model

$

$

$

Loan repayment + deposit in farmers’ savings account

The contribution of SACCOS to Value Chains has ranged from increased productivity though access to capital give access to inputs and equipment; adds value to agricultural products through loans for processing, packaging; Bring product to consumer which enables through loan to distributors or retailers and enhancing provision of food security in the community through financing storage. The proximity and the scope offered by savings and credit cooperatives are powerful levers that can considerably facilitate, at all steps of a value chain, the transfer of money flows that supports the flow of produce from the field to the end consumer’s food basket. This lever is so much more powerful and effective when lasting partnerships can be established between the different players who support an agricultural system.

7 Agricultural Marketing Co-operative Society

5.6.2 Role of SACCO Networks in Value Chain Financing, Lessons from Kenya experience of Co-operative Bank of Kenya

By Mrs Catherine Munyiri

The role of Co-operatives movement in Africa was recognized and Kenya’s case study received special attention. The Co-operative Movement in Kenya has evolved over the last 40 years into a formidable force for the socio and economic transformation of the Kenyan population. Kenya has approximately 10,000 registered co-operatives and 5,000 active Saco’s presenting the most developed co-operative movement in Africa. With approximately 6.3 million registered members, the sector is estimated to impact directly or indirectly over 25.2 Kenyan which translates to approximately 72% of Kenya’s population. The movement has mobilized over Kshs.10 Billion in savings representing about 25% of the total domestic savings. The Co-operative movement has evolved over several decades with cases of both success and failure which has eventually led to an emerging upgraded model that aims at meeting the dynamic needs of its members through a continuous product development approach. The Co-operative Societies of Kenya cut across various sectors such as agricultural marketing co-operatives, teaching sector, tea industry, employee-based and lately community based. The Co-operative Bank of Kenya was formed by co-operators through their Co-operative Societies in 1965 to deliver financial services to the Co-operative movement. Role of SACCOs in value chain financing include; mobilizing savings, intermediation, loans to members, and basic financing services. To enhance the efficiency of value chain financing models it is important to address the following;

• Infrastructure development especially in rural areas • Explore new markets e.g. coffee to China and other Asian markets • Promote local consumption • Increase value addition to target new markets and increased incomes • Develop new financial products/models with less stringent collateral requirements • Direct marketing by Co-ops • Development of suitable financial linkage model e.g. Group Lending

Some of the unique features of the bank is that it is 100% owned by the Co-operative movement, the 4th largest bank in Kenya in terms of assets and liabilities with 43 branches distributed countrywide, 137 ATMs countrywide with 20 more to be commissioned by the end of the year to make a total of 157 ATMS. In 2000 it became the second bank to offer fully centralized, online, real-time banking throughout the entire bank network.

5.7 Strategic partnership for financing – Equity bank experience

By Mrs Esther Muiruri Equity Bank is taking a lead in development of financial products that are affordable and applicable for smallholder farmers and further focus on women. Equity Bank’s financial services are based on a business model with an increased focus on interventions in the agricultural sector and increasingly adopting a value chains approach to financial intermediation. Value chain approach presents several benefits to all the value chain players. Product development dynamics has placed Equity Bank at the cutting edge of development of pro-poor financial products aimed at deepening financial services and further enhance fewer barriers to banking services. While, Kenya’s rural poor are largely in the category of a non-bankable citizen, Equity Bank is developing systems that would enhance their access to financial services. The Network systems in place currently have also been design to increase outreach in both the urban and rural areas. Highlights:

� A Value chain partnership successfully implemented in partnership with Osho chemicals has been based on a value chain approach leading to enhanced access to chemicals by small-scale farmers. The

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approach will be replicated across other commodity chains where applicable and further attract private companies to be

� Financial products are developed to meet the emerging financial needs in the agricultural sector � It is important that alternative methods of delivering credits/finances are tested across various sub-

sectors.

5.8 Value chain financing model and vision for Value Chain Financing in Africa

By Mwangi Kariuki - Commercial Bank of Africa Business models for value chain commodity financing developed by Commercial Bank of Africa (CBA) have factored in the dynamics that exist within a value chain particularly in a context where smallholders play a vital role. The bank is more focused on value chains for stable market shares and presenting opportunities for smallholders. Several cases also exist where there is multiple financing along value chains via financial institutions however, CBA clientele has mainly been larger corporations and further offers advisory services along such chains. Commercial Bank of Africa has been involved extensively in Technical Value Additions which largely include: Commodity processing (Vertical) e.g. leather products, preserved fruits, and fish products; Share of Manufactured merchandise (Horizontal); apparels, accessories; Trade Support Services; general business services, infrastructure (roads, air transport, railways, ports, telecoms, energy), Marketing agencies; New: ICT support Services, call centers, information processing centers and Financial support to the entire Export Cluster. However there are challenges facing Supply chain: inability to genuinely capture the whole chain; Administrative bottlenecks, transparency issues among others. Figure 4: below shows a typical Agricultural Value Chain

FARMERS / PRIMARY

PRODUCERS

COOPERATIVES /

SOCIETIES / RAW MATERIAL SUPPLIERS

MILLERS / GINNERSPROCESSORS /

MANUFACTURERS

COLLATERAL

MANAGEMENT /WAREHOUSE

InternationalCorrespondent

Banks

LOCAL

BANK

OFF -TAKERS ( International / Local ) BUYERS

Informal Trade ; Retailers ; Distribution /

Wholesale Trade ; International Trade ; e-

Commerce ; Trade in Services

E F

C D

O

G

BA

J

K

L

MNP

Q

LCs in favour of the BankPayment of proceeds

Release Goods Againts Documents

H

Sales Contracts ,Firm orders Against LCs

Credit Facilities

Non - Negotiable WH Receipt

Deposit Goods

Forward Non -Negotiable WH Receipts / Pledge of

Bill of Landing

Reports / Submit Documents / Warehouse Receipts

LCsDocs

ReimbursementsACs

Analysis /Feed BackApprovals

Release Documents

against payments

DeliverPayments

Deliver /Payments

Documents

Fish , Cotton , CashewnutsRice , Sugar , Wheat , Hides & Skins , Pyrethrum , Sesame ,

Coffee , Tea , Groundnuts , Macandamia nuts , Tropical Fruits , Milk products , Metal

AND Steel products .

Input Providers

CreditSupplyInputs

I

Distribution

FARMERS / PRIMARY

PRODUCERS

COOPERATIVES /



MANUFACTURERS

COLLATERAL



Banks

LOCAL

BANK





E F

C D

O

G

BA

J

K

L

MNP

Q



H


Credit Facilities


Deposit Goods


Bill of Landing


LCsDocs

ReimbursementsACs


Release Documents

against payments

DeliverPayments

Deliver /Payments

Documents



AND Steel products

FARMERS / PRIMARY

PRODUCERS

COOPERATIVES /



MANUFACTURERS

COLLATERAL



Banks

LOCAL

BANK





E F

C D

O

G

BA

J

K

L

MNP

Q



H


Credit Facilities


Deposit Goods


Bill of Landing


LCsDocs

ReimbursementsACs


Release Documents

against payments

DeliverPayments

Deliver /Payments

Documents



AND Steel products .

Input Providers

CreditSupplyInputs

I

Distribution

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5.9 Mainstreaming Small Holder Farmers into the World Economy – Using Farmer Ownership Model

By Herment A. Mrema, Africa Rural Development Support Initiative (ARUDESI) - Uganda ‘Why Farmers are Poor?’ was the question opening the presentation with an aim of triggering the audiences to assess the various highlights under the presentation. The issues raised in response to the question included; farmers are in a poverty circle, small production for self consumption and small surplus for sale and money is mainly used to buy basic items they do not produce (soap, paraffin oil, sugar, match box) and further more the farmers sell the small surplus at extremely low prices. The smallholders’ competitiveness in the market is also highly reduced since for cash crops they sell as individuals, not adding value to justify the basis to negotiate and bargain for a better price. For farmers who are selling through cooperatives or associations they do not have the sense of ownership hence they surrender ownership to the managers and leaders who assume free ownership without investing on the production. Appropriate approaches to reversing the Poverty Circle would include;

� Organize farmers into business groups( 25 – 35 per group) using a strategic crops in a holistic, integrated and harmonized manner within the farming systems, and get their businesses names registered with the Registrar of Companies for legal backing (can be sued, sue, open bank accounts and enter into contracts etc).

� Assist groups to profile their baseline and establish baseline data that will be used to develop vision based business plans and implementation strategies

� Assist groups to develop survival and Working Capital accumulation strategies � Groups lending to members to finance their immediate needs so that they can postpone individual sales

of their produce at a give away price � Encourage value addition by stopping selling to middle men and move higher to the nearest bigger

market with bigger volumes � Group marketing of all products for bargain power due to bigger volumes and value addition

6.0 ADDRESSING CAPACITY AND COMPETITIVENESS ISSUES FOR PARTICIPATION IN VALUE CHAINS AND FINANCE

Overview: Promotion of a new paradigm that will offer another approach to improve livelihood in sub-Saharan Africa and particularly a paradigm shift focused on increased agribusiness interventions both at the farm level and along the value chains. Besides high transaction costs along value chains, smallholders face a myriad of challenges that drastically reduce their effective participation along highly dynamic value chains. Enhancing the competitiveness of smallholder and value chains players with a focus of production / processing efficiency is capacity intervention for consideration by development agencies while access to information and knowledge should be enhanced along value chains.

6.1 Small-scale farmer capacity and competitiveness

By Susan Minae – Ethiopia & Godrick Khisa ‘Farmer field schools’ Small-scale farmers’ capacity in dynamic agricultural value chains is an important aspect especially in reference to aspects such as increase productivity and production costs reduction. There is also need to enhance an enabling environment taking into consideration the status of small scale sector in value chain. Small and Medium Enterprise (SME) Value chain actors need to consider markets, infrastructure and Post harvest issues while farmer organizations need to address management concerns and concerns on access to technical support. Value chain financing would be successful if the following aspects were well addressed within the context of smallholders; Capital formation, Credits management and Safe guard against risks. Aspects of capacity building ought to be included and preferably assess existing models like ‘Farmers Field School’ through which farmers

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are supported in their observation capacity, analytical and decision marking capacity as well as Groups’ cohesion are elements of focus. Key issues in financing small scale /informal sector include; Costs, Qualification, Enabling environment, Lack of long term funding, Enhancing savings and Innovative finance products The central characteristics of FFS include:

• hands-on training methods in which farmers test management methods for themselves and learn concepts directly;

• flexible, non-lecture field study using a group field that allows the “field to be the teacher”; • strong emphasis on observation, analysis, discussion and debate, which allows new ecological concepts

to be combined with local knowledge; • the use of a technically competent facilitator who leads group activities, but is not seen as the “all-

knowing source” of the “right information”; • Focus on farmers becoming experts and “farmer facilitators” in their own communities.

6.2 Client experiences

Case Study 1: Jennifer Khaemba- Farmer representative working with DrumNet in Kenya. DrumNet is part of Pride Africa which offers financial services for members of Napakase women group which had started with a merry go round and registered with the ministry of culture and social services. The group was trained on credit management and further DrumNet promoted sunflower production and marketing; Sunflower is a good alternative to sugar cane planting with 3 seasons per year. They currently have 10 acres under sunflower and their linkage to BIDCO was enhanced. BIDCO provides training and transport while equity bank facilitates financing. Case Study 2: Catherine Nyaga – FIPs processors – [Farm Concern Intl’ partnership] FIPS is a processing company largely for passion fruits and mangoes. They source these from farmers in central and rift valley provinces and currently handle 80 tones of passion juice per month and a turnover of approximately Kshs. 5 million shillings per month while mango juice is valued at Kshs. 1.5 m per month. Main customers are industrial and institutional buyers. Though the business is profitable within a growing market share, FIPs faces a range of financial challenges; up front payments, asset financing, premises congested, credit payments (delayed credit payments under credit delivery systems. FIPs has some areas for short, medium and long term financial intermediation to cover business requirements particularly for; factory and warehouses, labour and increase equipment needs. FIPs can tap into enormous business opportunities if financed affordably.

Case Study 3: Bernard Maina – FIPs processors [-Farm Concern Intl’ partnership] Bernard Maina is a trader dealing with French beans sourced from smallholders and with a current capacity of 30 tons per week making gross income of Kshs. 5m per month and transacting Fresh Tomatoes worth over Kshs. 2 Million monthly. Bernard is currently employing 26 employees and paying approximately Kshs. 240,000 per month. Main challenges facing his enterprise include; up front payments, equipments and transport and post harvest losses due to lack of cold room.

6.3 Safety, quality standards in relation to local and export markets

By Francis Wario, FPEAK

Fresh Produce Exporters Association of Kenya (FPEAK) has been spearheading the implementation of Kenya GAP with key objectives on; Environmental protection, food safety, product traceability, welfare, occupational health and safety of workers. They lay emphasis on Food safety and traceability that is customized to Kenyan conditions, national interpretation guidelines, Large and small-scale growers, Flower and Vegetable Scopes, risk-based GAP application, “what” and “how” information is shared, either quality management system(QMS) template and adaptability to other countries.

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Key issues in the quality standards in relation to local and export markets are market driven standards, environmental concerns, expensive undertaking for small holder farmers, opportunities in good quality, competitiveness and sustainability. This initiative has some benefits and this is that it minimizes costs through: Risk assessment approach to soil and water analysis; Regional mapping; Benchmarked to international standards; Local expertise and CBs available; Consultative in Design and development. However Kenya Gap is facing a range of challenges which include; large numbers to certify, Group organization, Costs and funding, market prices, maintenance and sustainability In future Kenya Gap looks forward to a situation where;

o All growers will have the opportunity to be certified against Kenya – GAP o The Standard document will be publicly available o Only approved bodies will be able to award certification against Kenya-GAP o The document will be available online o FPEAK will embark on training growers on the requirements of the standard through the uses of

approved trainers

7.0 POLICY ON AGRIBANKS: ADDRESSING POLICY ISSUES

7.1 World Bank Perspectives

By Renate Kloeppinger-Todd

There is need for financial sector reforms and subsidized interests rates. More often than not farmers have not been able to access credit to finance their farm activities due to the stereotypes associated with immense risk. Financial institutions believe that funding the farmers will adversely affect their business whenever there is a risk or an adversity. It is believed that this will lead to the collapse of the financial institutions due to the loss and so there is needed to introduce innovation and more friendly financial policies and subsidized interest rates for small holder farmers in the sector so that farmers could access loans much more easily and cultivate prudent skills to repay the loans after the crops have matured, harvested and marketed. Farmers’ access to markets has continued to be a major problem despite the reasonable produce and high quality levels achieved. This therefore calls for agricultural finance and rural finance policies to be enhanced and the principle task is actually to work on the micro economic stability, price instability and the task of retaining it within a single digit, Control interest rates and assess possibilities to reduce rates, exchange rates control for export and foreign exchange control imports.

7.2 The Fiscal sector discusses tax policies and concessions.

The fiscal sector will have to discuss tax policies and concessions with a view to ensure there is tax treatment. Expenditures on infrastructures is given a priority in the Agricultural sector and also focuses on other financial sector policies for efficiency, stability and technology for improved access to markets, policy issues on subsidies and rate of subsidies. Key issues here are;

� Subsidizes on interest rates by financial institutions � Subsidies for technologies that enhance agricultural business � Even policies that are outside � Small scale actors enhancing small actors � Warehouse and quality ( warehousing receipts /bonded warehouse ) � Policy environment and enforcement etc

7.3 Roles of Central Banks

By Abdoul Anziz – UNCDF

Roles of Central Banks should ideally provide an enabling environment for private, bilateral and even multilateral financial investment. Interference and unnecessary regulation stagnates or prevents private financial investment to thrive in any country.

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Provision of the Framework for developing of policies is a key role of Central Banks and would have to be in the forefront of developing frameworks for sound policies in the private financial sector to ensure fair treatment among players. In many countries in Africa there is no fairness in the manner in which people do business in the financial services sector. Laws are not uniformly applied and have loopholes where some players circumvent the laid down law to benefit themselves due to lack of supervision and accountability. Capacity building of the clientele is a key component. The clientele find themselves in problems many times due to the non-availability of a platform for capacity development so that they can make informed choices. In the same vain this normally leads to massive loss of huge amounts of money. Promoting viable banking is an important initiative by Central Banks: Case studies sited included Central Bank of Sierra Leone and Agricultural Development Bank of Ghana. The initiatives should aim at supporting profitable farming systems, macro support policies to rural infrastructure and research to pave way for the evolution of better farming methods and products which will provide efficiency, high returns and enhance competition.

7.4 Policy Perspectives from Central bank of Kenya

By Cassian Nyanjwa

Key highlights; Principal task of the Central Bank of Kenya is to ensure macro-economic stability through Price stability and check that inflation kept at single digit. The policy initiatives are therefore geared towards enhancing Agri finance and rural finance. The policies also help in controls of interest rates as well as Exchange rates controls for exports foreign exchange control in imports

The recently developed MFI bill will be implemented to provide for licensing fees concessions so that more branches are established, improved Technologies for improved access and legal reforms to regulate. SACCOs will be organized by a bill in parliament and this will also apply to the establishment of Agric rural banks establishment as well as legislation on Communication Commission of Kenya (CCK), Central Bank of Kenya (CBK) and mobile banking and other forms of money transfer

7.5 Challenges of Central Banks in the region

Central Banks often lack autonomy from policy makers however, the policy makers need to be given leeway to develop useful and market oriented sensitive policies that lack political expediency and are not necessarily focused on the macro economy. Balancing regulation/supervision (over-regulation can kill banks) hence need for good regulatory frame work that assist in promoting the sector. This will allow financial institutions to be responsive to the market needs and cut out market driven products that will spur growth in the financial sector and therefore enhance macro economy. All stakeholders develop a shared vision and joint policy (all institution and CBs) to avoid collision. CBs have a framework to link practitioners and the banks. A shared vision will provide synergy and better coordination resulting in the well grounded market driven and sensitive policies to the economy.

7.6 Main Policies in Agribanks

By Nicholas Waiyaki (KIPPRA)

Macro-economic policies must be sound to support the Agricultural and Financial sectors by providing opportunities for profitable farming systems and rural infrastructure, research and financial policy assessment. Some of the policies specify defaults by drawing a well grounded legal framework which is compulsory for all players and supportive of profitable farming. Secure land tenure is a major constraint in agri-banking. It is a well known fact that very few people in rural areas have title to land; perhaps this explains the reason why 50 % of people have no access to funds because of lack of collateral. Policies that encourage financial sector policy can allow rural and small-scale financing. The governments should strive to void unnecessary government power to control, regulation and especially the rate of providing subsidies.

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7.7 Agriculture is the mainstay of Nigeria’s majority

By Donatus Etim, Central Bank of Nigeria

According to the author of the paper, Agriculture was the major foreign exchange earner before the advent of oil in the 1970s. However just like other agricultural economies in Africa, Nigeria’s major problem is inadequate funding by government and the private sector. Most of the population estimated at 65% lack formal funding. The rationale for Government Agricultural Finance policies is development. Nigeria’s development goals focus on Food, poverty eradication, employment generation, reduction in the rural to urban migration, less dependence on importation of food items and increase in foreign exchange earnings. The main objective of Agricultural financing is to establish an effective system of sustainable Agriculture financing schemes, programs and institutions that could provide micro and macro credit facilities for small medium and large producers, processor and markets.

• Reasons to failure of past initiatives Unwillingness of conventional banks to deliver services effectively and support the micro-enterprises, scarcity of funds, incompetence in management and poor corporate control to be loaned among others, poor credit administration and the absence of support institutions in the sector etc • Challenges most schemes and programs and institutions are not adequately funded for effective performance, cumbersome processing procedures, inadequate infrastructure, undue political influence on lending. And weak legal structures etc

It was recommended that the way forward would include adequate budget provision and prompt payment, establishing a Micro-Finance Development Fund, review of institutional, schemes and program policies to enable them support value addition to farm gate output etc. Most important is the synergy among the credit delivery institutions.

8.0 COMMODITIES EXCHANGE AND RISK MITIGATION Overview: Risks that affect agricultural financing can be broadly grouped as systemic/correlated risks and idiosyncratic/independent risks. Major systemic risks include production risks (farming practice, weather, pests, etc), price risks, and political risks (export bans, price caps, debt write offs, etc). Both producers and lenders face the impact of these systemic risks. Idiosyncratic risks include risks that the borrower faces (life, health, asset, etc) as well as those that the lender faces (willful default, wrong estimation of credit-worthiness, wrong pricing, etc). This session was chaired by Mr. Juma Reli, Deputy Governor Bank of Tanzania and comprised of three presentations on risk mitigation strategies, Options of raising capital for Agriculture and addressing risk through commodity management.

8.1 Risk Mitigation Strategies

By Ajai Nair, Consultant for World Bank

Inadequate or absence of risk mitigation strategies leads to low private investments in farming and agribusiness, low availability of finance for farming and agribusiness, slow adoption of agricultural technology, and low bargaining power for producers in commodity markets. This, in turn, results in high volatility in household income and food security. The impact on low income households is higher because they have to reduce consumption and liquidate assets to cope with shocks caused by these risks. Both these coping strategies lead to reduction in future income, thereby keeping many of households in poverty.

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Better management of risks in agricultural financing involves managing these risks at different levels of the borrower, at the level of the lender, and at the level of the economy. At the borrower level, this means reducing and managing risks directly related to agriculture farming as well as those related to life, health, and productive assets. Use of improved seeds, farming practices and technology, agricultural development services and access to agricultural insurance help reduce direct agricultural risks. Access to life, health and asset insurance reduces vulnerability to these risks. The risk from fluctuation of prices of agricultural commodities is better managed using physical tools such as forward sales and minimum price guarantee contracts, and financial tools such as options (typically through intermediaries).

8.2 Options for raising capital for agriculture

By Jimnah Mbaru, Kenya Stock Exchange

The stock exchange is made for primary (IPOs) and secondary market trading. It is actually affiliated to the African securities Exchange Association (ASEA) which aims to establish systematic corporation, enhance sharing of information and development of harmonized market standards. As at October 2007, the NSE comprises of 74 government bonds, 53 listed companies, 6 corporate bonds, 7 licensed investment banks, 11 licensed brokers and market trading. The equity secondary market has thrived due to improved governance and strategies which determine performance. NSE Market performance relies on equities primary markets, equities secondary performance and bonds primary and secondary market. Drivers of the stock market are;

• Economy, • Economic monetary cycle i.e.– recession, recovery, boom, then extended boom or recession • Technology effects such as CDS & ATS • Increased, corporate profitability, increased foreign exchange earnings, increased remittances from

the Diaspora, • Increased market participation • Increased investment vehicles • Privatization for financing budget deficit; • Money by Kenyans from oversees • Increase in money held by institutions • Foreign investors • Private equity has become a key source of finance

The role of commodity exchange is to facilitate offsetting commodity transactions without impacting on physical goods until the expiry of contracts, offers, types, market players, Farmers. It is worth noting that commodities controlled by boards are heavily regulated and many small producers are challenged by the stability based on client base in an environment of struggling institutions especially cooperatives due to inefficiencies and internal bureaucracies on elective posts and decision making process. We also have issues such as conservative approaches and partial liberalization of some commodities sectors (coffee) which have really brought about challenges. There are several options for raising capital; thus private equity/capital, IPOS, corporate bonds - backed by a good brand name of the organization, securitization and syndicated loans. Finally, the role of government in setting up the exchange is to facilitate one off grants, reform the producer sector, exchange income tax exempt, provide warehousing (Subsidized), plan a regulatory body for commodities, possible to raise funds through NSE, reforms essential for the successful MCE in Kenya, MCE way forward, government cooperation and support essential.

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8.3 Addressing risks through commodity management

By Andre Soumah (ACE Control)

Warehouse receipting has developed into a highly dynamic field that integrates financial services into agricultural value chains based on negotiable or non negotiable terms. However, the systems have to be based on stable legal framework aimed at comprehensively protecting all the players in the market. ACE which has been practicing warehouse receipting for 11 years in 73 countries highlighted key parameters for success as follows;

• Reliability as a key requirement for all players • Quality and weight controls subjected to all transactions • monitory and control services • processes must integrate; production, distribution and collection • Insurance covers well established along the value chain • Financing and structuring opportunities

Types of selling applied by ACE includes; forward, future and spot while the credit risk mitigation done by focusing on the commodity as opposed to focus on the client. The transaction processes are guided by various models which include components on;

• Contacts • Identification and Verification • Pricing • Controls • Risk mitigation methods

9.0 OPEN DIALOGUE – EXPERIENCE AND TRENDS This session attracted various experts who shared on different perspectives in value chain financing

9.1 Standard Chartered Bank’s experience shared

By Stephen Muriu

Standard charted Bank just like most banks is involved in wholesale and Consumer banking where it serves corporate and institutional clients with world class offerings built on product capabilities that are innovative and responsive. It also provides clients with complete, customized solutions: Transaction services, Financing, Risk management, Advisory and Investment. On commodity traders and Agri-business (CTA) Africa the key message is getting the right client coverage in place, growth opportunities existing in our markets, abilities to deliver consistent and effective banking solutions and maintaining solid partnerships with clients. The corporate clients involved come from, commodity traders, energy metals and mining and Agri-finance. And in capturing the flows in the Agri food value chain they deal in the following flow features:

o Grain Hedge, fertilizer Hedge, working capital structured Finance, Term debt, o Pre-finance, working capital o SPV-Repo warehouse inventory o Structured Receivable Financing. o Debtor Finance, working capital, FX, Derivatives and term dates.

Key Drivers and Trends

o Africa is set to become a breadbasket for the world, if challenges of insufficient infrastructure and limited finance can be overcome

o End to end focus for Agri-finance in Africa is critical (production – processing – trade – off-take) to create the economies of scale to warrant infrastructure development and commercialization back to the production segment

o Agri-trade between Africa and India, and Africa and China set to increase Agri economies

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o African government programmes for countries to feed themselves – strong production segment focus o Government focus on diversifying into commodities for export (coffee, oils, rubber, cocoa, etc) o Higher risk in Africa leading to continued high returns until 2010 o Biofuels opportunities

9.2 Field Experiences; Lessons learnt in value chain financing

By Sanga – Basix India In India the major focus of the agricultural system has been on the transfer of technology from lab to land has not been successful for the following reasons:

1. The experiments carried out were not suitable for the farmers as they were not practical due to sparsely located and disaggregated land holdings

2. The needs of women farmers and farm laborers are neglected. 3. Poor extension network

Moreover in India commercialization and specialized farming is increasing creating a need for context specific extension services and handhold support for skill building, access to technical know-how, market information and markets Key highlights; This value chain evolved as Basix strategy, a livelihood strategy with partners for backward and forward linkages otherwise referred to as Potato value chain with 2,000 growers with a revenue base. These included different varieties and farmer groups were formed for efficiency purposes. In the chain Frito provides technical service, supply seeds and credit to the farmer, packaging, grading and sorting, assured market – paid after 10 days timely, produces collectively 20% net gain to the farmer, lobby the government for subsidies for farmer insurances and recovers loans up to about 90%. As far as cotton is concerned Basix buys pesticides from the shops, provides the necessary technology, credit to farmer groups and has put in place peer pressure mechanisms in the groups to make sure loans are repaid, link farmers to source input and market output linkages and ensures value addition and market intelligence. Private – public sector partnerships is also encouraged however there are Lessons learned in this value that is worth sharing. There is a comprehensive approach such as insurance and commodity derivates for risk mitigation and access to mainstream markets.

10.0 INNOVATIONS, SUCCESS STORIES AND WHAT CAN BE REPLICATED IN AFRICA

10.1 Value chain finance innovations and experiences

By Kenneth Marangu – Kenya BDS

The Kenya BDS Program is a 6-year USAID funded activity implemented by the Emerging Markets Group (EMG) and the objective is to increase growth and incomes among rural micro- and small-enterprises through increased access to business services.The main areas of focus are:

o Tree-fruits (passion, mango, avocado) o Lake Victoria Fish (Nile Perch, Tilapia and Sardines)

This process involves selection of Target Industry, Conducting Value Chain Analysis, Identifying and prioritizing constraints, design Interventions, tendering among Local facilitators, awarding, Supporting, and Monitoring. The underlying factors that influence the chain are the crop husbandry and spray services which can increase grade 1 yields, farmers inability to gain access to or afford high cost (upfront) of agrochemicals, spray equipment, and labor, increasingly rigid production standards from the European Union require appropriate use

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of specified pesticides and the fact that for example this loan program is a joint venture between Equity bank, KBDs -Market linkage/ group management companies and export market.

For Agriculture to be developed the following approaches must be adopted: identify and develop independent agrochemical spray service providers, educate farmers on the need for Integrated Pest management (IPM) and agrochemical spray services, credit facility to farmer groups for agrochemical spray services, supply contract with exporter. Payments by check off systems through the bank to allow the bank deduct its scheduled loans that farmers owe the banks. The bank and Agrochemical spray service providers should consolidate service receipts on a monthly basis for payment from bank. In addition to the above there is a Loan process mapping

• to supply contract in place between farmers and exporter • Group farmers complete loan application form and chattel agreement for Equity (for overall season) • Application forms consolidated at group level and submitted to bank • Bank approves loan for season • Assumption that spray season is July - February • Assumption that repayment period is March - June • Farmers sell fruits to exporter. • Exporter remits sales proceeds to Bank (with detail break down payment by group). • Bank pays farmer groups; less 20% deduction for loan repayment until cleared (The loan must be

cleared by a certain period).

10.2 Financing Smallholder farmers

By Jonathan Campaigne- DrumNet

The system of finance, production, marketing, and distribution of produce from small farms is inefficient, leeching away income and profits from all participants in the transaction chain, but particularly from the farmer herself. PRIDE AFRICA has been successful over the past 15 years developing and implementing a scalable micro lending model for the informal sector- 90 branch net works serving over 200,000 in the region. Microfinance works and the poor have been proven bankable but only in urban and peri-urban areas so the current focus should be on developing a supply chain service model for small holder farmers The Value of the Model

� Farmers are able to access both credit and markets through their interactions with DrumNet, paying off loans with their farm produce proceeds.

� Large-scale buyers are freed from the requirement of managing cumbersome transaction intensive credit programs to ensure reliable supplies of product. Instead they write a single check to DrumNet every harvest.

� Stockists can access new customers without the requirement of selling products on short-term credit. � Banks are able to tap into a currently inaccessible market for savings and credit while avoiding high

transaction costs. � For all participants, payments take place in a convenient timeframe, mostly in a cashless manner,

increasing security and accuracy. � DrumNet allows all members to focus on core businesses and to use the network to intermediate the

flow of information and funds.

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Figure 5: Supply Chain Management platform linking financial and non financial services for value chain actors

10.3 Smallholder commercialization based on ‘Commercial Village Approach

By Mumbi Kimathi – Farm concern Commercial Village Approach aimed at Commercializing a typical African Village by clustering of producers groups within a village setting. The community Village comprises of 500 Households and currently a 60,000 HH (Avg. 6 members/HH) village co-ordination unit, and a multileveled leadership structure. There is an executive committee that spearheads commercialization and sub committees that comprises of marketing, financial and social committees. This approach is meant to trigger commercialization by identifying markets, conducting value chain analysis, Identifying routes for market entry, developing value chain partnerships, prioritizing products from farmers’ basket by avoid wide range or too narrow range, conducting cost benefit analysis along the Farm-to-Market chain, assessing target farmers, agro-ecological zone analysis and BDS Mapping. African Traditional Vegetables case study This is an initiative of Farm concern implemented within the framework of the CVA. Some of the highlights mentioned are that consumption for ATV in Nairobi has increased from 31 tones in 2003 with an estimated farm gate value of US$ 6,000.A current 600t tones in 2006 with an estimated farm gate value of US$ 142,860. A farm gate price increased by 30% and the current supply of 500 Tones is estimated to account for 60% of the demand level. The ATV distribution network includes supermarkets, kiosks, informal markets and street markets. The model is supposed to bridge the gap between poverty & creditworthiness by triggering commercialization, assisting the farmers to access Market financial services (MacFis) a pro-poor credit line. These financial services are supposed to trigger income growth from mandatory savings of sales and repayment of loans recovered from payments. Because of this initiative Farm concern international was among the 5 global winners of the pro-poor innovative challenge.

Buyer/ Transporter

Stockist

Bank

Self Help groups

Farmer Field Schools

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10.4 M-PESA money transfer technology

By Joseck Mudiri, Safaricom

M-PESA is a money transfer technology by use of mobile phones by Safaricom; a leading mobile service provider in Kenya. It was designed to provide Financial Services for the many Kenyans without access to conventional banking and originally a DFID co-funded pilot to make Finance more accessible

• Business based upon high volumes of low value transactions and operates through registered cash outlets

• Usage is both by the banked and un-banked which requires a simple SIM card for transactions assures greater availability; It is also convenient for those with bank accounts

• Customers can use the services to; load their M-PESA account with e-money and exchange e-money for cash and send money to another by SMS instruction buy Safaricom prepaid airtime

Customers Register at Agents:

1. Complete a form 2. May get a free new generation SIM card* 3. Register their account 4. Send M-PESA an SMS

M-PESA has 1,050 outlets. M-PESA is electronic value [e-money] backed by real money in a conventional bank account. Users of this service can; buy e-money for cash, send it to others by SMS instruction, sell e-money in exchange for cash. M-PESA has the Trust Account with the real money and M-PESA records to whom that money belong.

11.0 EFFECTIVE WAYS OF REACHING SMALL SCALE FARMERS Several presentations were shared under this broad topic. Overview: Increased cost of inputs and technologies are major drawbacks for smallholders in Africa while market globalization compounds the situation gradually pushing smallholders out of the mainstream marketing systems. Small-scale farmers focus on subsistence farming further reduces their capacity to effectively participate in the markets resulting into less capacity to access cash which translates into lower purchasing capacity for technologies and inputs. Diminishing natural resources in Africa have also largely reduced the agribusiness opportunities at the disposal of rural production and processing systems. The new debates on whether ‘time is out for small-scale farmers in the global markets’ reflect reducing efforts to build capacity for the players at the bottom of the pyramid. The emerging threat for small-scale farmers in Africa is a direct threat to Africa’s production system which is predominantly driven by small-scale farmers. Against this backdrop, there is an urgent need to develop innovative approaches for reaching smallholders, build their capacity to participate in national, regional and global systems and further modify Business Development Services to suit the rural and peri-urban systems.

11.1 Experience of Fédération Caisse Populaire du Burkina

By Celestine Toe

FCPB has a membership of 154,000 and has developed various programmes to meet the needs of its members with a special focus on women who account for at least 23% of the total membership. However, the risk for women borrowers is unique and mechanisms have been developed to manage risks of low income women. Some of the principles applied to reduce risks include; deal with solidarity group, mobilize Village heads for commitment; analysis of needs- through the solidarity group and move progressively according to needs as well as limiting the amount offered. Community agents are key support systems though collateral and insurance systems are in place. FCPB financial services have largely increased the access to credit for women in Burkina Faso.

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11.2 Value chain financing

By George Odo, CARE International

CARE prioritizes value chain financing as an intervention to link smallholders to wealth/income creation activities and further build their capacity to take up emerging market opportunities. However, smallholders are not attractive to financial service providers due to: lack of collateral; weak institutions; high transaction cost and lack of entrepreneurial experience. To address the challenges faced by smallholders, CARE has developed a model which systematically applies the following steps;

o Source market o Establish contracts o Farmers able to access inputs and finances – from the private sector including the buyers

Through the implementation process, CARE has learnt some key lessons that have effectively contributed to the success of the model. Some of the lessons learnt include; Models should not distort the market, sustainability issues versus models, integrate the private sector in the models and traditional funding not sustainable

The slide below shows CARE’s approach of integrating smallholders where the propose starting with the market and working backwards” Figure 6: Care's approach

Market

Demand

Produce

Aggregator

InputsGoods

Aggregation of the smallholders goods

Aggregation of the smallholders demand for goods or services

Market ‘contracts’ as collateral

Inputs/cash advances on credit pre financed By Aggregator/Exporters/buyers

11.3 Integrated approach to reaching small-scale farmers in Zambia

By Margaret Mwenya, SIDA / ASP Zambia

The implementation approach of SIDA /ASP in Zambia has been designed based on four components which includes; Enterprise, Lands & livestock, Infrastructure and Capacity building. The mode of delivery is predominantly through facilitators, who are primarily government workers using a ‘facilitation cycle’. Through targeting, households are organized into groups of 100 households per facilitator. The Facilitation Cycle has both backward and forward linkages in a model with self evaluation loops and networks.

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Figure 6: ASP facilitation cycle

ASP Uses a ASP Uses a

process of process of

facilitation to facilitation to

assist small assist small

scale farming scale farming

households to households to

build their build their

EntrepreneurshEntrepreneursh

ip skills as well ip skills as well

as their as their

businessesbusinesses

The organization is focusing on a diversity of livestock aimed and brokers are equipped to play the role of market intermediaries. The approaches based on market linkages and financial services access has effectively graduated target households from farmers to entrepreneurs. The business orientation to farming activities has gradually increased the demand for financial services leading to successful establishment of 800 out grower schemes. SIDA/ASP’s experiences in farmer empowerment has led to conclusions that organizations must move away from technical interventions to commercializing farmers while profitability and sustainability should be priority focus for projects in Africa. After the presentation by ASP, a farmer who partnered with ASP shared her experience as below;

11.4 What has worked – lessons from the field,

By Helga Malamba (An ASP Facilitated Farmer – Zambia)

Farming over years has grown not to be a profitable venture for small-scale farmers particularly with the increased focus on maize production in Zambia. Farmers have been equipped to form interest groups of different enterprises and participatory identification of enterprises involving households and interest groups applied. The participatory process allows a stepwise approach to; idea generation, starts of business, improve business, business expansion, women entrepreneurship skills, financial and record management, contractual farming and opportunity identification after the trainings.

The enterprise identified to present opportunities for smallholders in various villages was groundnut growing with one group of women starting with 20kg seed of groundnuts and gradually expanding the farm enterprises.

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With time the women group headed by Helga diversified into pig production and commenced with 2 pigs. The women also conducted some market research to enable them understand the trends of the market which contributed significantly to understand the market requirement. The group started realizing income of 6000 dollars annually and planned to increase their pig stock to 25 pigs. The vision of the women is to improve their shelter and support education for their children however; the group is still largely challenged by access to finances and financial support for follow up to the out grower members. The group’s technical capacity has been enhanced through exposure visits to Congo, village banks in Mbeya in Tanzania, Southern Zambia to learn conservation agriculture and Farmer to farmer visits. The women group success in enterprise and cohesion has further been achieved through groups’ savings, market-led farming and improved food security mechanisms.

12.0 CLOSING SESSION

12.1 Summary Conclusions and recommendations of the 3rd Agribanks AFRACA Forum

The summary conclusions and recommendations of the 3rd Agribanks Forum were prepared by Mary Nandazi, Calvin Miller, Dorothy Nduku K. Kipsang and Mumbi Kimathi. They were then presented by Calvin Miller in which he highlighted the relevance of the various topics covered during the workshop and further recognized the participants consensus on a need to increase development efforts in the value chain financing initiatives. Agriculture as a key sub-sector in Africa required a business orientation and a fair platform for women. Calvin further highlighted that an integration of the private sector would enhance the efficiency of value chains in Africa. Lessons learnt over time across various pro-poor development initiatives should be applied across new interventions. Some of the lessons learnt have highlighted that some of key parameters to enhance the success of development initiatives include: Value chain analysis crucial; Risk mitigation is critical; Products and market diversification; emphasis on efficiency of development interventions; financing, training not enough – holistic approach; skill and capacity building is an essential component; BDS necessary to make farmers bankable; farmers have to be trained on key commercial requirements and intermediaries are instrumental in the value chains. As shown in the FAO Right to Food Day presentation, access to safe and nutritious food for all is critical and increased attention on urban and rural poor is required. Increased government’s recognition of the role of rural farming economies and its willingness to participate in agricultural value chains and challenges enumerated and discussed inhibit agricultural growth. The workshop participants were challenged therefore to focus on finding solutions particularly in rural finance and value chain financing interventions There was an understanding that for Farmers who are interested in becoming business persons; a market orientation for them is key to define for example that the role of women in agriculture is critical and must receive attention, that the active engagement and commitment of the private sector is required for value chain development; interventions must include, learning from, partner with and strengthen the private sector’s investment in agriculture and agribusiness and their interaction with small farmers. Lessons learnt and conclusions

o Huge milestones have been covered in years evolving value chains from plantations dominated to value chains integrating smallholders

o Successful models aimed at increasing the participation of smallholders along dynamic value chains as highlighted by Farm Concern Intl’, Technoserve, Actis, Kafo, ADB Ghana

o Infrastructure plays a major role in agricultural value chains, and must be addressed o The poor state of traditional markets in most countries is still a major challenge for stable value chains

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o Strong SACCO Networks can play a role in financing and empowering many smallholders for integrating into value chains

o Value chain analysis is an important part of understanding chains and relationships and how to best target work in them, especially for rural farmers

o A holistic approach and partnership are required to build the capacity and services needed to integrate small farmers into commercial value chains.

o Risk mitigation – is critical in value chain finance o commodity management is central to address product quantity, quality and weight o commodity management (ex. ACE) for control, monitoring, and inspection services are needed

around the world o risk mitigation begins with “knowing your client” – combining good production practices and

secure markets for clients, good loan analysis and good value chain and market understanding o An emphasis must be given to efficiency – technical, economic and allocation of resources o Diversification of products and niche markets is important to reduce risk and to address opportunities o Business development services are required to make small farmers bankable and have access to

profitable value chains – many successful facilitation models exist (ex. BDS Kenya, Farm Concern, CEPCO, BASIX, DrumNet....)

o Skill and capacity building – addressing needs of small farmers in a collaborative and efficient manner o Farmers have to be trained to understand commercial agriculture, take necessary measures to meet

buyer specifications; most will be willing, some will not o Farmers have the potential, we need to facilitate its realization o Investment resources are needed and comes from multiple sources; successful models include:

o Savings: SACCOS, banks o Loans: Banks, MFIs, investment companies o Equity and venture capital: ACTIS, Technoserve o Shared risk models

o Equity and quasi-equity sources are especially important for agribusiness finance. o Intermediaries play an important role and need to be considered when financing the supply chain o Experiences from the “Middlemen” indicated that they play important role as value chain actors as

drawn from - Passion fruit, processing into pulp and selling to large buyers - Bernard Maina, aggregation and sales of tomatoes and French beans

Recommendations and future issues Among the issues is a standard platform and guidelines for value chain finance, AFRACA and FAO are platforms for collaboration and collaborative learning. A joint effort to grow and learn together is further presented and value chain finance will offer an answer to address agriculture and agribusiness finance; the way forward in perfecting and promoting it.]

12.2 Call to Action

Mr. Omurembe Iyadi presented the call to action which was prepared by Omurembe Iyadi, Simon Maitha, Dorothy Nduku K. Kipsang and Mumbi Kimathi.

As a call to action by all partners AFRACA is to; o Coordinate interactive fora (Electronic and face to face); o Facilitate capacity building through exchange visits; o Promote networking (within AFRACA, other mainstream sub-sectors and other R&D Agencies); o Facilitate continuous generation of new knowledge, develop best practices and disseminate; o Increase membership of non-financial services providers and create an interactive platform between

financial and non-financial service providers; and o Lobby Governments and donors for increased support

The member institutions were also called upon to and take their responsibility to; o Deepen understanding and appreciation of value chain financing;

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o Build Research & Development Capacity on all aspects along the value chain; o Mobilize technical and financial resources to support value chain financing; o Develop appropriate products & carry out product modifications where necessary; o Design, test and provide financial services models to smallholders and value chain players; o Increase interactive learning among members and others.

Governments to;

o Create enabling environment o Conducive policies o Regulatory and legal framework o Create incentives for increasing resources toward agricultural financing; o Create awareness on services available to farmers; o Coordinate the services of the various financial service providers to avoid duplication and exploit

synergies; o Increase technical assistance to target smallholder clientele; and o Support capacity building of extension officers to evaluate and improve viable value chains.

Finally to donors and technical agencies to;

o Facilitate technical assistance in research and capacity building; o Support technology transfer; o Support product development; o Provide resources for agricultural finance innovations and expansion; o Support all institutions that adopt best practices; and o Support and facilitate interactive fora for learning and information exchange.

12.3 Reactions by participants

Workshop participants highlighted the timeliness of the workshop to address the emerging needs of the Agricultural sub-sector in Africa and possible role of value chain financing in enhancing the growth of the sub-sector. The recognition of a focus on smallholders was exemplary with participants recognizing that players at the bottom of the pyramid play a major role in the Agro-systems and further was a potential market for various Business Development Services including financial services.

Highlights of participants comments; � Farmers must be made attractive to the other value chain players � Focus on the results/impact of the workshop in terms of changing the status quo � Some efforts should be made to profiling who is doing what as a basis of consolidating efforts � Challenge for financial institutions to go the Equity Bank approach – such as informing the groups to

become co-guarantors, � SACCOs’ role along the value chain to strengthened � Programmes to link farmers to key sources of finance supported by the various governments � There is a need to share various success models to avoid duplication � Develop strategies for scaling up � Need to create awareness amongst key stakeholders and particularly the farmers on various available

financial opportunities � Emphasis on the weak links as products are seemingly available however linkages to farmers are weak � Harmonization of the various chain players financial and non financial, that is need for comprehensive

integration for mutual benefit � Programmes aimed at changing the farmers stereotyped mentalities for sustained commercial farming

12.4 Reactions by Workshop Hosts and organizers

The AFC Managing Director, Iyadi Omurembe highlighted the need for the workshop discussions and outputs to be applied by AFRACA, member institutions, Government and Donors. Iyadi further emphasized the need for Donor to increase support to Agricultural Financing Institutions in Africa. A review forum on progress in

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agricultural value chain financing was an appeal to AFRACA by Iyadi. A reaction by the participants to Iyadi’s remarks included support to opinions and emphasized a need for AFRACA to facilitate time bound plans and the need for governments to set up an insurance fund to cushion farmers against risks. AFRACA’s Secretary General, Mary Nandazi, remarks focused on the importance of integration of smallholders into finance systems in Africa and the relevance of the agricultural sector was a key agenda across various donors which were an indication on the timeliness of AFRACA to address the value chain financing. AFRACA would be organizing a forum in 2010 that would offer a platform for review of progress made and further position AFRACA members to respond to the needs of the members and the target clients. Follow ups to be made by AFRACA to ensure accountability and create a platform for Governments to develop insurance systems targeting smallholder farmers in various countries. A reaction by one of the participants echoed the outcome of the forum was timely and well coordinated and there is need for more such meetings.

12.5 Final Remarks, AFRACA Secretary General, Mary Nandazi

AFRACA’s Secretary General, Mary Nandazi highly appreciated the commitment and enthusiasm reflected by the participants and special appreciation to workshop donors and organizers which included FAO, AFC, M-PESA, DRUM NET, CO-OPERATIVE Bank and also recognized the Farm Concern International’s role in the forum facilitation. Mary Nandazi further suggested establishment of a discussion group which would review the impact while AFRACA would facilitate capacity building interventions for the members. Communication expected from the participating institutions on the models to be undertaken while she appealed to institutions to deal with service delivery inefficiencies and make services relevant to target clients. AFRACA would also facilitate a learning process between institutions in Africa and those in other continents through AFRACA partners associations in other continents as well as linkages and partnerships in sub Saharan Africa. An upcoming meeting in Bangkok in 2007 is aimed at strengthening partnerships in the Micro-Finance sector. Commercial banks have indicated interested to come on board and will be considered. AFRACA will continuously communicate with all participants on new developments in the financial markets.

12.6 Final Remarks, Deputy Governor, Central Bank of Kenya

Africa is facing a myriad of drawbacks in the financial sector, for example in Kenya, 38% Kenyans have no access to financial services. However, to increase the viability of financial services, there is to commercialize agricultural production, consider value addition, address infrastructure, form and strengthen farmer organizations and implement the resolutions made. Policy support however is required for successful implementation while lessons learnt on smallholder empowerment ought to be used as learning opportunities for boosting local economies. Central Bank of Kenya will be keen supporting the resolutions by the forum. The Deputy Governor appreciated AFRACA’s efforts to convene a forum for the financial sector to rethink the role of financial service providers in value chain financing.

12.7 Vote of Thanks;

The chair of the closing session, Patrick Kinyori of AFC appreciated the participants, organizers, donors and special appreciation to Dorothy Nduku K. Kipsang, AFRACA who coordinated the workshop Organization and Mumbi Kimathi, the workshop facilitator. Mr. Malaba CEO, Agribank Zimbabwe delivered the official vote of thank with special recognition to all direct and indirect participants and services providers which include; Vice President of Kenya, Minister for the Ministry of Agriculture, Central Bank of Kenya, Workshop Donors, AFRACA, AFC, Presenters, Workshop Facilitators, Hotel and Participants

End

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13.0 ANNEXES

Annex 1: Speech by Hon. Vice President, Mr. Moody Awori

Good morning ladies and gentlemen, I am delighted to be with you this morning and to participate in this very important forum that has brought together financial institutions and other players involved in providing financial services to the rural population in Africa. I take this opportunity to thank the Agricultural Finance Corporation (AFC) and Africa Rural and Agricultural Credit AFRACA for organizing the forum. As the theme of this forum suggests, the players in the field of agricultural financing must devise ways and means not only of increasing financial access to rural producers, traders and agribusinesses but also of help build the capacity of the rural poor who are mainly farmers to transform the farming activities from subsistence to commercial undertaking. I believe that this is a very substantive issue at this moment and time in Africa. Agricultural financing in Africa is facing myriad of problems. One of our major concerns in Africa in general is how to effectively finance agricultural activities especially at the level of the small farmer who forms the majority of our farming population but whom, because of lack of collateral cannot get loans from the mainstream commercial banks. The second reason explaining less financing of agricultural sector is the risk related with it and non-financing of the value chain. This forum therefore offers and immense opportunity for certain relatively successful member of various agricultural credit institutions in AFRICA to share their experience in the field of agricultural credit. We should not re-invent the wheel. Let us learn from others. The second major challenge for agriculture in Africa is the lack of capacity to build food reserves. The majority of the Kenyan population and indeed in Africa is food insecure and more often than not lack access to adequate food and when they do, is of poor nutritional value and quality. This food insecurity can partly by explained by disintegrated approach to agricultural activities. Ladies and gentlemen, in order to realize full agricultural potential for Africa and to build a food security environment, we must not only think about value chain financing but also improving the link between research, extension and the farmer. Thus agriculture must be given and integrated approach. In Kenya, the government recognizes the importance of agricultural financing. This is a very important aspect of economic and social development as it opens a wide range of opportunities to the majority of the poor and low income earners particularly the rural areas bringing them into financial services mainstream. It is for this reason that the government has worked towards creating and enabling policy framework for both informal and formal financing institutions to provide financial services particularly to the unbanked Kenyans. The government’s goal is to create a financial system that is inclusive and one that avoids duplication of efforts particularly in the public sector. In this aspect, agricultural finance cooperation is among the state financial institutions currently under review in the ongoing financial sector restructuring program. This will help repositioning it to be a leading player in agricultural financing. Secondly, in order to improve farmers’ access to credit and other financial services the Kenyan government has encouraged an orderly development of micro-finance institutions through the enactment of facilitative legislation. It has also encouraged commercial bank to set up operations in the rural areas by providing appropriate incentives. More importantly the government has motivated commercial banks to lend to agriculture by reviewing and repealing legal provisions that have undermined banks lending to the sector. On agricultural policy reforms, the Kenyan government in 2003 pledged to revitalize the agricultural sector which it recognized as the backbone of the Kenya economy. And through various initiatives it has continued to improve the rural finance environment through appropriate economic and agricultural reform policies and to support agricultural institutions to provide accessible and affordable financial services to the rural population. This marked as important beginning for restructuring and resuscitating agricultural finance corporation. I note

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that today AFC has over 7.5 billion loan portfolio. This too was in line with Economic Recovery Strategy (ERS) (2003-2007) aiming at accelerating Kenya‘s economic growth as whole. It is also important to note that agriculture in Kenya and indeed in many Africa countries plays a critic role in the national economic growth and development, providing over 75% of Kenyan labour force who live in rural areas and contributing directly more than 25% of GDP, and 60% of the export earnings. This under scores the importance of commercialization of agriculture and financing of the value chain as well as increasing the growth of the sector by encouraging farmers to diversify farming into non-traditional high value crops. To attract financing from commercial banks, however, it is important to make agricultural sector a viable undertaking. Good pricing for agricultural produce and affordable inputs, unrestrictive market condition and cross boarder trade have guaranteed Kenyan farmers attractive market condition and cross border trade have guaranteed Kenyan farmers attractive returns on thief investment, financial institutions should therefore explore ways of funding market oriented strategies and activities as well as agribusiness to take advantage of the favorable financing environment created by the government policy reforms. In conclusion, it is important to reiterate that value chain financing demand that closer relationship between all financing institutions and agricultural development agencies such as believe that this conference is a step in the right direction. Ladies and gentlemen, it is now my singular honour and duty to officially declare THE 3rd AFRACA AGRIBANKS FORUM officially open. Wish you fruitful discussion and deliberations.

Annex 2: Speech by Omurembe Iyadi, Managing Director, AFC

Ladies and gentlemen, It is my great pleasure to welcome you all to this rare forum and to this beautiful Country of Kenya. May I also take exceptional recognition of our guest of honour the Hon. Vice president, Mr. Moody Awori, and the Minister for Agriculture Hon.Kipruto Arap Kirwa for finding time to be with us this morning. I wish to thank you both for accepting our invitation at very short notice. Indeed I am aware that both of you have other pressing engagements soon after this. I will therefore be very brief and request other speakers at this session to do the same. As a host of this important forum, I wish to thank all the delegates for investing their time and resources to come and deliberate on one of the most omnipresent aspects of agriculture in Africa namely, Value chain financing. Do feel at home and enjoy the hospitality of the Kenyan people. Hon. Vice President, ladies and gentlemen, as we will be discussing later on in this forum, the global business arena has become very dynamic and the local scene is not exceptional. Automation through ICT has enabled players to greatly improve their service delivery. Increased competition has forced the big players and new entrants in the finance sector to downscale and target small businesses including agribusiness and households. AFC as development financial institution charged with the responsibility of developing agriculture and contributing to food security has since inception served a cross section of farmers, both small scale and large scale. However, in tandem with the new trend, we are now giving greater emphasis to the small scale farmer. In addition, we have diversified our services to address the financial needs of small scale processors and traders in the agricultural sector. Our focus remains the agricultural sector and therefore, for all intents and purposes, AFC remains a rural finance institution. In response to competition and in pursuit of greater business opportunities, financial markets have been continuously segmented as each financial institution seeks to develop a niche market. Agricultural sector has not been spared from this development. This has largely been done with little consideration of value chain concept and particularly the dynamics and relationships that exist within a value chain. For example, our government through the Ministry of Agriculture has underscored the need for value addition and this need to be addressed by financial service providers.

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Hon. Vice President, ladies and gentlemen, it is necessary to underscore the need for provision of financial services to farmers. This is a segment that most private financial institutions have avoided in view of the inherent risks. It is for this reason that primary agriculture production has necessitated Government, and in the past donor intervention. Because of diminished budgetary allocations, the sustenance of lending programs targeting primary production remains a big challenge to institutions such as AFC. The lack of appropriate insurance products in the Kenyan market and in most of the member countries does not help the situation. I hope the insurance industry is listening. Accordingly, we have recognized that the only way to remain sustainable is to diversify our products and services. And in order to ensure that we do not lose focus of our niche market which is agriculture, we find that we can best achieve our diversification strategy by exploiting opportunities within the agricultural value chain. As I have already indicated, we have developed products targeting agri-processors and agri-businesses. This we believe in the long run will lead to the sustainability of the institution and support the riskier segment of primary production which we must continue to finance to meet the development objective for which the Corporation was established. Further, in our endeavor to remain sustainable, we have entered into partnerships with other institutions, both Government and non-government, seeking to provide financial services to the agricultural sector, for example, Coffee Development Fund, Sugar Development Fund and the Ministry of Livestock and Fisheries Development and the GTZ. Under these programs, the value chain has been addressed; for example, under the Sugar Development Fund; we are financing cane development and production, transportation and other aspects of the value chain. Under the GTZ project, we are financing small scale manufacturing of improved energy saving devices at the farm level. This contributes to environmental conservation To address more effectively the dynamics of value chain financing ladies and gentlemen, AFC is undergoing major transformation. First the Corporation has embarked on a comprehensive computerization program to automate our operations and service delivery and this is at an advanced stage. Secondly, AFC is also carrying out a comprehensive staff rationalization program. This will facilitate achievement of our strategic objectives which are clearly stipulated in our Strategic Plan 2005-2010. These will ultimately redefine our market niche and give the corporation a competitive advantage over competition. Mr. Vice-President and Mr. Minister Sir, this is a brief of the experiences we shall be sharing with our colleagues. Some of our colleagues share a similar background with AFC and we shall be keen to share their own experiences in turning around their institutions. Other institutions which have a commercial banking background or microfinance background will certainly be keen to share our experience in order to develop appropriate strategies as they venture into the challenging area of agricultural financing. We at AFC intend to take advantage of lessons from across the globe in order to transform our institution into an effective vehicle for achieving the millennium goals and or country’s vision 2030. With these few remarks ladies and gentlemen, it is my pleasure to call upon Mr. Mr. Patrick Kariuki Kinyori, Board Chairman of Agricultural Finance Corporation to address the forum and invite the Hon. Minister for Agriculture to proceed with the programme.

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Annex 3: What is a value chain? By Calvin Miller, FAO

A value chain is often defined as sequence of value-adding activities in a supply chain – from production to consumption, through processing and commercialization. Value chains in agriculture can be thought of as a “farm to fork” set of processes and flows – from the inputs to production to processing, marketing and the consumer. Each segment of a chain has one or more backward and forward linkages. A chain is only as strong as its weakest link and hence the stronger the links, the more secure is the flow of products and services within chain. It is important to note that the benefit of value chain finance goes beyond that of the financial flows within the chain. Yes, it is about finance with agriculture and agribusiness within a chain but also about aligning and structuring finance with the chain or because of it. Simply being a part of a secure market chain makes one a better credit risk. What is “financing along the value chain?” For centuries traders have provided finance to farmers for harvest, inputs or other needs such as emergencies. Many of the traders in turn receive finance from millers and processors who in turn may be financed from wholesalers or exporters who are farther “up” the chain from production to marketing. We all understand how trade finance typically works. But we also want to note that there are many entry points and many factors involved. Products typically flow from stage to stage along a chain in one direction, while financial resources mostly flow in another. Funds can also flow into the chain at any stage. Chains operate within a complex environment of policies, regulations, institutions and support services. Achieving chain competitiveness is thus no simple task: it requires operational efficiency in each of its segments, coordination of transactions among chain actors and insertion within a supportive business environment. Finance and agribusiness today often go far beyond simple linkages and has often moved into integrated systems. Large agribusinesses may integrate credit and other financial services directly or indirectly at many or all of the steps in the value chain. Directly they can provide funding upstream or downstream in the chain, at whatever level in the farm-to-fork continuum. Indirectly they do so in two manners. First, they can facilitate or intermediate funding from a third party to the client or company in the chain, such as when an export company helps arrange funding for the companies or producers it buys from or sells to. Alternatively, the mere fact of being within a value chain is often sufficient for the chain actor to obtain funding from financial organizations. Value chain finance is built not only upon physical linkages but also knowledge integration. Innovations in technology have made value chain finance what it is today. Access to market information is available for buying and selling with the ticking of an SMS on a cell phone. Smart cards, internet access and others let us communicate with each other – banks, farmers, agribusinesses and suppliers. As we will learn in this conference, there are many exciting innovations in this area. There are also many innovations in the products and services as we will discuss. For example, there are new ways for product-linked finance which uses the commodity as collateral. A key to success in finance is to “know the business and the client.” Those who know the business the best are those persons and companies directly involved in the value chain. Having and using that knowledge of the chain, they can understand the risks and work to mitigate them much easier than a traditional banker who works with all types of businesses and clients. For this reason, some business groups have formed conglomerates which provide both formal banking and a range of agribusiness services to serve the value chain. The logic is to increase efficiency, ensure tighter control and accountability within the supply chains, and consequently increase profits. While this creates greater competition for other financial service providers, it can also create opportunities for collaboration and partnership. There are many bankers here. Traditional loan risk assessment is still important. But we now give more emphasis to the market, to competitiveness and to the cash flow. We give less to the collateral, hence a big benefit for the poor. We also move from a supply driven offer of products and services to one based on the client and business. Good loan structuring can increase one’s credit capacity without increasing risk. This is facilitated by the new and improved technologies and products. Not all of these fit the small farmer – many risk management tools, for example, are more practical for agro-industries and wholesalers, but can stabilize prices and reduce risks for all producers and bankers. Risk mitigation tools can help stabilize income and hence improve borrowing access and conditions. Crop and/or weather insurance provide an income stream to

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those insured in case of failure. Forward contracts provide an avenue sell a product for future delivery at a specified price. This not only reduces price risk but also the futures contract can be used as collateral upon which one can borrow money. This is being used by small farmers in India and a few other countries but direct widespread use will be difficult in many developing countries. However, if millers and wholesalers use forward contracts, they can offer farmers prices with less risk and ostensibly with a higher price due to the reduction in uncertainty. Furthermore, they can access funding more easily due to the security of such contracts, thus providing more capital and potentially more competition and higher prices to producers. Another key to note for small farmers is the access to technical assistance and training. Without it there is little hope for many to be competitive. We will hear some good examples in the coming days. So what does it look like for the future? For bankers, value chain finance means more than just making loans but to invest in: a) market trend knowledge, b) understanding of key risks and 3) being aware of alliance and linkage opportunities. For bankers as well as agribusinesses it means employing improved methodologies to reduce one’s exposure to market price risk, client production risk and collateral risk. For policy makers and donors, the success in many of these tools and approaches is contingent upon the legal and environment. If there is a weak enforcement of contracts, or if there are no agreed standards for product quality and control of the product, then the program cannot work effectively. It also means ensuring the technical capacity and oversight is available. Investment in information services, in improved infrastructure and capacity building can do more for the small farmer than subsidies or donor aid. So many challenges are caused by a lack of capacity, both human and physical. Policy and product development also include addressing the livelihood and financial service needs of those households whose production systems are not or soon will not be competitive within this changing environment. In summary, what are the key factors for consideration by all, four areas where we can focus and use the value chain to address many of the financial needs of agriculture. These are: Key Factors for Consideration

Understanding � market and industry � client and strategic partners

Administration � fund the chain at most strategic points � insure effective and transparent partnerships � innovate with new technologies and products

Risk � take advantage of the value chain � analyze and structure loans properly

Service � offer timely, multiple and flexible financial services � focus on the client and business

Two principle points can be concluded for agricultural value chain finance. First, the growth of financial services embedded into or linked with the value chain can be expected to continue to grow as production and marketing system integration intensifies. Secondly, and perhaps most importantly, the concept and use of value chain systems is and should become even more important toward informing financial service providers in their lending decisions and product development for agriculture. Using the knowledge of a value chain, assessing its strengths, risks and trends and assessing a loan client’s position and competency within that chain will inform the lending decision making at both the client level and that of their overall portfolio.

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14: 0 APPENDIXES

Appendix 1: Photo Album

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Appendix 2: 3rd AFRACA Agribanks forum programme

3RD AFRACA AGRIBANKS FORUM “Africa Value Chain Financing”

October 16-18 2007; Nairobi, Kenya Day One: 16th October 2007

Time Theme: Africa Value Chain Financing Resource persons

08:00 – 08:30 Registration

Session 1. Opening Session MC – G. Nasieku Tarayia –AFC

� A world Food Day Presentation FAO

� Welcome remarks by AFC MD Iyadi Omurembe - AFC

� Remarks by AFRACA Secretary General Mary Nandazi - AFRACA

� Opening address – Setting the stage in Value Chain Finance Calvin Miller - FAO

� Welcome of Minister for Agriculture Patrick Kinyori – AFC Board Chairman

� Welcome of Chief Guest Hon. Kipruto Arap Kirwa – MP, Minister for

Agriculture

� Key note Address Hon. Moody Awori – MP, Vice President, Republic of Kenya

Vote of thanks

Group Photograph All participants & Chief Guest

08:30 - 10:00

10.00 – 10:30 Health Break (water/Tea/Coffee)

Session 2. Lessons Learned – setting the scene Chair: Daffe Arfang - CNCA Senegal

� Historical Overview; financial trends

� Infrastructure and opportunities in relation to Markets

James Nyoro - Tegemeo Institute

Joseph Kibe

10:30 - 11:00

Question and Answer

Session 3. Value Chain and Financing Models Chair: James Shikwati Inter Region Economic Network

� Concepts of Value Chain and value chain analysis Mumbi Kimathi - Farmconcern

� Private agribusiness finance and marketing

Case of KILICAFE (farmer owned)

Steve Harris - Technoserve

Carl Cervone - Technoserve

� Private finance model Brian Kiai – ACTIS

� What are bank benefits and challenges in Value chain

finance

Experiences on agribusiness financing (Case of Mali &

Ghana)

David Dao --Kafo Jiginew Mali Martin Poku -

ADB Ghana

11.00 – 13:00

Discussions

13:00 – 14:00 Lunch Break

Session 3… Value Chain and Financing Models Chair: James Obama Pride TZ

� Role of SACCO Networks in Value Chain Finance

o Lessons from Tanzania and West Africa &

Video on paddy production in Burkina Faso

o Lessons from Kenya

Yves Boily - Desjardins

Catherine Munyiri - Cooperative Bank of

Kenya

� Strategic Partnership for finance Esther Muiruri - Equity Bank

� Value Chain Financing Models and Vision for Value Chain

Financing in Africa

Kariuki W. Mwangi – Commercial Bank of

Africa

Commentator Jeremiah Adero

14:00 – 16:00

Interventions / Q & A

session 4 Break out sessions Chair: Mumbi Kimathi - Facilitator

Health Break (Water/Tea/Coffee) will be during the sessions

(a) Agribusiness: Addressing capacity and competitiveness issues for participation in value chains and finance

Jonathan Campaigne - DrumNet 16.00 - 17.30

� Small farmer capacity and competitiveness Susan Minae – FAO Ethiopia

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� Farmer Field schools

Farmer representative

Godrick Khisa – FF Schools

Jennifer Khaemba

� FIPs processors Catherine Nyaga

� Wholesale Tomato trader Bernard Maina

� Safety, Quality, standards in relation to local and export

markets

Francis Wario - Fresh Produce Exporters

Association of Kenya

(b) Policy on Agribanking: Addressing policy issues Chair: IFAD

� Central Bank of Kenya Cassian Nyanjwa

� Kenya Institute for Public Policy Research & Analysis

(KIPPRA)

John Omiti

� World Bank Renate Kloeppinger-Todd

� UNCDF Abdoul Anziz

� AFRACA Ms. Mary Nandazi

NB

Session 4 will be round table discussions. The pre-selected institutions listed here will make 5 minute presentation as a way of setting the stage and other institutions will add

on.

Session 4 a: Addressing capacity and competitiveness issues for participation in value chains and finance.

Session 4 b: Central Banks: How they do policy making in their countries Practitioners: what is missing in terms of policies? How can we move forward in this?

18:00 Welcome Cocktail

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Day Two: 17th October 2007

Synthesis and highlights of Day one Facilitator: Mumbi Kimathi 08.30 – 09:00

Value Chain efficiency Mumbi Kimathi

Session 5 Commodities Exchange and Risk Mitigation Chair: Juma Reli DG – Bank of Tanzania

� Risk mitigation strategies Ajai Nair (World Bank)

� Options for raising capital for Agriculture Jimnah Mbaru - Kenya Stock

Exchange

� Addressing risk through commodity Management André Soumah - ACE Control and

Expertise

Question and Answer session

09:00 - 10:30

10:30 – 11:00 Health Break (water/Tea/Coffee)

Session 6 Open Dialogue – Experience and Trends Chair: PS Agriculture

Field innovations dialogue 11:00 – 11.30

� Lessons learned in Value chain financing – case of Basix Sanga Amarnath – Basix India

11:30 – 11:40 Discussions

Investor Dialogue

� Private investment – Agribusiness firms Patrick Ndagu - AAC

� Standard Chartered Bank Stephen Muriu

� Agricultural Finance Corporation (AFC) Omurembe Iyadi

Donor Dialogue

� International Fund for Agricultural Development (IFAD) Robson Mutandi

� How national strategy can contribute to solutions of Value Chain Abdoul Anziz - UNCDF

� FAO Calvin Miller

11:40 - 12:45

� World Bank Renate Kloeppinger - Todd

Question and Answer Session

12:45 – 14:00 Lunch Break

Session 7 Innovations, Success stories and what can be replicated in Africa Chair: Land Bank South Africa

� Value Chain Finance Innovations and experiences Kenneth Marangu – Kenya BDS

� Financing smallholder farmers Jonathan Campaigne - DrumNet

� Small holder Commercialization; Commercial Village Model Mumbi Kimathi - Farmconcern

� M-PESA money transfer technology Joseck Mudiri - Safaricom Kenya

� Commentator Jeremiah Adero

14:00 – 16:00

Question and Answer

16:00 – 16:30 Health Break (water/Tea/Coffee)

session 8 Break out reporting Chair: NACRDB

� Session 4 Group reports Group representatives 16.30 – 17.30

� Take away insights Calvin Miller - FAO

Free evening

Day Three: 18th October 2007

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08:30 – 09:00 Synthesis and highlights of Day Two Mumbi Kimathi - Facilitator

Session 9 Effective Ways of Reaching Small scale Farmers Chair: Aleke Dondo - KDA

� Effective Ways of Reaching Small scale Farmers; Experience of

Fédération Caisse Populaire du Burkina

Celestine Toe - FCPB

� Linking to services and markets George Odo – CARE CEPCO

� Integrated approach to reaching Small Scale farmers in Zambia Margaret Mwenya – SIDA/ASP

Zambia

� Testimony of what has worked /lessons from field experience

� What has worked – experience of Githiga Commercial village

Helga Malamba – Zambia

Village Representative- Kenya

09:00 – 10:30

Discussions

10:30 – 11:00 Health Break (Water/Tea/Coffee)

Session 10 Closing session Chair: Patrick Kinyori - AFC

� Summary Conclusions and recommendations Castro Camarada – FAO Kenya

Rep

� Call to action Omurembe Iyadi - AFC

� Remarks by the Secretary General Mbita Mary Nandazi

� Official Closing remarks Jacinta Mwatela – Deputy Governor, Central Bank of Kenya

� Vote of thanks Agribank Zimbabwe

11:00 – 12:00

12:00 – 13:00 Lunch Event Organizers

Session 11 Field Visit

13:00 – 16:00 Sasini - Tea growing and processing Event Organizers

Appendix 3: Contacts

3.1: List of participants

Due to the length of the list of participants it could not be annexed here. In case any reader would like to have it, contact AFRACA at; [email protected] or +254 20 2715991 /+254 20 2717911

3.2: 3RD Agribanks Facilitator

Mumbi Kimathi, Mrs., Programmes Director, Market & Chains Analyst, Farm Concern International, FCI, Nairobi, Kenya. Tel: +254 20 4444031 / 6751229 / 4444140 Email: [email protected] [email protected] Cell: +254 722 392674 Website: http://www.farmconcern.org