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Agricultural Finance in Sierra Leone Product Innovation and Financial Access – Agricultural Value Chains – Cassava, Rice, Poultry and Cocoa

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Content

1. Objectives and Context 1 2. Executive Summary 4 2.1 Macroeconomic Overview 4 2.2 Enabling Environment for Inclusive Financial Services 6 2.3 Rural and Agricultural Finance Opportunities 7 3. Overview of the Agricultural Sector 9 3.1 Government Policies, Donor & Development Partner Interventions 9 3.2 Microeconomic Perspective on the Agricultural Sector 10 3.3 Review of Important Agricultural Value Chains 20 3.3.1 Cassava 20 3.3.2 Rice 22 3.3.3 Poultry Rearing 27 3.3.4 Cocoa 30 3.4 Foreign Investment in Rural Areas 35

4 Analysis of Rural and Agricultural Finance 37 4.1 Financial Sector Overview - Macro Level 37 4.1.1 Macroeconomic Context 37 4.1.2 Financial Sector Regulation and Supervision 39 4.2 Financial Sector Overview 40 4.2.1 Financial Infrastructure 40 4.2.2 Institutional Perspective 43 4.3 Structural Bottlenecks in Rural and Agricultural Finance 48 5. Making Finance Work: Promising Instruments and Interventions 54 5.1 A Holistic Private Sector Perspective 54 5.2 Informal Financial Services 55 5.3 In Search of Products and Interventions that will Work for Sierra Leone 56 5.4 Agricultural Asset Finance/Micro Agri-Leasing 58 5.5 (Micro)-Finance for Rural Enterprise & Service Clusters 60 5.6 Supply Chain Finance 61 5.7 Building Carbon Credits into Agricultural Finance Products 61 5.8 Inventory Credit and Warehouse Receipts 62 5.9 Trade Finance Facilities at Commercial Banks in Sierra Leone 64 5.10 Private Equity for Medium-Size Agribusiness 65 5.11 Creation of a new National Agricultural Finance Institution 66 5.12 Agricultural Finance Enablers & Meso Level Interventions 67 6. Conclusion and Outlook 70

Appendix 1: Transition to Sedentary Agriculture 71Appendix 2: References 72

1AbbreviAtions

AfDB African Development BankATV All Terrain Vehicle

BMZ German Ministry of Economic Cooperation and DevelopmentBSL Bank of Sierra Leone (central bank)

CAADP Comprehensive African Agriculture Development Programme CDC Commonwealth Development CooperationCEO Chief Executive OfficerCFLCO Consumer Finance & Leasing Co.CILSS Comité permanent Inter-Etats de Lutte contre la Sécheresse dans le SahelCORAF West and Central Africa Council for Agriculture Research and Development CPI Consumer Price Index

DEG Deutsche Entwicklungsgesellschaft (German Private Sector Investments)

EFP European Financing Partners (EU Development Finance Institution)EU European UnionEUR Euro

FAO Food and Agriculture Organization (United Nations)FARA Forum for Agricultural Research in AfricaFMO Dutch Development BankFSA Financial Services AssociationFSAP Financial Stability Assessment Program FSDP Financial Sector Development Plan

GDC German Development CooperationGDP Gross Domestic ProductGIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (formerly GTZ)GoSL Government of Sierra LeoneGPS Global Positioning System ha Hectare

Abbreviations

IFAD International Fund for Agricultural DevelopmentIFC International Finance CorporationIITA International Institute for Tropical AgricultureILO International Labor OrganizationIMF International Monetary Fund

KfW Kreditanstalt für Wiederaufbau, German Development Bank

MAFFS Ministry of Agriculture, Forestry and Food SecurityMFW4A Making Finance Work for Africa Process MITAF Microfinance Investment and Technical Assistance FacilityMSME Micro, Small and Medium Enterprise

NACSA National Commission for Social ActionNASSIT National Social Security and Insurance TrustNGO Non-Government OrganizationNSADP National Sustainable Agriculture Development Plan

ODA Official Development AssistanceÖEB Austrian Development Bank

RTGS Real Time Gross Settlement SystemSCP Smallholder Commercialization ProgramSLARI Sierra Leone Agricultural Research InstituteSLL SL Leone SMS Short Messaging Service

UNCDF United Nations Capital Development FundUNDP United Nations Development ProgrammeUSD US Dollar

VSL Village Savings & Loans

WFP United Nations World Food ProgramWHO World Health Organization

1objeCtives And Context

Context

the initial version of this study has been commissioned by the bank of sierra Leone and the German Ministry of economic Cooperation and development (bMZ) in the context of the German support for financial sector devel-opment in sierra Leone.

the report is to take a broad, holistic view of economic opportunity and the supply/demand of financial services in agriculture and in rural areas of sierra Leone. it is ex-pected to provide pointers for implementation priorities within the Financial sector development Plan (FsdP)1 and specifically for various initiatives under the FsdP that will improve broad-based access to finance, such as the Microfinance investment and technical Assistance Facility (MitAF) ii.2

the study was originally submitted in March 2011 based on in-country research and available data as of late 2010/early 2011. For the inclusion in the GiZ/MFW4A publica-tion series, some easily accessible public statistics have been updated through year-end 2011, but generally the document reflects underlying facts and market develop-ments only through january 2011.

1 republic of sierra Leone, FinAnCiAL seCtor deveLoPMent PLAn, 31 oct 2009, www.bsl.gov.sl/pdf/FsdP.pdf 2 investors: UndP/UnCdF, KfW, Cordaid. see: http://mitaf.esglobal.com/

Objectives

the report pursues three main objectives: (1) an overview of the agricultural sector in sierra Leone, (2) a critical analysis of the current state of agricultural finance and (3) a set of recommendations on instruments and inter-ventions that could enhance access to rural and agricul-tural finance. As part of the Overview of the Agricultural Sector, the study is to:

• survey current policies and strategies in rural/agricul-tural development pursued by Government and donor initiatives;

• provide a microeconomic perspective on the agricul-tural sector in terms of products, production methods, markets and trade relationships;

• analyze key value chains for a number of major crops.

the Analysis of Agricultural Finance is designed to:

• identify potential bottlenecks in the economic environ-ment and regulatory framework for agricultural finance,

• review the rural demand for financial services, and • analyze the supply of formal and informal financial

services along agricultural value chains.

the study should culminate in a number of practical recommendations concerning:

• formal and informal instruments that meet the finan-cial needs of actors along agricultural supply chains,

• instruments and interventions for broader access to agricultural finance that could be implemented within the Financial sector development Plan and its MitAF ii component,

• necessary interventions in the institutional and policy framework of financial services.

1. Objectives and Context

http://mitaf.esglobal.com/

http://mitaf.esglobal.com/

2 objeCtives And Context

Definition of Rural and Agricultural Finance Making Finance Work for Africa succinctly defines Agricultural Finance as encompassing “the full range of financial services – loans, savings, insurance, and payment and money transfer services – needed, offered, or used by the agricultural sector, meaning farming and farm-related activities including input supply, processing, wholesaling, and marketing. Agricultural finance refers to financial services ranging from short-, medium- and long-term loans, to leasing, to savings, to crop and livestock insur-ance, covering the entire agricultural value chain – input supply, production and distribution, wholesaling, process-ing and marketing.”3

the term also encompasses rural finance (see iFAd definitions in box 1). For this reason we will include rural finance aspects in the following analysis of the agricultural and financial sector and in the recommendations to make finance work for agriculture and as well for rural areas, where the majority of the population engages in subsist-ence agriculture.

rural and agricultural financial services may be provided by formal financial institutions, such as banks or regulat-ed microfinance companies, as well as through informal channels. informal financial services occur in the family or community context and are provided by savings clubs or small village banks or even by long distance truck driv-ers who may carry money transfers for a small fee. often, we find formal or informal supplier credit among non-financial agents in the agricultural supply chain.

3 see www.mfw4a.org: Agricultural & rural Finance.

BOX 1

The Financial Market

• Microfinance:Financialservicesforpoorandlow-income people

• Ruralfinance:Financialservicesusedinruralareasbypeople of all income levels

• Agriculturalfinance:Financingofagriculture-relatedactivities, from production to marketing in rural and urban areas

Source: International Fund for Agricultural Development (2010) IFAD Decision Tools for Rural Finance, p. 12

Financial Market

Rural Finance

Agricultural Finance

Micro Finance

3Objectives and cOntext

Financial Access Challenges

despite the multitude of potential products and channels, actual availability of financial services in rural areas and in agricultural supply chains is often constrained. this limits the economic integration and welfare of rural populations. the lack of access is often explained by the slow and un-even roll-out of formal financial offerings into rural areas, the high cost of reaching out to widely dispersed rural res-idents, the lack of basic infrastructure and the perceived riskiness of agriculture and the rural economy in general. Land titles and property rights can be difficult to verify in rural areas, posing problems in the use of collateral. Previ-ous subsidized lending programs for agriculture have also made it difficult for self-sustaining, commercial financial services to take hold.

Farmers and agricultural businesses typically have variable and seasonal income streams and often face long matura-tion periods before investments in life-stock, soil improve-ment, or tree plantations produce revenue. Agriculture is also eminently risky. it is exposed to price fluctuations on inputs and products and threatened by crop failure due to pests and diseases, extreme weather events, drought and climate change.

despite these difficulties, rural and agricultural finance, if delivered through sustainable institutions and appropri-ate products, can be an important catalyst for economic growth, for alleviating poverty and bridging the divide between urban and rural residents in sierra Leone.

Methodology

this report was compiled by dr. Peter schröder and dr. joachim bald based on comprehensive desk research and consultations with a diversity of stakeholders in sierra Leone in december 2010 and january 2011.

the initial results were presented for discussion with representatives from Government, development part-ners, and private sector agribusiness in a stakeholder workshop on january 26th, 2011, at the German development Cooperation (GdC) offices in Freetown. We received extensive support and many important insights from our local expert counterparts at inclusive Growth strategies, especially Farrell elliott, Chukwu-eemeka Chikezie and dr. stephen Medo.

We would like to thank Ms. Andrina Coker, deputy Governor of the bank of sierra Leone, for her valuable guidance and the GdC/GiZ experts for sharing their years of experience on the ground.

the envisioned scope of the study is very broad and ambitious and carries a risk of getting lost in the details. there is already an impressive body of competent re-search flowing from the long-standing engagement of the development community with the rural and agricul-tural space in sierra Leone. We tried to incorporate this wealth of knowledge by way of a desk study, but will not attempt to inventorize in this report every program and intervention by Government and the international de-velopment partners. We proceed rapidly from describ-ing the current reality to a critical evaluation of some conventional assumptions about economic opportunity and the development impact of financial services in the agricultural sector.

4 exeCUtive sUMMAry

tion and urbanization pressures. With these dynamics, progress in per-capita statistics and quality of life is even harder to realize than nominal headline growth.

the sierra Leonean public sector budget depends heavily on foreign official development Assistance (odA), hence the high ratio of odA to fiscal revenues in Figure 1. the current account and the balance of trade continue to be in structural deficit such that foreign inbound investment flows are critical for filling the balance of payment gap. relief for the current account is on the horizon thanks to significant investment in new natural resources projects. in the short-run, however, these investments tend to weigh on the balance of trade as equipment and expert human capital is being imported before export revenues will ultimately begin to flow.

2.1 Macroeconomic Overview

ravaged by a decade-long civil war that ended in january 2002, sierra Leone remains one of the poorest and least developed countries in the world. the country ranks 158th out of 169 on the UndP Human development index. the population stands at 6 million in 2011 and continues to grow at a rate of at least 2.5% per year. 50% of sierra Leoneans are under the age of 18, 63% live in the rural areas and 70% live at or below the national poverty line. Life expectancy at birth is only 48.2 years, infant mortality is high and 59% of adults are illiterate.

the macroeconomic indicators in Figure 1 must be read with this very fragile post conflict environment in mind. economic fundamentals are gradually improving, albeit from a very low basis and against a backdrop of popula-

Macroeconomic Indicators 2006 2007 2008 2009 2010 2011 Notes

Population 5,271,000 5,420,000 5,560,000 5,700,000 5,848,000 6,001,000 IMF

GDP Current Prices USD million 1,423 1,664 1,952 1,856 1,901 1,905 IMF

GDP per Capita USD at purchase power parity

687 731 769 782 810 849 IMF

Real GDP growth rate 7.30% 7% 5.50% 4% 4.50% 5.33% BSL & IMF

Fiscal Deficit / GDP (excl. grants) 9.70% 6% 15% 10.50% 12.71% 15.65% BSL, own calc.

ODA Grants / Total Fiscal Rev-enues

40.69% 31.26% 28.45% 40.06% 34.50% 29.72% 2011 to Jun

USD/SLL Official Rate Year End 2,973.94 2,977.59 2,981.10 3,855.68 4,239.99 4,300.00 BSL

Balance of Trade, USD million -163.79 -201.36 -318.47 -289.64 - 263.84 - 407 BSL

External Reserves, USD Million 184.22 215.48 209.47 336.27 345.22 376.79 BSL

CPI Inflation Annual 9.55% 11.65% 14.834 9.25% 17.78% 18.46% IMF

3-Month Treasury Bill Yield p.a., at year end

14.19% 21.29% 9.06% 13.99% 24.54% 23.38% BSL

Prime Lending Rate p.a. 25% 25% 24% 22.00% 21.50% 21.50% BSL

Savings Deposit Rates p.a. 7.63% 7.39% 6.65% 6.32% 6.19% 6.62% BSL

Time Deposits Rates 3-month, p.a. 10.43% 9.70% 9.63% 8.87% 8.90% 10.07% 2011: Jun. BSL

Figure 1: Sierra Leone Macroeconomic Indicators. Source: IMF and Bank of Sierra Leone (BSL).

2. Executive Summary

5exeCUtive sUMMAry

of natural resources exports. the challenge remains to entrench this growth more broadly across the economic spectrum, to share its benefits across the urban/rural divide and to integrate the ever growing number of unemployed young sierra Leoneans. in order to ‘make finance work’ for sierra Leone, the financial services in-dustry must become an engine for broad-based equitable growth. Under the economic realities of the country today, the challenge is first and foremost in rural and agricul-tural finance.

economic activity in sierra Leone is dominated by natural resource extraction and subsistence agriculture, compare Figures 2-4. value added industry, agri-process-ing and the service sectors are grossly underdeveloped. Private sector business activity outside of mining remains very weak. Government and the international develop-ment ‘industry’ are the most important sources of formal employment.

one is encouraged to note that across the board, the trends in Figures 1, 2 and 4 point towards growth: in food production, in revenues from cash crops and in terms

Minerals Production and Export 2006 2007 2008 2009 2010 2011

Production

Diamonds Carats '000 582.32 603.70 371.29 400.48 437.55 355.32

Bauxite Metric Tons '000 1,071.14 1,169.00 954.37 742.82 1,087.19 1,457.51

Rutile Metric Tons '000 73.60 82.81 78.91 63.86 68.20 67.98

Ilmenite Metric Tons '000 13.81 15.75 17.26 15.20 18.21 14.59

Gold Ounces '000 2.28 6.82 6.15 15.25 8.69 5.28

Export

Diamonds USD '000 125,041.2 142,048.5 98,803.6 78,373.9 113,514.70 129,766.02

Bauxite USD '000 23,573.1 32,706.1 28,063.2 18,677.8 31,061.10 38,998.00

Rutile USD '000 28,501.1 38,146.2 36,658.7 35,920.3 40,567.20 34,436.50

Ilmenite USD '000 1,063.3 1,200.6 2,569.3 916.9 2,653.10 4,441.70

Gold USD '000 1,062.5 2,984.9 4,116.4 4,764.0 9,295.80 7,280.20

Figure 2: Sierra Leone Natural Resources Sector. Source: Bank of Sierra Leone

Figure 3: Mineral Resources. Source: Collins Social Studies Atlas for Sierra Leone, 2009.

Bo

Kenema

Makeni

Freetown

Gold

Diamonds

Iron ore

Bauxite

Rutile

Alumina

Salt

6 ExEcutivE Summary

Figure 4: Agricultural Production and Export. Source: Bank of Sierra Leone and FAO.4

4 We have doubts about the 2011 figure for cocoa production quoted from bsL statistics. We know of significant investments in cocoa plantations and rehabilitation of existing groves that could have increased production, but hardly at this scale.

Agricultural Production and Export

2006 2007 2008 2009 2010 2011 Notes

Cash Crops

Cocoa Production Metric Tons '000

13.94 13.72 17.89 19.44 19.00 52.60 BSL

Cocoa Export USD '000 11,570.80 11,368.10 14,981.90 20,544.60 37,051.30 44,022.03 BSL

Coffee Production Metric Tons '000

1.48 2.48 1.96 7.32 2.99 3.79 BSL

Coffee Export USD '000 1,093.40 1,854.70 1,487.60 13,123.50 1,698.20 2,000.80 BSL

Staple Foods

Cassava - Metric Tons '000 350.00 370.00 396.56 349.62 361.30 FAO Stat

Maize - Metric Tons '000 48.81 22.85 23.53 29.64 37.79 FAO Stat

Sweet Potato - Metric Tons '000 30.00 23.53 30.30 28.81 25.50 FAO Stat

Groundnut - Metric Tons '000 115.20 57.45 59.72 75.05 94.37 FAO Stat

Rice Production Metric Tons '000 803.44 454.44 524.23 606.20 705.65 FAO Stat

Rice Import USD '000 23,594.50 24,010.80 59,294.80 55,467.10 71,662.40 84,726.49 BSL

Rice Import Metric Tons '000 99.68 157.94 89.58 155.38 BSL

2.2 Enabling Environment for Inclusive Financial Services

We discuss many of the real and perceived constraints to broad based financial access, particularly for farmers and agri-businesses. the review of the enablers and con-straints is organized along the conventional continuum of macro-economic environment, meso-level financial sec-tor infrastructure and the strengths and weaknesses of the institutional landscape for financial service delivery. the imperfections and obstacles are numerous and complex. they range from the underdeveloped physical infrastruc-ture (electricity, water/sanitation, transport, security) to lack of qualified human resources to deficits in the rule of law. they also include capacity challenges at the regulator/supervisor level, lack of reliable business intelligence and credit reference databases and the insufficient long-term capital formation and the widespread short-term, rent seeking business attitudes.

yet, the ambition of the study is to move beyond wallow-ing in the already well-documented challenges and mar-ket constraints. this is sierra Leone, one of the poorest countries on the planet and barely 10 years since coming out of a brutal civil war. of course, the legal framework for complex securitization is not ready. Upon closer in-spection, we find out that many of the known structural bottlenecks are not really binding at this time. this means that much more can be a chieved in expanding commer-cially viable access to financial services even while we wait for the fundamental structural issues to be worked out.

our main tenet is that financial services must seek out sustainable economic opportunity. Where the underlying economic fundamentals do not add up, there is nothing that finance can do. With this truism in mind, we manage to identify a number of financial products and develop-ment interventions (see below) that will make finance work for farmers and rural residents in the near term and within the present economic and institutional context of sierra Leone.

7ExEcutivE Summary

2.3 Rural and Agricultural Finance Opportunities

Contextrural sierra Leone is dominated by smallholder subsist-ence agriculture. For 3.5 million people, or roughly 60% of the population5, this is the way of life, planting rice and cassava, some vegetables and groundnuts for own consumption with occasional surplus for sale. some cash is generated with cocoa, palm oil and palm wine sales and making charcoal from wood cut in the countryside. the average plot under cultivation per smallholder fam-ily is 2.74 hectares, typically made up of a combination of upland sites and inland valley swamps or gently sloping riverine terrain.

Government’s Smallholder Commercialization Program (sCP) is the flagship initiative in agricultural development in sierra Leone. the vision of the sCP is to make agricul-ture the engine for socioeconomic growth and develop-ment through commercial agriculture and to promote “farming as a business”. the sCP vision and objectives are indeed right on target. there can be no sustainable rural development without making the millions of smallholders more productive. the problem is that in public perception, the sCP is sometimes simplistically equated with mecha-nization, big powerful tractors imported from india and plowing the wide-open (but rather infertile) bolilands.

Reality Check on Arable Land and Productive Capacitybecause of the common misconceptions about large tracts of unused arable land, ample rainfall and fertile tropical conditions, the study departs from a critical as-sessment of productive realities and the availability of land for agricultural expansion. indeed, there is no green revolution in the making. some incremental improve-ments and a more dignified smallholder livelihood are possible, but countrywide food self-sufficiency and major wealth creation from cash crops are simply not realistic.

5 eC joint Country strategy 2008 - 2013.

the question of the underlying economic fundamentals is quintessential for rural and agricultural finance. if the conditions are not conducive to producing profitable sur-plus for sale, then what is there to finance in agriculture?

With a closer look, some bankable opportunities in agri-culture can be found, of course. At the level of the small-holder, they arise from better management of the farm as a diversified business with multiple income streams. this should occur in the context of the overdue transition to a sustainable sedentary farming approach instead of the current slash-and-burn rotation with long fallow periods. sedentary (stationary) farming represents a long-term in-vestment in improving soil fertility through introduction of organic matter and nitrogen fixating cover crops and hedge rows. in the suitable locations in the east, an agro-forestry model with food and cash crops (cocoa, coffee, wood lots) grown in conjunction are also very promising, particularly if they can be combined with carbon offset payments. With these investments in soil preservation/ fertility, smallholder food production can be increased slowly but steadily. in the aggregate, these changes will amount to incremental steps in the direction of food self-sufficiency. in our assessment, however, full self-sufficien-cy in food for the entire country is not achievable, because the productivity gains will be outpaced by continuing population growth. the most tangible opportunities for cash income generation in the smallholder environment are cocoa plantations and woodlots for firewood, con-struction material, and charcoal production.

At the level of large commercial farm investments, there could be bankable economic opportunities in biofuels, palm oil and commercial cocoa plantations. yet, there is no idle productive land that could easily be made available for commercial investment under the current patterns of smallholder upland cultivation and fallow rotation. small-holder commercialization via the transition to sedentary (stationary) farming and agro-forestry, therefore, is an essential prerequisite to ceding large tracts of land to com-mercial investments. otherwise, a major conflict over land for subsistence food production is pre-programmed.

8 ExEcutivE Summary

Rural Enterprise Clusterseconomic opportunity in the rural space is not just limited to primary agricultural production and agro-processing, of course. there is a wave of large scale foreign investments in mining coming to sierra Leone and the prospect of oil production off shore looms large. All of these investments are bringing economic activity into rural areas and dras-tically change the realities of rural life. the expectations of the surrounding communities must be managed, how-ever. the small land lease payments and the jobs created directly at the investment site are not enough to lift rural communities out of poverty. nonetheless, wherever there is activity, there is economic opportunity. Local com-munities need to capitalize on the anchor investment as a source of spin-off opportunities in small and micro-busi-nesses. Microfinance institutions can play an important role in financing such rural enterprise clusters, ideally with the support of the foreign investor.

Financial Products and Interventions that will Work Today in the Agricultural Sectorour “tour d’horizon” of the financial sector interventions and products that can make finance work for agriculture especially in rural sierra Leone is very much grounded in the critical assessment of the economic fundamentals. success in rural finance is about careful identification of financially robust opportunities. some activities may simply be held back by excessive risk that could be managed better, so that they become financially feasible transactions. others simply don’t add up with any amount of financial engineering and cannot be financed at this time. For example, agricultural asset finance or agri-leasing can be a feasible way to reduce risks in smallholder agricultural production. industrial-scale poultry and egg production, however, just do not make sense in sierra Leone. in 2011, the cost of sourcing the chicken feed (40% maize, 60% soybean or pigeon peas plus additives etc.) would have come out over double the price per kg of imported chicken meat.

the paper also discusses some of the real and perceived constraints to financial access for agriculture and rural populations at different levels: land titles, security of tenure, lack of a credit bureau, financial literacy etc. Here, the imperfections are many, but these factors rarely are the immediately binding constraints that prevent finance from flowing to rural populations. the real bottlenecks at this time are all about the underlying economics and the layers of risks, real and perceived, which come with it. With a fresh look and a creative mindset, a lot is possible in financing rural sierra Leone today, especially when tak-ing into account that an estimated 62% of people live out-side the cities.6 the report details some of the promising products and interventions, namely:

• Agricultural asset finance/micro agri-leasing• (Micro)-finance for rural enterprise & service clusters• supply chain finance for example in the cocoa sector• building carbon credits into agricultural finance

products• inventory credit and warehouse receipts• trade finance facilities at commercial banks • Private equity for medium-size agribusiness• Public market information services• Access to commodity futures markets for wholesalers

and agri-business.

6 CiA the World Factbook

9Overview Of the AgriculturAl SectOr

3.1 Government Policies, Donor & Development Partner Interventions

Government PolicyAgricultural development is a critical priority for the Government of sierra Leone. Agriculture is the backbone of the economy. it accounts for 45% of total GdP and em-ploys 70% of the population. Government is keenly aware that sustainable livelihoods, food security and mass em-ployment will be possible only through successful development of the agricultural sector.

the 2008 Agenda for Change (2nd Poverty reduction strategy Paper) sets out a five-year plan for development in four strategic priorities: energy, transportation, agricul-ture, and human development. Agriculture is critical for meeting the Millennium development Goal 1 by reducing poverty and food insecurity.

the Ministry of Agriculture, Forestry and Food security (MAFFs) developed a National Sustainable Agriculture Development Plan (NSADP) for 2010-20307, a sector-wide framework for putting the Agenda for Change into action. in september 2009, sierra Leone was the 5th country to sign the Comprehensive African Agriculture development Programme (CAAdP) compact, after rwanda, burundi, togo and ethiopia. the CAADP is an umbrella program under the auspices of the African Union/economic Com-munity of West African states. the nsAdP is the central vehicle for implementation of the CAAdP commitments.

Among the four sub-programs in the nsAdP, the Small-holder Commercialization Program (SCP) has been prioritized for national implementation as the component with greatest impact on food security and income for the most vulnerable populations in the near term.

With several large road and energy infrastructure projects started or completed in 2010, agriculture has become the President’s top priority. Public investment in the agricul-tural sector reached 10% of overall budget in 2011, which puts sierra Leone in compliance with the targets of the

7 Available for download from: http://typo3.fao.org/fileadmin/user_ upload/fsn/docs/nsAdP_CAAdP _discussion_paper_for_Compact_double _sided.pdf

2003 Maputo declaration8 and the respective CAAdP ob-jective 9.

there are a number of related policies in other areas that further enable agricultural development. these include the revised Decentralization Policy and the Local Gov-ernment Act (2004) which transfer power to local commu-nities and enhance service delivery to farmers through de-volution of technical and financial resources. the Private Sector Development Strategy impacts agriculture, as it focuses on (1) access to finance; (2) the legal and regulatory framework; (3) promoting entrepreneurship; (4) making markets work better; and (5) improving physical infra-structure. Agriculture is also a target growth sector in the National Export Strategy (2010-2015) and is supported by the sierra Leone investment and export Promotion Agency. Finally, the Youth Agricultural Farm Scheme is designed to promote youth employment in rural areas.

the smallholder Commercialization Program (sCP) currently is the flagship initiative in agricultural devel-opment.10 the vision of the sCP is to make agriculture the engine for socioeconomic growth and development through commercial agriculture and to promote “farming as a business”. the sCP (Art. 103) sets out the key activities and government agencies responsible for implementation as follows:

• Production intensification support, value Addition and Marketing, responsible: Agricultural extension services division, Crop division, sierra Leone Agricultural research institute (sLAri), Livestock division, Forestry division, Ministry of Fisheries and Marine resources, Ministry of trade and industry;

• small scale irrigation, responsible: Agricultural engineering services division with support from the national Commission for social Action (nACsA);

• Market Access, responsible: Agricultural engineering services division in collaboration with the sierra Leone roads Authority and nACsA;

• rural Finance, responsible: MAFFs and bank of sierra Leone;

8 Available for download at: diplomatie.gouv.fr/fr/iMG/pdf/04_ Maputo-declaration-2003.pdf 9 bank of sierra Leone Annual report 2011, p7ff. 10 smallholder Commercialisation Programme, GosL – MAFFs, 2010

3. Overview of the Agricultural Sector

http://typo3.fao.org/fileadmin/user_ upload/fsn/docs/NSADP_CAADP _discussion_paper_for_Compact_double _sided.pdf



http://diplomatie.gouv.fr/fr/IMG/pdf/04_ Maputo-Declaration-2003.pdf

http://diplomatie.gouv.fr/fr/IMG/pdf/04_ Maputo-Declaration-2003.pdf

10 Overview Of the AgriculturAl SectOr

• social Protection, responsible: MAFFs with Ministry of employment and social security, Ministry of education, Ministry of Health.

Development Partner Interventionsthe international donor activity has over the last few years been making a transition from post-conflict emergency relief to longer-term development emphasizing capacity-building, productivity through mechanization, input sup-ply and rural infrastructure including feeder roads.

the largest financiers in the agricultural sector are: the eu-ropean Union, World bank, Afdb, WFP, iFAd and the is-lamic development bank. they are joined by many others including japan international Cooperation Agency, irish Aid, italian Cooperation, governments of China, Germany and nigeria, as well as a range of nGos including Action Contre la Faim, ACdi/voCA, Africare, brAC, Care, Con-cern, CooPi, Catholic relief services, Christian Aid, Heifer international, oFid, oxfam, World vision as well as the Un agencies including FAo, iLo, UndP, UniCeF, UneP, WHo and WFP.

sub-regional organizations also give support on food se-curity issues and on the implementation of the nsAdP. these include the Mano river Union, eCoWAs and CiLss. research assistance is provided by the West and Central Africa Council for Agriculture research and development (CorAF), by the Forum for Agricultural research in Africa (FArA), by the international institute for tropical Agricul-ture (iitA) and by the Africa rice Centre.

We apologize if we omitted important contributors in our list above. the point is simply to highlight the scale and scope of international development assistance active in rural sierra Leone. the volume of aid is indeed impressive and accounts easily for more than half of all economic activity in the country. direct official development as-sistance for the general budget alone makes up a third of government revenues, see Figure 1.

3.2 Microeconomic Perspective on the Agricultural Sector

A Reality Check on Arable Land and Productive CapacityMost reports and publications on sierra Leone include glowing statements about the abundance of natural re-sources. For example: “sierra Leone is well endowed with arable soils, forests, grasslands, freshwater resources, wet-lands (swamps), wildlife, extensive fisheries and other bio-diversity resources and mineral resources”11 or “plentiful rainfall and good land suggest a variety of exports, bring-ing cash directly into the hands of rural households. How many countries might envy sierra Leone’s good fortune, were it not for her troubled past?”12

the agricultural production reserves are frequently esti-mated to be quite high: “Around 5.4 million ha or 74% of the total land area is considered suitable for agriculture, of which only 15% is under cultivation. the availability of land is especially notable in the highly fertile lowland inland valley swamps where even less than 15% of the area is cultivated.”13

other papers state, however: ‘the irrational use of the environment and natural resources over the years has resulted in considerable environmental degradation. the exploitation of natural resources has not been effectively managed to the benefit of the country, its people, but has rather increased poverty.”14

the Country environmental Profile raises concern on the following critical environmental issues, which have nega-tive repercussions on the socioeconomic development of the country:

11 Capacity building for sustainable Land management, GosL – UndP 2007 12 sierra Leone diagnostic trade integration study (ditis), 2006 13 smallholder Commercialisation Programme, GosL – MAFFs 201014 eC joint Country strategy 2008 - 2013


• Deforestation/Land Degradation: Land degradation is considered an increasing problem throughout the coun-try. the forest resources are regarded as seriously threat-ened by uncontrolled logging, agricultural expansion, fuel wood extraction and charcoal burning as well as mining. Apart from unsustainable agricultural practices, deforestation has been identified as priority cause for soil erosion and land degradation. Although no reliable figures on the quantitative and qualitative dimensions of deforestation are currently available, the negative trend is generally perceived as a major environmental threat to the country. As compared to the 1950s, sierra Leone has lost nearly 70% of its forest cover, with less than 5% of the original forest remaining. the loss in biological diversity of flora and fauna in the various eco-systems is significant. the overall land degradation has significant effects on livelihoods with negative repercus-sions on the overall food security situation and on the natural resource base. the problem is further aggravated by natural hazards such as floods and droughts.

• Agricultural Expansion: nearly 75% of the land area of sierra Leone represents arable land. the most fertile lands are found in low-lying coastal plains, including the mangrove swamps and on riverine grasslands, in-

land valley swamps and alluvial flood plains of major river systems. sierra Leone is highly dependent on subsistence agriculture, which contributes to 31% of the GdP and gives 60% of the population a living. the com-bined effects of poor farming practices such as shifting cultivation, recurrent bushfires and overgrazing have negative repercussions on the environment, resulting in further land degradation.15

in order to assess the present situation of land use pat-terns, cropped areas and production potentials, we will use the available statistics at district level. the prevailing cropping system in the upland is shifting (slash-and-burn) cultivation, which is sustainable only when the fallow pe-riod lasts for 20 to 30 years, i.e. depending on the ability of the vegetation to recover and restore soil fertility.

sierra Leone covers 72,300 km2 (7,230,000 ha), of which about 5,400,000 ha are considered arable. Compare Figure 5 for the break-down of the total arable surface by land type and utility from the base-line 1979 FAo survey. 16 in the latest survey dated 2004 17, the total cropped area amounts to 1,995,830 ha, of which 609,707 ha (30.4%) ac-count for upland and swamp rice cultivation – an increase

15 eC joint Country strategy 2008 - 2013 16 the topology and suitability for cultivation is also rather stable over time, so this data from 1979 is still the best available.17 2004 Population and Housing Census, Analytical report on Agriculture

UNDP / FAO 1979 ha '000 % of total land

Cultivated ha '000

Cultivated % of ecology

Maximum available years

fallow

Upland 4,300 59.5% 280 6.5% 15.4

Inland Valley Swamp 630 8.7% 100 15.9% 6.3

Boliland 120 1.7% 10 8.3% 12.0

Mangrove Swamp 200 2.8% 25 12.5% 8.0

Riverine terrain 110 1.5% 20 18.2% 5.5

Total 5,360 74.1% 435 8.1% 12.3

Figure 5: Land Typology Sierra Leone, UNDP/FAO Survey 197916.


of about 175,000 hectares compared to the 1979 UndP/FAo. other major crops were coffee with 17.3% of the total area under cultivation in 2004, cassava with 12.7%, oil palm with 11.6% and cocoa with 7.4%. the average possible fallow period, calculated as avail-able hectares divided by hectares currently cropped, was 15.4 years on upland areas in 1979 (Figure 5). Compared to the necessary recovery periods of ideally 20-30 years, this indicates that already forty years ago the upland was over-cropped.

in the following table18 the percentage of un-cropped area apart from the Kailahun district is well over 45 percent – which may create the impression that land reserves for an-nual crops in the upland would still be available. yet, once we factor in the fallow periods necessary to maintain soil fertility, it is clear that there is a land shortage rather than an abundance under traditional cultivation methods.

18 2004 Population and Housing Census, Analytical report on Agriculture: the data for Western Area (W/A) rural and W/A Urban in all tables show some inconsistencies/mistakes which can be neglected due to the very small area represented.

Figure 7: Predominant Agricultural Use. Source: Collins Social Studies Atlas for Sierra Leone, 2009.

Freetown

Bo

Kenema

Makeni

Cattle

Oil Palm

Swamp rice

Cacao

Coffee

Groundnuts

Fishing

Figure 6: Vegetation Cover. Source: Collins Social Studies Atlas for Sierra Leone, 2009.

Lungi

BoDaru

Bonthe

Forest

Woodland

Savanna

Mangrove


ha uncropped ha total cropped ha total arable District percentage uncropped

17,845.5 268,106.4 285,952 Kailahun 6.2%

203,970.9 244,556.4 448,527 Kenenma 45.5%

199,872.5 218,125.6 417,998 Kono 47.8%

477,720.1 113,968.4 591,689 Bombali 80.7%

117,008.8 113,294.0 230,303 Kambia 50.8%

755,870.5 142,295.6 898,166 Koinadugu 84.2%

274,465.1 149,312.8 423,778 Port Loko 64.8%

398,236.3 120,686.0 518,922 Tonkolili 76.7%

179,155.1 207,572.8 386,728 Bo 46.3%

194,512.4 62,466.4 256,979 Bonthe 75.7%

331.878.2 179,560.0 511,438 Moyamba 64.9%

153,977.3 150,203.2 304,181 Pujehun 50.6%

26,129.2 14,181.2 40,310 Western Area Rural 64.8%

-10,538.3 11.501,6 963.3 Western Area Urban ***

km2 District Farming Households

Arable Land 74.10% km2

Rice ha % Annual Crops ha

% Tree Crops ha

%

3,859 Kailahun 63,942 2,860 66,841.2 23.4 38,644.0 13.5 162,621.2 56.9

6,053 Kenenma 68,465 4,485 55,641.2 12.4 33,958.4 7.6 154,956.8 34.5

5,641 Kono 56,249 4,180 53,826.0 12.9 49,405.2 11.8 114,894.4 27.5

7,985 Bombali 54,102 5,917 43,321.6 7.3 57,472.8 9.7 13,174.0 2.2

3,108 Kambia 35,099 2,303 48,218.4 20.9 48,429.6 21.0 16,646.0 7.2

12,121 Koinadugu 41,259 8,982 57,004.8 6.3 59,765.2 6.7 25,525.6 2.8

5,719 Port Loko 59,844 4,238 69,016.0 16.3 64,305.2 15.2 15,991.6 3.8

7,003 Tonkolili 48,878 5,189 48,820.8 9.4 42,952.4 8.3 28,912.8 5.6

5,219 Bo 69,158 3,867 54,268.4 14.0 52,777.6 13.6 100,526.8 26.0

3,468 Bonthe 22,672 2,570 10,409.2 4.1 30,832.8 12.0 21,224.4 8.3

6,902 Moyamba 40,238 5,114 63,378.0 12.4 80,662.4 15.8 35,519.6 6.9

4,105 Pujehun 35,159 3,042 32,561.6 10.7 37,961.2 12.5 79,680.4 26.2

544 Western Area Rural

27,090 403 3,405.6 8.4 7,650.0 19.0 3,125.6 7.8

13 Western Area Urban

107,285 10 2,994.8 310.9 4,158.0 431.6 4,348.8 451.4

71,740 totals: 729,440 53,159 609,707.6 11.5 608,974.8 11.5 777,148.0 14.6

Figure 8: Cropped versus Fallow Lands by District. Source: 2004 Population and Housing Census, Analytical Report on Agriculture.

Figure 9: Main Crops by District. 2004.


the composition of the three groups of crops on the ar-able land (rice crops, annual upland crops, tree crops) is shown in Figure 11, representing the typical cropping pat-terns of the districts.

the general practice is to have annual crops in the upland follow after rice planting in the prior year. thus to a cer-tain extent, the area of the upland annual crops also rep-resents an upland rice cultivation area within the typical cropping/fallow cycle.

the percentage of un-cropped arable land varies consid-erably: whilst in Kailahun nearly all land is covered with mostly tree crops, Koinadugu, bombali and tonkolili districts in the northern Province around the town of Makeni seem to display the most ‘potential’ for expansion. However, one has to take into account that cattle ranchers use the upland, too. this adds another stress on the veg-etation cover, which is needed to restore soil fertility and to sustain the yield level.

the key factor for sustainable agriculture, i.e. for main-taining or increasing existing yield levels, is the remaining fallow period. the maximum residual fallow period is found by dividing the remaining un-cropped arable land by the surface of the upland crops. the results are shown in Figure 10.

it shows that in all districts there is not enough un-cropped land left as would be necessary to restore soil fertility and to sustain the present yield level under the traditional 20-30 year fallow rotation.

only in the Koinadugu district (12.6 years) and in the tonkolili district (9.3 years) do the available fallow periods indicate a less intensive use. but even here, the threshold where agriculture is beginning to eat into the substance of the natural resources has been passed a long time ago.

therefore, one has to come to the conclusion that under the present cropping system, there is no remaining po-tential to significantly enlarge the area under cultivation anywhere in sierra Leone.

Soil Properties and Productive Capacitythe mangrove swamps are the most fertile soils in sierra Leone with yields of 2 tons/ha of rice in the area with long fresh water seasons against 2.6 tons/ha in the short sea-sons near the sea.19 As to the other ecologies, the yield for upland rice is stated to be 0.72 tons/ha and for lowland at 1.23 tons/ha.20 Lowland comprises inland valley swamps, riverine grasslands and bolilands.

bolilands are extended shallow swamps with very few trees growing. therefore they have long been thought to be potentially suitable for mechanical cultivation. How-ever, most of the boliland soils have a very low pH, causing acidity and iron toxicity. in addition, the nutrient status is rather low – compared to other rice lowland ecologies and even to the upland.

19 WArdA,1984 20 smallholder Commercialisation Programme, GosL – MAFFs 2010

years left for fallow: upland crops

Kailahun

Kenenma

Kono

0,5

6,0

4,0

Bombali

Kambia

Koinadugu

Port Loko

Tonkolili

8,3

2,4

12,6

4,3

9,3

Bo

Bonthe

Moyamba

Pujehun

3,4

6,3

4,1

4,1

W/A Rural

W/A Urban

3,4

-2,5

Figure 10: Maximum Remaining Fallow Periods. 2004. W/A = Western Area.


during the colonial times, bolilands were initially ploughed. similar attempts were made later by develop-ment projects. the result was that with the initial rela-tively successful cultivation the soil nutrients were already depleted. Fertilizer response subsequently was small due to the low storage capacity (lack of organic mass and clay minerals). Consequently, there was no economic return, neither to mechanical cultivation nor to chemical fertili-zation.

Given the low yield potential and the increasing prices for fertilizer and machinery, this kind of intensification on bolilands cannot be a profitable option today.

some of the riverine grasslands have in the past been cultivated, too, after some leveling, and infrastructure for irrigation has been put in place. Here as well, the mechani-cal soil preparation in combination with irrigation was not profitable enough to sustain the more intensive way of cultivation. Consequently the infrastructure fell apart again.

Most of the inland valley swamps have not been cultivated in the past due to the fact that decades ago it was more lucrative for the individual farming family to cultivate the upland. but with the growing population, upland was less available and/or less fertile than before due to shortened bush fallow periods. therefore the inland valley swamps became relatively more attractive.

With the support of development programs, some of the previously neglected inland valleys were cultivated. the major investment – digging ditches and small channels and weirs to control the water – was mostly given as an initial subsidy. With improved fallow practices, i.e. us-ing fallow crops as green manure to sustain or improve organic matter as a carrier of soil fertility, this kind of rice cultivation could continue with reasonable returns.

improved fallow crops halt the depletion of plant nu-trients and introduce organic matter. very effective are nitrogen-fixing cover crops during the dry season, like pigeon peas (cajanus cajan). in such a context, rice cultiva-tion in inland valley swamps promises slowly but steadily

rising yields, which in the long run may even reward the use of chemical fertilizer. Fertilizer is necessary to over-come limiting low levels of phosphorus and potassium as basic dressing, in addition to the always insufficient nitrogen.

one may still wonder why the previous regional develop-ment projects and the countless small initiatives in rural areas have so far failed to deliver a sustainable intensified rice production in both lowlands and on upland sites. this is despite improved varieties, attempted fertilizer use and providing small implements and processing equipment.

one obvious fact is that the increased yields achieved did not suffice to accumulate the funds necessary for contin-ued purchases of factor inputs and maintenance. Another problem is that the farm households have never been considered holistically as an economic unit. Farmers were always looked at as producers of single commodities with a mentality of maximizing gross tonnage. However, land and/or labor availability are always the limiting factors in the economics of subsistence farms. thus the financial return to the limiting factors – land and/or labor – will determine the investment decisions of any farming person.

the average cropping pattern and the farm seize is shown in Figure 11. only in Moyamba district is the area for an-nual upland crops per farm household more than one hectare. otherwise, households with tree crops have the largest area cropped.

the average size of the plots per farming household at 2.74 ha in 2004 can be misleading as far as the true avail-ability of arable land is concerned. Apart from permanent tree crops and any lowland rice plots, the farm household requires 20 to 30 times the area of their annual upland crops to sustain production. the only exception is the por-tion of upland rice cultivation that doubles up within the same crop cycle, as it always precedes the other annual up-land crops. in other words, the average farm household in reality needs about 20 to 30 ha to guarantee a sustainable living under the present cropping practices.


Commercialization of the Smallholder Enterprise Commercialization is seen as the key to moving subsist-ence farmers from absolute poverty to a dignified exist-ence. in practice this means that farmers must find ways to maximize the overall surplus of production beyond the immediate nutritional needs of their household. in addi-tion to cash crops such as coffee, cocoa and oil palm prod-ucts (to some extent), all annual upland crops as well as lowland rice have to be evaluated with a view to increasing marketable surplus. in other words, one should analyze the farm household as a diversified farm enterprise and make it more efficient in terms of returns to labor by opti-mizing the total of the various contribution margins.

Clearly, the traditional development approaches need to be reconsidered. subsidized or credit-financed inputs with support from extension services that focus only on com-modity production techniques have not been sustainable.

Viable Perspectives for Increasing Smallholder Productionthe sCP supports an agricultural extension system revolv-ing around Farmer Field schools, whereby 40,000 farmer facilitators in 1,465 Field schools are to be trained. the curricula and the topics of the training are not yet fully specified.

We note that to a large extent even the sCP takes for granted that land presently not cultivated would repre-sent a production reserve. For inland valley swamps and riverine grassland this may be the case. yet, only detailed feasibility studies with proper valuation of factor inputs and necessary infrastructure investment combined with realistic yield estimates can clarify whether it will be eco-nomical to cultivate these ecologies. to our knowledge, this kind of critical feasibility analysis has never been at-tempted.

District rice ha/hh

ann cr ha/hh

tree ha/hh

rice+ann cr ha/hh

total ha/hh

Kailahun 1.05 0.60 2.54 1.65 4.19

Kenenma 0.81 0.50 2.26 1.31 3.57

Kono 0.96 0.88 2.04 1.84 3.88

Bombali 0.80 1.06 0.24 1.86 2.11

Kambia 1.37 1.38 0.47 2.75 3.23

Koinadugu 1.38 1.45 0.62 2.83 3.45

Port Loko 1.15 1.07 0.27 2.23 2.50

Tonkolili 1.00 0.88 0.59 1.88 2.47

Bo 0.78 0.76 1.45 1.55 3.00

Bonthe 0.46 1.36 0.94 1.82 2.76

Moyamba 1.58 2.00 0.88 3.58 4.46

Pujehun 0.93 1.08 2.27 2.01 4.27

Western Area Rural 0.13 0.28 0.12 0.41 0.52

Western Area Urban 0.03 0.04 0.04 0.07 0.11

average: 1.67 2.74

Figure 11: Average Cropping Pattern and Farm Size by District. 2004.


in contrast, the production potentials for the major cash crops are more promising. these include cocoa, coffee, oil palm and also the often forgotten cola nut. Abandoned plantations are in the process of being rehabilitated. With rising world market prices and available premiums for specialty qualities or fair traded coffee and cocoa, the ex-port quantities and revenues are increasing steadily.

the local market for palm oil remains stable. the palm kernel by-product is purchased for further processing in Freetown.21

As far as upland locations are concerned, attractive pro-duction potentials in cash crops can only be assumed in the context of a transition to more sustainable cropping systems. Appropriate cropping systems include elements of organic production and sedentary (stationary) farming with hedgerows for nitrogen fixation, fast growing trees and improved fallow cover crops. in the 1990s, before the war, first attempts to foster organic/sedentary farming with hedgerows and fast-growing trees have been made with some success. As a result, one notices the tree species that were introduced for that purpose (acacia mangium, a. angustifolium, leucaena leucocephala) even entering urban areas today.

21 eC/stabex, studies export Commodities, 2009, review of Production and Processing Coffee, Palm oil, jatropha.

organic farming as we use it here does not necessarily mean that ‘biological’ or ‘organic’ products will be offered to the market that might fetch a better price than ordinary products. it simply refers to growing and storing organic matter in the soil both to improve microclimate and as a way to overcome the limitations of low soil fertility. it has been well established by research - and is routinely prac-ticed with cover crops in commercial plantations - that plant nutrients that can boost crop yields require organic material as an interim store and as a slow- release supply. this is especially true in tropical regions with very old de-mineralized laterite soils, see Figure 12. Chemical fertilizer will be most effective, when organic matter on and in the topsoil is available, the more the better. tropical areas in general suffer from the ‘tropical disad-vantage’ phenomenon, which means that poor soils and shorter sunshine hours during the growing season lead to much lower yields per hectare on food crops than can be achieved in temperate climates.22 in sierra Leone, we have the added complication of very pronounced dry seasons and extreme wet seasons with torrential rains that drain the soil and lead to alternating rain and sunshine deficits, see Figure 13.

22 see: john Luke Gallup and jeffrey d. sachs: Agriculture, Climate and technology: Why are the tropics Falling behind?, earth.columbia.edu/sitefiles/file/about/director/pubs/AmerjournA-grecon0800.pdf

Figure 12: Soil Landscape. Source: Social Studies Atlas for Sierra Leone, 2009.

Freetown

Bo

Kenema

Makeni

Laterite soil

Swamp soils

http://columbia.edu/sitefiles/file/about/director/pubs/AmerJournAgrEcon0800.pdf

http://columbia.edu/sitefiles/file/about/director/pubs/AmerJournAgrEcon0800.pdf


Sedentary Farming ‘sedentary’ farming means that smallholders would in the future no longer be required to rotate their plots in the uplands. With a sedentary or stationary farming approach they would instead make permanent investments into improving their cultivated soils. this would also mean that the otherwise necessary 20–30 years fallow rotation on the uplands could be avoided. it was shown above that the land-use realities no longer support these extensive fallow periods and actual rotations have been forced down to only four to twelve years on average. the essence of sedentary farming is the incremental improvement of soil fertility as a long term-investment. thus, the general yield level and the contribution margins of the various farm enterprises should improve slowly but steadily.

An average farming household would need to invest in both hedgerows and improved fallow crops in order to move to the sedentary farm enterprise model with contin-uous cropping. this means, one would need two or three additional plots of the same size in addition to the already cultivated two upland plots of rice and the one for other annual crops.

the typical crop rotation would be:

Year 1: upland rice Year 2: annual crops like cassava, maize, benni seed, ground nuts, cow peas, etc; pigeon peas in mixed cropping, Year 3: pigeon peas, Year 4: pigeon peas or mucuna or pueraria as cover crop, Year 5: upland rice and so on.

About 20% of the land is used to establish hedgerows, which will also provide fuel wood and fruits. the excess organic material is harvested and placed into the annual crops to ensure the upkeep of soil fertility. see also the crop rotation and initial introduction schedule for seden-tary farming in Appendix 1.

With the transition towards sedentary agriculture, the to-tal space requirement for a smallholder family is reduced considerably. one average farm household will require only about 6 ha, out of which 4 ha are needed for the an-nual upland crops. based on the 6 ha per smallholder requirement, the available land statistics reveal that within four districts there would still exist a surplus of land that could accommodate commercial investment in agricul-tural production. For the other districts, the challenge

Figure 13: Annual Rainfall and Sunshine Profle, Njala, Central Sierra Leone.

600

500

400

300

200

100

0

Rain

fall

(mm

/mon

th)

Suns

hine

(hou

rs/d

ay)

8

7

6

5

4

3

2

1

0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Rainfall

Sunshine


With the transition towards sedentary agriculture, the to-tal space requirement for a smallholder family is reduced considerably. one average farm household will require only about 6 ha, out of which 4 ha are needed for the an-nual upland crops. based on the 6 ha per smallholder requirement, the available land statistics reveal that within four districts there would still exist a surplus of land that could accommodate commercial investment in agricul-tural production. For the other districts, the challenge remains to consolidate and improve the soil fertility and yields for the existing smallholders on the land.

these are of course very broad-stroke, back of the enve-lope style calculations. the reality at village level will obvi-ously be quite varied.

the shift to sedentary/ organic farming also has important social implications. it must overcome traditional land use patterns with century-old practices and may at times con-flict with customary laws under the chieftaincy leadership structures.

Transition Costs and Constraints the biggest financial constraint in the switch to sedentary farming is the need for medium to long-term invest-ment into farm development. the returns on the labor for planting hedge rows and cultivating the additional plots will only accrue after a four to six year transition period. At that point, one can expect yields of upland crops to increase significantly such that loan repayments could be-come possible. the situation is very similar to the invest-ment in a coffee or oil palm plantation, where also five to seven years must elapse, before returns can be expected.

the credit volume for the conversion of one hectare may be up to eUr 500 over 5 years as per our own estimates. this would include the cost of seed, seedlings, lost produc-tion on land used to establish hedges, additional labor in peak season, etc. With several hundred thousand hectares of upland areas requiring conversion over the next two decades, the volume of such a program is considerable.

the second bottleneck is the lack of extension services and insufficient research support. Farmer Field schools, farmer-based organizations and the planned Agricultural business Centres are all not functional yet and will take time to become fully established. the activities on the district level are coordinated between the Ministry of Agriculture, Forestry and Food security (MAFFs) and a new Unified Agricultural extension service.

Considerable efforts will be necessary to familiarize the various agents and stakeholders with the knowledge on production techniques, farm record keeping and account-ing (contribution margin calculations). experience with organic/sedentary farming with hedgerows is sporadic. thus the introduction of this agricultural development approach will be a learning-by-doing process.

in the various projects grouped under the sCP, the sup-ply of small implements, tools and processing equipment is always a component. it would make sense to structure this assistance in a way that credit components like asset financing remain an option in a commercially viable ap-proach to farm development.

Figure 14: Slash-and-Burn Rotation vs. Sedentary Farming with Hedgerows. Own Photos.


3.3 Review of Important Agricultural Value Chains

3.3.1 Cassava

Cassava is also known in other parts of the world as manioc, or tapioca in some of its processed forms. Cassava is an annual to biannual crop – depending on the variety. in the majority, it is cultivated in the upland and to some extent also in lowlands, which have drained during the dry season but maintain some residual moisture.

After rice, cassava is the second staple food grown across the country with an estimated annual production of 365,000 tons between 2006 and 2010 (FAo stat). in a 2004 study, 729,000 households. i.e. the vast majority of rural households had planted some cassava. the main areas of production are in the south-west, central and far north. According to FAo data, the annual harvested area amounts to 65,000 to 70,000 ha in recent years at yields of about 5.5 tons of cassava tubers per ha.

yields of 5.5 t/ha are low by international comparison and the potential of cassava cultivation is far from being fully utilized. Cassava varieties grown are mainly local cultivars, although there now exists a major variety improvement program run by the national research institute. Apart from using improved varieties, better returns can only come from improved production techniques that raise the return per labor hour and ha in combination with the other crops of the household, i.e. in a farm enterprise ap-proach.

both the cassava tubers and the leaves are consumed. the leaves serve as a protein and as mineral-rich ingredient for the sauce (placas) that comes with boiled rice. the harvest-ed leaves cannot be stored but have to reach the consumer within 24 hours. some efforts have been made by develop-ment projects to produce dried and packed leaves.

once cassava tubers have grown to a harvestable size, they can still remain in the soil for storing. After harvest, however, they must be processed within one or two days to avoid deterioration. they can either be prepared for im-mediate consumption (boiled or roasted cassava) or pro-cessed for longer-term storage. these products are mainly dried cassava chips or gari, the cassava flour.

Compared to rice, cassava is vulnerable to disease and pests in the field and also more sensitive post-harvest, in terms of proper storage and marketability. Unless cassava is processed to chips or gari, the transport-worthiness is low. the relevance of cassava as a cash crop is determined mostly by the cost of transport to the processing station and to the ultimate consumer.

According to the nsAdP, the production of fresh cassava tubers exceeds the national consumption, which should translate into an economic opportunity for value-added processing and regional export. Processing capacity and transport are important bottlenecks in capitalizing on this opportunity. the nsAdP clearly identifies these con-straints and devises programs for overcoming obstacles in quality, processing, packaging and adequate transporta-tion of cassava products.

More generally, the key obstacles for small farmers to gen-erate income from cassava can be summarized as follows:

• the quality of produce is inconsistent und insufficiently controlled.

• Producer prices are depressed, farmers have inadequate market price information and are easily taken advantage of by middle-men.

• transport to market is expensive and poorly organized, there is a lack of cooperation and networking among producers.

• Processing equipment is of poor quality or prohibitively expensive.

Figure 15: Cassava Field and Cassava Tubers. Own Photos.


• Access to packaging materials and equipment is limited (particularly for gari).

• Access to credit for the necessary investment and work-ing capital is difficult.

• Processing centers are too small and poorly equipped.• Administrative barriers to regional export persist.

Cassava Processing Opportunities the processing of cassava to gari flour is quite labor and energy intensive. With the shortage of space in the upland, the production and supply of fuel wood is a serious bot-tleneck.

only 6.5% of the farm families in the eastern Province (17.5% - northern, 75.5% - southern, 0.5% - Western Area) have access to graters that are necessary for the basic pro-cessing into gari flour.23

despite the obstacles, gari is sold to Guinea to the tune of 300 to 400 tons per week and to Liberia in the order of 60 tons per week in small-scale informal cross-border ship-ments.24

in the town of bo, gari production has evidently been commercialized in a way that larger quantities in labeled plastic packages are on offer everywhere. this is an en-couraging example of how local surplus production is finding an outlet into organized marketing and distribu-tion.

the sCP does envision the supply of implements and equipment to rural areas. if and how these elements of the program can be embedded into rural financial services is not yet clear. We see a potential opportunity for small-scale asset finance, for cassava graters, presses, and drier ovens.

A number of community-based food processing facilities are being developed with assistance from MAFFs and do-nors. We visited the binkolo Growth Center near Makeni where local women come together to process cassava into chips and gari. simple wood-fired steam dryer ovens have been developed for this type of application. there

23 2004 Population and Housing Census, Analytical report on Agriculture 24 Cross-border trade and food security – Liberia, sierra Leone, WFP, May 2010

are doubts, however, about the commercial sustainability of this kind of artisanal processing and hence the suit-ability of external financing for equipment and working capital. At this scale, cassava processing is only marginally profitable and we were told that many women will readily abandon the activity as soon as other seasonal opportuni-ties arise. More bankable opportunities might be found in larger-scale ‘industrial’ cassava processing that could absorb a steady flow of freshly harvested cassava from the area. one such facility exists in bo, where an ample supply of pack-aged cassava flour is sold in local markets. synchronizing the demands of an industrial production schedule for a perishable commodity with a large number of smallholder growers would be one of the key challenges.

the cassava industry associations in sierra Leone are relatively well organized, which should help in the devel-opment of more effective industrial scale processing and marketing networks. in 2009, the iitA as the implement-ing agency and sLAri jointly commissioned five cassava processing sites as a way to overcome the processing bottleneck. the sierra Leone Chamber of Agribusiness development (sLeCAd) also trains cassava producers and processors in business development and financial literacy.

Figure 16: Wood-Fired Cassava Drying Oven. Own Photos.


one key objective of Government agricultural policy is to achieve self-sufficiency in rice production. the situation regarding the availability of rice at the level of the prov-inces is reflected in Figure 17.

the paddy harvest from the area cropped with rice has been divided by the population numbers for the districts. the two alternative yield assumptions were 720 kg (900 kg) for the upland (= 64% of the rice-cultivated area) and 1230 kg (1600 kg) for the lowland (= 36% of rice-cultivated area). the milling rate was set at 55%, i.e. 1000 kg paddy = 550 kg white rice.

Clearly, significant investments at all levels of processing and marketing are needed. Public-private partnerships should play an important role in addressing the con-straints in developing a domestic and regional market for processed cassava. Further growth can be achieved by de-ploying suitable equipment and machinery, provided that the necessary political support and improved infrastruc-ture will enable these efforts.

3.3.2 Rice

According to various reports, the annual per capita rice consumption in sierra Leone ranges between 81.35 kg25 and 104 kg26 of white rice.

25 Global Food security response: West Africa rice value Chain Analysis, UsAid microreport #161,2009 26 smallholder Commercialisation Programme – investment Plan, 2010

District Population White rice: kg / person / year

Low High

64%: 720 kg/ha 64%: 900 kg/ha

36%: 1230 kg/ha 36%: 1600 kg/ha

yield paddy yield paddy

Kailahun 358,190 92.7 118.2

Kenenma 497,948 55.5 70.8

Kono 335,401 79.8 101.7

Bombali 408,390 52.7 67.2

Kambia 270,462 88.6 113.0

Koinadugu 265,758 106.6 135.9

Port Loko 453,746 75.6 96.4

Tonkolili 347,197 69.9 89.1

Bo 463,668 58.2 74.2

Bonthe 139,687 37.0 47.2

Moyamba 260,910 120.7 153.9

Pujehun 228,392 70.9 90.3

Western Area Rural 772,873 2.2 2.8

Western Area Urban 174,249 8.5 10.9

Sierra Leone 4,976,871 60.9 77.6

Figure 17: Local Availability of Rice per Capita by District. Source: Own calculations, 2004 Population and Housing Census, Analytical Report on Agriculture.


even with the alternative assumption of a yield increase by 25% (upland) and 30% (lowland), eight of the twelve rural districts would not reach the average of 104 kg/capita actual consumption.

this means that the value chain for most of the paddy produced ends already at the farm gate or on the village level by way of immediate local consumption.

For the producer, it is crucial to feed his family. thus his concern must be to maximize the return to labor and/or to land. Usually, this is done by applying best practices in production technique and optimized use of inputs. the availability of seed is, of course, indispensable. Most farm-ers keep their own seed, although improved varieties (roK xx, Lac 23, neriCA xx, and others) have been developed27.

Certified seed or commercial seed of equal quality is not available on the village level. the seed rate per ha varies: A skilled farmer would use only 70 kg per ha, whilst oth-ers use 100 kg/ha in the upland. the germination rate is the second factor that determines the yield performance. With a low germination rate of say 60% as against about 95% for certified seed, the input costs vary considerably. Per hectare, these germination rates could mean a dif-ference of 19 kg of white rice (milling rate 55%), which is equal to about 68 buttercups, i.e. 68 good meals wasted. in the lowland, less than 20 kg of certified seed are necessary, provided the farmer is skilled in nursing and transplanting the seedlings.

27 For an introduction into the improved variety rice seed topic, see Africa rice Center at www.africarice.org.

Figure 18: Transplanting Rice Seedlings in Inland Valley Swamp at Binkolo. Own photo.

the national seed multiplication system in sierra Leone is unfortunately not functioning at this time and hence certified seed is not available at reasonable prices to most farmers. if one wants to increase yields across the board, using certified seed would be the logical first step.


Box 2: Seed Multiplication System

Preconditions for the production of certified rice seed are: (1) the availability of genetic material to maintain old and to create new varieties, (2) physical infrastructure and (3) an appropriate regulatory system. Breeding institutions like the International Rice Research Institute in the Philippines, the West African Rice Development Authority, or Rokupr Rice Research Station in Sierra Leone normally work on the maintenance of old varieties and the creation of new varieties and they produce the initial breeder’s seed. For every new cropping season, these varieties must be multiplied from breeder’s seed (a few kg) in several generations to certified seed (up to hundreds or thousands of tons).

This multiplication is normally done by commercial seed companies, which have a high degree of organization, specialization, and an internal quality control system. Apart from stores and transport facilities, the most important assets are seed cleaning machines with a capacity from one t/h upwards, which guarantee the physical purity and uniformity of the seed. Dirt, straw, empty and half filled grains, stones are removed and only complete sound grains are left, which from their physical body can ensure vigorous growth of the seedling.

Professionally multiplied seed has a certified germination rate. This certification is internationally standardized by the Inter-national Seed Testing Association at a minimum level of 80%. However, higher percentages of up to 98% are common and they increase the commercial value of the produce.

A further quality criterion - apart from moisture content and absence of pest and diseases – is the genetic or variety purity: By definition, the official list of varieties guarantees a yield performance that is higher than the yield of the numerous strains of so-called local varieties.

To secure the commercial reliability and trustworthiness of the seed sector, the quality should be certified by an independent laboratory, which tests the samples of the various lots sold and which keeps reference samples for liability cases. For internal performance and quality control, the seed companies do perform the same quality control, also.

A seed law typically provides the legal basis for the commercial certified seed production.

In practice, the use of certified seed has three effects: (1) physical purity, which can only be achieved by processing machines and (2) a high germination rate, which will assure the seed’s vigorous growth at all production levels. (3) The effects of variety purity and high yielding characteristics will materialize the better the more fertile the soils are.

The costs of production for certified seed are reflected in the price: it is about twice the price of consumption rice. Typically, subsistence farmers are not in a position to pay (exchange) more than a premium of 10% on the price of seed versus their consumption rice.

To finance the certified seed production, these programs were initiated mostly by development projects, but with a strict business set-up. The intention was that these enterprises would be commercially viable or that unavoidable losses due to necessary price subsidies would be taken over by Government. This would have been justified, as the increase of production would offset import requirements. Thus the otherwise needed foreign exchange could be used for imports other than rice.

Another alternative to make a seed enterprise commercially viable would be to add the trade of consumption rice to the business activities. Profits from trading in consumption rice could compensate the losses from the seed trade. This way, the seed company could fully leverage available infrastructure, transport facilities, stores, cleaning equipment and the staff’s ex-perience in the rice trade.

The present situation in Sierra Leone is that the recently rehabilitated structures and the organizational set-up of the seed project have been neglected due to mismanagement and are now largely defunct again. Some breeder’s seed and variety maintenance is provided by the Rokupr Rice Research Station, but the principle of how to run seed production as a business still remains to be revived.


can be achieved. this compares to hullers or small old rice mills that reach only about 55% white rice (mostly broken). Presently, there is no production of bran and the husk is not used, for example for fuel or construction purposes.

Modern rice mills would not only reduce the losses by increasing the milling rate, they would also achieve the quality label ‘de-stoned’ that is essential for selling into urban markets. Already, the price for locally produced rice is about 10%–15% higher than for imported rice varieties, because of the preferred taste, better cooking proper-ties and higher nutritional value. de-stoned local rice of consistent quality, milled with modern equipment would fetch an even higher premium.

Post Harvest Processing After harvesting, drying, thrashing and milling (pounding) are the next steps in the value chain. on average, about 33% of the farm households have access to drying floors, 3% to thrashers and 10% to rice mills. the exception is the Kambia district where about 50% have access to process-ing equipment.28

drying is done on mats, bare ground or – were available – on solid concrete drying floors, or even on tarmac roads.

on the village level, any kind of infrastructure that im-proves the drying capacities and avoids the contamination with stones has a positive effect. the drying process is shortened and valuable labor is saved. the lower the mois-ture content, the better the storing abilities are.

Milling At the farm level, the rice is mostly pounded and win-nowed to remove the husk. Parboiling on an artisanal level is common and improves the milling results and the nutritional value (increase vitamin and protein content of the remaining grain).

With modern industrial milling, results of 67% white rice - unbroken and broken, 10% bran, 20 % husk, 3% rejects

28 smallholder Commercialisation Programme – investment Plan, 2010

Figure 20: Rice Pounding

land preperation, seeding

farm developmemt plan for soil fertility, hedge-rows seed procurement

weeding, fencing, bird scaring

low land: irrigation infrastructure harvesting organic material as fertilizer and weed cover

harvesting, threshing, drying, selling husk rice (paddy)

drying floors, bags thrashers, small harvesting machines

storing - selling, milling- seeling milled (white) rice, bran

hullers, rice mills, bags

Figure 19: Rice Cultivation Process, Critical Equipment and Input Factors.


this more modest goal of rural self-sufficiency could be achieved in a largely self-financed or (micro-) bankable process. Farmers would need improved certified seed as an occasional external input every three to four years and otherwise would rely on improved production techniques that could be implemented with effective extension ser-vices. the underlying source of the higher yields per ha and relative to labor input is the previously discussed transition to organic/sedentary farming.

if the objective was rice self-sufficiency for all of sierra Leone including Freetown, then massive investments would indeed be required:

in order to trigger a yield increase of about 400 kg/ha in the lowlands one may calculate that a dosage of 150 kg compound fertilizer of nPK (23-10-5- -) per hectare is needed. the current price as of january 2011 quoted cif dakar is eUr 347.00 per metric ton in 25 kg bags.

A bushel (27 kg) of husk rice in Makeni was about sLL 35,000 to 40,000 or eUr 0.26 – 0.30 per kg. this means that of the 400 kg expected yield increase, already 351 to 402 kg of paddy rice are needed just to compensate for the cost of fertilizer (150 kg costing eUr 104.10) without even taking into consideration further handling, transport and financ-ing costs in sierra Leone. Under present production meth-ods, fertilizer therefore clearly would not be profitable.

thus from a macroeconomic point of view, it is more ef-ficient to use the foreign exchange reserves to import the cheaper rice to feed the urban population than to import and subsidize the fertilizer to grow it locally.

29 Trading trading in rice generally is constrained by the fact that there is little surplus for sale beyond the immediate con-sumption needs at the village level.

nonetheless, there are some cross-border shipments to Guinea, estimated at about 360 t of parboiled rice per month30, as well as some smaller sales to Liberia. Although informal export of rice is sometimes likened to smuggling or profiteering by unscrupulous foreign traders, there is no evidence that these would not be willing-buyer/willing-seller transactions at fair prices. in fact, small-scale export seems to be a profitable alternative to the costly transport to the urban centers of sierra Leone, which depresses the prices paid by domestic buying agents.

there is also anecdotal evidence of grain traders advanc-ing funds to farmers during the growing period to be re-paid in kind with the rice harvest later. Credit volumes and implied interest rates are difficult determine from these casual reports.

Rice Self-Sufficiency the much desired self-sufficiency in rice production is a realistic prospect only for rural populations themselves and in part for the supply of smaller towns and cities where residents may be able to afford the higher prices for local rice.

29 Global Food security response: West Africa rice value Chain Analysis, UsAid microreport #161,2009 30 Cross border trade and food security – Liberia, sierra Leone; WFP, May 2010

Box 3: Potential of Modern Milling Equipment

Assuming that about 10% of the paddy harvest of Sierra Leone (96,000 tons in 2008)29 would be milled on equipment that has a capacity of 1 ton/h of paddy (1 t/h, 8h/d 100 days) about 120 mills would be needed. Per mill, we would have a better recovery of 10 kg white rice and 5 kg of bran per 100kg paddy as compared to the existing hullers or old equipment. Per year, this would amount to 60 t of white rice and 30 t of rice bran for a single mill. In other rice producing countries like Cambodia, the bran would pay for the milling cost. Bran is used in bakeries, animal feed or to produce rice bran oil.

The question presently is whether a rice miller could acquire sufficient rice quantities in order to run the mill at capacity. For example, the World Food Program Sierra Leone had planned to purchase 600 t of rice in the Moyamba district in 2009 and in 2010. It only managed to buy 117 t in 2009 and 300 t in 2010, although generally prevailing market prices were offered.


(West). Chickens also make up the vast majority of the national poultry stock, ducks and guinea fowl amount to only 0.3%. Low intensity rearing of rural and backyard poultry account for 90% of all poultry production in sierra Leone.31

domestic production of poultry is not fully meeting the demand for meat and eggs and is not keeping up with the population growth, particularly in the urban areas. domestic per capita production of poultry meat and eggs is in steady decline (Figure 22) and some of the shortfall in domestic production is covered by imports (Figure 23). Absolute per capita consumption of poultry products is also trending lower in recent years, most likely because of constrained affordability of purchased poultry. it stands at 4.89 kg/capita, which is slightly below the West African average of 5.1 kg/capita.32 this could point to an opportu-nity for increased domestic production, provided it can be price-competitive with commercial imports.

31 Poultry Market in West Africa: sierra Leone, evans school Policy Analysis and research (ePAr), brief no. 92, july 7, 2010 32 ibid.

For special projects – like the rehabilitation of irrigation schemes – a proper cost/benefit analysis may look differ-ent. However, the risks related to achieving the projected yield and the recovery of loans for the required invest-ments will still be very high. the accountability for long-term and short-term inputs, ownership and management of such schemes remain difficult issues. they may indeed appear overwhelming compared to the modest potential profits and the difficulty in securing that those returns flow back to stakeholders and funders. the record of Gov-ernment in managing complex long-term agricultural investment projects in sierra Leone is not encouraging.

3.3.3 Poultry Rearing

Poultry is an important traditional component of the nutritional mix for sierra Leoneans. on average, 59% of households keep at least one chicken. this figure varies by district, from 31% in Kono (east) to 84% in Port Loko

Sierra Leone Poultry Statistics 2002 2003 2004 2005 2006 2007 2008 2009 2010

Poultry Stocks (head '000) 7,070 7,575 7,575 7,575 7,680 7,780 7,775 7,875 7,875

Poultry Meat Imports metric tons 9,102 4,953 3,157 1,473 1,908 3,632 4,141 3,838

Poultry Meat Import USD '000 9,302 3,821 2,404 1,139 1,289 3,697 4,968 3,371

Figure 21: FOA Statistics on Sierra Leone Poultry Sector.

Figure 22: Domestic Poultry Production and Consumption. Metric tons. FAO Stat.

Consumption

Domestic Production

35000

3000025000

20000

15000

10000

5000

02000 2001 2002 2003 2004 2005 2006 2007


• General unavailability of essential drugs for livestock;• Limited sources of funding and/or credit for the live-

stock sector;• Poultry-sector perceived as particularly risky;• erratic electricity supply;• taxation of poultry farming inputs;• Unregulated import of eggs and poultry products lead-

ing to unfair competition with the local industry.

the poultry workshop gave two principal recommenda-tions to address the current limitations to the poultry industry:

1. the establishment of cottage industries with the help of development partners for the production of feeds, concentrates and vaccines for poultry.

2. Government should encourage commercial banks and other financial intermediaries to allocate a specified proportion of their loan portfolio to poultry farming.

Poultry Production Paradigmsthe consultant’s opinion is that there are three basic op-tions for poultry production:

1) extensive, mostly free roaming production on individual farms,

2) semi-intensive production at the village level,

3) industrial production in peri-urban areas.

sierra Leone has very few commercial poultry operations, mainly located in the Western Area, in bo and Freetown. nationally, commercial rearing supplies only ten percent of total poultry. Within the area surrounding Freetown, however, commercial operations cover 30% of poultry consumption.33 According to the Agricultural survey 2004, the commercial poultry sector employed about 1,700 people in sierra Leone.34

the general state of the poultry sector was summarized in a recent national convention as follows:35

• the demand for poultry products has increased sub-stantially in recent years.

• demand is driven by the rapid increase in the urban population, which has a high concentration of foreign nationals and other relatively affluent residents who can afford these products.

• Present demand far exceeds local production – a fact which has resulted in ever-increasing volumes of im-ports to satisfy the shortfall.

• Prices of poultry products are high due to high demand.

the workshop also highlighted the following constraints:

• Lack of feed mills;• Lack of hatchery;• veterinary services are very rudimentary;• shortage of trained personnel and basic labor;

33 ibid. 34 sierra Leone integrated Household survey (sLiHs), 2004. 35 seminar: Poultry sector development validation Workshop: research into Use – sharing lessons to enable innovation agriculture, Freetown, August 2010

Figure 23: Domestic Chicken Meat and Egg Production. Kg/Capita. FAO Stat.

Chicken meat

Hen eggs

3.0

2.5

2.0

1.5

1.0

0.5

02000 2001 2002 2003 2004 2005 2006 2007 2008


in order to produce 1 kg of meat, 3 kg of compound feed is needed. As an example, a 50 kg bag of imported rice as a substitute for locally produced maize or rice costs about sLL 100,000 Leone (= Usd 27). one kg rice would be 54 cent. the locally produced rice costs about 64 to 73 Us cent per kg.

Given the high price levels of local and imported grains in sierra Leone, it is hard to imagine how entrepreneurs would be able to produce compound feed with all its different necessary ingredients competitively and come out anywhere near 30 cents per kg for chicken meat. the grains that go into the compound to feed the chickens are already worth Usd 1.50 per kg of meat.

if industrial chicken production is out, the option of extensive small scale poultry keeping in a holistic farm enterprise might still be valid. Here, the development path would be:

1) increased production in all farm businesses by investing in soil fertility and sedentary farming,

2) introduction of pigeon peas into the sedentary farming cycle. Pigeon peas have nitrogen fixing ability, are drought resistant and produce ample leave litter.

3) with more organic matter and better soil fertility come yield increases in all crops and surpluses that can be used for chicken feed.

of course, the integrated poultry farming is a learning-by-doing process and should be accompanied by training from the extension service via the Farmers Field schools. small loans for the construction of chicken pens and for tools and equipment would also be helpful. the process chain for semi-intensive chicken poultry rearing is in Figure 24.

We see the major bottlenecks in poultry production as the lack of veterinary services, the access to drugs and vaccines for intensive poultry keeping and the availability and price of feed.

At the farm level, fowl live mostly free-roaming and scav-enge for their own supply. occasionally, they feed on food waste (half filled grains, cassava peels) or are reared on feed supplies otherwise suitable for human consumption, such as maize, cow peas, pigeon peas, etc.

Here, more intensive production is only feasible once the availability of feedstuff is improved without directly com-peting with subsistence needs or cash sales on the market. this implies that farm development with its various farm enterprises has to be intensified and the farming family has to decide how to produce more feed for the poultry. the question becomes whether an increased production of maize and pigeon peas for feed is possible and profitable.

In semi-intensive production at the village level, the fowl is mostly kept in cages and occasional veterinary service is available or managed locally and the products are market-ed regularly. in this approach, the question of availability of feed is crucial. is there fodder available that is otherwise not used? sources could be debris from rice milling, rice pounding, cassava processing. is it possible to produce cassava, sorghum/millet, rice bran, maize, cow peas and pigeon peas in sufficient quantities to have feed available all year round?

For large scale industrial poultry production, the crucial point is the availability of standardized compound feed. the more intensive the production is, the more refined the recipe has to be.

Economics of Poultry Production in 2008 for example, FoA data show imports of chicken meat of 4,141 tons valued at Usd 1,199 per ton. the im-ports of hen eggs amounted to 2,509 tons valued at Usd 1,041 per ton. thus, the value of one kg of imported chick-en meat is 30 Us cent.


before the war, the production was above 20,000 t per year. After a severe depression during the time of civil unrest and war, the production has recovered to 19,000 t in 2009.36

36 Cocoa value Chain sierra Leone, Workshop 2010 and bsL statistics.

3.3.4 Cocoa

in sierra Leone, cocoa bean is grown on 148,665 ha mainly in the eastern region. 53,401 ha are planted in Kailahun, 36,364 ha in Kenema and 36,437 in Kono. Cocoa bean yields are reported to be between 100 - 200 kg/ha in 2004. Cocoa covers the smallest area under cultivation with less plantation area than coffee (344,658 ha) or oil palm (232,912 ha).

Box 4: Chicken Feed Compound for Broilers

We propose a simple model calculation on the availability of maize as a major component for chicken feed in broiler production:

Compound feed necessary to produce one broiler: 3kg of compound feed

Broilers to be produced: 4,000,000 birds @ 1kg

Percentage maize in the compound feed: 40%

Quantity of maize to be procured: 4,800 metric tons

In the 2004 census, the area with maize crop was 60,238 ha with an average yield of 2.2 t resulting in a total production of 132,500 t. (Note that the published BSL figures for maize production are even lower at around 40,000 t/yr for 2006-2010).

One would assume that the necessary 4,800 t of maize (2.2 t maize yield per ha = 2,182 ha cropped area) needed to provide this feed component would be easy to acquire. In reality, areas suitable for maize cultivation are very limited and so are stor-age locations that could accommodate a year’s supply. In the Moyamba district, for example, in 2004 about 11,765 ha of maize were cultivated. To get an additional production of 4,800 t of maize, the area under cultivation would have to be en-larged by about 18 percent. It was shown above that such production reserves in terms of land and labor are just not available in the short run.

The other 60% of the compound feed must have higher and more complete protein contents as compared to maize. Pigeon peas could be used, since the usual soybeans are not grown in Sierra Leone. However, pigeon peas have only become more common after the war and are not cultivated in significant marketable quantities yet.

constructing cages, keeping local fowl

plan: feeding material, construction material arrange with the veternary service for regular health check

feeding, watering, disease management

organizing feed supply, medication, drugs small equipment for water supply and feed hygene

marketing

establish business contacts to traders supply to restaurants on a privaledged contact basis

Figure 24: Poultry Process Chain – Semi Intensive Production


it would make sense to augment such resettlement with microcredit for productive equipment and working capital.

From the available statistical data, it is difficult to estimate whether suitable land is available for a major expansion of the cocoa plantations. Anyway, for new plantations or for re-planting seedlings are required, which have to be bought. the up-front cash investment would be a binding constraint for most cocoa farmers. the obvious option would be to first rehabilitate the existing plantations and improve both yield and the quality of the cocoa. to date, sierra Leone is known for inferior quality cocoa and its exports trade at a discount to world market prices, see Figure 26.

As a perennial crop, a cocoa plantation needs permanent care, especially in respect to the regeneration of accompa-nying plants and the cover by shade trees.

during the war, plantations have been overgrown and a lot of manual work is still needed to clear the unwanted underbrush. Cocoa plantations operate with long lead times. it takes several years of maintenance, before har-vests may start again and full production capacity is reached. As most cocoa farmers are well beyond middle age, a physically able labor pool is becoming a critical shortage for the rehabilitation of older cocoa plantations.

some development projects have started to resettle young families who had fled to Freetown during the war back into rural communities. Apart from technical inputs, these programs always comprise village work components: ac-cess to land and social integration is facilitated. in total, it costs only about Usd 500 to resettle a jobless person from the overcrowded city and to create a permanent job op-portunity in the village. Given the labor shortage in the cocoa sector, resettlement appears a useful intervention at moderate cost. While the initial expense of transport and start-up capital should continue to be grant funded,

Figure 25: Cocoa tree in plantation with proper shade management. Plantation areas. Own photo, Social Studies Atlas for Sierra Leone, 2009.

Figure 26: Cocoa Quality and Export Performance. Source: Cocoa Summit Nov 2010.

Sierra Leone vs. international quality standards

Measure Grade 1 cocoa Sierra Leone average

Mould <4% >8%

Defective beans <3% >5%

Moisture content <7.5% >10%

Fermentation Well fermented Not well fermented

Sierra Leone export at discount

Less income for farmer

Less income for trader

Less income for agent

Less income for government

Export Price Discount

Other Countries Sierra Leone

$ 3.000 $ 750

$ 2.250


The Cocoa Value Proposition Cocoa is easily the most lucrative cash crop in sierra Leone. this is where sierra Leone probably has its highest comparative advantage in agriculture and is presented with a realistic opportunity to create solid, sustainable livelihoods in rural areas.

the climate and the soils are quite suitable for cocoa cul-tivation and this type of tree crop has the added benefit of integrating naturally into environmentally beneficial agro-forestry concepts.

Global consumption of chocolate and other applications for cocoa powder and cocoa oil in food and cosmetics are booming. suitable growing locations are limited and other traditional suppliers, most notably ivory Coast and Ghana have structural issues that limit their production and ivory Coast was recently going through a period of politi-cal instability. this is prompting buyers to actively pursue new supply channels elsewhere.

Prices will continue their firm long-term trend, even if the price spikes above Usd 3,000 per ton seen between 2009 and early 2011 have proven to be temporary, see Figure 27.

Cocoa Processing the first quality-critical step in the cocoa value chain is a controlled fermentation process in order to achieve a pronounced aroma. this process lasts about one week. it is important to stir and re-shift the beans together with the flesh. At this stage only basic labor is needed.

the next step is the drying process of the beans. Here, equipment is necessary: either drying floors or a dry-ing channel, i.e. a solar dryer consisting of shelving with plastic sheeting cover. Warmth and evaporation must be enhanced nowadays, because clouds and fog often do not lift until late in the day. Previously, before these changes in the micro-climate, one would have had longer drying hours per day. Moisture meters may be needed to deter-mine the allowable moisture content (<6%), which is dif-ficult to estimate correctly without special equipment.

the third step is quality control. this control has to be done visually and labor is required.

the transport of the dried cocoa beans from the farm to the point of collection or sale remains a problem. rural feeder roads are improving but many cocoa growing areas remain very difficult to access. Quality jute bags that pre-serve the quality of the beans are expensive and in short supply.

Figure 27: World Market Prices for Cocoa USD/t. Source: Nymex.


if any at all, because the cost of maintaining an organic certification was not rewarded in the market. it is true that organic status may not pay while otherwise the quality is sub-par and the scale of the operation remains small. but once the quality issues have been addressed and produc-tion has recovered to pre-war levels and above, the addi-tional premium commanded by organic cocoa might well be worthwhile.

Inefficiency of Domestic Trading and Processing For a relatively small cocoa sector, there are many actors that intervene in the cocoa value chain between the farm gate and the export terminal. some believe there are actu-ally too many small and unprofessional actors in the cocoa sector that are out to make a quick Leone and do not have the capacity to move the industry forward, see Figure 28.37

37 source: Catholic relief services, Cacao subsector Analysis, septem-ber 2006.

even with the known quality issues and the logistical dif-ficulty of sourcing cocoa in sierra Leone, the 2010/2011 season saw a sharp increase in demand for cocoa beans with buyers and agents scrambling to fill their quotas from increasingly assertive producers. if cocoa farmers managed to professionalize and reliably build up quantity and quality, cocoa could become an important economic engine for the entire eastern region of the country.

An additional marketing advantage for cocoa from sierra Leone is that due to funding constraints and the neglect during the war, most plantations are entirely free of chemical fertilizers and pesticides. the local cocoa would therefore immediately qualify for ‘biological’ or ‘organic’ certification. At this time, most grower cooperatives have limited themselves to obtaining a fair trade certification,

National

District

Chiefdom

Village

Figure 28: Actors in the Sierra Leone Cocoa Value Chain.37

Village collectors

Local traders

Farmers

Local collecting agent

City agent

City representatives

EXPORTERS


war. only very recently, some growers have been able to break out of this spiral with the help of development part-ners and responsible buyers who promote a focus on qual-ity and building a brand for sierra Leonean cocoa.

Figure 29 is excerpted from the june 2010 Cocoa summit documents by Henning ringholz (giz). it succinctly sum-marizes the low-quality/low-return situation that has characterized the cocoa sector in sierra Leone since the

the role of Lebanese trading businesses in the cocoa sec-tor is often criticized as rather destructive. by lending to cocoa famers during the lean season before the rice and cocoa harvest and then aggressively collecting the cocoa beans as repayment, they are perceived as taking advan-tage of producers and as interested in their continued entrapment in poverty. Consequently, the solution is seen in internalizing more of the processing, collection and transport under the farmers’ direct control or in farmer cooperatives.

From our cursory discussions with stakeholders, we be-lieve that the prejudice against cocoa traders and the Leb-anese in particular is a bit unfair. one has to acknowledge that these traders took risks and kept the market open even during adversity and thereby brought at least some revenue to the community and this without any kind of external subsidy.

Figure 29: Low-Quality / Low-Price Spiral in the Cocoa Sector. Source: Cocoa Summit June 2010.

Bad quality = bad price

No incentivefor farmersto improve

quality

Agents who refuse bad

quality loose out

Many agentspay by weight,

not quality

Agents compete for supply

of cocoa

Tradersobtains cocoa as

payment

Farmersare indebted to

traders

Consequences

•Farmerscontinuetoproduce bad quality •Farmersreceivelittlemoneyand stay poor

•Tradersobtainlow sales prices

•SierraLeonereceivesless export earnings

•Sierra Leone cocoa badly regarded on world markets

•DiscountforSierraLeonebad quality drains money out of the country

The current incentives lock in players in a low-quality, low-price spiral

The incentives for stakeholders along the value chain encourage bad quality


the jury is still out on whether these farm land invest-ments are a blessing or a curse for host countries such as sudan, Ghana, Mali, ethiopia, tanzania and others. inter-national development agencies are beginning to take a more balanced view of the risks and opportunities and are trying to shape the debate with recommendations on how to do it right, in a way that benefits local communities and improves agricultural productivity sustainably. A United nations Code of Conduct is in preparation and the World bank has proposed guidelines.38

sierra Leone is creating its share of interest from foreign agriculture investors, mostly in the form of government to government deals. the Chinese company Complant has begun to rehabilitate the Magbass sugarcane plantation and mill at Magburaka in northern sierra Leone. swiss-based Addax Bioenergy is in the process of building up a large sugarcane plantation and ethanol production com-plex near Makeni (see box below). other projects in the pipeline or at various stages of implementation include:

• Quifel: Portuguese group investing in rice, oil palm, sugar cane in Lokomasara and Masimera

• Gold tree: a UK group investing in an oil palm plantation in daru

• iranian government: palm trees, castor oil plantation• sub-sahara biofuels (sL) Limited: a sugarcane to

ethanol project in tonkolili district• Africa development Corporation: a group of sierra

Leonean expatriates and other investors pursuing a sugarcane project in Pujehun district.

38 ibtimes.com/articles/72461/20101015/un-body-fails-to-backland-grabs-code-of-conduct.htm

We wonder why supply chain credit within established business relationships, whether in kind or in monetary form, could be a bad thing. in fact, supply chain credit is one of the promising financial interventions that we high-light in Chapter 5. We have been told that the exchange relationship between rice and cocoa applied in small in-kind supply chain credit may imply an interest rate as high as 30% for six months. this may sound high, but if the loan was monetized by a microfinance institution, it would also easily cost 5% per month, which compounds to 80% p.a.

it seems to us that the current drive to internalize trading and processing within farmer cooperatives carries a high risk of introducing new inefficiencies into the value chain. the risk is that with significant investment of farmers’ time and development partner funding, cooperatives end up duplicating storage, transport and processing capacity that has already been invested at the level of the tradi-tional traders.

Would it not be better to simply increase quality-sensitive competition among buyers, foster price transparency and educate farmers on how to be a smarter seller of raw cocoa ex farm gate? if labor and the farmer’s time are already a binding constraint in cocoa production, should the farmer not rather specialize in rehabilitating plantations and growing quality cocoa instead of dabbling in processing and transport?

3.4 Foreign Investment in Rural Areas

Climate change, population growth and the food and commodity price spikes of the last few years have created a global race for farmland and water resources that is sub-ject of considerable controversy. Much of this investment in off-shore food and biofuel production is going to Africa, where it is seen either as a catalyst for a green revolution or a neo-colonial land grab, depending on the perspective. one of the more spectacular deals globally, which ulti-mately fell through because of the political furor it created, was the lease of almost half the land mass of Madagascar by daewoo Logistics corporation of south Korea.

Figure 30: Who is buying land in Africa. Source: International Food Policy Research Institute, quoted per Economist, 2010.

Farms raceSelected investors, hectares obtaines, 2006-09, ´000

China

South Korea

UAE

Saudi Arabia

Qatar

0 200 400 600 800

2.8 m

http://ibtimes.com/articles/72461/20101015/un-body-fails-to-backland-grabs-code-of-conduct.htm

http://ibtimes.com/articles/72461/20101015/un-body-fails-to-backland-grabs-code-of-conduct.htm

Overview Of the AgriculturAl SectOr36

We are in no position to pass judgment on whether these investments have been fairly designed and should be ap-plauded as breakthroughs in agricultural development for sierra Leone. What seems clear, however, is that these investments are coming and that more are in the pipeline. the challenge then is to make the most of the new reality for the benefit of local farmers and rural populations. this is particularly important when one considers the com-bined impact on land resources from both the agricultural projects and the even bigger mining and extraction invest-ments moving into rural sierra Leone at the same time (see list below).

As we saw above, productive arable land is not in surplus as one is often made to believe. Land can only be ceded to foreign investments without impacting local food supply, if existing smallholders can in parallel manage the transi-tion to more intensive stationary (sedentary) farming.

As well mining is relevant because investments in this sector are happening in rural areas and present oppor-tunities for encouraging economic participation of rural populations via microfinance, for example. some of the large mining projects that are currently in production or in preparation include:

• sierra rutile Ltd.: rutile, ilmenite and zircon dredging operations,

• African Minerals: tonkolili iron ore mine,• vimetco Ltd.: bauxite projects,• London Mining: Marampa iron ore mine• Koidu Holdings: industrial diamond mining• Cluff Gold (sL) Limited: baomahun gold project.

Finally, although still several years away from making a tangible impact in the country, the discovery of oil was announced by the independent prospecting company Anadarko in september 2010 off the coast in the sierra Leone/Liberia basin.

Box 5: Case of Addax Bioenergy, Makeni

Swiss-based energy company Addax & Oryx Group is developing an integrated agricultural and renewable energy project for fuel ethanol and electricity outside of Makeni. The scope includes a sugarcane plantation, ethanol distillery and a biomass power plant. The plantation will reach 10,000 – 20,000 ha with a distilling capacity of 350,000 l of ethanol per day. 15 MW power generation capacity will also be installed. The total investment volume is estimated at EUR 200 million. Once in full operation, employment should reach more than 2,000 staff. Production start is slated for 2012. Currently the project is at sugarcane nursery stage.

The project is co-financed by a consortium of development banks including AfDB, Swedfund, Dutch Development Bank (FMO), Austrian Development Bank (ÖEB), European Financing Partners etc. The German DEG is also actively considering an investment.

The project has been controversial within the development community because of sensitive land use issues and the biofuel vs. food crops debate. However, an effort is being made to address social and environmental impacts through: (1) extensive community outreach, (2) involvement of local government and chieftains, (3) thorough environmental and social impact studies, (4) careful plantation siting and the avoidance of involuntary resettlement.

Sugarcane requires prime upland locations. The idea of the project was that local farmers would retain inland valley swamps and bolilands for food crops. Although local farmers generally signed consents to lease the upland locations, there could still be a conflict with smallholder food production on the horizon. This is because of the rotation of cultivated land under tradi-tional farming and the necessary long fallow recovery periods. The conflict could potentially be mitigated with a transition to the intensive fallow / sedentary farming approach described earlier in this report.

AnAlysis of RuRAl And AgRicultuRAl finAnce 37

4.1 Financial Sector Overview – Macro Level

4.1.1 Macroeconomic Context

the economic context in sierra Leone with solid GdP growth, manageable inflation and a growing inflow of in-ternational capital should make for relatively conducive conditions for financial sector development.

there is a high degree of dollarization for longer-term and larger-value transactions throughout the country. the local currency is used essentially only for government’s fiscal operations and for small value transactions between private sector entities. the widespread nominal anchor-ing in Usd of financial assets and real sector prices is not necessarily a constraint to economic activity. in fact, it is generally seen as a contributor to growth and stability, as current account transactions are sufficiently liberalized to give businesses access to foreign currency at realistic exchange rates.

sierra Leone is making reasonable progress towards the convergence criteria tracked by the West African Monetary Zone (WAMZ, see www.wami-imao.org). Although the implementation of the eventual monetary union will likely continue to be postponed, improved regional financial integration is already materializing throughout the six-country zone (Gambia, Ghana, Guinea, Liberia, nigeria, sierra Leone). it is in evidence in sierra Leone by the number of nigerian banks setting up sub-sidiaries in the country.

the financial sector operates in a relatively liberalized private sector environment: Government or publicly owned institutions do not dominate financial services. in-terest rates, exchange rates and credit allocation decisions are largely determined by market forces.

Although the bank of sierra Leone (bsL) as the bank regu-lator has recently become a bit more critical of new bank applications, barriers to entry for private sector provid-ers of financial services including foreign operators are not prohibitive. Wholly foreign-owned bank subsidiaries are allowed. the prospects for a further deepening of in-ternational integration in the real sector and in financial services are good. Foreign capital inflows remain strong, driven by the natural resources opportunities, including the recent discovery of oil reserves off-shore. there is also a large number of sierra Leoneans living abroad, more than 100,000 in the UK alone, who send remittances and maintain a keen interest in engaging economically with their native land. 39

overall, it seems fair to say that the macroeconomic con-text in sierra Leone remains complex and volatile, but not prohibitive to the emergence to a well-functioning finan-cial services industry. However, the potential remains vastly under-utilized to date. Figure 31 shows the recent development of the banking sector’s net interest margin in comparison to regional benchmarks Ghana and nigeria. German data is provided as a reference for typical margins in developed financial markets. the net interest margin is defined as the accounting value of net interest revenue relative to total earning assets and captures the overall in-termediation spread in the banking industry.

39 Compare sierra Leone diaspora network at sLdn.org.uk.

4. Analysis of Rural and Agricultural Finance


shallow market for private sector credit that is barely mak-ing an impact on the economic reality of businesses and households in the country.

Private sector credit penetration is on an entirely differ-ent trajectory in Ghana and Nigeria, signaling a signifi-cant contribution of the banking industry to the financing of real sector activities, boosting economic growth and employment.

the fundamental potential is present in sierra Leone for the financial sector to play a catalytic role in economic development. yet, the challenges and constraints are numerous and complex. they range from inadequate physical infrastructure to the rule of law and the enforce-ability of collateral. Understandably in post-conflict soci-ety, business has a pervasive short-term outlook, capital flight is rampant and many of “role models” of business success display an extractive, rent-seeking mindset rather than entrepreneurship and an inclination for strategic investment. the financial industry is also vulnerable to in-filtration by Latin American drug cartels and money laun-dering rings that have discovered sierra Leone as a trans-shipment point to europe. see also the detailed review of the challenges facing inclusive financial service providers in the following Chapter 4.2.1 that discusses the financial infrastructure.

the net interest margin for banks in sierra Leone is vola-tile and based on a very thin earning asset base, so the changes year-on-year should not be over-interpreted. What can safely be said is that the intermediation spreads are much higher in sierra Leone than in Ghana and nige-ria and have not even begun to join the downward trend typical for emerging financial sectors. very high interme-diation spreads as in sierra Leone are actually not an in-dicator of particular profitability in the banking industry, but rather a symptom of very shallow, exclusive banking markets that serve only a small elite and extend credit to the real sector only under the most onerous collateral requirements.

A more inclusive mass market approach is always accom-panied by lower intermediation spreads applied to a much broader base of bank assets. From bsL data on prime lend-ing and average deposit rates, it appears that the interme-diation spreads have dropped off in 2010 and 2011, but sierra Leone still has a long way to go to catch up with the financial inclusion and net margin trends in Ghana and nigeria, for example.

Figure 32 shows the amount of credit to the private sector extended by all financial institutions in the market relative to GdP. the global benchmark for fully developed markets is around 100%. At 5% sierra Leone displays an extremely

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

2002 2003 2004 2005 2006 2007 2008 2009

Figure 31: Banking Sector Net Interest Margin. World Bank Financial Structure Database, last updated Nov 2010.

Sierra Leone

Ghana

Nigeria

Germany


4.1.2 Financial Sector Regulation and Supervision

Regulationsierra Leone is in the process of establishing a modern regulatory platform for financial services. regulation (and supervision) is directly addressed by Goal A under the FsdP and is certainly among the areas of intervention, where some of the most tangible progress has been made in recent years. the fundamentals are now in place:

• the Bank of Sierra Leone Act of 2011 reaffirms bsL as the monetary authority and the regulator/supervisor of the commercial financial system. the Act includes an explicit commitment to achieving price stability and safeguards the independence of the central bank from direct political influence.

• the Banking Act of 2011 provides a modern legal frame-work for licensing, regulating and supervising banking sector institutions in line with international best practice.

• the Anti-Money Laundering and Combating of Fi-nancing of Terrorism Act of 2012 brings sierra Leone into formal compliance with the recommendations of the Financial Action task Force (www.fatf.org). However, full implementation throughout the financial system in

the good news is that there appears to be the political will to tackle the obstacles that constrain the financial industry from engaging more deeply with rural popula-tions, agriculture and small or micro businesses. there is strong commitment from all financial sector stakehold-ers, especially from the bank of sierra Leone. the bsL has managed to rally Government and the various develop-ment partners around a platform for coordinated inter-vention at all levels of the financial sector – the Financial Sector Development Plan (FsdP)40. the core of the FsdP is a detailed matrix of prioritized initiatives, supporting actions and performance indicators grouped around four overarching objectives:

• Goal A: strengthening safety and soundness of the banking system;

• Goal b: increasing Access to Finance;• Goal C: strengthen Contractual savings and Long-term

Finance;• Goal d: strengthen the enabling environment.

40 the republic of sierra Leone, Financial sector development Plan, 31 oct 2009.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

110.00%

120.00%

2002 2003 2004 2005 2006 2007 2008 2009

Figure 32: Private Credit by Banks and Other Financial Institutions relative to GDP. World Bank Financial Structure Database, last updated Nov 2010.

Sierra Leone

Ghana

Germany

Nigeria

Côte d´lvoire


bsL has been making progress towards risk-based supervi-sion, but significant gaps remain vis-à-vis the benchmark of the basel Core Principles for banking supervision (oct. 2006). bsL does not yet maximize the synergy between off-site data analysis and on-site inspections and the limited supervisory resources are still too focused on rote compliance rather than homing in on critical prudential exposures. strengthening the capacity of financial sector supervision both in terms of systems and staff is therefore one of the leading initiatives in the FsdP and a focal point for the contributions of the development partner com-munity.

4.2 Financial Sector Overview

4.2.1 Financial Infrastructure

Physical Infrastructurethe financial sector infrastructure issue in sierra Leone indeed has a very tangible physical infrastructure dimen-sion: power cuts are a frequent occurrence in the urban areas, and in the country-side financial institutions are en-tirely on their own in devising reliable and affordable elec-tricity solutions. the basics of sanitation, water, security and road access (particularly during the rainy season) are additional practical complications of rolling out financial services to rural areas in sierra Leone.

Technology Access to information technology and telecommunica-tions and the human capital to operate these resources is another cross-cutting constraint on the financial sec-tor, which was specifically highlighted in the 2006 World bank-iMF FsAP, for example. information technology bottlenecks manifest themselves at multiple levels: in payment systems, in rural outreach, in service quality and credit risk management, in terms of institutions achieving efficient scale, as well as in financial reporting and timely, risk-based supervisory interventions.

Many transformative developments and innovations are underway that should progressively address the informa-tion technology and telecommunication constraints. one of the areas where the FsdP has achieved the most pro-gress is notably in the area of payment systems:

the context of technical and human capacity constraints remains a challenge.

• the BSL Guidelines for the Operations of Credit-Only Microfinance Institutions of 2009 define a workable regulatory regime for the emergence of sustainable pro-poor micro-financial services.

• the BSL Operating Guidelines for Other Deposit-Tak-ing Institutions of 2011 complete the suite of recently modernized banking sector regulations.

the insurance sector and capital market institutions are still awaiting a review of their respective regulatory funda-mentals. However, the FsdP clearly identifies an overhaul of the insurance Act 2000 and the finalization of the Col-lective investment schemes bill as priorities for action. Further downstream initiatives regarding the legal and regulatory framework of financial services that are already visible on the action item list of the FsdP include inter alia the creation of a deposit insurance Corporation and the drafting of regulations for securities intermediaries.

Financial Sector Supervisionthe bank of sierra Leone Act of 2011 affirms bsL in the dual role of monetary authority and financial system regulator/supervisor. Following the recent global financial crisis, doubts have emerged in many developed countries, whether the modern separation of the financial sector regulatory function from the central bank was a wise idea. not only does it duplicate much of the information pro-duction effort, it also impairs prompt and decisive crisis management. sierra Leone decided to stick with the cost-efficient and time-honored approach of the “central bank is boss”.

Financial sector supervision is designed to be the enforce-ment arm of financial regulation. obviously, the objective is not to create onerous busy work for commercial banks but to focus on risk management. the objective is to bal-ance the protection of depositors with sustainable growth in accessible financial services that engage with the real sector in a meaningful, transformative way.

such relatively light, efficient and risk-based supervision of financial service providers is the stated objective of the FsdP and the mantra of the development partner support provided to the banking supervision department at the bsL.


access to financial services therefore is highly dependent on technology as a cross-cutting enabler. Use of technol-ogy also implies a human capacity element for managing the systems as well as a financial literacy component that encourages poor and often illiterate rural residents to en-gage with branchless financial services.

Market Transparency and Credit Reference Databasesonly a very small minority of sierra Leoneans work in formal and verifiable employment relationships. Most businesses, from micro-entrepreneurs to significant medi-um-sized companies also operate informally. this makes it difficult to find reliable, independently verifiable informa-tion on businesses’ financial position, quality of product/service and their behavior vis-à-vis suppliers, customers, employees and other stakeholders.

it is also often impossible to (1) establish who exactly a financial institution is dealing with and whether the indi-viduals can legally engage the activity and assets that they purport to represent and (2) to find them again under cir-cumstances of adversity when these individuals or compa-nies may chose to break off communication.

sierra Leone needs a functioning system of national identification, corporate register and tax identification that can establish identity and representation rights quickly and with legal certainty. this is the platform on which government and private sector providers can build credit reference databases and more broadly defined busi-ness information services42.

Sierra Leone currently does not yet have a fully function-al private credit bureau or other source of industry-wide information on credit exposures and payment perfor-mance. For larger corporates there is mandatory pruden-tial reporting of exposures to the central bank and banks will share information by way of traditional ad-hoc bank inquiries on particular clients. but in the small business and personal credit markets, a credit bureau infrastructure with participation of all bank and non-bank lenders is

42 What we mean here is business information that goes well beyond the scope of credit and payment behavior as reported by financial institutions. examples are information services à la dun & bradstreet or the German bürgel Auskunftei that capture also the behavior vis-à-vis suppliers and customers and provide comprehensive “business intelligence”.

At time of writing this report in january 2011, work on the national low-value payment switch was in full swing. the hardware and network links were installed over the course of 2011 and acceptance testing and training are under way with a target date for a fully operational payments switch by year end 2012. the WAMZ-compliant large value pay-ment mechanism (rtGs) is also largely completed and should go into production during the second half of 2012. these payment systems initiatives have been generously supported by a Usd 9.4 million Afdb program.41

the rapid expansion of mobile phone ownership and the vastly improved signal coverage even in remote rural areas has the potential to leapfrog many of the infrastructure obstacles and revolutionize rural outreach and access to mass-market payment services.

early pilot implementations of various technology solu-tions such as AtMs, point-of-sale terminals, mobile and internet banking applications do exist in sierra Leone, but their market penetration is disappointing so far. one of the main reasons for the slow adoption of technology in banking is the low level of financial literacy. Also, the util-ity of these pilot services was severely limited by the lack of interoperability, i.e. drawing cash at an AtM owned by another bank or transferring money from a particular mo-bile cash account to a user of a competing platform or to an ordinary bank account was not possible. With the low-value payments switch now in operation, interoperability should no longer be an issue.

Spatial Barriers rolling out traditional bank branch networks into every corner of rural sierra Leone is a costly endeavor because of the physical infrastructure challenges mentioned above and the availability of qualified staff in the provinces. the cost is often not justified by the limited volumes in depos-its and transactions that can be generated within small rural communities. Although the road network has much improved and rural feeder roads are being built, more flex-ible approaches using cash point agents, mobile branches, cell-phone banking etc. will be necessary to efficiently overcome the spatial barriers to financial access. rural

41 Keynote Address by Mr. sheku sesay, Governor, bank of sierra Leone. national Course on the development, regulation and supervision of Payment systems, june 18-22- 2012, www.bsl.gov.sl.


Legal Infrastructure for Financial Services Greater access to financial services can only develop under the rule of law, where the rights of financial institutions and their customers are protected and a timely, fair and binding conflict resolution is available through the courts should the need arise.

the legal infrastructure for financial services in sierra Leone still presents significant obstacles to the proper enforcement of private contracts. this is particularly evi-dent in the area of debt recovery, i.e. obtaining executable titles against delinquent borrowers and the foreclosure into real estate collateral. Without an efficient route to re-covery and foreclosure, it is difficult for banks to let go of the cash collateral habit and other onerous requirements that traditionally limit the access to bank credit for ordi-nary individuals and small businesses.

the FSDP provides a succinct inventory of the necessary actions for making the legal framework more conducive to broad-based inclusive financial services:

• FsdP objective d.2: Strengthen Legal Environment for Debt Recovery.

– Action.d.2.1: develop and implement procedural rules for effective commercial court system that provides private contract enforcement.

– Action.d.2.3: install incentive systems for courts to respond in a timely and fair manner in financial contract enforcement.

– Action.d.2.4: require commercial courts to fast track banking cases.

– Action.d 2.7: implement system for movable collateral registry and resolve legal issues regarding receivables cession.

• FsdP objective d.3: Strengthen Land-Related Legal Environment.

– Action.d.3.1: establish a modern land titling system instead of traditional document registration. enact necessary changes to laws and regulations.

– Action.d.3.2.: draft, consult with stakeholders and enact Law on Commercial Use of Land.

sorely lacking. A credit bureau is seen as a critically impor-tant enabler for sustainable, broad-based access to credit. Credit reference data can help prevent undesirable credit bubbles and at the same time will benefit responsible bor-rowers by lowering their cost of credit.

in MsMe finance and personal lending in urban areas, we already witness a certain incidence of over-indebtedness and reckless borrowing from multiple sources, which make the organized exchange of borrower data an urgent action item. the bsL is currently taking the initiative on getting a simple credit database in place, similar to a model developed in Liberia. the first version of the credit reference database started operations in May 2011. over 2,000 credit reports had been issued on businesses and in-dividuals by year-end 2011.43

As far as rural and agricultural credit is concerned, a credit reference bureau that would carry a complete data profile for every farmer and rural dweller would obviously be nice to have. yet, the challenges to establish identity and addresses are formidable in an environment where most adults are illiterate and public records have been ravaged by civil war. Creative, technology-driven solutions can certainly be found (digital fingerprints, GPs coordinates, biometric customer/membership cards etc.), but these will have to develop organically in parallel to the actual finan-cial service and not as a pre-requisite for it. Under the cur-rent reality in access to finance in rural areas, it seems the industry has a way to go, before we need to worry about an emerging credit bubble in agriculture.

Limited Financial Industry Representation An Association of Commercial banks (www.sLACb.org) and the more recent sierra Leone Association of Micro-finance institutions (sLAMFi) exist, but their impact in terms of advancing issues of common interest for all fi-nancial institutions is rather limited. the Financial sector development Plan of sierra Leone envisages the Associa-tion of Commercial banks and sLAMFi as multipliers and delivery mechanisms for institutional capacity building and financial education for small businesses and consumers.

43 bank of sierra Leone Annual report 2011, p. 37.


space therefore are what the FsdP already recommends, namely:

• strengthen the role of bsL as the central securities de-pository for government debt.

• implement monetary policy through scheduled tender auctions using debt securities as repo collateral.

• encourage a secondary interbank market in govern-ment and other debt securities.

• bsL to facilitate collateral administration for bilateral interbank repo transactions.

• integrate the money market settlement with the WAMZ-wide rtGs and facilitate secured interbank transactions at a regional level.

4.2.2 Institutional Perspective

We turn now to the institutions that provide financial ac-cess to users of financial services. sierra Leone currently has 13 licensed commercial banks, six community banks, 15 microfinance institutions, a leasing company, a defunct Postal bank and number of inactive state development banks. there are plans for more community banks, and additional commercial bank applications are apparently under review by the central bank.

before we take a closer look at each group of financial ser-vice providers, a preemptive remark on the institutional landscape is in order. the problem certainly does not appear to be with the number of financial institutions. some stakeholders seem to suggest more institutions as the way forward: a specialized agricultural bank, a com-munity banking apex, a microfinance central bank, more cooperative banks etc.

We do not believe in the reflex of creating an institution for every problem. For the size of the country and its econ-omy, the number of institutions in sierra Leone seems more than sufficient. obviously, nothing should prevent new private sector entrants from trying their luck and competing with the incumbents. We would simply advise against using public funding and development resources to the effect of further splintering up the financial services supply-side. rather, we should invest in making the ex-isting institutions more efficient, more competitive and more successful in their outreach to rural populations and agricultural producers.

Capital Markets Infrastructure/Interbank Markets Domestic capital accumulation and long-term savings are very weak in sierra Leone. Long-term capital genera-tion is naturally constrained by poverty and the hand-to-mouth reality of daily survival for the vast majority of sierra Leoneans. yet, it is also obvious that the elites who could and should invest in the future of the country prefer to hold most of their wealth off-shore. this is true even for the middle class, including the Lebanese business commu-nity, who are careful not to invest too much for too long, so as to not be caught over-exposed when the music stops and the next crisis sweeps across the country. these short-termist reflexes can only be overcome slowly by means of a track record of stability and credibility among govern-ment, financial institutions and business leaders. in the meantime, long-term capital will have to be imported by way of foreign direct investment like in most other de-veloping and emerging markets.

Against this back-drop, the Stock Exchange of Sierra Leone opened in 2010 is a rather pointless prestige pro-ject that serves little economic purpose. the only stock-exchange related activity that may have merit in sierra Leone would be to set up a liaison office or help-desk for accessing international capital markets. this could be use-ful for the handful of local companies that might benefit from a listing on an established regional stock exchange (nigeria, south Africa, Ghana, Kenya) or directly on a suit-able overseas exchange, such as the Alternative invest Market at the London stock exchange.

A second frequently cited shortcoming of developing fi-nancial markets is the lack of an active exchange of short-term funds between banks in the sense of an interbank money market. A low-cost, flexible transfer of liquid assets from banks with a short-term surplus to others requir-ing a temporary injection of liquidity sounds like a useful idea. Many observers have chided local banks for not be-ing more liberal in trading with each other in the money market. What is often ignored in this context is that since the start of the financial crisis in 2007, there really is not much of a market in unsecured interbank deposits left in the developed world, either. instead, banks manage their liquidity exclusively with the central bank and in the se-cured money market by means of repo transactions, using prime (government) debt obligations as collateral. the tangible near-term action items in the money market


clients. bribes paid not only make a loan more expensive, they also compromise the willingness of clients to make sacrifices in holding up their end of the loan contract. in turn, banks’ efforts at collections on arrears are hampered by loan officers who took bribes and are concerned that overeager follow-up might make their fraud apparent.

From the customer perspective, a minimum level of fi-nancial literacy is an important enabling condition for broad-based financial access. People with an understand-ing of financial principles and a willingness to take charge of their personal financial situation tend to use financial systems more than those with little exposure to financial education. this will help build the demand side of finan-cial access.

the education component is ranked as one of the weak-est elements in sierra Leone’s very low level of human development. due to the chaos of the civil war and dec-ades of neglect, adults today have on average attained less than three years of schooling.45 Adult literacy throughout sierra Leone is only 41% and typically lower than average in rural areas. so clearly, along with basic literacy and life skills training, financial education will be essential to pre-vent rural populations from falling for cheap scams and to turn them into smart consumers of financial services. Along with understanding the basic rights and obligations in loan contracts, it would help, if people could properly assess the cost of different credit products and of credit versus savings in the context of inflation and a partially dollarized economy. Financial education could also help manage expectations of what financial institutions can possibly offer and what makes an acceptable client or bankable proposal.

Commercial Banks Following the sale of ProCredit sierra Leone to the local ecobank subsidiary in 2010, there are 13 licensed banks active in the country: rokel Commercial bank, sierra Leone Commercial bank, standard Chartered bank, Union trust bank, Guaranty trust bank, First international bank (Fi-bank), international Commercial bank, ecobank, Access bank, United bank for Africa, skye bank, Zenith bank, bank PHb.

45 UndP Human development index 2010/2011.

experience from other emerging markets shows that the success factors in sustainable deepening of rural financial services are scale and innovative use of information tech-nology. Hence, the way forward is to encourage consoli-dation and professionalization of the financial service provider landscape as a prerequisite for a deeper and more efficient financial inclusion.

Human Capital Constraints the quality of human resources in the financial system is essential for realizing the benefits of broader and deeper financial access. Without the necessary technical and pro-fessional qualifications, it will be impossible to scale up financial services at the institutional provider level, nor to adequately supervise mass market finance at the level of the central bank. More important even than the technical skills are the integrity and genuine commitment to service of the financial sector staff who interact with the public. this is where trust and customer goodwill needs to be built up over time. Again, the FsdP is spot-on in empha-sizing the human capacity dimension (objective d.4) of financial sector development and planning industry-wide training initiatives and a systematic communication with the general public about consumer rights and responsi-bilities in financial transactions.

sierra Leonean bankers’ skills and experience are gener-ally perceived to be low by regional standards. developing new skills in information technology, quantitative analyt-ics, economics, corporate finance and customer service are critical success factors of accelerated financial sector development. yet, technical excellence is for naught, if the public trust is not earned. Corruption in banking appar-ently continues to be an issue.

We have been told that corruption not only plagues all levels of public administration but apparently is also a concern in commercial banks.44 it is said that bank staff tend to create situations where the release of funds under approved loan agreements is held back under various pretexts until a kick-back is paid. Corruption is particu-larly destructive in financial services because it erodes the necessary trust between financial institutions and their

44 sierra Leone is classified “Highly Corrupt” and ranks 134 out of 182 countries in the 2011 Corruptions Perception index published by transparency international, www.transparency.org.


Four of these banks predate the civil war: rokel bank (disinvested by barclays in 1999), standard Chartered bank (majority owned by stanchart, UK), sierra Leone Commer-cial bank and Union trust bank.

six of the ten banks that opened in sierra Leone since the war are subsidiaries of large nigerian banks: Access, PHb, Guaranty trust, skye, UbA and Zenith. two more are ma-jority owned by nigerian interests but are not headquar-tered in nigeria: these are ecobank based in togo and First international bank based in the Gambia.

Figure 33 shows some key figures from the analytical bal-ance sheet of the consolidated commercial banking sector.

the balance sheet of the banking industry displays healthy growth, but in absolute terms it remains miniscule with less than Usd 700 million in total assets. An average mu-nicipal savings bank in europe easily exceeds Usd 1 billon in balance sheet volume.

the level of intermediation as measured by net Loans to total Assets is only about one third of total Assets and stagnating. A level of earning customer assets of at least 60% would be typical for a well performing banking in-dustry in a developing economy context.

efforts are being made to bring down the high level of non-performing loans (nPLs). in the process, accounting profits tend to suffer as write-offs and provisioning ex-pense on uncollectable loans are being digested through the income statement. in fact, the low profitability in 2008-2009 is more a reflection of dealing with past loan losses than an indication of a deteriorating lending cli-mate at present.

the 13 banks that make up the industry-wide statistics in Figure 33 operated a combined total of 75 branches in sierra Leone as of year-end 2009. We know of four or five additional branches that were opened over the course of 2010. As of december 2009, 42 of the 75 branches were in Freetown, 6 each in the two other principal towns of bo and Kenema and the remaining 21 spread around the country.

relative to the rural population, the number of financial service points outside of Freetown is extremely low, barely 16 branches per 1 million adults. other emerging and de-veloping markets easily reach averages of 5 to 10 branches per 1 thousand adults.

Commercial Banking Sector USD ‘000 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011

USD/SLL 2,977.59 2,981.10 3,855.68 4,239.99 4,377.71

Total Assets 355,934 500,039 508,963 597,729 681,266

Net Loans 74,161 122,286 154,391 202,713 214,529

Net Loans / Total Assets 20.84% 24.46% 30.33% 33.91% 31.49%

Liquid Assets 216,137 287,510 270,043 323,614 125,477

Liquid Assets / Total Assets 60.72% 57.50% 53.06% 54.14% 58.92%

Capital Adequacy Ratio 38.74% 43.45% 33.97% 15.79% 26.96%

NPL / Gross Loans 31.69% 23.39% 16.54% 15.61% 15.08%

Return on Assets 3.00% 2.00% 1.55% 3.40% 3.78%

Return on Equity 10.28% 7.00% 3.82% 12.10% 15.59%

Figure 33: Commercial Banking Sector, Key Indicators. Source: Bank of Sierra Leone.


Community BanksAs a way to jump-start banking services in rural areas, the Government of sierra Leone instructed bsL to set up six Community banks in the Chiefdoms of Marampa and yonibana in 2003, in Mattru and segbwema in 2004 and in Kabala and Zimmi in 2008. each community bank re-ceived start-up equity from bsL of about Usd 350,000 and was supposed to raise additional capital by selling shares and mobilizing deposits within the community where it operates. the Community banks were incorporated (or since converted into) Companies Limited by shares and are licensed and supervised by bsL under the other Fi-nancial institutions Act 2001.

the Community Banks have operated with mixed success. raising capital from the community has proved difficult, the dual role of bsL as shareholder and regulator has complicated their governance, and the lending opera-tions have been plagued by poor collections. Marampa Masimera Community bank and yoni Community bank are considered the better performing and the only viable institutions among the original six. yet, even yoni and

the commercial banking industry in sierra Leone held 98,437 domestic current accounts and 257,551 domestic savings accounts as of year-end 2009. even if we neglect corporate accounts and we assumed that there were no wealthy customers with multiple accounts, these num-bers would only give a possible maximum of 11% account ownership among the 3.32 million sierra Leonean adults aged 15 and over.

realistically, formal bank account ownership must be assumed around 10% of adults and lower in rural areas, which highlights the access to finance gap compared to the regional benchmark of Ghana, where 33.9% of adults hold a formal bank account46. see also the Finscope “access strands” for other African countries at various survey dates in Figure 34 below: 47

Already with the rudimentary available banking statistics, it is clear that access to formal financial services from commercial banks in rural areas of sierra Leone is drasti-cally underdeveloped both in terms of account ownership and service point coverage.

46 Finscope Ghana Launch Presentation 2010, www.finscope.co.za 47 www.Finscope.co.za

9.0%

14.0%

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33.9%

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South Africa - 2011

Botswana - 2009

Ghana - 2010

Ghana - 2010Kenya - 2009

Ghana - 2010Nigeria - 2008

Ghana - 2010Uganda - 2009

Ghana - 2010Rwanda - 2008

Ghana - 2010Tanzania - 2006

Ghana - 2010

2.0%

Figure 34: Financial Access in Sub-Saharan Africa. Source: FinMark Trust.47

Banked Other Formal Informal Financially Excluded


omidyar network. LAPo is the local subsidiary of LAPo nigeria. Finance salone is the microfinance subsidiary of Union trust bank with a minority investment by the Afri-Cap fund.

the current regulatory environment for microfinance is defined by microfinance guidelines issued by bsL in early 2009. the regulations are ‘light touch’ and allow credit-only microfinance providers to operate as nGos without any particular prudential requirements beyond a regular audit and some minimal reporting to bsL. For deposit-taking MFis, minimum capital is set at about Usd 500,000 equivalent. deposit taking MFis must further maintain capital adequacy of 15% and hold liquid assets of at least 20% of their deposit base.

Other Financial Sector Institutionsother than banks and microfinance institutions, the rest of the financial sector includes two discount houses that provide occasional short term finance (factoring, dis-counting bills of exchange) and brokerage services on a very rudimentary scale. there is also one leasing company set up in 2010, the Consumer Finance and Leasing Co. (www.cflco.com).

there are some 10 insurance companies, a similar number of brokers and a much larger number of agents, which are regulated by the sierra Leone insurance Commission. one of the larger companies, the government-owned national insurance Co, is scheduled for privatization. there are no noteworthy insurance offerings that might be of benefit to smallholder farmers at this time (crop insurance, weather insurance etc.).

the sierra Leone stock exchange holds a single weekly trading session – currently only one stock is listed/traded (rokel Commercial bank) and volumes traded are ex-tremely low.

Finally, there is the national social security and insurance trust (nAssit) to which all employers/employees contrib-ute 15% of salaries paid each month. nAssit controls the only large pool of investment funds in the country (in the order of Usd 100 million).

Marampa Masimera report significant capital constraints and struggle to carve out a market between the activities of microfinance institutions and the commercial banks, who are beginning to move into rural areas. this is in part because yoni and Marampa Masimera have confined themselves to the narrow market segment of retail trad-ing businesses and rural salaried individuals and have not really began to engage more deeply with the agricultural sector.

the international Fund for Agricultural development (iFAd) working under the auspices of MAFFs is in the process of setting up a string of new community banks throughout rural areas of sierra Leone, with three currently awaiting licensing by the bsL. these new com-munity banks will operate according to international best practices and are designed to integrate closely with a par-allel initiative to create small Financial services Associa-tions (FsAs) in rural communities. these FsAs are modeled after the Kenyan village banks developed by K-rep48, who are advising iFAd on the implementation of the FsA approach.

Microfinance Providerssierra Leone is a new microfinance market. the first experiments in microcredit started immediately after the civil war in the context of nGo relief operations. Professionally organized microfinance really only began around 2004 with the help of the Microfinance invest-ment and technical Assistance Facility (MitAF), sponsored by UndP/UnCdF, KfW and Cordaid. today, there are 15 active microfinance institutions (MFis) with a rapidly growing client base of about 150,000 borrowers and a total portfolio approaching Usd 16 million. As would be expected in a post-conflict situation, the savings mobili-zation lagged the growth of microcredit initially, but has been catching up. there were about 35,000 active savers contributing aggregate micro-savings of over Usd 8 mil-lion to the sector by year end 2009.

Leading MFis are brAC Microfinance sL Ltd, LAPo sierra Leone, Hope Micro, Association for rural development, salone Microfinance trust, and Finance salone Ltd. brAC sL is an affiliate of brAC bangladesh with co-investments from the soros economic development Fund and the

48 www.K-repbank.com


ity works in the other direction: Banks are not finding enough credible, experienced, bankable borrowers and projects to profitably absorb their existing resources. this seems particularly true in farming and agribusiness.

if the banks were brimming with well-performing lend-ing business, additional funding from their parent banks and development finance resources would easily find their way onto their balance sheet. obviously, there is a bit of circularity in this problem in that banks may not be look-ing creatively enough for bankable business, or simply are trying to push the wrong products onto the sMe market, or regard the entire rural and agricultural segment as gen-erally suspicious and too risky.

in summary, it seems fair to say that:

1) the small balance sheet of the commercial banking sector is not in itself a binding constraint for rural and agricultural finance at this time.

2) occasionally, the largest domestic agribusinesses might encounter single obligor constraints at an individual bank, but this can be resolved by diversifying banking relationships.

3) Large foreign direct investments in mining and agri cultural production are beyond the financing capacity of the commercial banking sector. this is not a constraint, however, because foreign investors arrive already with an internationally sourced long-term funding package and would never consider trying to put a large project finance deal together locally.

4) Funding for profitable incremental loan portfolio growth in rural and agricultural finance will follow organically, as long as banks can improve their borrower/project selection and devise products that better manage the inherent risks in agricultural production.

Agriculture is too Risky and just not Bankable in all discussions with bank managers and loan officers, the spontaneous reflex to our questions about lending to agriculture was strikingly similar. everyone sees the need and would like to do more to develop the agricultural foundation of the country’s economy. but it is just so risky,

4.3 Structural Bottlenecks in Rural and Agricultural Finance

At this point, we would like to take a more detailed look at what might be holding back domestic and international financial institutions from engaging more broadly with rural populations, agricultural producers and agribusi-nesses in sierra Leone. these would be specific structural constraints applicable to rural and agricultural finance, beyond the general issues identified above.

Is the Banking Sector too Small to Make an Impact?As we saw by the look at the analytical balance sheet of the commercial banking sector, financial intermediation is very shallow and the capacity to finance substantive projects through local commercial banks is quite limited. Prudential regulation (and survival instinct) restricts maximum single borrower exposure to a small percentage of the bank’s equity. At this time, this seems to work out to a typical single exposure limit of roughly Usd 1.5 million at most banks. this point was highlighted by palm kernel oil processor Marika in Freetown-Wellington and a num-ber of other businesses as a constraint in raising funding for their otherwise entirely bankable expansion plans and equipment finance needs.

We agree that the single obligor limit could occasion-ally become an obstacle to financing credible investment projects. but one has to wonder why with 13 banks look-ing for sMe business, it would not be possible to spread borrowing requirements across multiple banks or get the primary bank to syndicate part of the exposure to other institutions. Certainly, the solution should not be to lobby the bsL for a relaxation of the well-justified single obligor limits, but for banks to work out new ways to share the risk of large exposures among several institutions in sierra Leone and abroad.

one should also not generalize the limited financing ca-pacity of the commercial banks for larger projects to the much more relevant medium and small (agri-) business market. yes, bank balance sheets are small, but liquidity is high and the capacity ratio (net loans/total assets) is very low, which leaves significant room for loan portfolio growth at all banks. taken together with the high non-performing loan rates, the issue of low intermediation and high liquidity rather seems to indicate that the causal-


it is true that most financial professionals have only very limited knowledge of agricultural production methods, their economics, their risks and opportunities. this may to some extent explain why financial institutions in sierra Leone shy away from financing what they do not fully un-derstand. yet, hiring trained agronomists as loan officers would only solve the smaller part of the problem which can truly be attributed to a lack of appreciation for the workings of agricultural production. the vast majority of agricultural activity, however, does not get funded because it is indeed too risky to be financed with traditional lending products.

the list of risk factors is extensive and each is potentially catastrophic, putting the entire harvest and revenue at peril: flood, drought, hail, pests, disease, theft, civil unrest, labor issues, market prices etc. Worse still from the per-spective of the lender, is the high degree of correlation among both the risk factors and among the fortunes of individual farmers in the portfolio. For example, extreme weather also favors disease and pests. Any of these risks, if they materialize, tend to impact many farmers in the re-gion. And finally, if one actually does have a good harvest

and bankable proposals are so hard to find. this seemed to be the consensus across commercial banks, community banks and microfinance institutions alike.

in consequence, it is no surprise that even at community banks, agricultural production finance is an exception and most rural finance simply goes to retail businesses in rural centers and to salaried individuals who live in the chief-doms covered.

the only comprehensive statistic of rural and agricultural credit comes from the monthly reporting to bsL, in which banks break down their loan portfolio by eight broad in-dustry segments49: Agriculture, Forestry & Fishing, Mining & Quarrying, Manufacturing, Construction, electricity, Gas & Water, Commerce & Finance, transport, storage & Communication, services, and Miscellaneous.

Although Agriculture, Forestry & Fisheries roughly account for half of the country’s GdP, it attracts tradition-ally only a small fraction of bank credit, as low as 1% in 2006 but growing to about 6% to 7% more recently. see Figure 35.

49 bsL – Monetary sector: 11 Analysis of overdrafts, loans and advances of commercial banks.

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Figure 35: Share of Industry Segment in total Commercial Bank Loans and Advances. Source: BSL Monetary Sector Survey.

Agriculture Mining Manufacturing Commerce & Finance


3) the weather will cooperate and that there will be no pests or diseases,

4) the farmer will manage to bring in and store the harvest in good time,

5) prices will hold up and that after meeting immediate family cash needs, the farmer will be inclined to actually come to the bank and pay off the loan with interest.

the cumulative risks in this most naïve approach to agri-cultural lending will probably remain prohibitive for any lender for quite a while. instead, it seems logical to chip away at the agricultural production challenge incremen-tally by only financing particular well defined segments while creatively leveraging all available risk mitigation strategies. Chapter 5 “Making Finance Work: Promising instruments and interventions” will explore exactly these types of products and risk management elements that can increase the depth and reach of rural and agricultural finance in the near term. Following are some building blocks that will be essential in structuring those immedi-ately realizable financing opportunities:

• systematically select agricultural financing proposals that display the most robust underlying economics and actively steer initiatives towards the highest yielding opportunities;

• insert financing into the supply chain through estab-lished buyer-producer relationships rather than lending directly to smallholder producers;

• reduce price risk by structuring minimum price guaran-tees or off-take agreements into the loan contract,

• disburse loans for input factors through supplier merchants as a way to obtain bulk buying discounts and to ensure loans are used for the stated purpose;

• collect proceeds from harvest sales at source through the buyer, agent or marketing cooperative;

• reduce moral hazard by obtaining alternative ‘psychological’ collateral or collective guarantees etc.

despite all the risks, the likelihood is large that so do other farmers in the area and that therefore prices will be lower than expected.

in sierra Leone, agriculture is mostly practiced by poor smallholder households, where there rarely are other significant assets or alternative revenues that could com-pensate for the failure of the farming activity and provide security to the lender.

Moreover, even close-knit rural communities are not im-mune to moral hazard, because the civil war has eroded traditional values of obligation and respect for contracts. it happens that farmers misrepresent facts to obtain a loan, will try to evade loan payments, will simulate harvest losses or find other ways to pursue short-term financial advantage to the detriment of the lender and their own long-term financial prospects. the nature of agricultural production and the geographical dispersion of borrow-ers unfortunately create relatively more opportunities for dishonest behavior and breach of contract than one would find in tightly managed lending programs to urban busi-nesses or salaried individuals.

Considering all the above risk factors, it would seem that lending to smallholder agricultural producers in sierra Leone is quite correctly perceived as an extremely risky proposition. However, we wonder why most bankers in sierra Leone feel compelled to adopt an all-or-nothing approach in agricultural lending. in our discussions with banks and microfinance institutions, the conversation seemed to gravitate immediately towards the most com-plex and riskiest of all lending propositions in agriculture, i.e. to provide unsecured cash loans with long grace peri-ods for farm inputs or equipment with collections based on the spot sale of the harvest. With such an approach, the bank must simply hope that:

1) the loan value is indeed spent on the stated productive purpose or investment,

2) the farmers actually apply their best efforts towards the production plan,


or slowly maturing tree crops, agro-forestry strategies or organic/sedentary farming.

Freehold ownership titles: the first argument that ag-ricultural finance is blocked by farmers not having a bankable freehold title to their land has been a regular complaint by international experts. it has also been in-corporated into the FsdP in the context of objective d.3 “strengthen Land-related Legal environment”. We beg to differ in so far as we cannot see how the land title problem could be a binding constraint on agricultural finance in the foreseeable future. this is easy to see, if one imagines what would change were the title problem solved tomor-row: Let’s assume all rural land has been surveyed, pos-session and traditional user rights fairly established and converted to undisputed freehold titles and an electronic land registry system has been installed by which titles can be verified, mortgaged and transferred. still, in this perfect new world of freehold titles on rural land, nothing has changed in terms of access to finance for agriculture. this is simply because:

1) no rational lender is interested in funding uneconomic projects as a way to dispossess smallholder families of their ancestral land. default and

Traditional Land Rights – A Binding Constraint? Agricultural lands in sierra Leone are collectively owned by the communities and are allocated to local residents through the traditional chieftancy leadership. individual farmers do not have freehold title or full permanent own-ership rights to the land. the land can consequently not be sold or used as collateral for financial transactions. such communal or traditional land rights are wide-spread in rural areas throughout sub-saharan Africa.

the system of traditional land rights in sierra Leone is frequently cited as a major obstacle to deepening access to finance in rural areas. the two main arguments are:

1) because there is no ownership title to the land, agricultural producers cannot pledge their land as collateral and are unable to obtain the low-cost and long-term finance needed to commercialize their operations.

2) As land use rights are awarded and possibly revoked under the customs of traditional leadership, the security of tenure on the land is never certain. insecurity of tenure discourages long-term investment, for example in permanent buildings, irrigation canals

Box 6: The Case of BRAC Microfinance SL Ltd.

Although its operations in Sierra Leone started only in 2009, BRAC is clearly the most visible microfinance provider in rural areas with a comprehensive agricultural finance strategy. BRAC has 35 branches and 450 staff in Sierra Leone and is ramping up the presence to a target of 65 branches with additional smaller sub-branch service points.

BRAC pursues a holistic approach to rural communities and offers basic health and skill building services (animal husbandry, agricultural techniques) through its NGO arm in combination with financial services through the BRAC MFI. The small agri-cultural loans are generally embedded in particular themed programs such as homestead vegetable gardening, poultry rear-ing, cassava-gari processing and are accompanied by agricultural field workers and technical assistance. Seeds and fertilizers are often provided as free start-up support.

BRAC is certainly a skillful microfinance operator and has managed to build up an impressive level of activity around its rural branches in a very short time. BRAC also expertly pulls in grants, donations and subsidized funding through its international network. However, we have serious doubts whether the economic fundamentals of the production models that are being promoted could ever generate the returns to support the use of microcredit in the absence of the initial subsidies. This is, of course, the fundamental question of this study: Where are the sustainable economic opportunities that can move rural populations ahead? Growing rice with high fertilizer inputs on marginal lands and intensive chicken rearing in the absence of inexpensive locally sourced feed are definitely not competitive business models. Our analysis of the agricultural value chains in Chapter 4 refers.


Finally, one could say that even if freehold titles on small-holder plots are not good collateral, this must be different for the large tracts of land that foreign land investors are interested in. After all, it is the land that attracts these investments, so surely it must be valuable. Unfortunately, here too, the reality is different. the economics of large agricultural investments for food production and even biofuels generally only work out, if the land can be had for free or at token lease rates. so, even though the land is the essential ingredient in the deal, it does not represent an independently realizable value.

in fact, we know of not a single large foreign investment in agricultural land in Africa, where funding would have been obtained against a pledge of the land under cultiva-tion. the circularity of such an approach is evident: the land is awarded to the foreign investor through a largely political process involving to varying degrees the central government, traditional leadership structures and local residents who currently have possession of the land. Main-taining cost-effective access to the land is the most im-portant risk factor in the project from the perspective of the investor. Hence, no reasonable creditor would accept a pledge of the land as collateral for the project, because the land value is so strongly correlated with the success of the investment.

Moreover, freehold title to rural land would never be is-sued first to a foreign investor. if land ownership reform did come through, it would naturally document the exist-ing landscape of control and possession. this means that the foreign investor would have to buy or lease the land from a large number of individual freehold owners. today instead, the investor negotiates with central / regional governments and traditional leadership while engaging in some community relations to manage the impact on ordi-nary rural residents. it is easy to see that atomistic freehold ownership of agricultural land is not an advantage to for-eign investors and is thereby also not in the interest of the sierra Leonean elites. therefore, it is not likely to material-ize any time soon.

Security of Tenure: the second potential constraint within the traditional land rights system, the security of tenure, is also not immediately obvious. traditional lead-ers are not despotic absolute rulers of a rural population in serfdom. We have not heard of land regularly being

foreclosure is the last resort, it is not a sustainable business model for the financial institution.

2) Freehold title on agricultural land can only be useful collateral, if in the rare event of a default there is a ready market for the sale of the foreclosed property. yet, a secondary market for rural property does absolutely not exist. Who would have the cash or the interest in buying the land on which another farmer has just demonstrated the impossibility of earning a living? What would be the price of a small plot, if lease rates on large tracts of good quality farm lands in the same area are only Usd 10-20/ha p.a.? Who would want the social stigma of profiting from a neighbor’s bad fortune by moving onto their foreclosed land, while many other smallholders would gladly sell their plot and move to Freetown for the promise of a better life? if there is no reasonable prospect of recovering any significant funds after deducting the expense of foreclosure and eviction, then even a clean freehold title is not useable collateral.

one could argue that even if there is no realizable value from ownership titles, at least there would be the threat of taking the land away which could serve as a deterrent and a punishment for those who might otherwise simply refuse to pay. Already, punishment by forceful eviction from ancestral land is not really part of the best practice vocabulary in rural finance. but even the practicality of it is doubtful. After the family has been chased off the land, will the bank burn the house and poison the water, or pay armed guards to prevent the tenants from simply reoc-cupying their plot? Will the family be barred from being allocated other land from the chief? We believe that there are much less costly and effective measures against willful default, such as attaching movable possessions (furniture, refrigerator, tv, power tiller) as collateral50. the proceeds from chattel mortgages will generally barely cover the cost of liquidation, but the public shaming of having small possessions carried off by the bank can be a powerful de-terrent.

50 the development of a legal framework and official register for moveable property pledged as collateral has been identified in the FsdP as an important initiative in the enabling environment for financial services.


the authors have observed the same conundrum in the context of land-reform and the “Affirmative Action” lend-ing scheme in namibia, which was supposed to finance willing-buyer / willing-seller transitions of white-owned farms to aspiring black farmers. there also, the econom-ics of the land simply did not support a credit-financed transition, which would give a fair compensation to the retiring owner and generate a sustainable livelihood for the new farmer.

We would even dare to generalize that in the absence of public subsidies, the economics of food crops never sup-port a decent livelihood for famers, when land must be purchased or leased on terms that afford a similar stand-ard of living to the previous owner. In short: forget farm-ing, if you cannot get the land for free. this unfortunately also means that sending urban youths back to the villages to become smallholder farmers can only succeed at small scale. it is certainly not a solution for hundreds of thou-sands of Freetown slum dwellers. the question of freehold titles versus traditional land use rights really changes nothing about the access-to-land dynamics: once off the land, forever off the land.

the above structural issues in rural and agricultural finance come in addition to the long list of general con-cerns raised in the previous chapters. taken together these do significantly constrain access to financial services for economically active sierra Leoneans and are a particular concern for economically vulnerable rural populations. However, in our discussion of these issues we always tried to assess how binding these constraints are at this time. While we support the priorities of the FsdP and other ini-tiatives directed at improving the environment for private sector financial services, we want to avoid using the long list of structural issues as an excuse for not looking more creatively into concrete ways to unlock finance for rural and agricultural activities today. Financial institutions will need to work harder at identifying bankable projects and developing smart products that make it possible to serve the rural market profitably in the presence of the obvious structural bottlenecks. in the following chapter we de-velop a few pointers for such robust products and services that could be deployed in the rural and agricultural space right now.

taken away from hardworking smallholder families on a whim by erratic chiefs. However, absentee land claims may indeed not be tolerated under traditional systems. it may also happen that the community shuns certain in-dividuals for various reasons and can make life miserable to the point where the family feels compelled to abandon their land. As far as we have been told, such situations are rare exceptions and really are more about the sometimes brutal social dynamics in marginalized communities than about the legal fine points of land ownership.

For the vast majority of smallholders who actually live on their land, the security of tenure is not a real issue that would hold them back from investing in their land. yet, if there are lingering concerns over security of tenure, these could be addressed with simple workarounds far short of a paradigm shift to freehold titles. For example, in com-munal land areas of south Africa, chiefs will issue “Permis-sions to occupy” as documentation of permanent land use rights that automatically transfer to children by way of in-heritance. the only real basis on which tenure would ever be revoked is abandonment of the land. such a system should work rather well in sierra Leone also.

Access to Land for the Landless Young: the question of access to land for those who would like to farm, but cur-rently do not have land is indeed a complex problem for a country with a rapidly growing population. the issue goes far beyond the immediate question of land titles as collateral for loans. but since we found them frequently combined in our discussions with stakeholders, we would nonetheless like to offer a few reflections on this aspect.

First, it should be clear that better access to land for the landless young and better legal protection and documen-tation of existing land claims are naturally opposing in-terests. As we have pointed out before, sierra Leone has no large reserves of vacant productive land that could simply be allocated without taking it away from someone else. in theory, clear tradable freehold titles could facilitate these transitions, as young farmers would buy the land from the ageing current owners and thereby provide them with retirement income. in reality, however, this will rarely work, because the same land now must feed two families, that of the retiring famer and of the current occupant, and it must in addition cover interest and risk premium for the financial institution that finances the purchase.

Making Finance Work: ProMising instruMents and interventions 54

Transmission services are another essential ingredient to pro-poor financial inclusion. they are new and promising new departures. even people with very modest resources regularly have a need to send money or receive funds from family members, for paying fees and bills. When trans-acted in physical cash, these small scale transfers can be very costly and time consuming, which is particularly true in rural areas where the distances are greater and the op-portunities for informal solutions (e.g. combining errands or sending the money along with someone else) are fewer. due to the volume of remittances from the large sierra Le-onean, a reasonable infrastructure for international trans-fers already exists. Most bank branches and microfinance institutions offer MoneyGram, Western Union and other wire transfer services. estimates of annual remittance flows to sierra Leone through the formal financial system range between Usd 20 to 40 million52, but additional large amounts of cash are brought into the country by travelers and through other informal channels. the main challenge is to bring the cost of remittances down, as combined pay-er and receiver fees can eat up as much as 25% of smaller remittance amounts.53

New domestic money transfers systems using cell-phone access are being rolled out by mobile-phone provider Zain (“zap”, www.zain.com) and by Guarantee trust bank under the splash Mobile Money brand (www.splash-cash.com). these are worthwhile initiatives that hold the potential to achieve massive scale and bring tangible benefits to poor households that can now manage their finances more efficiently and at lower cost. these mobile payment and transfer systems are classic examples of the ‘network ef-fect’, where the full benefit of the service arises only, once a critical mass of users and merchants adopt the system. the success of M-Pesa54 in Kenya illustrates this point.

Clearly, a holistic look at the financial service require-ments of rural populations is required in order to lev-erage the maximum benefit from financial inclusion. savings and transfer mechanisms are part of this basic product spectrum that every economically active house-hold should have access to. Credit, however, is not neces-

52 World bank Migration and remittances Factbook 2011, www.worldbank.org. 53 iFAd, sending Money Home to Africa, remittance markets, enabling environment and prospects, www.ifad.org.54 see www.safaricom.co.ke.

5.1 A Holistic Private Sector Perspective

Making finance work in sierra Leone, be it the financing of agriculture-related activities or the provision of other fi-nancial services, is much more of a challenge in rural than in urban areas. that’s why, when thinking about promis-ing interventions to make finance work in sierra Leone, one needs to look for suitable approaches that are relevant for rural population segments, be they engaged in agri-cultural activities (as it is the case for the majority of rural sierra Leoneans) or any other economic activity.

However, rural populations need more than credit in order to succeed. in fact, credit is rarely the optimal first step in providing financial access to formerly marginalized rural clients. Much of the discussion so far has by default gravitated towards credit and finance for agricultural investment, but this is not meant to diminish the impor-tance of other financial services for rural communities, notably savings and transmission products.

in a naturally evolving financial ecosystem, savings mech-anisms are typically the first services to emerge. People want to pool their savings and find safe investments for their emergency reserve fund. rural populations tradi-tionally are thriftier than urban or salaried individuals, because a safety buffer in savings is essential for survival in a local economy dominated by volatile and risky agri-cultural income.

Savings-led approaches have been very successful in many rural areas elsewhere in Africa and have been the driver behind the growth of cooperative banking models. examples of success in savings-driven financial services include PAMeCAs and Crédit Mutuel in senegal, the CAMCUL cooperative network in Cameroon and banque Populaire in rwanda to name just a random few.51 A com-mon feature of inclusive financial ecosystems in the ab-sence of external development funding is that cooperative or savings bank balance sheets typically display an equi-librium of three to four savers per one borrower. this is evidence of the natural ‘savings-first’ evolution of broad-based financial access.

51 institutional profiles available on www.mixmarket.org.

5. Making Finance Work: Promising Instruments and Interventions

http://www.worldbank.org.

http://www.worldbank.org.


sarily for everyone. it is only rational where a minimum of predictable income and a scalable entrepreneurial ac-tivity are present. For those who are beginning to climb the ladder out of poverty, micro-insurance can also be an effective addition to the financial product mix.

Informal financial services are ideal complements to the formal product offerings discussed here. they can be very cost efficient due to their high volunteer content and may fill access gaps where formal financial services are not yet available because of spatial barriers or the high cost of ru-ral outreach.

the entire continuum of inclusive financial services is worthy of development support and should be encour-aged to push the limits of access-to-finance within an ena-bling legal and regulatory environment. the sierra Leone FsdP recognizes these imperatives and elevates access to a broad range of financial services by a diversity of providers to a top level objective of financial sector development.55

5.2 Informal Financial Services56

Like everywhere across Africa, a variety of informal sav-ings, transfer and credit mechanisms exist in sierra Leone. these include rotating savings clubs, informal safekeeping and money carrier services, small village banks etc. Funds collected by savings associations are also often lent out to members and non-members as a way to generate interest income.

such informal financial activities are actually not an ex-clusive feature of emerging or developing countries, they also coexist with fully developed financial markets in europe or north America. the author has a bank account in Germany and in the Us and has often accepted deposits in one to pay out from the other as a service to traveling family members and friends. Many european students like to pool their limited funds in diversified share portfolios

55 Compare: objective.b.1: broaden Microfinance and rural Credit delivery outreach, and objective.b.3: rehabilitate the Community banking system and support informal MFis. 56 As the current reality is that informal financial services are used they are taken into account in the underlying analysis. Formal financial services are however generally seen as the better proposi-tion for clients over informal finance in terms of efficiency, sustainability and reliability.

through stock market clubs. Walk into a traditional bar in a small German town and you inevitably will find sets of metal mailboxes bolted onto the walls that serve as micro-savings receptacles for various community savings clubs. We are not trying to belittle the efforts at cultivating informal financial services in Africa. the point is simply that informal financial services are not a new and revolu-tionary development intervention. they are a natural fact of community life and have a role to play in financial eco-systems everywhere. because of their high volunteer con-tent, informal mechanisms are often more cost effective and culturally appropriate, particularly under the realities of cash-poor rural economics.

in sierra Leone, iFAd has launched a large-scale initiative to augment informal financial services associations (FsAs) in a methodology modeled after successful village banks in Kenya. Care sierra Leone supports similar village sav-ings & Loans (vsL) groups as a vehicle for instilling thrifti-ness and generating savings that can circulate within the community. FsAs and vsLs generally have no more than 30 members, most often women, who should join together voluntarily and know each other well. All members fre-quently contribute small savings amounts and build up a pool of capital that can be lent to each other as the need arises.

in rural sierra Leone FsAs and vsLs can be very effective vehicles for financial literacy, fostering a savings culture, achieving a measure of financial independence and em-powering women.

overall, it seems fair to say that informal financial services are great where they arise naturally without much exter-nal prompting and to the extent that there is mutual trust and community cohesion to make them work.

From the authors’ experience throughout sub-saharan Africa, small cooperatives and informal financial organi-zations often fail when scaled up with outside financing. rapid expansion dilutes the common bond of friendship and renders community discipline ineffective. the outside funding also encourages professional wage expectations and diminishes the volunteer-based cost advantage. even capacity building and professional training for volunteers is often ineffective, because trained staff will typically leave and seek out gainful employment elsewhere. Grant-


5.3 In Search of Products and Interventions that will Work for Sierra Leone

Subsidies and Economic Fundamentals Let us remind ourselves that financial products do not create economic opportunity. Financial services can sim-ply augment or accelerate economic activity, or redistrib-ute the inherent risks. Without underlying economic op-portunity, there will not be sustainable financial services.

sometimes this economic opportunity can be created by explicit public subsidy. Leaps in agricultural productivity in Asia, for example, have been driven by massive public investment. the success factors in agricultural subsidy are transparent allocation mechanisms and clear time limita-tions that do not create permanent dependency. When designing subsidies for agriculture, it is important to keep the economic incentives in place for farmers to work hard and to optimize production. that is particularly important if food security is the objective and not maintenance of rural living standards and general landscape beautifica-tion. the subsidy ‘monster’ created by the eU Common Agricultural Policy should be more a warning than a model57 for sierra Leone.

one way to efficiently allocate subsidy and promote food-independence would be a tariff on imported rice that raises the income for farmers on every bag of locally pro-duced surplus rice. Local rice already sells at a 10% price premium over imported commodity rice (see rice value chain in 4.3.2). With a tariff, both price points would move up in tandem. over time, higher available prices would provide a stimulus for farmers to intensify production and bring more locally grown rice to market. in parallel, Government would have to off-set the price increase for vulnerable low-income groups with direct cash transfers or subsidy vouchers for basic food stuffs.

A counterproductive way to administer subsidies, how-ever, would be via directed credit for agricultural produc-ers. there are numerous examples of failed subsidized agricultural lending schemes across Africa, including at the now defunct national development bank and the

57 For a primer on the Common Agricultural Policy, see ec.europa.eu/agriculture/publi/capexplained/cap_en.pdf

ed, training and personnel development is never entirely lost to the financial sector as a whole and who would want to blame an individual for capitalizing on their training and pulling themselves out of poverty. We are simply cautioning to not overestimate the potential of informal services to substitute for professionally managed, formally governed and commercially viable inclusive financial ser-vices.

Also, one must put into perspective the capacity to gen-erate investable capital from rural populations through formal and informal savings mechanisms. yes, poor people do save and often rural communities are thriftier than urban dwellers, but how much can they possibly accumu-late? We have heard of one FsA in the iFAd program that had over time gathered sLL 15 million in their common cash till, which they then proceeded to invest with a com-munity bank. that is impressive, but it still is only Usd 3,500, i.e. the price of a used car or the weekly cost of an international community development consultant. if the problem is the extreme poverty of rural sierra Leone, how can we possibly expect that these marginalized communi-ties, through whatever instrument, could be the primary source of finance for the commercial transformation of agriculture?

this is why in the following, we focus on products and methodologies that can channel credit and investment to rural populations, farmers and agri-businesses. Much of this funding will initially come from outside sources, but that need not be a constraint. development finance spon-sors and even commercial investors are standing by and are following sierra Leone with great interest. the money will flow, if one can show bankable opportunities that earn a reasonable return with manageable risk. that is the challenge we must address to make finance work for sierra Leone.

http://ec.europa.eu/agriculture/publi/capexplained/cap_en.pdf

http://ec.europa.eu/agriculture/publi/capexplained/cap_en.pdf


cooperative landscape is widely perceived as an instru-ment of government control and a platform for allocating paid positions and extracting rents.

We also came across another widespread myth that corre-lates with the disrespect for famers’ time: Labor suppos-edly is abundant and cheap in rural areas and thus not a binding constraint in agricultural development. the real-ity is different. Most farmers are middle-aged or older and beyond their peak of physical strength. Many young men have long left for the promise of a better life in the city. Labor therefore is mostly limited to the family unit on the smallholder farm.

indeed, we were told basic labor rates are low, around two to three dollars per day plus a meal. but at planting and harvest time, labor is already a binding constraint and simply not available at these rates. in order to motivate people to come back from urban areas for seasonal labor, a significant multiple would have to be paid. if we accept that labor is not free and famers’ are not idle, this changes everything in agricultural economics. then we should look at diversifying income streams with various activities that require peak labor inputs at offset times and maxi-mize the marginal return on labor as opposed to simply pushing output in a single crop.

the following product opportunities all take their origin from a very keen analysis of the underlying economic op-portunities. only activities should be funded that gener-ate sufficient revenue to improve the welfare of the rural household while returning principal and interest to the funder. those bankable opportunities unfortunately are in limited supply.

therefore any supporting intervention from Government and development partners that can improve the eco-nomic fundamentals is welcome: if it reduces factor cost, improves yield, mitigates risk, fosters competition and transparency, it is useful. Most practical would be a focus on providing the necessary public goods, such as famer education, seed multiplication, building rural access roads and basic infrastructure for water management and irriga-tion etc.

national Cooperative development bank in sierra Leone. Government-sponsored credit for agriculture implicitly tolerates default, rewards economic failure and distorts the market for commercial financial services.

even a rational subsidy strategy using temporary import tariffs on basic food stuffs may be ineffective, if the realities of soils and climate simply offer no hope of ever producing at world market prices. tariff protection can only create a temporary window of opportunity during which productivity must catch up and become competi-tive. if this is materially impossible, then making the country eat rice that is more expensive than it needs to be leaves everyone poorer.

Again: Respect the Economic FundamentalsWe are dwelling so much on the fundamentals of produc-tivity, because government policy and well-intentioned development programs unfortunately go so often against the grain of the economic realities. in our visits with stake-holders and rural communities, we witnessed cases of ‘form over function’ left and right: Why is it so important that women farmer groups organize in limited liability companies?58 if successful women entrepreneurs decide by themselves to join together and register a corporation, great, let it happen. but why spend precious development funding on creating social laboratory experiments?

Why do the managers of eastern Famers’ Multipurpose Cooperative sit in an empty warehouse on a work day dreaming about getting their delivery trucks from the 1980s without wheels fixed with donor money? so, that once a year they can transport one container of cocoa rather than hiring out the transport, which costs Usd 475 insured Kenema to Freetown? What happened to ‘time is money’ and the benefits of the division of labor?

in much of the well-meaning cooperative and community organizing efforts, we sense a lack of respect for farmers’ time. Many farmers realize this and resent officially initi-ated cooperatives. Consequentially, KPeyA and eastern Famers, who we visited in Kenema, complain about only a minority of members actually paying their dues or actively participating in the operations of the cooperative. the

58 An initiative of the sierra Leone Chamber of Commerce, Agribusiness Centers.


• power tillers, micro tractors, trailers, small all-terrain vehicles,

• refrigeration units, refrigerated transport boxes,• outboard engines for artisanal fishermen.

2) Assets must be rugged, indestructible, require minimal maintenance and hold their value well in the secondary market.

3) the lender should negotiate bulk buying discounts and favorable import tariffs that reduce the total cost of ownership and absorb some of the finance cost.

4) the equipment should be supported by a partnership with the manufacturer for maintenance, spare parts, and remarketing of repossessed equipment.

in order to get started, we would recommend that lend-ers compile a limited catalogue of high quality equip-ment items that are well suited to capitalize on obvious economic opportunities. these should be marketed to geographic clusters of borrowers in order to allow volume purchase and delivery and coordinate the availability of spare parts in the area.

5.4 Agricultural Asset Finance/Micro Agri-Leasing

Rationale instead of generic term finance, we propose that banks and MFis develop asset finance and (micro-) leasing meth-odologies for agriculture and small business in rural areas. the productivity of agricultural producers and small busi-nesses is frequently constrained by lack of access to basic tools and small capital assets. Funding these critical pieces of equipment can pay for itself with interest and improve the welfare of rural households.

the main innovation of asset finance is that it addresses two key risk factors in lending to agriculture and small business: (1) because the loan is tied to the acquisition of a particular asset, the risk is minimal that funds are misap-propriated for non-productive purposes, (2) the asset itself serves as collateral and significantly reduces loss-given-default.

in this context it is actually of minor importance whether the transaction is legally structured as an asset backed loan or a finance lease. in developed markets, it is often tax considerations that drive the relative attractiveness of a loan versus a lease, but these finer points are of little rele-vance in sierra Leone at this stage. What counts is that the nature of the asset represents a tangible economic oppor-tunity in itself and that it has a ready secondary market, should the borrower fail to capitalize on the opportunity and the asset must be repossessed.

For asset finance or (micro-) agri-leasing to work, we see the following success factors:

1) Careful identification of productive assets that embody a robust economic opportunity. For the most part, these assets should be in a price range accessible to microfinance (< Usd 5,000).

examples of promising items are:

• cassava peelers, presses and dryers,• moisture meters and scales (e.g. for cocoa traders),• mechanical rice thrashers,

Figure 36: Cassava Press - Possible Asset for Agri-Micro Leasing


Figure 37: Indian Tractors in an Equipment Shed at the Seed Centre in Makeni. Own Photo.

ideally, a microfinance institution would embed the as-set finance product into a technical or entrepreneurship training program that makes sure borrowers utilize the equipment optimally. Leasing and small asset finance are also well suited for delivering funding for the rural enter-prise clusters around large anchor investments in mining and agriculture described in the following chapter.

An example of a comparable agricultural micro-leasing initiative that the authors are familiar with and that seems to be developing well is juhudi Kilimo in Kenya (juhudikilimo.com).

Box 7: Big Tractors from India.

Under a soft loan from the Indian government, Sierra Leone has been able to import 256 powerful tractors as well as com-plementary equipment and implements over the course of 2009 in a transaction valued at USD 15 million.

These tractors have been made available to farmers and cooperatives through a leasing deal where recipients cover 60% of the purchase price and government pays 40%. Of the 60%, lessees are supposed to provide 20% up-front, the rest is annu-itized into lease payments over 7 years. The lease program is administered by Fi-Bank.

Could this deal be an example of successful asset finance for agriculture along the lines of what we propose in this chapter? We believe not. For the most part, it fails the first test of the asset being appropriate for the application and representing a self-financing economic opportunity. These tractors are very powerful, complex machines that are generally unsuitable for the inland valley swamps and the upland rice locations that smallholders farm with food crops. One could plow the wide open bolilands, but the incremental yield on these soils will not even pay for the fuel of the tractor, let alone cover the lease rate.

As it stands now, the tractors even at 40% subsidy are a weight around the neck of those cooperatives that are actually hoping to somehow pay the lease rates and an idle status symbol in the garage of those who never had the intention to pay in the first place.

Assuming there was a business case for large tractors, these expensive pieces of equipment must still be running 300 days a year to earn a return for the owner and pay for the eventual replacement. So, placing these assets with a cooperative as op-posed to an individual farmer is a step in the right direction in terms of regular utilization. It would be even better to create livelihoods for individual owner/operator tractorists, who would hire their services out to farmers and cooperatives. It would be in the immediate interest of the tractorist to optimize the utilization of the equipment across different crop cycles and to differentiate peak and low-season rates, for example. Collective farming has failed so often at the basic task of getting trac-tors and combines at the right time to the right fields. Owner/operators and private contractual networks tend to be so much better at this type of micro-coordination in farming.


and potential resettlements. Microfinance institutions can therefore expect that investors would be receptive to the idea of supporting enterprise development in the com-munities where they operate. this support could take the form of grants and subsidies to MFis and microfinance borrowers. An even more elegant approach might be to re-duce the risk of the business activity that is being financed by the MFi via off-take guarantees from the investor. For example, a village resident who buys a used van for worker transport with funding from the MFi could benefit from a guaranteed minimum number of runs per month under a long-term contract with the mining firm. Likewise, the firm could give rental guarantees for back yard rooms built in the community to accommodate their temporary or seasonal laborers.

it would further reduce the risk and thus the cost of mi-crofinance, if one built in a mechanism whereby the MFi can collect loan installments at source from the accounts payable department of the mining investor.

Potential bankable business opportunities in such enter-prise clusters include:

• small hotels and guest houses, • backyard rentals and other low cost accommodation for

laborers,• food services: catering, restaurants, lunch stands, • worker transport and trucking services, • vehicle and equipment maintenance,• medical services, • workforce recruitment and training services, • entertainment and leisure activities etc.

From our discussions with MFis and MitAF ii, we hear that initial exploratory contacts about local enterprise development are already underway with some high profile investors such as Addax biofuels in Makeni and African Minerals, who are developing the tonkolili iron ore de-posits.

We spoke at length to Amadu Massally, the Managing di-rector of Consumer Finance & Leasing Co., the first leasing company licensed in sierra Leone (www.cflco.com). Active leasing operations at CFLCo have only begun in 2011 and the focus is currently on building up a hire purchase port-folio of mostly passenger vehicles for salaried individuals in Freetown. However, there is a keen interest in doing more in the rural space and in tapping the potential of agricultural producers. We encouraged CFLCo to pursue an agricultural leasing pilot program in collaboration with MitAF ii and/or through a marketing partnership with a microfinance institution that has a strong presence in rural areas, such as Association for rural development or brAC.

5.5 (Micro)-Finance for Rural Enterprise & Service Clusters

in Chapter 3.4, we gave an overview of the large foreign investments in mining and agriculture coming to sierra Leone at this time. there is a promise – or a threat depend-ing on the perspective – of more big projects in the pipe-line, given the discovery of oil off the Coast, the interest in biofuels and the global race to secure mineral resources.

Whether one endorses these developments or not, the in-vestments are coming. And they create a new reality in ru-ral areas of sierra Leone. However, expectations that rural populations will be uplifted simply by the land lease pay-ments and some direct employment within the projects will regularly be disappointed. this is already in evidence around existing and newly launched operations: the Chi-nese sugarcane plantation at Magbass, Koidu Holdings’ in-dustrial diamond mining site, the tonkolili and Marampa iron ore mines, or at the Addax biofuels site in Makeni.

Leveraging Support from the Anchor Investorthe challenge is to maximize economic benefit for sur-rounding communities by productively tying into the activities of the anchor investor. Microfinance providers can help by providing the necessary capital for local resi-dents to realize their entrepreneurial ambitions. All major foreign investors in rural areas understand that they must be proactive about community relations and manage ex-pectations about environmental impacts, jobs, land leases


sale buyer. this way, the incentives remain in place for the buyer to manage the supplier relationships prudently.

We understand that sierra Leone brewery Ltd. (owned by Heineken) runs a substantial outgrower scheme for sor-ghum and other key ingredients and provides some bridge financing to its growers. this kind of loan book might be a candidate for outsourcing to a financial institution. An added attraction for the financial institution would be the opportunity to cross-sell additional services, such as sav-ings and transfer products to this client base over time.

in our discussions with the business development Man-ager at Union trust bank (Utb) it became clear that Utb, and we assume other banks as well, have already identified supply chain finance as a promising strategy to make first inroads into agricultural finance and are actively building up a portfolio of pilot transactions.

5.7 Building Carbon Credits into Agricultural Finance Products

Rationale it strikes us that several of the elements in the vision for sustainable smallholder livelihoods might well qualify as carbon off-sets that could be eligible for transfer pay-ments. For example, the intensified fallow using hedge rows as well as diversified agro-forestry plantations have clear carbon sequestration benefits. this is certainly also the case for fast growing wood lots for charcoal, scaf-folding and pulp/fiber applications. even palm oil groves could qualify, if they are planted on previously degraded land and do not replace prime indigenous forest.

the international systems of carbon trading and carbon offsets are not yet well understood in sierra Leone and there have been some misconceptions (money for noth-ing) and a bit of bad press related to certain agents enrich-ing themselves on possible future carbon benefits accruing to the Gola Forest Conservation Programme. nonetheless, from our initial inquiries with carbon market experts, we believe there is a case for leveraging carbon offsets for qualifying agricultural practices in sierra Leone.

5.6 Supply Chain Finance

Rationale supply chain (or value chain) finance is an alternative approach to get funding flowing to agriculture and agri-processing with lower risk than simply asking financial institutions to lend on faith to farmers in an arm’s length transaction. the idea is to insert financing in larger vol-umes higher up the supply chain and have the resources work their way down the chain within established buyer-seller relationships.

because finance is dispensed within a trusted business relationship, there is better visibility of risk and the rela-tionship itself provides the platform for loan collections at time of the produce sale. supply chain credit also has a plausibility check on the economic fundamentals built di-rectly into the transaction: A buyer would never finance a supplier for more than can be realistically repaid from the value of the forthcoming production or delivery.

buyer credit is not a new phenomenon in sierra Leone. it is common practice in cash crops and particularly in the cocoa supply chain, where buyers and agents often pro-vide bridge financing to producers. Frequently these loans are informal and given in-kind, i.e. one bag of rice today for one bag of cocoa beans in three months. Formal supply chain finance instead monetizes the underlying exchange relationships and thereby improves transparency and competition in the supply chain.

Outsourced Supply Chain Loan Books At the upper end of the supply chain, the credit volumes and numbers of participating borrowers may amount to a substantial loan book run by wholesale buyers and trad-ers, or by processors within outgrower schemes, for ex-ample. often, these wholesale buyers do not see credit as their core business and are reluctant to tie up capital and management capacity for supply chain finance. Hence, there is a business opportunity for banks and MFis to fund and administer such loan books on behalf of wholesale buyers in cash crop value chains. outsourcing the credit operations to a financial institution leads to economies of scale and ultimately to lower cost of credit for suppliers. in outsourced supply chain credit, it is important that at least a portion of the credit risk remains with the whole-


Carbon offset payments could be a catalyst that makes small-scale medium term agricultural finance feasible: carbon credits could be accrued in a sinking fund towards repaying the loan, or could be held as a collective risk cov-erage pool etc. the transition to agro-forestry or sedentary farming and the establishment of palm oil plantations and other tree crops require medium term finance over five to seven years. this is generally perceived as too risky for conventional lending, but with the added benefit of a guaranteed external cash flow from carbon offsets it might become possible.

if in the end carbon sequestration in agriculture and forestry turns out to be too complex at this time, the con-solation prize in carbon related microfinance would be the promotion of energy efficiency products. there are numerous precedents for energy efficiency projects with built-in carbon benefits in Africa and in other develop-ing countries.60 typical items that can be distributed and financed through MFis include solar cook stoves, efficient bio-mass burners, photovoltaic panels, cooking gas from bio-digesters etc.

salone Microfinance trust mentioned to us that they are in early stage discussions with energy in Common (energ-yincommon.org) about financing similar energy efficiency products with a carbon offset component. these projects often work such that the MFi receives refinancing for the energy efficiency portfolio at zero interest. some of the funding cost advantage can then be passed on to buyers of the qualifying products.

5.8 Inventory Credit and Warehouse Receipts

Rationaleit is common practice in developed markets to evidence the deposit of agricultural commodities in standardized quality in a professionally managed, secure common storage facility by way of negotiable warehouse receipts. Warehouse receipts can become effective instruments for trading and transferring ownership of the commodity

60 Compare: Finca Uganda, “Lighting Africa” project in Kenya (iFC funding), spandana MFi in india, and xacbank, Mongolia.

The Challenge is in the Detailsit is certainly a complex world of project standards and technical terminology featuring Clean development Mechanisms (cdm.unfccc.int), a Gold standard (cdmgold-standard.org) and complicated Project design documents. independent audits and regular verifications of carbon offsetting activities on the ground must be provided, and funds typically only flow after the fact, on the basis of the Co2 emissions effectively avoided or sequestered.

the voluntary carbon offset market rather than the even more complex and process-heavy compliance market would be the logical starting point for getting carbon credit funds to sierra Leonean farmers. this would involve working with voluntary carbon offset clearing houses such as CarbonCare, Atmosfair, MyClimate etc. We are told that there is currently a trend away from bulk credits for energy efficient power stations in China, for example, to ‘quality credits’ with a higher human development impact. this should make agricultural projects in sierra Leone an attractive value proposition to carbon credit buyers.

the amounts at stake are small but significant in the con-text of rural income levels. Atmosfair charges eUr 23 per ton of Co2 to airline passengers, for example. At Carbon-CareAsia.com, one ton of Co2 for a reforestation project in China ‘retails’ for about Usd 20. the value of Co2 credits available at the project level in sierra Leone might come out to about Usd 10 per ton. A one hectare woodlot can sequester approx. 20-30 tons of carbon over 7 years until maturity, which is equivalent to 73.4 – 110.1 tons of Co2.59

Building the Carbon Credit into the Financial Servicesince the available carbon off-set amounts are modest per individual farmer and the process for getting a pro-ject certified and funded is complex, the only realistic approach is through a coordinated effort led by a profes-sional organization with international backing. this is why microfinance institutions or banks who already work with rural clients and have field agents reaching out to farmers would be an ideal channel for certifying and monitoring carbon offsets and subsequently transferring even small payments.

59 one ton of Carbon (C) equals 3.67 tons of Co2. For the woodlot carbon sequestration assumptions compare: environmental services of Agroforestry in southern Africa: Lessons, Challenges and Future directions, G. sileshi, P. W. Matakala, F. K. Akinnifesi and o.C. Ajayi.


does not exceed the total stored. the protection against theft and spoilage, as well as the risk of forgery and fraud in respect to quality controls and the warehouse receipts themselves, all remain major challenges under the current realities of rural sierra Leone.

Care international consultants are currently working on a warehouse receipting system for rice in a number of pilot communities in sierra Leone62 in collaboration with Union trust bank and its microfinance subsidiary Finance salone. since farmers generally do not trust community storage facilities due to theft and lacking pest control, the Care system is built around paid private storekeepers with 24/7 guard protection. storage fees are sLL 5,000 per bag for the season. instead of fungible receipts that confer title to a certain quantity and quality, the Care system issues certificates that convey the right to obtain the particular bags of rice stored by an individual farmer. in the absence of widely accepted quality grades for local rice, this is a reasonable workaround. However, our sense was that the system was not yet fully watertight regarding the rights of a creditor holding the certificates as collateral.

Another interesting pilot program is the palm oil storage and inventory credit scheme tested by innovations for Poverty Action (poverty-action.org). Under this pilot, iPA collaborates with the national Program Coordination Unit at MAFFs and three Community banks in order to offer inventory microcredit in forty communities in the Kono and Kailahun districts. the idea is that farmers would store their 20 liter containers with freshly pressed palm oil at harvest time in a community store under double lock by the community and the bank. the bank will provide bridging loans against the stored palm oil, so that farm-ers can meet immediate cash needs while they wait to sell their oil at a higher price a few months later.

Low-Risk Product but with Diminishing Returns We note these early initiatives on inventory credit with great interest and believe they represent a straightforward and low-risk mechanism to inject meaningful financing into agricultural production. inventory credit is also well suited for funding trading activities in cash crops and food commodities in larger volumes higher up in the supply chain. However, there are still a few open questions in

62 Contact: Care international in sierra Leone, Mr. Faridul Alam.

while in storage and can serve as collateral for short-term lending.61

there are examples from Ghana and tanzania where warehouse receipts have been introduced with success in terms of improved access to credit and higher sales pro-ceeds. in Ghana, this experience relates to a warehousing scheme in the brong-Ahafo maize triangle, where price fluctuations around harvest time have tended to be high. the opportunity to safely store their grain has allowed farmers to sell tactically at higher prices spread out over time. in tanzania, the Agricultural Marketing systems development Programme supported by iFAd has made warehouse receipts accessible to small grain farmers. iFAd also shaped their countrywide roll-out under the Ware-house receipt system Act of 2005. the effect for farmers in tanzania has been equally positive in that they can now avoid dumping their produce on the market at har-vest time when prices are lowest and take a bridging loan against the stored commodities to meet immediate cash needs.

short-term inventory credit against the pledge of a secure-ly stored agricultural commodity seems a quick win that can be offered by banks or microfinance institutions in sierra Leone today without difficulty. As long as a reason-able haircut is applied to the valuation of the stored com-modities in order to protect against price fluctuation and quality issues, then a warehouse receipt is highly bankable collateral.

Practical Issues However, we should remind ourselves of the implicit prerequisites of warehouse receipts: A warehouse receipt must evidence the negotiable property rights to the speci-fied quantity and quality of the commodity stored. the depositor may not claim the grain back unless he can pro-duce the receipt. And a bank foreclosing into the collateral must be able to obtain possession of the grain without the cooperation of the depositing farmer. A high level of trust in bonded and insured warehouse operators is required, who must uphold the integrity of the system and guaran-tee that the amount of warehouse receipts in circulation

61 A concise summary of the role of warehouse receipts in developing agricultural commodities markets can be found in the World bank paper “Warehouse receipts: Facilitating Credit and Commodity Markets”, go.worldbank.org/P5Hd25FQK0.


but not from the largest volume buyer of low-grade cocoa, the dutch theobroma bv.

these occasional supplier credit advances by european importers are a drop in the bucket compared to the exist-ing trade volumes and do very little to tap the potential for deeper integration of sierra Leone into international trade flows. More financing options and a better command of instruments and trade practices would improve transpar-ency and competition and hence deliver better terms of trade and more value along the entire supply chain, all the way back to the farm gate.

outside of the cocoa trade, the benefits of trade finance are equally relevant to importers of food commodities and manufactured goods. south-south trade and regional West-African trade probably stand to derive the biggest boost most from improved trade finance access.

Design of a Trade Finance Facility the proposed intervention would be for international development banks to provide dedicated trade finance facilities to the leading commercial banks in sierra Leone. on the back of these committed resources, commercial banks could scale up the available funding for commod-ity streams in and out of the country. such a refinancing facility should ideally be accompanied with technical training at banks and within the business community. the training and capacity building efforts would need to convey technical skills in documentary operations, trans-action structuring, trade and shipping conventions and quality control / certification.

With the backing of a trade finance facility, the local banks would be in a position to provide more volume and better services around the following types of transactions:

• Pre-financing sierra Leonean exporters based on export letters of credit or signed export contracts;

• discounting future collections on shipments in transit;• issuing letters of credit by order of sierra Leonean im-

porters with confirmation by the foreign advising cor-respondent;

• Financing advance payments and merchandise in tran-sit for importers etc.

addition to the concerns on secure storage and the legal force of warehouse receipts: More specifically, we are a bit worried about the economic viability of the ‘store low – sell high’ strategy when applied at scale. essentially, this is a classic cash and carry arbitrage between spot and forward prices. Would the arbitrage profit not go away, if most farmers tried to store at harvest and sold later? And is this not a zero sum game, as certainly others - grain traders, ‘the Lebanese’ – are already buying low at harvest time in order to store and sell high later? instead of simply taking the carry profit away from other legitimate rural businesses and duplicating storage infrastructure in the process, should one not rather attempt to make markets more transparent, so that the ‘carry’ captured by the tra-ditional traders is reduced to a fair price for the storage services and the risks assumed?

5.9 Trade Finance Facilities at Commercial Banks in Sierra Leone

Rationale even though the topic of trade finance is certainly less relevant for those depending on self-sufficiency farming, especially small and medium-sized enterprises with their potential for job creation – also in rural areas – may, how-ever, feel a strong need to turn their export opportunities into actual sales. From a “product opportunity” point of view, we therefore decided to incorporate also the issue of trade Finance Facilities into the list of promising instru-ments.

importers and exporters of food products, agricultural inputs and commodities in sierra Leone are constrained in their business development by a lack of trade finance and insufficient experience with documentary instruments, shipping terms and other conventions of international trade. this impression has been confirmed through our discussions with commercial banks and the larger traders and agri-processors, who could potentially have the vol-umes and capacity to engage in import or export transac-tions directly.

We have heard of some pre-financing of shipments being provided by cocoa importers in europe, such as fair trad-ing buyer twin trading UK and London-based Armajaro,


locally, generate sorely needed employment opportunities and serve as a reliable buyer for locally grown crops at fair prices.

Who are the Players?Private equity as a financial product is an opportunity for specialist private equity fund managers in collaboration with local commercial banks, who should be able to pro-vide valuable referrals and debt co-financing.

interested investors in a private equity fund for sierra Leone would be the private sector development arms of national and multinational development agencies, such as iFC, deG, CdC, FMo, and ProPArCo as well as private foundations (most notably the soros Foundation), and other socially-responsible private investors.

some early private equity initiatives that are already beginning to look at investment opportunities in sierra Leone include:

• West African venture Fund backed by iFC (www.wavfonline.com);

• Manocap Private equity, backed by CdC and the soros Foundation (www.manocap.com);

• desert Lion Partners (www.desertlionpartners.com).

Here are some promising business models in the rural and agri-business space that hold the potential for successful private equity investments:

• fish processing and canning, • palm kernel oil mills and palm oil processing centers, • cassava chips and flour processing, • bio-mass to energy, agri-waste to animal feed

processing, • specialty fruit juice concentrates and extracts, • food packaging products.

Success Factors Private equity is by nature a very risky business. in order to properly balance these risks with a reasonable promise of attractive returns, we see the following three critical success factors: (1) improved governance and financial management, (2) active managerial/advisory involvement and (3) a range of credible exit opportunities.

instead of direct financing to the commercial banks, much of the same effects could be achieved by providing a guar-antee facility. instead of backing up a confirmation order for an import L/C with cash collateral, for example, the sierra Leonean bank could then draw on the guarantee provided by a highly rated international development bank.

A first guarantee-based trade finance facility already ex-ists in sierra Leone. in 2007, the iFC signed trade finance agreements with sierra Leone Commercial bank, rokel Commercial bank, and Guaranty trust bank Ltd in the amount of Usd 1 million each. based on the experience from this pilot facility, we believe that the volume and the scope of participating banks could surely be increased as a way to foster sierra Leone’s competitiveness in interna-tional trade.

5.10 Private Equity for Medium-Size Agribusiness

Rationale the lack of risk capital is a critical constraint to private sector growth throughout Africa. Common equity for medium-sized businesses is essentially unavailable outside of informal channels and family networks. equity partici-pations by development sponsors and private investors in financial services and in telecommunications have become more common in recent years, but the bulk of medium-sized businesses in the real economy remain cut off from any form of equity finance or venture capital. in sierra Leone, medium-sized agri-trading and agri-process-ing businesses are acutely feeling the shortage of equity capital as a binding constraint on their development.

A proposal for private equity investments in larger busi-nesses could be misunderstood as an attempt to make well-to-do business people even richer, while neglecting the pressing needs of farmers and the rural poor. to the contrary, we see private equity as an appropriate initiative in a continuum of financial sector interventions, because small and micro entrepreneurship models are not likely to become competitive in most areas of agri-business and food processing. these are relatively capital intensive op-erations that require economies of scale to succeed. but these mid-sized processing businesses also create value


breaking the gridlock and channeling equity finance to the most promising growth stories in the private sector.

Many government donors and private foundations rec-ognize this market failure and might be prepared to fund an accompanying measure that could mitigate some of the risk factors stemming from intensive management in-volvement, high capacity building requirements and long lock-up periods.

5.11 Creation of a new National Agricultural Finance Institution

Feasibility Study Forthcoming in a number of discussions with stakeholders, we encoun-tered the idea of setting up a new national Agricultural bank in sierra Leone as a way to improve access to finance in the agricultural sector and to accelerate its commer-cial transformation. the concept is apparently gaining momentum within the MAFFs and in the financial com-munity. We saw the draft terms of reference created by a consultant to MAFFs for a feasibility study entitled “Agricultural Finance in sierra Leone – A study for the Formation of an Agricultural Finance institution” dated january 2011.

the terms of reference impress as well informed and in-sightful and correctly highlight the various challenges to the mobilization of finance towards productive commer-cial agriculture in the country. We are concerned, however, that the terms of the study already prescribe the outcome, namely that “this study will generate information that will guide the development of a specialized agricultural finance system for sierra Leone.” it is taken for granted that this would be a government-controlled institution that provides a comprehensive scope of financial services to the agricultural sector, namely:

• short and medium term production credit,• short term export and trade financing,• long term investment financing,• financing of working capital,• credit guarantees,• supplier credit,• insurance.

Transparency: Most medium-sized businesses in sierra Leone operate in a relatively informal context with weak financial reporting and a regulatory and tax regime in flux. Any international equity investor would be well advised to install a trusted chief financial officer or head account-ant / controller at the company in order to professionalize the financial management and to minimize information filtering by the resident owner/managers.

Management Involvement: in addition to instilling fi-nancial discipline, private equity success requires active long-term managerial and strategic involvement with the investee. the equity fund manager should pair each investment with a long-term strategic adviser from within its staff or on a consultant basis. this advisor will repre-sent the fund within the governance of the investee and contribute his/her entrepreneurial energy and business experience. Key advisers will receive an appropriate com-pensation for their time during the investment phase and will be substantially incentivized on the fund’s ultimate exit.

Exit Opportunities: occasionally, there will be an oppor-tunity to exit an investment through a public share offer-ing at a regional or international stock exchange in Kenya, nigeria, south Africa or London. in most cases, however, a fund will look for a private sale to a buyer in the industry. on the back of high profitability and strong income reten-tion, it will also often be possible to sell the private equity stake back to the original owner or family. All investments should be structured from the outset to include the neces-sary options to facilitate this type of transition.

External Donor Support Private equity is currently not flowing to African entrepre-neurs at a scale commensurate with the obvious opportu-nities. this is because investment periods are long, moral hazard in the underdeveloped legal, accounting and tax framework is high and public stock market exits with high pay-off multiples are rare. in this context, the identifica-tion and vetting of investment candidates and the subse-quent management involvement are often prohibitively expensive for strictly commercial investors. Complemen-tary external funding for some aspects of the business development at the fund and for technical capacity build-ing at the investee company would be a critical enabler in


such a guarantee fund could be set up with minimal effort at MAFFs and be outsourced for administration to partici-pating commercial banks. it would certainly not require the creation of a new Agricultural bank.63

5.12 Agricultural Finance Enablers & Meso Level Interventions

Crop Insurancethe vagaries of weather and climate change and the dan-gers of pests and disease add to the many risk factors in farming. Crop insurance could guarantee a minimum live-lihood for producers in the event of adversity and make farming a more bankable enterprise.

We believe that an attempt to introduce conventional all-peril crop insurance for smallholders in sierra Leone would be likely to fail because of prohibitive cost and mas-sive moral hazard. the willingness and ability of farmers to pay significant premiums must very much be in doubt under the current economic realities in the country. significant the premiums would have to be, because the moral barriers to insurance fraud will be quite low. our local expert counterparts believed that farmers could be tempted to simulate harvest losses in order to collect insurance pay outs, while selling the harvest on the side. insurance fraud being a ‘victimless crime’, this is unfortu-nately a plausible scenario.

An abstract weather index insurance that pays out in a de-fined weather event regardless of the individual loss seems to be more promising for sierra Leone. Weather index insurance is essentially a derivative, where participants go long/short rain or sunshine hours at a particular weather station or a regional average.

the initial experience with the tAKAyUA rainfall insur-ance in Ghana developed with GiZ support is encouraging. Acceptance of the index-based product appears good, but the premiums have been subsidized initially. Hence, the test of commercial sustainability is still outstanding.64

63 Compare the “smart subsidy approach” to guarantee funds in: Policy brief on agricultural finance in Africa, MFW4A, March 2012. 64 For detail see dean Karlan, yale University, iPA in: munichre-foundation.org/nr/rdonlyres/95F6C951-8F17-4Ce2-A7d5-26A875364214/0/P3_MiC2010_Presentation_Karlan.pdf

No Need for a new Agricultural BankWe are quite surprised by the confidence with which the concept of the Agricultural bank assumes that a new gov-ernment institution can do better what the 13 commercial banks, 6 community banks and 15 microfinance institu-tions in sierra Leone already are trying their best to imple-ment. As we pointed out before, there seems to be no lack of institutions. Generally the bottleneck is in the identifi-cation of economically viable activities and the design of the financial products that can structure these opportuni-ties into bankable transactions. the main objective of this report is to highlight exactly such tangible products that can be implemented in the near term. What reasons are there to believe that a new, inexperienced government-owned institution would be any better or faster at seizing these opportunities than the existing banks and MFis?

Moreover, we cannot spare the reader the fact that govern-ment-owned agricultural banks in Africa are an entirely discredited concept that makes the development partner community cringe.

if the rationale for the Agricultural bank is that it will pro-vide financing at lower cost and for longer terms where no commercial bank dares to tread, then the danger is obvious that the bank will quickly accumulate non-per-forming loans and become a vehicle for allocating costly subsidies. As we discussed before, paying out subsidies via non-performing loans amounts to rewarding economic failure and encouraging breach of contract and must be the worst way to dispense government support.

if the intention behind the creation of the Agricultural bank is to act as a catalyst for sustainable finance to flow to the commercially viable pockets of agriculture, then this could be realized more effectively by Government providing partial guarantees or other credit enhance-ments in support of agricultural lending via the commer-cial banking system. this way, the commercial lender still has enough capital at risk to not abandon prudent lending principles but may just push the boundaries of what are considered bankable risks. in the process, trusted relation-ships between agricultural producers and commercial banks will evolve that make it possible to withdraw guar-antee support over time.

http://munichre-foundation.org/NR/rdonlyres/95F6C951-8F17-4CE2-A7D5-26A875364214/0/P3_MIC2010_Presentation_Karlan.pdf

http://munichre-foundation.org/NR/rdonlyres/95F6C951-8F17-4CE2-A7D5-26A875364214/0/P3_MIC2010_Presentation_Karlan.pdf


relevant commodities futures markets for sierra Leone are:

• Chicago board of trade (CMe Group) for rough rice, • bursa Malaysia for Crude Palm oil (tradeable via CMe), • nymex (CMe Group) for Cocoa and Coffee.

the contract specifications and trading conventions can be found on the Chicago Mercantile exchange Group web-site at www.cme.com.

As a tangible example of how price hedging with futures would work, consider a wholesale cocoa trader like F.t. saad in Makeni with a large inventory of cocoa beans. As world market prices for cocoa rose in February 2011 dur-ing the export boycott in ivory Coast, F.t. saad could have been concerned that they would not be fast enough to ex-port the cocoa from the ongoing buying campaign to ben-efit from the current high price level. on February 24th, F.t. saad simply sells 5 nymex cocoa contracts (ticker Cj) for 10 metric tons each at the current price of Usd 3,467 per ton. by the end of April, prices have settled back down to Usd 2,900 per ton and F.t. saad closes out its position by buying back 5 contracts. the net difference of 50t *Usd 567 = Usd 28,350 is credited to F.t. saad’s trading account. in the meantime, F.t. saad sells its physical cocoa inven-tory at current market prices through the usual export channels.

obviously, the cocoa contracts that are traded on CMe-nymex are not standardized to sierra Leone cocoa quality and delivery points. but that is not necessary for a reason-able hedge performance. it suffices that the price of lower grade sierra Leone cocoa moves at least in close correla-tion with world market prices, which it generally does.

the practical steps for arranging access to global futures markets for corporates and professional wholesale trad-ers are straightforward and simple. the commercial bank in sierra Leone would ‘introduce’ its clients to a major foreign commodities broker, such as Man Financial, for example. if the bank does not yet have a business relation-ship with Man Financial, it could ask for an introduction via a european correspondent bank.

We like the simplicity of index-based weather insurance and the avoidance of moral hazard vis-à-vis the farmer. However, it is unclear whether the average farmer is ready to invest significant premiums in such an abstract instru-ment. With rainfall being relatively predictable in sierra Leone, weather may not be the famer’s biggest concern and hence the likelihood of sufficient take-up for a sus-tainable offering is low.

We also must wonder whether the necessary localized, au-thoritative weather data actually exist in sierra Leone. this is important, because index-based insurance in the end comes down to a bet on whether the rainwater in a meas-uring cup in a particular weather station reaches a certain line or not. With thousands of dollars riding on this result, is it unthinkable that someone would accept a bribe to add a bit or dump out a bit of water?

in summary, weather-index and all-peril crop insurance should be relatively low priorities for development finance investment. We do not see an imminent break-through for agricultural finance coming from the crop insurance front.

Access to Commodity Futures Marketsimporters, exporters and domestic wholesale traders in agricultural commodities often are exposed to short-term price fluctuations that impact the value of their inventory and the profitability of contractual commitments within the supply chain.

sierra Leonean wholesale traders in cash crops could use established commodities futures markets for hedging forward prices. this would be in lieu of the occasionally floated ideas of creating new commodities exchanges in various African markets. Futures exchanges are natural monopolies that are driven by liquidity: the more par-ticipants with a diversity of trading motivations (hedging, speculation, arbitrage etc.) and opposing price expecta-tions come together in the same market, the better it is for fair price discovery, small bid-ask spreads and deep liquidity. With remote electronic connections now being the predominant form of access to futures trading, geo-graphical distance is no longer an argument for not using the hedging opportunities provided by the leading global commodities exchanges.


one concern on the design for a comprehensive informa-tion service for agriculture in sierra Leone is that if one plans too big, it will never materialize. it seems logical to build such a service incrementally and start with the most obvious information need, which is timely and reliable price data.

this in itself is already more complex than it seems at first sight: just for one particular commodity, there is not just one price at one time but an actual pricing grid that differentiates prices by quality grade, delivery point and batch size. Further research is required how exactly such pricing grids can be generated in a reliable and representa-tive manner. one way would be to encourage competing buyers to self-report or post their current best offer by quality grade, delivery point and transaction size to the system. However, one would need to build in controls and spot checks to ensure that posted prices are actually being transacted and are not just teaser offers.

All the existing systems in Africa have been launched with some form of donor support. it would seem that public seed-funding will also be required to get a market infor-mation service off the ground in sierra Leone.

the bank in sierra Leone handles the necessary Anti-Money Laundering verifications. the bank also makes sure the client is a suitable professional and well briefed on the risks of derivatives trading and obtains the necessary releases. the client funds the initial margin account (mini-mum Usd 10,000 for retail clients), installs the trading front end software and is in business.

because futures trading is anonymous and on margin, there is no counterparty credit risk and no discrimination against occasional users with small volumes. the trans-action costs are negligible (approx. Usd 6.50 per contract) and access is possible from sierra Leone with a standard PC and a low-speed internet connection.

We do not want to sound overly enthusiastic about fu-tures trading. Hedging with futures is a niche product for a small number of relatively sophisticated cocoa traders, rice importers and other agri-businesses. it will not revo-lutionize agriculture in sierra Leone. yet, the next time major players in the market call for Government price insurance on commodities, we should channel this energy towards the futures markets instead.

Market Information Servicesinefficiencies and income loss to agricultural producers often simply arise because farmers are poorly informed about current market prices for cash crops at different delivery points and for particular qualities. Price trans-parency along the value chain would be a major boost to competition and ultimately lead to a fairer deal for pro-ducers.

Price dissemination services via simple sMs have been quite successful elsewhere in Africa (Ghana, Kenya, tanzania, rwanda etc.). A scoping study for an agricultural information portal in sierra Leone has recently been car-ried out by PAGe/UsAid65. the study clearly confirms the need for a central information repository that would be accessible through multiple channels including cell phone, internet, and print. the issue remains unresolved who would host such a service and how it can become finan-cially sustainable in the long-term.

65 Leah Mansaray, Market Assessment & Feasibility study of Access to Agricultural Marketing information in sierra Leone, jan 2011, Commissioned by PAGe (Promoting Agriculture Governance and the environment) / UsAid.

70 ConCLUsion And oUtLooK

despite the progress of the FsdP, many issues remain unresolved that could constrain financial access in rural areas. take the lack of transferable freehold titles on agri-cultural land, for example. However, the study argues that many of these constraints are not immediately binding in that more finance would flow, if they were removed tomorrow. the real bottlenecks at this time are all about the underlying economics of farming and agribusiness and the many layers of risks, real and perceived, that come with it.

the main message of the report is that financial services must seek out sustainable economic opportunity. Where the underlying economic fundamentals do not add up, there is nothing that finance can do. We therefore look for robust financial products and development interventions that will make finance work for farmers and rural resi-dents in the near term and within the economic reality of sierra Leone. bankable opportunities present themselves in areas impacted by large foreign direct investments in agriculture and in natural resources extraction. Although controversial, these investments are a reality and finan-cial services can assist rural communities in maximizing the economic spin-off from the anchor investment by creating rural enterprise & service clusters. supply-chain finance in the cocoa sector is another relatively quick win. Cocoa is one of the few crops where the country has some competitive advantage and a realistic opportunity to cre-ate solid livelihoods in rural areas.

instead of wallowing in the obvious imperfections of the market environment, we want to encourage financial in-stitutions to expand access to finance by making the most of the limited bankable opportunities available today. by simply getting started in earnest, the financial sector will bring up the enabling environment and necessary regula-tions along with it. it service providers, credit bureaus, and stock exchange operators will not fully mature with dry-land exercises alone. you have to get wet, start lending into tangible and reasonable projects and thus create the self-reinforcing activity that will move rural populations ahead.

the study takes a broad view of economic opportunity and the supply / demand of financial services in agri-culture and in rural areas of sierra Leone. the described obstacles to financial access are complex. they include the underdeveloped physical infrastructure, a lack of qualified human resources, insufficient long-term capital formation and deficits in the rule of law. the good news is that there is manifest political will to tackle the high-level challenges in the business environment. the bank of sierra Leone has rallied Government and development partners around a platform for coordinated intervention at all levels of the financial sector, the Financial Sector Development Plan. Good progress is being made in the payment systems area and in supporting retail financial services through the Microfinance investment and technical Assistance Facil-ity. Also, with the banking laws and regulations passed in 2011, the fundamentals of a modern regulatory platform are now in place.

the discussion of agricultural finance opportunities in sierra Leone is often skewed by the misconception about large tracts of unused fertile land. the study shows that there is no imminent green revolution, most of the land is already overused relative to the fallow periods required under traditional rotating cultivation. some incremental improvements and a more dignified smallholder liveli-hood are possible, but only in the context of the transition to a sustainable sedentary farming approach. the most tangible opportunities for cash income generation in the smallholder environment that are compatible with more intensive stationary farming are cocoa plantations and commercial woodlots. the success of large commercial agricultural investments also depends on the transition to sedentary farming with systematic investments in soil fertility. that is the only way to free up land for commer-cial use without running into conflict with the food pro-duction needs of subsistence farmers in the near future.

6. Conclusion and Outlook

71ConCLUsion And oUtLooK

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ConClusion and outlook72

the above sketch symbolizes the systematic transition from shifting cultivation to a permanent sedentary crop-ping scheme with hedgerows and value-adding fallow.

to optimize growth of annual crops and to avoid shading, hedges have to be planted in east – west direction always. Planting hedgerows will be completely new to the farmers and means additional land use of about 20% of the total farm. Pruning hedges is also a new technique and needs to be trained – learning-by-doing – and so is planting fallow covers (green manure). After the first investment period the yield increase shall compensate for the 20% of land devoted to the production of hedges. Pigeon peas as fallow crop will give an additional return.

Appendix 2: References

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ConClusion and outlook 73

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Published byDeutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

Programme Promoting Financial Sector Dialogue in Africa: „Making Finance Work for Africa“

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Authors and editingDr. Joachim Bald, Dr. Peter Schröder Design Jeanette Geppert, Frankfurt

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