Agri-financing and the tourism sector

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Farmers

Hotels

Supplying the tourism industry is a value chain, and the various forms of value chain finance can be applied

Farmers

Hotels

Produce to be delivered

Payments due

Pre-harvest finance Post-harvest financeIf a farmers has a contract to supply a hotel/cruise ship/supermarket, then pre-finance is in principle possible. Supporting factors:- Track record of the farmer- Credit status of the buyer- Nature of the contract- Price paid by the buyer (if a premium price is paid for a premium product, there is less risk of diversion)

- Nature of the product (is there a strong demand from other buyers?

-Existence of insurance.

The financier would have the rights and payments under the contract assigned to him, and would control the actual use of funds (to minimize risk that produce will not be delivered).

Invoices can be readily discounted, most easily by a specialized factoring company.

Most efficient mechanism: to have a semi-automatic discount window, where farmers can immediately discount invoices to a pre-approved list of buyers.

Such a discount window can be operated electronically, using electronic invoices.

By using this system farmers build up track records, which can be used by banks to assess the possibility to offer medium-term (pre-harvest) finance.

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The St. Lucia buffer fund

• 2003: Oxfam GB project to increase access to tourism markets for farmers. Work on production, distribution, marketing and information systems; agricultural practices/production planning; and farmer group dynamics. 1,000 farmers included in the project.

• Farmers needed finance, but earlier models of “finance alone” were failures.

• A 2006 study found that farmers had to wait on average 70 days for hotels to pay for their purchases. Waiting for the payments, farmers had to rely on bank overdrafts to finance their inputs.

• Recommendation: a buffer fund, managed by an intermediary.

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The EU Microfin model

• The farmers didn’t like the idea of having an intermediary… Precedent: EU-funded Microfin scheme, abandoned because hotels didn’t pay the farmer directly.

• So: buffer fund model: buffer fund finances farmers on the basis of their invoices, but the hotels still pay the farmers and the farmers then repay the fund.

• Fund managed by St. Lucia Credit Union League. Started with EC$50,000 grant.

Farmers’ association

Hotels

Farmers

Delivery, payment by check after 7 days

NRDF

Ceding of confirmed invoices

Payment within 30 days

Encashment of cheques

Delivery, invoice, confirmed in writing by hotel

Buffer fundBelle Vue Farmers’

Cooperative

The St. Lucia buffer fund – how did it function in practice?

Revolving credit

Hotels

Member farmers (100)

Delivery, against 8-day-delayed payment

Delivery, against delayed payment (30-90 days)

Belle Vue marks up the prices by 67%

Payment in vouchers that have to be cashed with a Credit Union branch

Source: Cleve Scott, Creating a buffer fund to help farmers access the hotel trade in St Lucia, UNCTAD 2009

St. Lucia Credit Union

League

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Buffer fundBelle Vue Farmers’

CooperativeThe risk remains the same: the

cooperative’s credit risk – no credit enhancement

Hotels

Member farmers (100)

Inefficient payment mechanism

High concentration of receivables. Considerable credit risks.

Why the St. Lucia buffer fund model has difficulty scaling

Multi-purpose entity – not the best placed for the specialized job of factoring….

But it did scale a bit: Agricultural Payment Guarantee Fund in Barbados

St. Lucia Credit Union

League

National level only, not regional…

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Elements of a scaled model

Aggregation mechanism

Hotels

Farmers

Specialist organization

Support to farming practices, scheduling, quality of production,

Scheme at regional, not national level, given complementarity between islands (products, production schedules)

Facilitation of regional trade, without risk of disruptions due to customs/sanitary & phyto-sanitary rules.

Efficient payment mechanism

Inclusion of a broad range of buyers. Efficient invoicing & collection systems (electronic system, with mobile platform).

Coordination role: what do hotels need and when?

Data harvested for medium-term finance decisions

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Pre-harvest finance: how to deal with catastrophe risk – the Haiti example

Fonkoze (MFI)

Swiss Re

Farmer borrowers

Re-insuranceMicroinsurance Catastrophe Risk Organization (MICRO, Barbados)

• Started in March 2011.• Clients: 61,097 women-owned micro-

enterprises (2014)• Insurance portfolio: US$ 8 million• Payout in 2012/3: US$ 8.9 million• Average cost of premium: 5.3% of the

value of the microloan• Post-disasters, MFI (Fonkoze) receives

payouts, triggered by indices as measures at Fonkoze branches in Haiti, which it uses to recapitalize affected borrowers.

Insurance against hurricane, earthquake and rainfall risk is incorporated in loans.

MICRO

Insurance

Thank you

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CTA operates under the framework of the Cotonou Agreement and is funded by the EU.