Rural and Agricultural Finance. Day 1: Block 2 History of Rural Finance and what was learned about RF Needs

Transcription

1 Rural and Agricultural Finance Day 1: Block 2 History of Rural Finance and what was learned about RF Needs

2 History of Agricultural Lending Programs In the 1950s and 1960s Governments wanted to stimulate the adoption of new agricultural technologies Donor-driven and government-sponsored credit programs were designed that included: Specified beneficiaries Specified agricultural commodities Subsidized interest rates

3 Reasons for Failure of Earlier Agricultural Lending Programs Primarily large farmers served Some credit funds diverted Alternative funding crowded-out Technology expansion not supported Non-farm financial needs not addressed Loan repayment at a low rate Financial institutions not operating sustainably Dependent on political decisions made far away from rural areas Vigorous rural financial markets blocked

4 Lessons Learned from Previous of Agricultural Lending Programs Targeted credit can be problematic Farmers have broader financial service needs than just credit for agricultural inputs For financial institutions to be sustainable, they need to have diversified portfolios not dependent upon a single sector Transaction costs, especially for smaller farmers, are high Publicly-owned institutions sometimes are undermined by political interventions Liberal supply of liquidity, even if not subsidized, from donors and governments discourages banks from developing own resources (mobilizing deposits). Need to enforce payment discipline

5 Primary Features of Old and New Paradigms Features Problem definition Role of financial markets View of users Subsidies Directed Credit Overcome market imperfections Promote new technology Stimulate production Implement state plans Help the poor Borrowers as beneficiaries selected by targeting Large subsidies through interest rates and loan default Create subsidy dependence Financial Market Lower risks and transaction costs Information Intermediate resources more efficiently Special challenge of serving the poor Borrowers and depositors as clients choosing products Fewer subsidies Market rates Create independent institutions Sources of funds Associated information systems Sustainability Evaluations Governments and donors Designed for governments and donors Largely ignored Credit impact on beneficiaries Obligatory and voluntary deposits Designed for management A major goal Performance of financial institutions

6 Lessons From Microfinance Microfinance generally has been successful in: Proving that the poor can & will repay high volume, low value, unsecured loans to the working poor sustainable operations in higher population density areas

7 Lessons From Microfinance Microfinance generally has not been effective in: providing agricultural and term lending Radically reducing operating costs providing a multiple array of demand-driven products

8 Who Needs Rural Finance?

9 What Clients Want: Quick service Flexible loan amounts and terms Cost effective Not just working capital Choices of financial providers Diversity of products Serve household and business needs Not require traditional collateral Secure, convenient savings

10 Household Life Cycle Financial Needs Old Age Pension (I,S) Death (C, I) Marriage (C, S) Working Capital (C) Fixed Asset Acquisition (C) Investments (S) Health (C,S,I) Education (C,S) Asset Protection (I) Birth (C,S,I) C = Credit; S = Savings; I = Insurance

11 Financial Service Needs Medium & Large Exporters & Processors Build new plant Purchase new equipment Cash flow management Local Traders & Processors Purchase truck Purchase farm inputs and output Cash flow management Income smoothing Farmers Purchase of fixed assets (land, tractors, etc.) Purchase inputs (seed, fertilizer, labor) Mitigate risk (crop insurance) Cash flow management Income smoothing Input Suppliers Purchase Inventory Cash flow management

12 Demand/Users of Rural and Agricultural Financial Services Medium and Large Exporters and Processors Non-Agricultural rural Non-Agricultural rural businesses businesses Local Traders and Processors Rural Rural Households Households Producer groups Producer groups Off-farm microenterprises Off-farm microenterprises Farmers Input Suppliers Non-Farm Enterprises & Rural Households RURAL Non-Rural Agribusiness AG Farm & Ag-Related Enterprises

13 Financial Service Needs Non-agricultural rural rural businesses Purchase inventory Purchase of fixed assets like equipment Cash flow management Rural Rural Households Income smoothing and savings instruments Mitigate risk (health insurance) Access to remittances Life events Cash flow management Risk management (e.g. floods, fire) Equipment & assets (e.g. sewing machine) Off-farm Off-farm microenterprise microenterprise

14 What is Needed in Rural Financial Services? Diverse rural financial service providers, which: Are viable and sustainable Service diverse segments of the rural population Collectively provide a full range of financial services Have costs of service compatible with the returns to capital of the population

15 Rural and Agricultural Costs and Risks Rural Urban Agricultural Non- Agricultural H i g h L o w Transaction Costs Loan Terms Cash Flow & Income Regularity Co-variant Risk Collateral Assessment Skills Social Assessment Skills Agricultural Technical Understanding Market Assessment Understanding High Low

16 Value Chain Finance One Alternative to Lower RF Service Costs Financial Institution Suppliers Commercial Banks Value Chain Suppliers Medium and Large Exporters and Processors Local Traders and Processors Many rural enterprises are demanders AND suppliers of financial services!! MFIs, Cooperatives, NGOs Producer groups Producer groups Farmers Input Suppliers

17 Supply Chain Finance Multiple Links Medium & Large Exporters & Processors Commercial Banks MFIs, Cooperatives, NGOs Local Traders & Processors Producer Producer groups groups Input Suppliers Farmers

18 Improved Rural Finance Risk Control Products and Services Risk Reduction for Lenders Staff and management training Development of Inventory credit Development of Credit bureau Credit guarantees Currency stabilization or guarantees Risk Reduction for Producers/Investors Income and Crop Disaster Guarantees Price stabilization against major shocks

19 Unique Features/Requirements of Rural and Agricultural Finance High financial transaction costs of serving dispersed and small farm households Heterogeneity, seasonality, and duration of farming and non-farming loan needs Lower profitability and higher risk of on-farm investments Lack of easy loan collateral Need for training Informational needs of bank staff and farmer clients Politically sensitive environment May have lower loan repayment discipline

20 Commonalities of RAF and Non Rural Finance Financial management principles hold true: Full service finance is desired credit is important, but so are savings and other services Client assessment & new product development are key Financial systems and good MIS are critical Prompt and strict delinquency management is required Controlling transaction costs are very important Managing risk is critical portfolio, financial and systemic

21 Key Challenges in Rural Finance Day 1: Block 3

22 Global Context Challenges in Rural MF High cost of service, especially to poor Lack of coordination and standard reporting between MFIs Over-indebtedness of some clients High rate of agricultural finance default and default history in some countries Lack of bankable investments beyond trade

23 Key Challenges to Address in RF Service Provision Vulnerability Constraints Systemic Risk Market Risk Credit Risk

24 Key Challenges... Operational Constraints Geographical Dispersion Low Investment and Assets of Borrowers Often low returns to lenders

25 Key Challenges... Capacity Constraints Social Exclusion Technical Capacity and Training Infrastructural Capacity Institutional Capacity

26 Key Challenges... Political and Regulatory Constraints Political and Social Interference Danger; uncertainty Regulatory

27 Key Challenges in Rural Finance Day 1: Block 4 CASE STUDY FROM HARMENISTAN