Study on Rural and Agricultural Finance in Sierra Leone

Transcription

1 Study on Rural and Agricultural Finance in Sierra Leone - Product Innovation and Financial Access - March 2011 Dr. Joachim Bald Dr. Peter Schröder j.bald@int.fs.de peter@dr-p-schroeder.de Phone: Phone:

2 Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Dag-Hammarskjöld-Weg Eschborn / Germany T F E info@giz. de www. giz. de March 2011 Page 2

3 Content 1 Objectives and Context Introduction Agricultural and Rural Finance Country Overview Executive Summary Overview of the Agricultural Sector Government Policies, Donor & Development Partner Interventions Microeconomic Perspective on the Agricultural Sector Review of Selected Agricultural Value Chains Cassava Rice Poultry Rearing Cocoa Foreign Investments in Farmland and Mining Analysis of Rural and Agricultural Finance Profile of Financial Sector Institutions Structural Bottlenecks in Rural Finance Making Finance Work: Promising Instruments and Interventions A Holistic Private Sector Perspective Informal Financial Services In Search of Products and Interventions that will Work for Sierra Leone Agricultural Asset Finance / Micro Agri-Leasing (Micro)-Finance for Rural Enterprise & Service Clusters Supply Chain Finance Building Carbon Credits into Agricultural Finance Products Inventory Credit and Warehouse Receipts Trade Finance Facilities at Commercial Banks in Sierra Leone Private Equity for Medium-Size Agribusiness Creation of a new National Agricultural Finance Institution Agricultural Finance Enablers & Meso Level Interventions Appendix 1: Transition to Sedentary Agriculture Appendix 2: Contacts and Contributors March 2011 Page 3

4 Abbreviations AfDB ATV BMZ BSL CAADP CDC CEO CFLCO CILSS CORAF CPI DEG EFP EU EUR FAO FARA FMO FSA FSDP GDC GDP GIZ GoSL GPS ha African Development Bank All Terrain Vehicle German Ministry of Economic Cooperation and Development Bank of Sierra Leone (central bank) Comprehensive African Agriculture Development Programme Commonwealth Development Cooperation Chief Executive Officer Consumer Finance & Leasing Co. Comité permanent Inter-Etats de Lutte contre la Sécheresse dans le Sahel West and Central Africa Council for Agriculture Research and Development Consumer Price Index Deutsche Entwicklungsgesellschaft (German Private Sector Investments) European Financing Partners (EU Development Finance Institution) European Union Euro Food and Agriculture Organization (United Nations) Forum for Agricultural Research in Africa Dutch Development Bank Financial Services Association Financial Sector Development Plan German Development Cooperation Gross Domestic Product Deutsche Gesellschaft für Internationale Zusammenarbeit (formerly GTZ) Government of Sierra Leone Global Positioning System Hectare March 2011 Page 4

5 IFAD IFC IITA ILO IMF KfW MAFFS MFW4A MITAF MSME NACSA NASSIT NGO NSADP ODA ÖEB SCP SLARI SLL SMS UNCDF UNDP USD VSL WFP WHO International Fund for Agricultural Development International Finance Corporation International Institute for Tropical Agriculture International Labor Organization International Monetary Fund Kreditanstalt für Wiederaufbau, German Development Bank Ministry of Agriculture, Forestry and Food Security Making Finance Work for Africa Process Microfinance Investment and Technical Assistance Facility Micro, Small and Medium Enterprise National Commission for Social Action National Social Security and Insurance Trust Non-Government Organization National Sustainable Agriculture Development Plan Official Development Assistance Austrian Development Bank Smallholder Commercialization Program Sierra Leone Agricultural Research Institute SL Leone Short Messaging Service United Nations Capital Development Fund United Nations Development Programme US Dollar Village Savings & Loans United Nations World Food Program World Health Organization March 2011 Page 5

6 1 Objectives and Context Context 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 development in Sierra Leone. The German interventions are jointly implemented by GIZ, the German technical cooperation, and the German development bank KfW. In providing financial sector development support, the German Development Cooperation closely collaborates with the World Bank and the IMF, specifically in regards to prudential regulation and banking supervision. Conceptually, the development initiatives are designed to integrate with the inclusive financial systems approach of the Making Finance Work for Africa Process (MFW4A). The study 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 expected to provide pointers for implementation priorities within the Financial Sector Development Plan (FSDP) 1 and specifically for the Microfinance Investment and Technical Assistance Facility (MITAF) II. 2 Terms of Reference The terms of reference for the study envision three main components: (1) an overview of the agricultural sector, (2) a critical analysis of the current state of agricultural finance and (3) a set of recommendations on instruments and interventions that could enhance access to rural and agricultural finance. As part of the Overview of the Agricultural Sector, the study is to: survey current policies and strategies in rural/agricultural development pursued by Government and donor initiatives; provide a microeconomic perspective on the agricultural sector in terms of products, production methods, markets and trade relationships; analyze key value chains for at least three major crops. The Analysis of Agricultural Finance is designed to: identify potential bottlenecks in the economic environment 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. 1 Republic of Sierra Leone, FINANCIAL SECTOR DEVELOPMENT PLAN, 31 Oct 2009, 2 Investors: UNDP/UNCDF, KfW, Cordaid. See: March 2011 Page 6

7 The study should culminate in a number of practical recommendations concerning: formal and informal instruments that meet the financial 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. Study Methodology The study was compiled jointly by Dr. Peter Schröder, a senior agronomist with decades of agriculture development experience throughout Africa and Asia, who lived in Sierra Leone in the 1990s, and Dr. Joachim Bald, a financial sector development expert with 20 years in private sector finance and a broad portfolio of development projects in Africa and Eastern Europe. The study is based on comprehensive desk research and consultations with a diversity of stakeholders in Sierra Leone in December 2010 and January The initial results were presented for discussion with representatives from Government, development partners, and private sector agribusiness in a stakeholder workshop on January 26 th, 2011, at the German Development Cooperation 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 terms of reference are very broad and ambitious and carry in them a risk of getting lost in the details. There is an impressive body of competent research flowing from the long-standing engagement of the development community with the rural and agricultural space in Sierra Leone. We tried to incorporate this wealth of knowledge by way of our desk study, but will not attempt to inventorize in our report every program and intervention by Government and the international development partners. We discuss some of the real and perceived constraints to financial access for agriculture and rural populations, but we want to avoid a lengthy wallowing in the already well-documented institutional challenges and market constraints. This is Sierra Leone, one of the poorest countries on the planet and not even 10 years since coming out of a brutal civil war. Of course, the legal framework for enforcing mortgage collateral could use some refinement! When two outside consultants are hired to write another report on financial services in Sierra Leone, the objective obviously is not to discover entirely new detail, but rather to provide a fresh external perspective with a certain level of abstraction. We therefore try to proceed rapidly from describing 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. 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 simple truism in mind, we try to identify a number of financial products and development interventions that will make finance work for farmers and rural residents in the near term within the present economic and institutional context of Sierra Leone. March 2011 Page 7

8 2 Introduction 2.1 Agricultural and Rural Finance The Making Finance Work for Africa website (mfw4a.org) succinctly defines Rural Finance as encompassing the full range of financial services - loans, savings, insurance, and payment and money transfer services - needed, offered, or used in rural areas by households and enterprises. The term encompasses agricultural finance. Agricultural finance refers to financial services ranging from short-, medium- and long-term loans, to leasing, to crop and livestock insurance, covering the entire agricultural value chain - input supply, production and distribution, wholesaling, processing and marketing. Rural and agricultural financial services may be provided by formal financial institutions, such as banks or regulated 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 drivers who may carry money transfers for a small fee. Often, we find formal or informal supplier credit among nonfinancial agents in the agricultural supply chain. 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 uneven roll-out of formal financial offerings into rural areas, the high cost of reaching out to widely dispersed rural residents, 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. Previous 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 maturation periods before investments in life-stock, soil improvement, 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 appropriate products, can be an important catalyst for economic growth, for alleviating poverty and bridging the divide between urban and rural residents in Sierra Leone. 2.2 Country 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 158 th out of 169 on the UNDP Human Development Index. The population stands at just under 6 million in 2010 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 population and urbanization pressures. With these dynamics, progress in per-capita statistics and quality of life is even harder to realize than nominal headline growth. March 2011 Page 8

9 Macroeconomic Indicators Notes Population 5,271,000 5,420,000 5,560,000 5,700,000 5,848,000 Source:IMF GDP Current Prices USD million Source:IMF GDP per Capita USD, Current Prices Source:IMF Real GDP growth rate 7.30% 7% 5.50% 4% 4.50% 2010: IMF Fiscal Deficit / GDP (excl. grants) 9.70% 6% 15% 10.50% ODA Grants / Total Fiscal Revenues 40.69% 31.26% 28.45% 40.06% 32.06% 2010: Jan-Oct USD/SLL Official Rate Year End 2, , , , , : Oct Balance of Trade, USD million : Jan-Sep External Reserves, USD Million : Oct CPI Inflation Annual 8.30% 12.10% % 16.53% 2010: Oct 3-Month Treasury Bill Yield p.a % 21.29% 9.06% 13.99% 19.76% Prime Lending Rate p.a. 25% 25% 24% 22.00% 21.50% Savings Deposit Rates p.a. 7.63% 7.39% 6.65% 6.32% 6.32% Time Deposits Rates 3-month, p.a % 9.70% 9.63% 8.87% 8.99% Figure 1: Sierra Leone Macroeconomic Indicators. Source: Bank of Sierra Leone unless otherwise indicated. Economic activity in Sierra Leone is dominated by natural resource extraction and subsistence agriculture, compare Figures 2-4. Value added industry, agri-processing and the service sectors are grossly underdeveloped. Private sector business activity outside of mining remains very weak, government and the international development 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 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 industry 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 agricultural finance. Minerals Production and Export Notes Production Diamonds carats ' : Jan-Sep Bauxite Metric tons '000 1, , Rutile Metric tons ' Ilmenite Metric tons ' Gold Ounces ' Export Diamonds USD ' , , , , , : Jan-Sep Bauxite USD '000 23, , , , , : Jan-Sep Rutile USD '000 28, , , , , : Jan-Sep Ilmenite USD '000 1, , , , : Jan-Sep Gold USD '000 1, , , , , : Jan-Sep Figure 2: Sierra Leone Natural Resources Sector. Source: Bank of Sierra Leone March 2011 Page 9

10 Figure 3: Mineral Resources. Source: Sierra Leone Atlas Agricultural Production and Export Notes Cash Crops Cocoa Production Metric Tons ' : Jan-Sep Cocoa Export USD '000 11, , , , , : Jan-Sep Coffee Production Metric Tons ' : Jan-Sep Coffee Export USD '000 1, , , , , : Jan-Sep Staple Foods Cassava - Metric Tons '000 2, , , , Maize - Metric Tons ' Sweet Potato - Metric Tons ' Groundnut - Metric Tons ' Rice Production Metric Tons ' Rice Import USD '000 23, , , , , : Jan-Sep Rice Import Metric Tons ' : Jan-Sep Figure 4: Agricultural Production and Export. Source: Bank of Sierra Leone. March 2011 Page 10

11 3 Executive Summary Context Rural Sierra Leone is dominated by smallholder subsistence agriculture. For 3.5 million people, or roughly 60% of the population, 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 size under cultivation per smallholder family 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 agriculture the engine for socioeconomic growth and development 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 mechanization, big powerful tractors imported from India and plowing the wideopen (but rather infertile) Bolilands. Reality Check on Arable Land and Productive Capacity Because of the common misconceptions about large tracts of unused arable land, ample rainfall and fertile tropical conditions, the study departs from a critical assessment of productive realities and the availability of land for agricultural expansion. Indeed, there is no green revolution in the making. Some incremental improvements and a more dignified smallholder livelihood are possible, but countrywide food self-sufficiency and major wealth creation from cash crops are simply not realistic. The question of the underlying economic fundamentals is quintessential for rural and agricultural finance. If the conditions are not conducive to producing profitable surplus for sale, then what is there to finance in agriculture? With a closer look, some bankable opportunities in agriculture can be found, of course. At the level of the smallholder, 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 investment 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 selfsufficiency. In our assessment, however, full self-sufficiency 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, construction 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. Smallholder March 2011 Page 11

12 commercialization via the transition to sedentary (stationary) farming and agro-forestry, therefore, is an essential prerequisite to ceding large tracts of land to commercial investments. Otherwise, a major conflict over land for subsistence food production is pre-programmed. Rural Enterprise Clusters Economic 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 drastically change the realities of rural life. The expectations of the surrounding communities must be managed, however. 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 communities need to capitalize on the anchor investment as a source of spin-off opportunities in small and micro-business. 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 Our tour d horizon of the financial sector interventions and products that can make finance work for 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. Sourcing the chicken feed compound (40% maize, 60% soybean or pigeon peas plus additives etc.) comes out over double the price per kg of imported chicken meat, for the feed alone. The paper also discusses some of the real and perceived constraints to financial access for agriculture and rural populations at the meso and micro 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, that come with it. With a fresh look and a creative mindset, a lot is possible in financing rural Sierra Leone today. 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 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. March 2011 Page 12

13 4 Overview of the Agricultural Sector 4.1 Government Policies, Donor & Development Partner Interventions Government Policy Agricultural 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 employs 70% of the population. Government is keenly aware that sustainable livelihoods, food security and mass employment 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, agriculture, 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 , a sector-wide framework for putting the Agenda for Change into action. In September 2009, Sierra Leone signed 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 Community 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 Smallholder 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 agricultural sector will reach 10% of overall budget in 2011, which will put Sierra Leone in compliance with the targets of the 2003 Maputo Declaration 4. There are a number of related policies in other areas that further enable agricultural development. These include the revised Decentralization Policy and the Local Government Act (2004) which transfer power to local communities and enhance service delivery to farmers through devolution 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; (3i) promoting entrepreneurship; (4) making markets work better; and (5) improving physical infrastructure. Agriculture is also a target growth sector in the National Export Strategy ( ) 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 central flagship initiative in agricultural development. 5 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: 3 Available for download from: _discussion_paper_for_compact_double _sided.pdf 4 Available for download at: diplomatie.gouv.fr/fr/img/pdf/04_maputo-declaration-2003.pdf 5 Smallholder Commercialisation Programme, GoSL MAFFS, 2010 March 2011 Page 13

14 Production Intensification Support, Value Addition and Marketing Agricultural Extension Services Division, Crop Division, SLARI, Livestock Division, Forestry Division, Ministry of Fisheries and Marine Resources, Ministry of Trade and Industry; Small Scale Irrigation Agricultural Engineering Services Division with support from the NACSA; Market Access Agricultural Engineering Services Division in collaboration with the Sierra Leone Roads Authority and NACSA; Rural Finance jointly by MAFFS and Bank of Sierra Leone. Social Protection MAFFS with Ministry of Employment and Social Security, Ministry of Education, Ministry of Health. Development Partner Interventions The international donor activity has over the last few years been making a transition from postconflict emergency relief to longer-term development emphasizing capacity-building, productivity through mechanization, input supply and rural infrastructure including feeder roads. The largest financiers in the agricultural sector are: the European Union, World Bank, AfDB, WFP, IFAD and the Islamic Development Bank. They are joined by many others including JICA, 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, Concern, 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 security issues and on the implementation of the NSADP. These include the Mano River Union, ECOWAS and CILSS. Research assistance is provides by CORAF, FARA, IITA and 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 assistance for the general budget alone makes up 30% - 40% of government revenues, see Figure Microeconomic Perspective on the Agricultural Sector A Reality Check on Arable Land and Productive Capacity Most reports and publications on Sierra Leone include glowing statements about the abundance of natural resources. For example: Sierra Leone is well endowed with arable soils, forests, grasslands, freshwater resources, wetlands (swamps), wildlife, extensive fisheries and other biodiversity resources and mineral resources 6 or plentiful rainfall and good land suggest a variety of exports, bringing 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? 7 The agricultural production reserves are frequently estimated 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% 6 Capacity Building for Sustainable Land management, GoSL UNDP Sierra Leone Diagnostic Trade Integration Study (DITIS), 2006 March 2011 Page 14

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. 8 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. 9 The Country Environmental Profile raises concern on the following critical environmental issues, which have negative repercussions on the socioeconomic development of the country: Deforestation / Land Degradation: Land Degradation is considered an increasing problem throughout the country. The forest resources are regarded as seriously threatened 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 ecosystems is significant. The overall land degradation has significant effects on livelihood systems, having negative repercussions 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, inland 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 combined effects of poor farming practices such as shifting cultivation, recurrent bushfires and overgrazing have negative repercussions on the environment, resulting in further land degradation. 10 In order to assess the present situation of land use patterns, 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 period 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 km 2 (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. 8 Smallholder Commercialisation Programme, GoSL MAFFS EC Joint Country Strategy EC Joint Country Strategy March 2011 Page 15

16 UNDP / FAO 1979 ha '000 % of total land Cultivated ha '000 Cultivated% of ecology Maximum available years fallow % of total land cropped with rice Upland 4, % % % Inland Valley Swamp % % % Boliland % % % Mangrove Swamp % % 8.0 6% Riverine terrain % % 5.5 5% Total 5, % % 12.3 Figure 5: Land Typology Sierra Leone 100% = 435,000 ha Figure 6: Vegetation Cover. Source: Sierra Leone Atlas. In the latest survey dated , the total cropped area amounts to 1,995,830 ha, of which 609,707 ha account for upland and swamp rice cultivation an increase of about 175,000 hectares compared to the UNDP / FAO data from 1979, see Figure Population and Housing Census, Analytical Report on Agriculture March 2011 Page 16

17 Crops hectares % upland and inland swamp rice 609, % coffee 344, % cassava 254, % oil palm 232, % cocoa 148, % groundnuts 131, % sweet potatoes 89, % vegatables 73, % maize 60, % citrus 51, % Total 1,995, % Figure 7: 2004 Survey of Cropped Areas. Figure 8: Predominant Agricultural Use. Source: Sierra Leone Atlas. Other upland crops covered nearly the same area (608,974 ha), whilst tree crops accounted for 777,148 hectares, compare Figure 9. Crops hectares % upland and inland swamp rice 609, % upland crops others than rice 608, % tree crops 777, % Total 1,995, % Figure 9: Major Upland Crop Groups March 2011 Page 17

18 The average possible fallow period, calculated as available hectares divided by hectares currently cropped, was 15.4 years on upland areas in Compared to the necessary recovery periods, this indicates that already forty years ago the upland was over-cropped. In the following table 12 the percentage of un-cropped area apart from the Kailahun district is well over 45 percent which may lead to the wrong conclusion that land reserves for annual crops in the upland might still be available. ha uncropped ha total cropped ha total arable District percentage uncropped 17, , ,952 Kailahun 6.2% 203, , ,527 Kenenma 45.5% 199, , ,998 Kono 47.8% 477, , ,689 Bombali 80.7% 117, , ,303 Kambia 50.8% 755, , ,166 Koinadugu 84.2% 274, , ,778 Port Loko 64.8% 398, , ,922 Tonkolili 76.7% 179, , ,728 Bo 46.3% 194, , ,979 Bonthe 75.7% 331, , ,438 Moyamba 64.9% 153, , ,181 Pujehun 50.6% 26, , ,310 Western Area Rural 64.8% -10, , Western Area Urban *** Figure 10: Cropped versus Fallow Lands by District The composition of the three groups of crops on the arable land (rice crops, annual upland crops, tree crops) is shown in Figure 11, representing the typical cropping patterns of the districts. km2 District Farming Households Arable Land 74.10% km2 Rice ha % Annual % Tree Crops ha Crops ha 3,859 Kailahun 63,942 2,860 66, , , ,053 Kenenma 68,465 4,485 55, , , ,641 Kono 56,249 4,180 53, , , ,985 Bombali 54,102 5,917 43, , , ,108 Kambia 35,099 2,303 48, , , ,121 Koinadugu 41,259 8,982 57, , , ,719 Port Loko 59,844 4,238 69, , , ,003 Tonkolili 48,878 5,189 48, , , ,219 Bo 69,158 3,867 54, , , ,468 Bonthe 22,672 2,570 10, , , ,902 Moyamba 40,238 5,114 63, , , ,105 Pujehun 35,159 3,042 32, , , Western Area Rural 27, , , , Western Area Urban 107, , , , ,740 totals: 729,440 53, , , , Figure 11: Main Crops by District % Population and Housing Census, Analytical Report on Agriculture: the data for 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. March 2011 Page 18

19 The general practice is to have annual crops in the upland follow after rice planting in the prior year. Thus to a certain extent, the area of the upland annual crops also represents an upland rice cultivation area within the typical cropping / fallow cycle. The percentage of un-cropped arable land varies considerably: whilst in Kailahun nearly all land is covered with mostly tree crops, Koinadugu, Bombali and Tonkolili districts 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 vegetation cover, which is needed to restore soil fertility and to sustain the yield level. years left for fallow: upland crops Kailahun 0,5 Kenenma 6,0 Kono 4,0 Bombali 8,3 Kambia 2,4 Koinadugu 12,6 Port Loko 4,3 Tonkolili 9,3 Bo 3,4 Bonthe 6,3 Moyamba 4,1 Pujehun 4,1 W/A Rural 3,4 W/Aurban -2,5 Figure 12: Maximum Remaining Fallow Periods. The key factor for sustainable agriculture, i.e. for maintaining 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 12 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 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 potential to significantly enlarge the area under cultivation anywhere in Sierra Leone. Soil Properties and Productive Capacity The mangrove swamps are the most fertile soils in Sierra Leone with yields of 2 tons/ha in the area with long fresh water seasons against 2.6 tons/ha in the short seasons near the sea. 13 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. 14 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. However, 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. During the colonial times, bolilands were initially ploughed. Similar attempts were made later by development projects. The result was that with the initial relatively 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 fertilization. 13 WARDA, Smallholder Commercialisation Programme, GoSL MAFFS 2010 March 2011 Page 19

20 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 mechanical 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 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. using 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 nutrients 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 cultivation 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 overcome 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 development 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 continued 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 13. Only in Moyamba district is the area for annual upland crops per farm household more than one hectare. Otherwise, households with tree crops have the largest area cropped. The statistical data of an average size of farm household at 2.74 ha can be misleading as far as the true availability 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 portion of upland rice cultivation that doubles up within the same crop cycle, as it always precedes the other annual upland crops. In other words, the average farm household in reality needs about 20 to 30 ha to guarantee a sustained living under the present cropping practices. March 2011 Page 20

21 District rice ann cr tree rice+ann cr total ha/hh ha/hh ha/hh ha/hh ha/hh Kailahun Kenenma Kono Bombali Kambia Koinadugu Port Loko Tonkolili Bo Bonthe Moyamba Pujehun Western Area Rural Western Area Urban average: Figure 13: Average Cropping Pattern and Farm Size by District. Commercialization of the Smallholder Enterprise The practical meaning of turning a subsistence farmer into a commercial smallholder is that one must attempt to maximize the overall surplus of production over the immediate nutritional needs of the farmer household. In addition to cash crops such as coffee, cocoa and oil palm products (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 maximizing the total of the various contribution margins. Clearly, the traditional development approaches need to be reconsidered. Subsidized or creditfinanced inputs with support from extension services that focus only on commodity production techniques have not been sustainable. Viable Perspectives for Increasing Smallholder Production The SCP supports an agricultural extension system revolving 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 represent 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 economical to cultivate these ecologies. To our knowledge, this kind of critical feasibility analysis has never been attempted. 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 export quantities and revenues are increasing steadily. March 2011 Page 21

22 The local market for palm oil remains stable. The palm kernel by-product is purchased for further processing in Freetown. 15 As far as upland locations are concerned, attractive production 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. 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 practiced with cover crops in commercial plantations - that plant nutrients that can boost crop yields require organic material as an interim store and as a slowrelease supply. This is especially true in tropical regions with very old de-mineralized laterite soils, see Figure 14. Chemical fertilizer will be most effective, when organic matter on and in the topsoil is available, the more the better. Figure 14: Soil Landscape. Source: Sierra Leone Atlas. Tropical areas in general suffer from the classic tropical disadvantage phenomenon, which means that poor soils and shorter sunshine hours during the growing season lead to much 15 EC/Stabex, Studies Export Commodities, 2009, Review of Production and Processing Coffee, Palm Oil, Jatropha. March 2011 Page 22

23 lower yields per hectare on food crops than can be achieved in temperate climates. 16 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 15. Figure 15: Annual Rainfall and Sunshine Profle, Njala, Central Sierra Leone. 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 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 terminvestment. 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 continuous 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. 16 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/amerjournagrecon0800.pdf March 2011 Page 23

24 Figure 16: Slash-and-Burn Rotation vs. Sedentary Farming with Hedgerows. 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 sedentary farming in Annex 1. With the transition towards sedentary agriculture, the total 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 annual 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 agricultural 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 envelope style calculations. The reality at village level will obviously 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 conflict 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 investment 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 become possible. The situation is very similar to the investment in a coffee or oil palm plantation, where also five to seven years must elapse, before returns can be expected. March 2011 Page 24

25 The credit volume for the conversion of one hectare may be up to EUR 500 over 5 years. This would include the cost of seed, seedlings, lost production 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 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 accounting (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 supply of small implements, tools and processing equipment is always a component. These should be implemented in a way that credit components like asset financing remain an option in a commercially viable approach to farm development. 4.3 Review of Selected Agricultural Value Chains 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 fallen dry in the dry season and maintain some residual moisture. 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 harvested leaves cannot be stored but have to reach the end-consumer within 24 hours. Some efforts have been made by development projects to produce dried and packed leaves. Figure 17: Cassava Field and Cassava Tubers Once cassava tubers have grown to a harvestable size, they can still remain in the soil for storing. However, once they are harvested they must be processed within one or two days to avoid deterioration. They can either be prepared for immediate consumption (boiled or roasted cassava) or processed for longer-term storage. These products are mainly dried cassava chips March 2011 Page 25

26 or gari, the cassava flour. Compared with rice, for example, this crop is much more sensitive as far as storing and marketing is concerned. Unless cassava is processed to chips or gari, the transport-worthiness is low. In Sierra Leone, cassava is cultivated on 254,000 ha and represents the second staple food after rice. Cassava was cropped by 729,000 households in The relevance of cassava as a cash crop is determined mostly by the cost of transport to the market. With yields of 5.5 tons/ha, the potential of cassava cultivation is far from being fully utilized. However, 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 approach. 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 bottleneck. 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 processing into gari flour. 17 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. 18 In the town of Bo, the gari production has been commercialized in way that larger quantities in labeled plastic packages are on offer everywhere, which could be a sign of localized market saturation. Generally one can state that apart from the prevailing problem of lack of rural access roads and high transport cost to the markets, the issues of procuring processing equipment and the energy supply remain to be solved for a broader commercialization of cassava. 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. Figure 18: Wood-Fired Cassava Drying Oven Population and Housing Census, Analytical Report on Agriculture 18 Cross-border trade and food security Liberia, Sierra Leone, WFP, May 2010 March 2011 Page 26

27 A number of community-based food processing facilities are being developed with assistance from MAFFS and donors. 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 are doubts, however, about the commercial sustainability of this kind of artisanal processing and hence the suitability 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 opportunities 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 packaged 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 Rice According to various reports, the annual per capita rice consumption in Sierra Leone ranges between kg 19 and 104 kg 20 of white rice. 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 provinces is reflected in Figure 19. 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 kg paddy = 550 kg white rice. 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. 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, Kenenma 497, Kono 335, Bombali 408, Kambia 270, Koinadugu 265, Port Loko 453, Tonkolili 347, Bo 463, Bonthe 139, Moyamba 260, Pujehun 228, W/A Rural 772, W/A Urban 174, Sierra Leone 4,976, Figure 19: Local Availability of Rice per Capita by District 19 Global Food Security Response: West Africa Rice Value Chain Analysis, USAID microreport #161, Smallholder Commercialisation Programme Investment Plan, 2010 March 2011 Page 27

28 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 farmers keep their own seed, although improved varieties (ROK xx, Lac 23, NERICA xx, and others) have been developed. 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 others 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%, the input costs vary considerably. Per hectare, these germination rates could mean a difference 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. 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. Figure 20: Transplanting Rice Seedlings in Inland Valley Swamp at Binkolo. March 2011 Page 28

29 Box 1: 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 guarantees 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 International 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 experience 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 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. 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 March 2011 Page 29

30 and 10% to rice mills. The exception is the Kambia District where about 50% have access to processing equipment. 21 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 improves 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 moisture content, the better the storing abilities are. Figure 21: Rice Cultivation Process, Critical Equipment and Input Factors. Milling At the farm level, the rice is mostly pounded and winnowed 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 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. Figure 22: Rice Pounding 21 Smallholder Commercialisation Programme Investment Plan, 2010 March 2011 Page 30

31 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 properties and higher nutritional value. De-stoned local rice of consistent quality, milled with modern equipment would fetch an even higher premium. Box 2: Potential of Modern Milling Equipment Assuming that about 10% of the paddy harvest of Sierra Leone (96,000 tons in 2008) 22 would be milled in enterprises that have a milling capacity of 1 ton of paddy each (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 It only managed to buy 117 t in 2009 and 300 t in 2010, although generally prevailing market prices were offered. Trading Trading in rice generally is constrained by the fact that there is little surplus for sale beyond the immediate consumption needs at the village level. Nonetheless, there are some cross-border shipments to Guinea, estimated at about 360 t of parboiled rice per month 23, 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 advancing funds to farmers during the growing period to be repaid 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. 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 extensions services. 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: 22 Global Food Security Response: West Africa Rice Value Chain Analysis, USAID microreport #161, Cross border trade and food security Liberia, Sierra Leone; WFP, May 2010 March 2011 Page 31

32 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 ( ) per hectare is needed. The current price as of January 2011 quoted cif Dakar is EUR 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 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 ) without even taking into consideration further handling, transport and financing costs in Sierra Leone. Under present production methods, fertilizer therefore clearly would not be profitable. Thus from a macroeconomic point of view, it is more efficient 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. For special projects like the rehabilitation of irrigation schemes a proper cost/benefit analysis may look different. However, the risks related to achieving the projected yield and the recovery of loans for the required investments will still be very high. The accountability for longterm 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 Government in managing complex long-term agricultural investment projects in Sierra Leone is not encouraging Poultry Rearing According to the agricultural survey 2004, 1,689 people were engaged in poultry production in Sierra Leone. In total 3.2 million chickens and half a million ducks were counted. Figures on the number of free roaming fowl in the villages are not available. It is likely that these figures have seen large increases or may even have doubled over the last six years. There are only a limited number of poultry enterprises, mostly in urban locations and especially in the Western Area and Bo. The general situation for poultry production was summarized in a recent poultry seminar as follows: 24 The demand for poultry products has increased substantially 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 imports 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; 24 Seminar: Poultry Sector Development Validation Workshop: Research Into Use sharing lessons to enable innovation agriculture, Freetown, August 2010 March 2011 Page 32

33 General unavailability of essential drugs for livestock; Limited sources of funding and/or credit for the livestock sector; Poultry-sector perceived as particularly risky; Erratic electricity supply; Taxation of poultry farming inputs; Unregulated import of eggs and poultry products leading to unfair competition with the local industry. The poultry workshop gave two principal recommendations 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. The consultant s opinion is that there are three basic options 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. 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 scavenge 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 competing 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 marketed 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. March 2011 Page 33

34 Economics of Poultry Production Imports of chicken meat are estimated to be about 4,141 tons valued at USD 1,199 per ton (FAO, 2008). The imports of hen eggs amounted to 2,509 tons valued at USD 1,041 per ton. Thus the value of one kg of imported chicken meat is 30 US cent. To produce 1 kg 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 23. Figure 23: Poultry Process Chain Semi Intensive Production March 2011 Page 34

35 Box 3: 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: Broilers to be produced: Percentage maize in the compound feed: 40% Quantity of maize to be procured: 3kg of compound feed 4,000,000 1kg 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 approx. 55,000 t/yr for ). 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 storage 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 enlarged 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 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 kg / ha in Cocoa covers the smallest area under cultivation with less plantation area than coffee (344,658 ha) or oil palm (232,912 ha). 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 14,000 t in As a perennial crop, a cocoa plantation needs permanent care, especially in respect to the regeneration of accompanying 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 harvests 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. 25 Cocao Value Chain Sierra Leone, Workshop 2010 March 2011 Page 35

36 Figure 24: Cocoa tree in plantation with proper shade management. Plantation areas. 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: access 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 opportunity 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, 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 25. Sierra Leone vs. international quality standards Sierra Leone exports at discount Measure Grade 1 cocoa Mould <4% >8% Defective beans <3% >5% Moisture content <7.5% >10% Sierra Leone average $ $ 750 $ Less income for farmer Less income for trader Less income for agent Fermentation Well fermented Not well fermented Less income for government Figure 25: Cocoa Quality and Export Performance. Source: Cocoa Summit Nov March 2011 Page 36

37 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 drying 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 determine the allowable moisture content (<6%), which is difficult 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 preserve the quality of the beans are expensive and in short supply. The Cocoa Value Proposition Cocoa is easily the most lucrative cash crop in Sierra Leone. This is where Sierra Leone probably has its highest competitive 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 cultivation 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 is currently going through a period of political instability. This is prompting buyers to actively pursue new supply channels elsewhere. Prices are on a long-term firming trend, even if the price spikes to above USD 3,400 per ton seen in February 2011 will prove to be temporary, see Figure 26. Figure 26: World Market Prices for Cocoa USD/t. Even with the known quality issues and the logistical difficulty 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 March 2011 Page 37

38 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 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 production has recovered to pre-war levels and above, the additional 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 actually 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 27. Figure 27: Actors in the Sierra Leone Cocoa Value Chain. 26 Figure 28 is excerpted from the June 2010 Cocoa Summit Documents by Henning Ringholz (gtz). It succinctly summarizes the low-quality / low-return situation that has characterized the cocoa sector in Sierra Leone since the war. Only very recently, some growers have been able to break out of this spiral with the help of development partners and responsible buyers who promote a focus on quality and building a brand for Sierra Leonean cocoa. 26 Source: Catholic Relief Services, Cacao Subsector Analysis, September March 2011 Page 38

39 Figure 28: Low-Quality / Low-Price Spiral in the Cocoa Sector. Source: Cocoa Summit June The role of Lebanese trading businesses in the cocoa sector 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 advantage 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 believe that the prejudice against cocoa traders and the Lebanese 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. 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 highlight in Chapter 6. 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%. 30% for six months 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 traditional 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, March 2011 Page 39

40 should the farmer not rather specialize in rehabilitating plantations and growing quality cocoa instead of dabbling in processing and transport? 4.4 Foreign Investments in Farmland and Mining 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 subject 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, which ultimately 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 29: Who is buying land in Africa. Source: Economist The jury is still out on whether these farm land investments are a blessing or a curse for host countries such as Sudan, Ghana, Mali, Ethiopia, Tanzania and others. International 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 UN Code of Conduct is in preparation and the World Bank has proposed guidelines. 27 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 complex 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 GoldTree: oil palm plantation in Daru Iranian government: palm trees, castor oil plantation Sub-Sahara Biofuels: sugarcane to ethanol project in Tonkolili district Africa Development Corporation: sugarcane in Pujehun district. We are in no position to pass judgment on whether these investments have been fairly designed and should be applauded as breakthroughs in agricultural development for Sierra Leone. What seems clear, however, is that these investments are coming and that more are in 27 ibtimes.com/articles/72461/ /un-body-fails-to-back-land-grabs-code-of-conduct.htm March 2011 Page 40

41 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 combined impact on land resources from both the agricultural projects and the even bigger mining and extraction investments 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 transition to more intensive stationary (sedentary) farming. Box 4: 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 Currently the project is at sugarcane nursery stage. The project is co-financed by a consortium of development banks including AfDB, Swedfund, EFP, FMO, ÖEB, 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 traditional 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. 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. March 2011 Page 41

42 5 Analysis of Rural and Agricultural Finance 5.1 Profile of Financial Sector Institutions 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 supposedly under review by Bank of Sierra Leone (BSL), the central bank. Before we take a closer look at each group of financial service 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 seemed to suggest more institutions as the way forward: a specialized agricultural bank, a community 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 economy, 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 existing institutions more efficient, more competitive and more successful in their outreach to rural populations and agricultural producers. Experience from other emerging markets shows that the success factors in sustainable deepening of rural financial services are scale and innovative use of information technology. Hence, the way forward is to encourage consolidation and professionalization of the financial service provider landscape as a prerequisite for a deeper and more efficient financial inclusion. 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. 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 Commercial 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 majority owned by Nigerian interests but are not headquartered in Nigeria: these are Ecobank based in Togo and First International Bank based in the Gambia. Figure 30 shows some key figures from the analytical balance sheet of the consolidated commercial banking sector. March 2011 Page 42

43 Commercial Banking Sector USD '000 Dec 2007 Dec 2008 Dec 2009 Jun 2010 USD/SLL , , , Total Assets 355, , , ,672 Net Loans 74, , , ,154 Net Loans / Total Assets 20.84% 24.46% 30.33% 34.99% Liquid Assets 216, , , ,426 Liquid Assets / Total Assets 60.72% 57.50% 53.06% 43.83% Capital Adequacy Ratio 38.74% 43.45% 33.97% NPL / Gross Loans 31.69% 23.39% 16.54% Return on Assets 3.00% 2.00% 1.55% Return on Equity 10.28% 7.00% 3.82% Figure 30: Commercial Banking Sector, Key Indicators. Source: Bank of Sierra Leone. The size of the banking industry displays healthy growth, but in absolute terms it remains miniscule at USD 550 million in total assets. The level of intermediation as measured by Net Loans to Total Assets is only 35% in A level of earning customer assets of at least 60% would be typical for a well performing banking industry 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 expense on uncollectable loans are being digested through the income statement. In fact, the declining profitability is more a reflection of dealing with past loan losses than an indication of a deteriorating lending climate at present. The 13 banks that make up the industry-wide statistics in Figure 30 operated a combined total of 75 branches in Sierra Leone as of year-end We know of four or five additional branches that were opened over the course of 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. Figure 31: Financial Institution Branches per 1,000 Adults. Source: CGAP Financial Access March 2011 Page 43

44 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 developing markets easily reach averages of 5 to 10 branches per 1 thousand adults. Compare Figure 31. The commercial banking industry in Sierra Leone held 98,437 domestic current accounts and 257,551 domestic savings accounts as of year-end Even if we neglect corporate accounts and we assumed that there were no wealthy customers with multiple accounts, these numbers would 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 well below 10% of adults, which highlights the access to finance gap compared to the regional benchmark of Ghana, where 33.9% of adults hold a formal bank account 28. See also the Finscope access strands for other African countries at various survey dates in Figure 32 below: Figure 32: Financial Access in Sub-Saharan Africa. Source: Finscope Rwanda The very rough banking sector statistics above already make it clear that access to formal financial services by commercial banks in rural areas of Sierra Leone is drastically underdeveloped both in terms of account ownership and service point coverage. Community Banks As 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 Each community bank received 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 Financial Institutions Act Finscope Ghana Launch Presentation 2010, March 2011 Page 44

45 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 operations 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 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 trading 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 community banks will operate according to international best practices and are designed to integrate closely with a parallel initiative to create small Financial Services Associations (FSAs) in rural communities. These FSAs are modeled after the Kenyan village banks developed by K-Rep, who are advising IFAD on the implementation of the FSA approach. Microfinance Providers Sierra 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 Investment 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 mobilization lagged the growth of microcredit initially, but has been catching up. There were about 35,000 active savers contributing aggregate microsavings of over USD 8 million to the sector by year end 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 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 AfriCap fund. The current regulatory environment for microfinance is defined by microfinance guidelines issued by BSL in early 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. March 2011 Page 45

46 Box 5: 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 agricultural loans are generally embedded in particular themed programs such as homestead vegetable gardening, poultry rearing, 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. Other Financial Sector Institutions Other than banks and microfinance institutions, the rest of the financial sector includes two discount houses that provide short term finance (factoring, discounting bills of exchange) and brokerage services as well as a leasing company, Consumer Finance and Leasing Co. ( 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. 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 extremely low. Finally, there is the National Social Security and Insurance Trust (NASSIT) to which all employers/employees contribute 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). 5.2 Structural Bottlenecks in Rural Finance At this point we would like to take a more detailed look at the critical question as to what is holding domestic and international financial institutions back from engaging more broadly with rural populations, agricultural producers and agribusinesses in Sierra Leone. March 2011 Page 46

47 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 number 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 occasionally become an obstacle to financing credible investment projects. But one has to wonder why with 13 banks looking 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 capacity of the commercial banks for larger projects to the much more relevant medium and small 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 causality works in the other direction: Banks are not finding enough credible, experienced, bankable borrowers and projects to profitably absorb their existing resources. If the banks were brimming with well-performing lending 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 looking 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 generally 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 agricultural 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. March 2011 Page 47

48 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, 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 finance is an exception and most rural finance simply goes to retail businesses in rural centers and to salaried individuals who live in the chiefdoms 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 industry segments 29 : 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 traditionally only a small fraction of bank credit, as low as 1% in 2006 but growing to about 6% more recently. See Figure % 32.00% 30.00% 28.00% 26.00% 24.00% 22.00% 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Agriculture Mining Manufacturing Commerce & Finance Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Figure 33: Share of Industry Segment in total Commercial Bank Loans and Advances. Source: BSL Monetary Sector Survey. 29 BSL Monetary Sector: 11 Analysis of overdrafts, loans and advances of commercial banks. March 2011 Page 48

49 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 understand. 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 perspective 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 region. And finally, if one actually does have a good harvest 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 compensate for the failure of the farming activity and provide security to the lender. Moreover, even close-knit rural communities are not immune to moral hazard, because the civil war has eroded traditional values of obligation and respect for contracts. If given a chance, many farmers will 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 borrowers unfortunately create relatively more opportunities for dishonest behavior and willful breach of contract than one would find in tightly managed lending programs to urban businesses 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-ornothing approach in agricultural lending. In our discussions with banks and microfinance institutions, the conversation seemed to gravitate immediately towards the most complex and riskiest of all lending propositions in agriculture, i.e. to provide unsecured cash loans with long grace periods 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, 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 agricultural lending will probably remain prohibitive for any lender for quite a while. Instead, it seems logical to chip away at the agricultural production challenge incrementally by only financing particular well defined segments while creatively leveraging all available risk mitigation strategies. Chapter 6 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 immediately realizable financing opportunities: March 2011 Page 49

50 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 established buyer-producer relationships rather than lending directly to smallholder producers; reduce price risk by structuring minimum price guarantees 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. 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 ownership 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 or slowly maturing tree crops, agro-forestry strategies or organic/sedentary farming. Freehold ownership titles: The first argument that agricultural finance is blocked by farmers not having a bankable freehold title to their land has been a regular complaint by international consultants. It has also been incorporated 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 tomorrow: Let s assume all rural land has been surveyed, possession 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 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 March 2011 Page 50

51 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 / 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 reoccupying 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 collateral 30. 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 deterrent. Finally, one could say that even if freehold titles on smallholder 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 cultivation. 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. Maintaining cost-effective access to the land is the most important 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 issued first to a foreign investor. If land ownership reform did come through, it would naturally document the existing 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 ordinary rural residents. It is easy to see that atomistic freehold ownership of agricultural land is not an advantage to foreign investors and is thereby also not in the interest of the Sierra Leonean elites. Therefore, it is not likely to materialize 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 leaders are not despotic absolute rulers of a rural population in serfdom. We have not heard of land regularly being 30 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. March 2011 Page 51

52 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 individuals 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 communal land areas of South Africa, chiefs will issue Permissions to Occupy as documentation of permanent land use rights that automatically transfer to children by way of inheritance. 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 currently 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 documentation of existing land claims are naturally opposing interests. 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. The authors have observed the same conundrum in the context of land-reform and the Affirmative Action lending scheme in Namibia, which was supposed to finance willing-buyer / willing-seller transitions of white-owned farms to aspiring black farmers. There also, the economics 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 support a decent livelihood for famers, when land must be purchased or leased on terms that afford a similar standard of living to the previous owner. In short: forget farming, 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 millions 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. Other Structural Bottlenecks Lack of credit reference databases: Sierra Leone currently does not have a functioning credit bureau or other source of industry-wide information on credit exposures and payment March 2011 Page 52

53 performance. For larger corporates there is mandatory prudential 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 sorely lacking. A credit bureau is seen as a critically important 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 borrowers 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. 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 even 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 financial service and not as a pre-requisite for it. Under the current reality in access to finance in rural areas, it seems the industry has a way to go, before we need to worry about reckless multiple borrowing and an emerging credit bubble in agriculture. Financial literacy: The education component is ranked as one of the weakest elements in Sierra Leone s very low level of human development. Due to the chaos of the civil war and decades of neglect, adults today have on average attained less than three years of schooling. 31 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 prevent 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. Cost of rural outreach and lack of infrastructure: Rolling out traditional bank branch networks into every corner of rural Sierra Leone is a costly endeavor because of infrastructure challenges (electricity, communications, road access) and availability of qualified staff in the provinces. The cost is often not justified by the limited volumes in deposits 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 flexible approaches using cash point agents, mobile branches, cell-phone banking etc. will be necessary to efficiently overcome the spatial barriers to financial access. Corruption in Banking: We have been told that corruption not only continues to plague all levels of public administration but apparently is also a concern in commercial banks. 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 like a cancerous growth that eats away the trust between financial institutions and their clients such that everyone loses in the end. Bribes paid not only make a loan more expensive to the client, 31 UNDP Human Development Index March 2011 Page 53

54 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. All of the above issues are valid structural bottlenecks that constrain the access to financial services for economically active Sierra Leoneans and are a particular concern for economically vulnerable rural populations. With our differentiated discussion above on how binding these constraints are at this time, we by no means want to belittle the important efforts underway at addressing these structural problems. A significant portion of the FSDP resources are rightly dedicated to improving the enabling environment for financial services. The objectives of Component D: Strengthening the Enabling Environment actually concisely summarize the key structural issues: (1) Establishing an enabling legal framework for financial services; (2) Strengthening the legal environment for debt recovery; (3) Strengthening the land-related legal environment; and (4) Financial Literacy, training and education. While we support the priorities of the FSDP, we simply want to avoid the reflex of using the long list of known structural constraints as convenient excuses 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 while dealing with the obvious structural bottlenecks. March 2011 Page 54

55 6 Making Finance Work: Promising Instruments and Interventions 6.1 A Holistic Private Sector Perspective 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 importance of other financial services for rural communities, notably savings and transmission products. In a naturally evolving financial ecosystem, savings mechanisms are typically the first services to emerge. People want to pool their savings and find safe investments for their emergency reserve fund. Rural populations traditionally 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 agricultural 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. 32 A common feature of inclusive financial ecosystems in the absence of external development funding is that cooperative or savings bank balance sheets typically display an equilibrium of three to four savers per one borrower. This is evidence of the natural savingsfirst evolution of broad-based financial access. Transmission services are another essential ingredient to pro-poor financial inclusion. 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 transacted 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 opportunities 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 Leonean diaspora 33, a reasonable infrastructure for international transfers 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 million 34, 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 payer and receiver fees can eat up as much as 25% of smaller remittance amounts. 35 New domestic money transfers systems using cell-phone access are being rolled out by mobile-phone provider Zain ( zap, and by Guarantee Trust Bank under the Splash Mobile Money brand ( 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 effect, where the full benefit of the service arises only, once a critical mass of users and merchants adopt the system. The success of M-Pesa 36 in Kenya illustrates this point. Clearly, a holistic look at the financial service requirements of rural populations is required in order to leverage the maximum benefit from financial inclusion. Savings and 32 Institutional profiles available on 33 Over 100,000 Sierra Leoneans live in the UK alone, compare Sierra Leone Diaspora Network, 34 World Bank Migration and Remittances Factbook 2011, 35 IFAD, Sending Money Home to Africa, Remittance markets, enabling environment and prospects, 36 See March 2011 Page 55

56 transfer mechanisms are part of this basic product spectrum that every economically active household should have access to. Credit, however, is not necessarily for everyone. It is only rational where a minimum of predictable income and a scalable entrepreneurial activity 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 rural outreach. The entire continuum of inclusive financial services is worthy of development support and should be encouraged to push the limits of access-to-finance within an enabling 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 Informal Financial Services Like everywhere across Africa, a variety of informal savings, 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 exclusive 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 through stock market clubs. Walk into a traditional bar in a small German town and you inevitably will find sets of miniature metal mailboxes bolted onto the walls. These are micro-savings receptacles of various community savings clubs who are funding their Christmas party or annual weekend on Mallorca this way. 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 revolutionary development intervention. They are a natural fact of community life and have a role to play in financial ecosystems everywhere. Because of their high volunteer content, 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. K-Rep consultants are actually implementing the community organizing efforts on the ground. Care Sierra Leone supports similar Village Savings & Loans (VSL) groups as a vehicle for instilling thriftiness 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 frequently 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 empowering women. 37 Compare: Objective.B.1: Broaden Microfinance and Rural Credit Delivery Outreach, and Objective.B.3: Rehabilitate the Community Banking System and Support Informal MFIs. March 2011 Page 56

57 Overall, it seems fair to say that informal financial services are great where they arise naturally without much external prompting and to the extent that there is mutual trust and community cohesion to make them work. From experience, small cooperatives and informal financial organizations 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. Granted, 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 services. Also, one must put into perspective the capacity to generate 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 accumulate? 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 community 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 communities 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 sponsors 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. 6.3 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 simply augment or accelerate economic activity, or redistribute the inherent risks. Without underlying economic opportunity, 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 limitations 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 beautification. The subsidy March 2011 Page 57

58 monster created by the EU Common Agricultural Policy should be more a warning than a model 38 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 produced 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, however, would be via directed credit for agricultural producers. There are numerous examples of failed subsidized agricultural lending schemes across Africa, including at the now defunct National Development Bank and the 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. It is also important to keep the role of subsidies in mind, before we jump to conclusions on transferring successful models of agricultural finance from Europe or the US. Agricultural lending is easy, when famers receive guaranteed income for farming and sometimes even specifically for not farming. The bank then essentially discounts future subsidy rents, which is not exactly an innovative approach to unlocking finance for Africa. 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 competitive. 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 Fundamentals We are dwelling so much on the fundamentals of productivity, because government policy and well-intentioned development programs unfortunately go so often against the grain of the economic realities. In our visits with stakeholders 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? 39 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 initiated 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 cooperative landscape is widely perceived as an instrument of government control and a platform for allocating paid positions and extracting rents. 38 For a primer on the Common Agricultural Policy, see ec.europa.eu/agriculture/publi/capexplained/cap_en.pdf 39 An initiative of the Sierra Leone Chamber of Commerce, Agribusiness Centers. March 2011 Page 58

59 We also came across another widespread myth that correlates with the disrespect for famers time: Labor supposedly is abundant and cheap in rural areas and thus not a binding constraint in agricultural development. The reality 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 activities that require peak labor inputs at offset times and maximize 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 opportunities. Only activities should be funded that generate 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 economic 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 irrigation etc. 6.4 Agricultural Asset Finance / Micro Agri-Leasing Rationale Instead of generic term finance, we propose that banks and MFIs develop asset finance and (micro-) leasing methodologies for agriculture and small business in rural areas. The productivity of agricultural producers and small businesses 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 misappropriated 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 relevance in Sierra Leone at this stage. What counts is that the nature of the asset represents a tangible economic opportunity 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). March 2011 Page 59

60 Examples of promising items are: cassava peelers, presses and dryers, moisture meters and scales (e.g. for cocoa traders), mechanical rice thrashers, 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 lenders compile a limited catalogue of high quality equipment 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. Cassava Press Foot operated rice thrasher Power tiller with trailer Figure 34: Possible Assets for Agri-Micro Leasing Moisture meter March 2011 Page 60

61 Ideally, a microfinance institution would embed the asset 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 enterprise 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). We spoke at length to Amadu Massally, the Managing Director of Consumer Finance & Leasing Co., the first leasing company licensed in Sierra Leone ( Active leasing operations at CFLCO have only begun in 2011 and the focus is currently on building up a hire purchase portfolio 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. Box 6: 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 complementary 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 annuitized 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 opposed 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 tractors 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. March 2011 Page 61

62 Figure 35: Indian Tractors in an Equipment Shed at the Seed Centre in Makeni. 6.5 (Micro)-Finance for Rural Enterprise & Service Clusters In Chapter 4.4, 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 depending on the perspective - of more big projects in the pipeline, 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 investments are coming. And they create a new reality in rural areas of Sierra Leone. However, expectations that rural populations will be uplifted simply by the land lease payments and some direct employment within the projects will regularly be disappointed. This is already in evidence around existing and newly launched operations: the Chinese sugarcane plantation at Magbass, Koidu Holdings industrial diamond mining site, the Tonkolili and Marampa iron ore mines, or at the Addax biofuels site in Makeni. Leveraging Support from the Anchor Investor The challenge is to maximize economic benefit for surrounding communities by productively tying into the activities of the anchor investor. Microfinance providers can help by providing the necessary capital for local residents to realize their entrepreneurial ambitions. All major foreign investors in rural areas understand that they must be proactive about community relations and manage expectations about environmental impacts, jobs, land leases and potential resettlements. Microfinance institutions can therefore expect that investors would be receptive to the idea of supporting enterprise development in the communities 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 reduce 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 microfinance, if one built in a mechanism whereby the MFI can collect loan installments at source from the accounts payable department of the mining investor. March 2011 Page 62