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Sesame Business Network Ethiopia

Benefit-SBN support project – EKN Learning Event

15th of November 2016, Addis Ababa

Finance in the Sesame Sector

Intervention Area Zones North Gondar Agew West Tigray North West Tigray

Area figures (8 woredas) 100+ kebeles 70,000 farmer households 68,000 smallholders 500,000 ha. cultivable land 250,000 ha. with SHF +/- 200,000 MT annual production Nation wide export value 2015: $400 M.

Challenges identified during baseline studies in 2012

Top challenge in the sector

Farmer income improvement and spill-over effects

Project Objectives: Three Pillars

1. Production Cost Price Reduction

2. Product and Market

Development

3. Strengthened Enabling

Environment

Farmer income improvement and spill-over effects

Project Objectives: Three Pillars

1.1 Yield & Quality improvement 1.2 Harvest, transport, storage loss reduction 1.3 Improved farmers’ access to input credit

2.1 Post-harvest value creation

2.2 Improved market linkages and sales

2.3 Improved access to marketing credit

3.1 Evidence-based information and sharing 3.2 Stakeholder capacity development 3.3 Enhanced stakeholder collaboration

Current Finance Situation

Production finance for the sector

Bank

Investors (50+ ha.)

Cooperative Unions

Primary Cooperatives

Smallholder farmers (<20 ha.)

MFI Informal

moneylender

Small investors (20> <50 ha.)

1. Farmer performs first activities with own cash 2. Farmer takes credit in May-June from MFI or

primary cooperative 3. He pays for the first costly production activities

and money starts to run short in August / September

4. Before harvesting, the farmer looks for informal moneylenders to get that final bit of money

5. Informal moneylenders give money, provided that the credit is repaid with sesame; the informal moneylender is a local trader as well

How farmers finance sesame production

Sesame Production Costs

birr %oftotalcost birr %oftotalcost birr %oftotalcost birr %oftotalcost birr %oftotalcost

1.Landcleaning 126 2.6% 343 7.9% 308 6.0% 245 3.7% 108 2.3%

2.Firstploughing 491 10.1% 271 6.2% 389 7.5% 158 2.4% 16 0.3%

3.Secondploughing 107 2.2% 116 2.7% 172 3.3% 147 2.2% 16 0.3%

4.Thirdploughing 12 0.2% 12 0.3% - 0.0% 177 2.7% - 0.0%

5.Sowing 119 2.4% 85 2.0% 73 1.4% 45 0.7% 11 0.2%

6.Fertiliserapplication 488 10.0% 142 3.3% 336 6.5% 391 5.9% 874 18.6%

7.Firstweeding 1,247 25.6% 995 22.9% 1,061 20.5% 1,184 18.0% 815 17.3%

8.Secondweeding 759 15.6% 854 19.6% 1,049 20.3% 1,646 25.0% 701 14.9%

9.Thirdweeding 115 2.4% 156 3.6% 397 7.7% 845 12.9% 518 11.0%

10.Firstchemicalfield 6 0.1% 5 0.1% 8 0.2% 10 0.2% 41 0.9%

11.Secondchemicalfield - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

12.Harvesting 931 19.1% 984 22.6% 957 18.5% 1,335 20.3% 1,234 26.3%

13.Threshing 242 5.0% 207 4.8% 262 5.1% 226 3.4% 218 4.6%

14.Bagging 52 1.1% 42 1.0% 35 0.7% 33 0.5% 30 0.6%

15.Firsttransport 108 2.2% 94 2.2% 81 1.6% 44 0.7% 21 0.4%

16.First(un)loading 14 0.3% 16 0.4% 25 0.5% 22 0.3% 19 0.4%

17.Firststorage 1 0.0% 1 0.0% 1 0.0% - 0.0% - 0.0%

18.Secondtransport 41 0.8% 19 0.4% 11 0.2% 39 0.6% 54 1.1%

19.Second(un)loading 8 0.2% 9 0.2% 6 0.1% 14 0.2% 16 0.3%

20.Secondstorage - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

21.Firstchemicalstore - 0.0% - 0.0% 2 0.0% 13 0.2% 6 0.1%

22.Secondchemicalstore - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

Total 4,867 100.0% 4,351 100.0% 5,173 100.0% 6,574 100.0% 4,698 100.0%

Micro(XS) Small-scale(S) Intermediate(M) Smallinvestor(L)

InvestorcategoriesSmall-scalecategories

Largeinvestor(XL)(≤5ha) (5>≤10ha) (10>≤30ha) (30>≤100ha) (100>ha)

Source: Financing sesame production in northwest Ethiopia (2014)

Bank credit for the sector

Bank Local market

trader

Investors

Smallholder farmer

Smallholder farmer

Production credit

Marketing credit

Production credit

Production credit

Collateral

Collateral

Sesame

Sesame

Expected New Finance Situation

• Implementation of improved production practices; 20-steps

• Innovative activities are fertiliser use and row planting

Pillar 1. Production cost price reduction

Current gap: Informal moneylenders contribute ±30% of total credit taken

New gap: Extra finance needed for 20-steps; ±66% on top of current investment level

Finance gaps

[WAARDE] Own Finance

[WAARDE] Formal Credit

[WAARDE] Inf.

Credit

Birr/Ha.[WAARDE]

Own Finance

[WAARDE] Formal Credit

[WAARDE] Inf.

Credit

[WAARDE] Extra Credit

Birr/Ha.

Current situation

6,000 birr production costs 4 quintals/ha.

New situation

10,000 birr production 8 quintals/ha.

66% extra investment 100% extra yield

Investment increase & yield increment

1. Centralised decision making at FIs makes it difficult to implement plans at field level; One-size-fits-all

2. Commercial banks prefer to finance export (forex) instead of production

3. Strong push from government to use fertilisers 4. Farmers and FIs do not understand each other 5. Commercial banks have shown willingness to finance

production, but only when guarantee fund is available

6. Cooperatives’ active market participation is beneficial for farmers

Key Lessons Learned

What if….

• Low adoption rate of 20-step practices

• Larger uptake of informal finance

• Fertiliser debt with FOs may increase

• Local traders collude to drive down prices in absence of primary cooperatives

…not solved

• Improvement of yields, in order to reduce costs per product unit

• Reduction of credit costs by replacing informal credit

• Increase cooperatives market share; Price corrective effect can be realised; Unions export more than the current 3% of total sesame exports

• Larger export volumes for forex earnings

…solved

1. Bring farmers and finance institutions closer to each other

2. Develop agricultural loan products for the sesame farmers

3. Improve farmers business skills; financial literacy trainings

4. Use guarantee funds for union loans to demonstrate banks that extra investments pay off

In the mean time…

• More than 1 billion birr extra is needed for NW Ethiopia. How can we convince donors and financial sector and, government that investments in agro-finance is a precondition for doubling yields

Main challenges

Sesame Business Network Ethiopia

Thank You