contrasts to agriculture finance in malawi by morut martin isyagi
DESCRIPTION
Agriculture contributes to 40% of Malawi’s GDP of which 70% production is derived from smallholder farmers, 90% of exports are Agro industry based derivatives. Access to financial credit to enable production is a big challenge to farmers due to the lack of Credit worthy collateral and that banks require first class collateral in the form of property on the major cities of Malawi. As such due to the inadequate finance productivity is compromised and commodity orders cannot be immediately meet in bulk due to the fragmented nature of production leading to intermediaries in the form of vendors being aggregators for commodities in the value chain. The intermediaries reduce farmer’s profitability as the middlemen in the value chain increase. Government led interventions like crop up scaling and national export strategy will be sustainable on the back of increased access to agriculture finance and ease of doing business in Malawi. According to Finscope Malawi (2008), the importance of increasing access to credit, savings opportunities and other financial services as a means of reducing poverty has long been recognized in Malawi. The Ministry of Economic Planning and Development 2013 annual report ,indicates that the Agriculture sector declined by 2.3% in 2012 compared to a growth of 6.7% in 2011.The decline was mainly on account of a 67% decline in Tobacco production due to low prices. To move forward in Agriculture, we need to put agricultural industrialization back on the development agenda, in the form of value addition and mechanization to increase productivity. Pro poor policies are usually poor and focus must be on wealth creation, based on a healthy domestic investor market which in turn will attract foreign investment and more market driven agriculture.TRANSCRIPT
Constraints to Agriculture Finance in Malawi
The voice of Malawian farmers
Morut Martin IsyagiDirector Agribusiness and Marketing
Farmers Union of Malawi
Inaugural ECAMA Research Symposium 8-10 October 2014
What is Farmers Union of Malawi?Farmers Union of Malawi (FUM) is an umbrella body of farmer organizations in Malawi.
Role of Farmers Union
Provide a collective voice of farmers in Malawi
Visible platform for interaction A vehicle for collective action Lobby for all farmers in Malawi
Farmers Union of Malawi Vision Ensure a union of Malawian farmers with a
powerful collective voice to advance the interest of farmers
Mission To promote and safeguard the interest of all
farmers in Malawi, and create a conducive agricultural operating environment for improved agricultural productivity, market access and increased farmer incomes”
Institutional Development
Agribusiness &
Market access
Policy AdvocacyPartnershi
ps
FUM
Key Operational Areas for FUM
Malawi Agriculture contribution
80% of Foreign Exchange 39% of GDP 65% raw material supply 70% of Agric GDP from Smallholder farmers
Importance of Agriculture finance
Access to financial services promotes Economic growth and development Facilitates large scale production of raw materials
and value addition Value chain economies of scale Development of service industry
Taxonomy of Global risk
• ECONOMIC RISKS• GEOPOLITICAL RISKS• ENVIRONMENTAL RISKS• SOCIETAL RISKS• TECHNOLOGICAL RISKS
Agricultural production/ supply chain - up- and downstream
Environment/weather
Biological
Political/Institutional
Market Economic
Management & operational Geo-political
Government
Variables that can influence agricultural production with varying intensity.
Source:Chris Blinaut 2014
Functions of Financial systems
Risk amelioration Savings mobilisation Information gathering of investments and
allocation of resources Facilitates exchange Types-Commercial Banks, Finance coops Development of financial markets and
institutions is a critical part of the growth process-Capital accumulation, technology change (Machete 2014)
5Cs of credit
Character Willingness to repay, financial delinquency
Capacity Strengths and weakness of agribusiness partners with
regard their financial, managerial and technical capacity
Capital(Collateral) Collateral based on products, contracts and processes
e.g. WHR
5Cs of credit
Conditions Short and long term conditions of the entire value
chain Cash flow (Most important)
Most important for determining the amount and timing of loans, repayment schedule and capacity
Agriculture credit places much weight on cashflows and condition
Why is Agriculture finance a problem High cost of lending(Cost to serve) High cost of borrowing(Cost to client) Lack of collateral-Limited financial ,Insurance instruments Risky nature of agricultural production-Climate,
Seasonality, Knowledge
Financial literacy, Economies of scale Value chain-Lenders/Farmers Markets,RDD KYC-reliable information about borrowers
Malawi Financial inclusion
Source:Finscope 2104
Financial inclusion
Opportunities -Value Chain Finance
Value Chain Models Producer driven Buyer driven Facilitated Integrated
Cooperatives development for economies of scale
Producer-Financier-Offtaker linkage
Value Chain Finance
Warehouse receipts system
What should be done to promote access
Promote access through market driven mechanisms –Land bank, Goverment catalyst
Enabling environment for private sector investors-Legislation e.g. WHR, transport infrastructure
Take measures to reduce sector wide risks and transaction costs-Weather index insurance,
Eliminate political interventions-Export bans,Elections,Food security vs. Food entrepreneurship
Discussion
Competitive Agriculture is connected agriculture Increased productivity on the back of market
driven finance to meet offtakers requirements Linking participants within a value chain in which
everyone involved has a vested interest New approaches to Agriculture finance
reduce costs and risks facilitated through value chain linkages, extension uptake
Discussion Cash flow analysis, value chain assessment and
tailoring of loans with appropriate conditions is critical.
Agriculture credit should be accompanied by insurance but this is costly and requires government intervention.
The most important insurance is built through savings and accumulation of assets after increasing productivity –Savings and investment culture
Discussion Agriculture finance depends on success of
Agriculture sector as a whole and competitiveness, risk profile of the client and value chain.
Government catalyst -EDF?,Development bank? Land bank equivalent
Discussion
Harness Financial Cooperative movements success into Agric cooperative as alternative finance source
Demand driven market financed knowledge generation and extension
Strengthening commodity cooperatives
Conclusion Market driven and aligned Structured trade and
commodity finance e.g. NES crops less exposed to interest rate shocks as earnings in USD.
Enabling environment to reduce costs of doing business e.g. Export bans, Commodity acts,ID,
Financial instruments-WHRs,WII,Land bank interventions, harnessing strength of financial coops
Financial and value chain literacy-Productivity Achieving inclusive sustainable Economic
growth from rhetoric to practice
Acknowledgments
Blignaut C : Certificate program in Agriculture and rural finance, University of Pretoria 2014
Finscope : Malawi 2014 report Legderwood J Etal: The New Microfinance
handbook ,Chp 10 pp 233-246,World bank 2014 Machete C: Certificate program in Agriculture
and rural finance, University of Pretoria 2014 World Economic forum :2013 Global risk
report ,pp 4-5
Thanks for your attention and to ECAMA and IFPRI