New Directions for Smallholder Agriculture:

Financing Smallholders & Entrepreneurs

in NENA and CEN

Mylene Kherallah and Omer Zafar

24 January 2011

Outline

the status of rural finance in NENA and CEN regions

IFAD’s guiding principles for rural finance

selected IFAD experiences

sanadiq in Syria

refinancing facilities in CEN countries

equity financing in Armenia

rural finance approach in Yemen

Status of Rural Finance in NENA

NENA’s rural financial sector is considered underdeveloped

rural lending through state-owned banks with subsidised credit

lending favours larger farmers and entrepreneurs with collateral

microfinance and commercial banks largely urban/peri-urban

savings, micro-insurance and other services rarely offered

small farmers and the rural poor lack access to financial services

Status of Rural Finance in CEN

state-owned banking sector disappeared in the 1990s

completely new systems and institutions had to be developed

weak enforcement of legal and institutional framework

absence of long-term capital invested in rural areas

initial interventions focused on credit lines and microfinance

SCAs, NGOs, MFIs and banks gradually expanding in rural areas

rural financial services and long-term capital still insufficient

IFAD’s Guiding Principles for Rural Finance

support access to a variety of financial services

promote a range of financial institutions and modalities

support demand-driven and innovative approaches

encourage market-based approaches

focus on sustainability and poverty outreach

promote an enabling environment for rural finance

Sanadiq in Syria

Concept

sanduq is an improved version of a savings and credit association

four operational pillars: self-reliance; autonomy; sustainability; outreach to the poor

Sanadiq in Syria

Sanadiq in Syria

Achievements

76 sanadiq created, with 13,500 members (45% women)

22,000 loans extended, amounting to USD 17 million

loans are short-term with maximum 1 year duration

members invest in agricultural and livestock micro-businesses and off-farm commercial enterprises

scaling up: now operating in all Syria projects, with similar model in Sudan, Somaliland, Yemen and other regions

Sanadiq in Syria

Way Forward

legalisation of sanduq as financial institution

creation of Apex institution for financial and other services

linkages for refinancing from financial institutions

innovative forms of capitalisation

Refinancing Facilities

Concept

MT and LT refinancing capital to financial institutions for onlending to smallholders and small agribusinesses

capacity building services to financial institutions and their clients (smallholders and entrepreneurs)

refinancing facilities financially sustainable for all stakeholders

Refinancing Facilities

Refinancing Facilities

Achievements in Rural Areas

Armenia: 9 PFIs; loans approved USD 13.9 million

Moldova: 9 PFIs; loans approved USD 22.6 million

Macedonia: 7 PFIs; loans approved USD 11.6 million

Bosnia & Herz.: 13 PFIs; loans approved USD 20.8 million

PFIs leverage IFAD funds with their own resources

near-perfect repayment rates (PAR 30 days)

Refinancing Facilities

Impact – Financial institutions are now:

increasing rural outreach and attracting new clients/resources

adapting financial products/services to rural/agricultural demand

investing their own funds and leveraging additional funds

introducing innovative collateral requirements (forward contracts)

Refinancing Facilities

Way Forward

diversification of financial instruments (e.g. micro-leasing; equity financing); already operational in some countries;

technical assistance to mobilise deposits and savings (as an exit strategy).

Equity Financing

Concept

temporary strategic investments in rural enterprises (often family-owned) with growth potential and job creation;

combined with non-financial advisory services (managerial, technical, market access);

the foundation is the value chain approach

Equity Financing - Value Chain Approach

Equity Financing in Armenia

Methodology

creation of an Equity Fund to channel IFAD resources

ongoing investments in rural enterprises through equity participation combined with optional debt financing

major investment criteria include backward linkages with smallholders as well as poverty reduction impact

pre-defined exit strategy based on enterprise sustainability at nominal value

Equity Financing

Way Forward

policy dialogue with Government to improve the conducive environment for rural investments

development of producers’ associations to increase smallholders’ bargaining power

access to private or institutional strategic investors (perhaps even producers’ associations)

equity participation in microfinance institutions to expand rural operations

IFAD’s Rural Finance Approach in Yemen

three programmes valued at USD 120-150 million cofinanced with strategic partners and managed by a public-private partnership

focus on economic opportunities in selected value chains (initially coffee, honey, horticulture, fish products, ornamental flowers)

debt financing, leasing and micro-insurance for small producers, and development of their associations

equity financing for processors/exporters with backward linkages to commercialised smallholders / associations (contract farming)

financial services to include savings/deposits, debt financing, venture capital, leasing, insurance

IFAD’s Rural Finance Approach in Yemen

Outputs

win-win; value addition across the supply chain; on-farm, off-farm and non-farm business profitability; equitable profit distribution

creation of market linkages between commercialised smallholders and processors/exporters

rural job creation

rural economic growth and sustained poverty reduction

strengthened financial institutions with improved rural outreach