rural and agricultural financial products and services...rural products for differentiated groups...

Rural and Agricultural Financial Products and

Services

Module 7

Rural Finance – Module 7

AgendaBlock 1• Introduction• Different products and different target groups• Term financeBlock 2 • Trader finance: Trader Credit and Out-grower Schemes

Coffee Break

Block 3• Trader finance: Benefits and limitationsBlock 4• Warehouse receipts schemes: Definition and actors involved• Precondition and expertises neededBlock 5• Review of the day by a participant volunteer• Daily evaluation• Readings for next day

Potential Rural and Agriculture

Financial Flows

High volume

Medium volume

Low volume

Commercial

Banks

Grass-

Roots MFIs

NGOs, Coops

Medium and Large

Exporters and

Processors

Local Traders and

Processors

Farmers

Input Suppliers

Non-Bank

Financial Institutions

Producer groupsProducer groups

Household 2

(includes input

supplier, and salaried

work)

Rural Products for Differentiated Groups

•Multi purpose loans:

– microenterprise loans (flexible ME and, esp.

working capital)

– Products for emergencies

•Flexible savings products

•Remittances

•Health insurance

Products for

non-agr. or transition rural

households

•Investment loans

•Warehouse receipt loans

•Trader loans

– to the trader

– to the clients linked with trader

• informal arrangements

•Future options

•Index based insurance

Products for

farmers

Loan Product Diversity: farmers

• Term loans

• Trader loans

• Warehouse receipts schemes

• Leasing schemes

Loan Product Diversity:

non agriculture or transition

households

• Multipurpose loans

• Working capital loans

• Lines of credit

• Emergency loans

Term finance

• Definition

- Time horizon: a distinction can be made between

medium-term finance (from one to five years)

and long-term finance (above five years).

- Source of funds: internal or self-finance (through

deposit, or other income sources of the farm

household) can be distinguished from external

finance using funds owned by third parties

(through term loans, leasing or equity finance)

Term Finance• Products

• Term loans: are the most widely used instrument because they can finance a wide range of investments and allow a considerable degree of flexibility in designing disbursement and repayment modalities.

• Financial lease: offers the advantage of reducing or even eliminating the need for additional collateral and the problems related to the creation, perfection and enforcement of security interests.

• Equity finance: by existing or new shareholders avoids fixed repayment schedules and costs.

Constraints in Term Finance

• Institutions

- Cash flows

- Risk vs. Increasing

term

- Match Short/long

terms

- Systemic risks

• Users

- Higher amount

- Risk vs. Investment

purposes

- Guarantees and

collateral (no

solidarity groups) vs.

costs

Dimensions of Term Finance

Dimensions of Term Finance

Time horizon

Source of Funds

Financing

Instruments

Medium -

term Finance

Long-term

FinanceExternal

Finance

- Term loans

- Leasing

- Equity

Self

Finance

Innovations in Term Finance

• Potential for innovations

- Collateralization

- Product design

- Role of non financial institutions

- Role of donors


Agenda

Block 1• Introduction• Different products and different target groups• Term financeBlock 2 • Trader finance: Trader Credit and Out-grower Schemes

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Trade Credit and Out-grower

Schemes

Trade Credit

Short term or seasonal loans between buyers

and sellers of inputs and products

Out-grower Schemes

Cash advances or inputs provided, tied to

formal purchase agreements

Trade Credit and Out-grower

Schemes

• Both may be in-cash advances;

commonly are in-kind advances of inputs

• Trade Credit is more temporary and

price-driven, common for commodities

• In Out-grower Schemes, sales-

purchase relationship is more formal –

buyer also provides marketing and

technical assistance, common for high

value specialty products

Trade Credit

Large Scale Trader

Inputs Importer/ Wholesaler

Input shopkeeper/ Small Scale Trader/Farmer Organization

Bank

Farmers

Trade

credit

Trade / seasonal

credit

Key

Product

sales

Input

sales

Exporter/ Wholesaleror Processor

Out-grower Scheme

Marketing and Financing Flows forHorticultural Produce in Asia

FARMERSFARMERS

LOCAL ASSEMBLERSLOCAL ASSEMBLERS

ASSEMBLY BUYERASSEMBLY BUYER

WHOLESALERSWHOLESALERS

SUB WHOLESALERSSUB WHOLESALERS

RETAILERSRETAILERS

CONSUMERSCONSUMERS

Commission

agents

Marketing and Financing Flows for Rice in Asia

N.B. The chart represents a generalised view of flows of produce and finance in the region as a whole and does not apply to any particular country.

FARMERSFARMERS

VILLAGE BUYERVILLAGE BUYER

ASSEMBLY BUYERASSEMBLY BUYER

or MILLER’S AGENTor MILLER’S AGENT

MILLERSMILLERS

LARGE WHOLESALERSLARGE WHOLESALERS

SMALL SMALL

WHOLESALERSWHOLESALERS

RETAILERSRETAILERS

CONSUMERSCONSUMERS

Sources of funds – millers% of finance

367-1020Vietnam

9631315Pakistan

106030Nepal

10201060Myanmar

-5941India

2121373Cambodia

OtherFinancial

institutions

Deferred

payment to

farmers/

traders

Money-

lenders

Family,

relatives

and

friends

Own

funds

Sources of Funds –Fresh Produce Wholesalers (% of finance)

4357Philippines

153748Pakistan

204040Nepal

202060Myanmar

5401045India

102565Cambodia

OtherFinancial

institutions

Deferred

payment to

farmer/traders

Money-

lenders

Family,

relatives

& friends

Own

funds

Effective Cost of

Marketing System Loans

• Practices vary widely and costs are difficult to assess. Estimates vary from nil to 300% p.a. (trader loans to farmers in remote Bangladesh)

• India – payment by 15-30 day post-dated cheque; 2% discount if cash required by farmer

• Loan recipients may have to pay more for their inputs, accept lower output prices, have to accept delays in selling their products and accept less favorable payment terms

• Retailers may have to accept lower quality produce

Financial Linkages

with Farmers

• Practice tends to grow as commercialization increases;

• Money flows both ways:

– from traders to farmers, in the form of inputs and consumption credit;

– from farmers to traders by accepting deferred payment;

• Deferred payment sums are greater but the duration is usually much less. In most cases traders are net lenders.



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Benefits of Trade Finance

• Reduces marketing transaction costs

and thus makes marketing more efficient

• Reduces risks by facilitating availability of

supply and guaranteeing sales

• Reduces credit transaction costs

because funds are circulated within the

production-marketing system and

borrowers do not incur costs of dealing with

financial institutions

Trader Credit and Out-grower Schemes

CommonSomeTechnical Services

FormalInformalMarket Access

Through agreementsStandards and Efficient Sales

high-value products

Increased quality, bulk sales ofHigher Product Prices

Through Bulk Purchases of InputsLower Costs

technical and marketing assist

Via increased inputs andVia increased inputsIncreased Yields

Timing tied to product transactions; in-cash and in-kindAppropriate terms, conditions

Future product/contractFuture productExpanded Collateral

relationshipsrelationshipsof Willingness to Pay

Through contractualThrough personalCost-Effective Screening

Out-grower SchemeTrader CreditBenefits

Benefits by product

Trader Credit and

Out-grower Schemes

Enforceable contractsEnabling Environment

Closer monitoringFrequent, high default riskSide-Selling

market info and trader

competition

need for reliable productover producers, checked by

Captive relationship, checked

by

Traders have bargaining

powerMonopoly/Unfair Pricing

contacts

High value producers only Time needed for personalExpanded Outreach

many high value crops

Economies of scale required forPreference – more efficientBias to Larger Producers

Out-grower SchemeTrader CreditLimitations

Product Limitations



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Warehouse Receipts

Definition

Warehouse Receipt: document listing

goods or commodities kept in

safekeeping in a warehouse;

the warehouse receipt can be used to

transfer ownership of the commodity,

instead of physical delivery

Warehouse Receipts

Participants

• Producers and traders who deposit

commodities in warehouses

• Warehouse operators who provide secure

storage and issue warehouse receipts

• Lenders who accept receipts as collateral

• Inspectors who certify that warehouse

standards are met

• Insurers who insure contents against loss

Warehouse Receipts

NoneTechnical Services

Systematic through upgraded marketing processMarket Access

security

Sight unseen transactions through standards andStandards and Efficient Sales

Bulk sales, extend sale seasonHigher Product Prices

Sight unseen transactions, fungible productLower Costs

Reduced spoilageIncreased Yields

Receipts enable longer storage, delayed salesAppropriate terms, conditions

Secured product, legal receiptsExpanded Collateral

of Willingness to Pay

Secured product, inspected warehousesCost-Effective Screening

Result from Use

Benefits of Warehouse Receipts

Traders and Farmer

Organizations

Exporter/ Wholesaleror Processor

Inspection

&

Licensing

Co.

Bank

Map of Products,

Receipts and Credit Transactions

Insurance Co.

Warehouse

Farmers

Trade credit

Trade / seasonal credit

Product Receipt

Key

Warehouse Receipts

Preconditions

• Legal and regulatory requirements, rights and

responsibilities of participants, title and

transferability of goods, use of receipts for

collateral

• Common accepted grades and standards

• Trustworthy certification and inspection service

• Market information systems

• Legal and regulatory expertise, contracts,

commercial code, financial regulations

• Financial institution acceptance of instrument

Warehouse Receipts

Expertise Needed

• Warehouse management, certification and

inspection

• Commodity grades and standards

• Grain merchandising

• Legal and regulatory: title, collateral,

negotiable receipts, warehouse inspection

and certification

• Insurance

• Appropriate lending experience



Coffee Break


Thanks for the attention!!

Module 7

Rural and Agricultural

financial products and

services

rural and agricultural financial products and services...rural products for differentiated groups...

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