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Presentation Outline
Background Findings from a Conference Findings from a Study Conclusions
Background
Agriculture Credit - The history of failed interventions Agriculture Credit Overview of recent approaches World Banks work in Agriculture Risk Management Food Crisis and the renewed interest in Financing Agriculture Studies, Conferences, and New Interventions
Agriculture Credit and a History of Failed Interventions in the 80s and 90s and little activity in most of the 2000s
Emphasis on Agriculture Development Banks and large credit lines = low repayments, elite capture, political influence on credit decisions Subsidized interest rates or interest rate caps = banks are unable to recover their costs; if there is reimbursement from the government most often limited funding leads to credit rationing and again to elite capture Loan forgiveness programs = bad credit culture Savings completely neglected = farmers are unable to build up reserves for own risk management purposes One off actions - sustainable access to credit for farmers not a topic Guarantee programs for banks are expensive and often lead to moral hazard and cherry-picking
Expert Meeting on Managing Risk in Financing Agriculture, April 2009, Johannesburg 14 Findings
Financing for Agriculture is viable if supported by sound risk management at multiple levels Good banking practices combined with understanding of the sector and the client is a core requirement Insurance is one tool in an overall risk management strategy
Mutually beneficial partnerships through which risk and benefits are shared lower risk Aggregation of clients reduce risk and transaction costs Innovative forms of collateral and collateral substitutes provide added security to lenders Financial literacy education is equally important for staff and clients of financial institutions
Expert Meeting on Managing Risk in Financing Agriculture, April 2009, Johannesburg 14 Findings
Method:
Rapid assessment of 15 institutions Detailed assessment of 2 institutions
Large loans traditional financial ratio analysis. 3 banks use credit bureau only for large farmers 1 bank uses bio-metric identification 5 banks use credit grading; only 1 uses risk modeling
Innovations
Use of biometric tools to uniquely identify borrowers. Parametric credit risk assessment and partial outsourcing of this process Tripartite lending arrangements produce buyer, lender and borrower. Provision of fee-based agricultural and business advisory services.
Some Conclusions
Lending to small farmers at scale requires nontraditional credit assessment systems Lending to small farmers requires use of collateral substitutes, but not other elements of microfinance. Multi-level diversification is key to credit risk management at the portfolio level Successful agricultural lenders have domain expertise in agriculture at multiple levels