Sunday, 25 August 2019

Resolving the perennial credit problem for small-scale farming: innovative solutions for staple food value chains

Access to finance by small-scale producers and value chain operators is the foundation of a well-functioning value chain and ensures steady agricultural development. For the majority of small scale producers, access to credit for staple food production is either unavailable or comes at prohibitive interest rates. Unlocking credit and finance constraints remains a huge challenge for agrifood chain development. At the Making Finance Work for Africa (MFW4A) Conference, held in Kampala Uganda in 2011, a declaration of principles was made on enhancing financial capability in Africa. The Kampala principles provide some useful guidelines in the search for solutions. Some of the relevant principles seek to: (i) ensure legislation to remove barriers to financing agriculture operations such as warehouse receipts and contract farming, and support the emergence of viable local rural financial institutions; (ii) develop financial markets to support the enhanced capacity of financial institutions to lend and meet the market demand; (iii) strengthen farmer organizations so that the production end of agricultural value chains becomes an effective influence on agricultural finance policy-making; (iv) improve financial literacy and farmer business education, inclusive of both men and women, as well as youth; and (v) ensure a sustainable flow of information on markets, output prices, cost of inputs, and cost and conditions of finance and credit.
Innovative solutions are required for staple food crops and can involve the public sector or public-private partnerships. Some finance models that have been applied with some success to cash or export crops could also be tried with staple crops. Among these are: (i) the social lender model (which focuses on lending directly to producer organizations and small-scale businesses); (ii) direct financing of out grower schemes where producer-buyer relations already exist; and (iii) finance schemes that involve two or three partners, including a finance institution and producer organization, with a government agency (sometimes with donor financial support) often supplying a guaranteed fund to back up the programmed.
One example is Ghana’s National Rural Growth Programmed (NRGP), which has test- piloted a new credit system as part of the value chain development targeting industrial crops, exported fruits and vegetables, crops grown especially by women, and livestock. Under the programmed, farmer groups, including those participating in out grower schemes, can register as a company known as a Special Purpose Vehicle (or SPV). The SPV has access to commercial bank finance and can provide farmers (or out growers) with input credit (fertilizers, herbicides, etc.), machinery and other mechanical services, as well as training in group cohesion and coordination. The programmed appears to be working, with a steady increase of participants – over 2 500 Ghanaian farmers (as of July 2012) benefit from the credit system – and with high repayment rates (91-98%).
Nigeria offers a different model to facilitate access to credit for value chains. Under the incentives-based
Shared System, the government of Nigeria, through the central bank, provides incentives to commercial banks to lend to private agribusinesses by reducing their investment risks in the agricultural sector. As a result, many commercial banks in Nigeria have expanded their lending and investment activities, focusing particularly on seed production where they have been actively seeking potential partners to expand seed production and distribution.
Another promising approach to facilitate access to credit for producers in staple food value chains is the inventory credit or warrant age system. Under this system, producers stock specific quantities of surplus production (usually cereals or other easily storeble crops) in a reliable warehouse, jointly managed with a financial institution. The stored crop is used as collateral in order to access credit. Once the credit is reimbursed, the producer can retrieve the production and sell it when market prices are at their seasonal peak. The warrant age system, first introduced by FAO in Niger, has since spread to several countries of the region and is being taken up by a growing number of cereal-based producer organizations. Under the European Union-funded project, All-ACP Programmed for Basic Commodities in the African-Caribbean and Pacific (ACP) countries, FAO examined several producer organizations in West Africa and concluded that, while warrant age is a powerful institutional innovation for credit access, its success depends on a number of critical conditions being met, such as: (i) the presence of a local financial partner; (ii) a functioning producer organization with sufficient internal coordination capacity and sufficient storage capacity; (iii) a storable commodity subject to predictable cyclical prices (high and lows within a season); and (iv) ability of the producer organization to fulfil contract obligations vis-a-vis the financial partner.
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