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SUCCESSFUL MODELS

FOR FINANCING

THE RURAL AND AGRICULTURAL SECTORS

The Rural Finance

Partnership presents

The views and opinions expressed in this publication are those of the authors and do not necessarily reflect the views of Incofin Investment Management, the Inter-American Development Bank or other funders involved in the Rural Finance Partnership for Latin America and the Caribbean

ACRONYMS AND ABBREVIATIONS

ATM(s) Automated teller machine(s) AVC(s) Agriculture value chain(s) AVCF Agriculture value chain finance DFS Digital financial services EbA Ecosystems-based adaptation EMS Environmental Monitoring System FI(s) Financial institution(s) GIRAS Gestión de Información de Riesgos Agropecuarios y Sistémicos (Management of Agricultural and Systemic Risk Information) GSMA Global System for Mobile Communications Association IADB Inter-American Development Bank Incofin IM Incofin Investment Management LAC Latin America and the Caribbean MFI Microfinance institution MIF Multilateral Investment Fund MNO(s) Mobile network operator(s) MSME(s) Micro, small and medium-sized enterprise(s) NDVI Normalized Difference Vegetation Index NGO(s) Non-governmental organization(s) P2P Person-to-person PAR30 Portfolio at risk over 30 days PC Personal Computer POS Point-of-sale RFP Rural Finance Partnership of MIF and Incofin IM SHF(s) Smallholder farmer(s) SPO(s) Smallholder producers’ organization(s) TA Technical assistance UNEP United Nations Environment Program VCF Value chain finance

Box 2-1: Assessing agro-climate risks – the GIRAS software by Sembrar Sartawi 33

Box 2-2: CelsiusPro’s Environmental Monitoring System (EMS) 36

Box 2-3: Index – or parametric – insurance solutions 39

Box 2-4: Critical factors for sustainable agricultural insurance schemes 42

Box 2-5: Crezcamos’s Microfinance Ecosystem-Based Approach 44

Box 3-1: Jardín Azuayo’s “solidarity correspondent agents” 54

Box 3-2: “Fede Punto Vecino” – The largest network of banking agents in El Salvador 56

Box 3-3: Tigo Money – financial services at the push of a button 60

and a common commitment to deep engagement in the LAC region. To this purpose, the RFP provides MFIs with tailored technical support to develop and roll out new credit and savings products, innovative delivery channels and enhanced risk and social performance management practices. The program’s primary objectives are, through partner MFIs, to provide higher quality financial services to 130,000 rural clients over the RFP’s four-year tenure and to encourage knowledge-sharing and peer-to-peer learning at the regional and industry levels.

Organized on October 27, 2016 by Incofin IM under the patronage of the MIF, the RFP learning event “Successful Models for Financing the Agricultural Sector – Insights from Latin America and the Caribbean (LAC) region” gathered fifty-two participants representing twenty-two financial service providers from twelve LAC countries to exchange experiences and best practices with regard to serving smallholder farmers and rural entrepreneurs.

The toolkit that follows represents a collection of the success stories presented during the event as well as practical tips for financial institutions hoping to replicate these models. We hope that the toolkit proves useful for our partners in the LAC region and globally.

FOREWORD

While important strides have been made in recent years to broaden access to financial services in Latin America and the Caribbean (LAC), much work remains to be done in the region for those committed to expanding financial inclusion. Particularly salient for investors, fund managers, microfinance institutions (MFIs) and donors alike is the “last mile” challenge of attending typically underserved and hard-to-reach rural populations with appropriate financial services. Indeed, 54% of rural adults in LAC remain outside the formal financial system, which faces the considerable challenge and opportunity of meeting a 19 million US$ demand for agricultural financing that, thus far, remains unsatisfied. In addition to improving the livelihoods of rural households, concerted efforts in expanding financial inclusion in rural and agricultural communities will likely play an important role in how we confront global challenges of food security, climate change and other economic and demographic shifts in the years to come.

Recognizing the unique opportunity to promote social and economic development in the LAC region, the Inter-American Development Bank’s Multilateral Investment Fund (MIF) and Incofin Investment Management (Incofin IM) formed the Rural Finance Partnership (RFP) in 2014, a technical assistance program aimed at enhancing the financial, operational and social performance of rural-focused MFIs in Latin America. The partnership builds upon both organizations’ extensive experience in rural microfinance

ENABLING INCLUSIVE

AGRICULTURE VALUE

CHAINS:

Opportunities

for financial institutions

In recent years, the agriculture value chain (AVC) approach has emerged as a prominent methodology in promoting the competitiveness of smallholder farmers and of micro, small and medium-sized enterprises (MSMEs), while fostering socio-economic development and poverty reduction. A value chain approach seeks to understand how the different actors—from input suppliers and primary producers to end-buyers – operate as a complex system composed of horizontal and vertical linkages with one another and with the support markets that provide technical, business advisory and financial services to the system.

ENABLING INCLUSIVE AGRICULTURE VALUE CHAINS: 13 opportunities for Financial Institutions

12 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector

THE ROLE of a Facilitator

integrated value chains and to strengthen the capacities of local market participants without creating distortions or dependence upon external sources of support.

An example of how a Facilitator can enable the development of an inclusive AVC system by helping SHFs to overcome entry barriers while strengthening vertical and horizontal intra-chain linkages is given in Box 1-1 based on the work conducted by Swisscontact.

An extra-chain actor who acts as Facilitator can promote systemic changes within the AVC by identifying and addressing challenges and opportunities across the chain to strengthen the whole market system. This role is particularly critical when the individual players within the AVC lack the coordination, skills, resources or competences to produce these changes independently. A facilitation strategy, in contrast with an interventionist strategy, aims to facilitate the articulation of

Box 1-1: A facilitation approach by Swisscontact: FOCAPIS Program

Swisscontact is an independent, business-oriented foundation, promoting economic, social and environmental development since 1959. Sustainable growth driven by an innovative private sector is the foundation of Swisscontact’s initiatives. FOCAPIS Program Launched in 2016, FOCAPIS is a program aimed at supporting the beekeeping sector in El Salvador and Nicaragua by facilitating stronger ties between upper and lower level AVC actors in the local honey AVCs. The effort necessitated extensive value chain mapping, or the delineation and analysis of relations existing among the different layers building the chain. By doing so, Swisscontact was able to identify challenges preventing the beekeeping sector from becoming inclusive and supportive of SHFs’ livelihoods.

A well-functioning value chain provides the actors involved with services that are essential to the sustainable development of their activities. These include:

1. Supporting more value-adding activities at each stage of the production process,
2. Helping to ensure compliance with stan- dards and technical regulations,
3. mproving the environmental aspects of products and services along the whole va- lue chain,
4. Providing access to finance in order to in- crease productivity and innovation,
5. Organizing and strengthening groups of operators , and building their backward and forward linkages,
6. Addressing policy , regulatory and insti- tutional issues ,
7. Developing information channels that can help value chain actors work more efficiently.

The value chain approach has its funda- mentals in a systemic way of thinking. A full analysis of the system’s structure and dynamics is needed to identify critical

factors, which pose challenges and create barriers to market access at all levels of the value chain, but especially for those players at the base. For instance, asymmetric access to market information, weak linkages, limited access to know-how and technology, poor infrastructure and lack of access to finance represent only a handful of obstacles to inclusive value chain development. To address these ‘systemic constraints’, value chain actors must endorse new behaviours and embrace new business models, in order to drive the systemic changes needed for a chain to operate sustainably in the long run.

Intra and extra-chain “enablers” can sup- port the AVC to attain its development poten- tial by either facilitating or directly providing access to key services that support SHFs to increase their competitiveness and participa- tion within the AVC. The following sections provide a framework for identifying key enablers of inclusive AVC development and highlight how FIs may capitalize on these opportunities to implement effective Agriculture Value Chain Finance (AVCF) strategies.

ENABLING INCLUSIVE AGRICULTURE VALUE CHAINS: 17 opportunities for Financial Institutions

16 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector

- Access to finance (steps 1 to 5): CAPUCAS acts as a financial intermediary between its members, who often lack access to adequate financial products, and finan- cial service providers, who do not have the means to reach out to small coffee producers. CAPUCAS obtains funding based on coffee sales contracts (see steps 1, 2, 3 and 4) from impact funds, such as Incofin’s Fairtrade Access Fund, and from local banks. CAPUCAS then provides its members with short-term loans to finance the coffee harvest (to buy inputs, fertilizers, etc.) and with medium- to long-term loans to foster their pro- ductivity, for example, by acquiring equipment or by renewing plantations affected by diseases (see step 5.) - Quality enhancement and commercialization (steps 6 and 7): CAPUCAS also acts as a trading partner for its SHF clients, conducting quality controls, providing processing services and eventually purchasing the certified coffee beans (see step 6), therefore reducing the risk of rejection of export assignments. CAPUCAS assumes the responsibility for commercializing the coffee to international buyers (see step 7). - Enhancing productivity and fostering innovation (step 8): In addition to loans, farmers receive technical assistance (TA) from CAPUCAS in all activities that relate to production (including fertilization, pest and disease control, etc.) and can also purchase their agricultural inputs directly from the cooperative (see step 8). For example, CAPUCAS has established a plant to produce organic inputs according to formulas that ensure good “cup quality” that are then sold to members at lower-than-market prices. The capacity building offered by CAPUCAS has proven crucial to ensuring an adequate quality of the coffee supply.

*Each number in Figure 1-1 is further detailed below

Figure 1-1: CAPUCAS coffee value chain mapping

COFFEE BUYERS

CAPUCAS

TRADE FINANCE LOAN CONTRACT

IMPACT INVESTORS

COFFEE PRODUCERS

International Coffee Market

Long-term investment loan for the rehabilitation of coffee estates

Credit disbursement, based on future sales contract

CAPUCAS buys certified coffee from small farmers at fair prices and implements quality controls

International buyers purchase and commercialize high-quality certified coffee from CAPUCAS at fair prices

5 8 9

6

3 7

2

4

1

Credit repayment

Short and long-term funding

Technical assistance & inputs

Support with certification

ENABLING INCLUSIVE AGRICULTURE VALUE CHAINS: 19 opportunities for Financial Institutions

18 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector

THE ROLE of Financial Institutions

Access to finance is often a significant barrier to the development of an inclusive and well- functioning AVC. At the same time, AVC systems offer excellent opportunities for FIs to unlock smallholder market segments by utilizing risk mitigation, guarantee and pooling mechanisms made possible by value chain linkages.

While conventional lending relies heavily on the creditworthiness of the individual borrower, a value chain finance (VCF) methodology takes a systemic approach, looking at the entire set of actors, linkages and markets of a given value chain. Financing decisions are made with reference to the health of the whole system, rather than that of the individual applicant.

When FIs seek to attend the small-scale farming sector, embracing a VCF approach can bring several important benefits:

• By considering the links and transactions that take place between the SHF and

other actors of a chain (e.g. the sale of a predictable flow of agricultural goods to a viable buyer) as a collateral substitute, VCF approaches help address one of the main obstacles for SHFs in accessing funding – the lack of a physical collateral

• and therefore enable greater financial inclusion;
• By exploiting existing linkages and intra- chain information, FIs gain a broader understanding of embedded risks and, consequently, are better positioned to mitigate those risks;
• By developing a thorough expertise of the whole agricultural system, financial institutions can offer more appropriate financial products and services, tailored to the specific needs of smallholders;
• Finally, by providing key non-financial services to AVC, financial institutions can contribute to the development of more inclusive and sustainable market systems, to which FIs can further expand their outreach.

An SPO may function as catalyser of financial

resources from FIs to SHFs by acting as:

• Financial intermediary, borrowing from an FI and then re-lending to its SHF associates;
• Broker, promoting financial products from an FI to SHFs;
• Guarantor, partnering with an FI to mitigate lending risks through the SPO’s sales contracts. - Certification and price stability (step 9): CAPUCAS supports its members in obtaining “fair trade”, organic and other certifications to ensure fair and relatively stable prices. Through certification, quality control and direct contacts with importers abroad, CAPUCAS can reduce the risk of price fluctuation.
• Access to information and markets: By promoting members’ coffee through fairs and business tours, CAPUCAS has developed a recognized brand and achieved sustained growth in export volume. The cooperative has established fixed contracts and long-term partnerships with fair trade importers in Europe, the US and Japan, helping to ensure a more stable income stream for its SHF members.

3

4

ENABLING INCLUSIVE AGRICULTURE VALUE CHAINS: 23 opportunities for Financial Institutions

22 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector

Identification of bottlenecks and opportunities for intervention (See Figure 1-5)

This step is about finding an entry point and/or as it was the case for IDEPRO (see Box 1.3) identify structural threats

Diagnostic or SWOT analysis

The business relationships existing across segments and among the actors are analyzed one by one.

Figure 1-4: Critical steps for a successful agriculture value chain fi- nance strategy (Steps 3-4)

Figure 1-3: IDEPRO quinoa value chain mapping

Trading

Collection and industrial processing for international registered markets

Registered exportation

Grain collector

Industrialization

Non-registered exportation Internal market

Processing

Production

Processors of products designed for exportation and for local consumption

Collection and traditional processing by hand for local consumption markets

Producer of organic quinoa Producer of conventional quinoa

Input Providers

Seller of inputs for sowing

Seller of machinery, tools and agricultural inputs

Producer of natural fertilizer

Ground transport

RELATED SECTORS

RELATEDSECTORS

LEVELS

SEGMENTS

ENABLING INCLUSIVE AGRICULTURE VALUE CHAINS: 25 opportunities for Financial Institutions

24 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector

Box 1-4:

Identifying the bottlenecks: IDEPRO’s experience with the Brazil nut value chain

Since 2005, IDEPRO has been attending the Brazil nut value chain through both tailored technical assistance and credits in the northern region of Bolivia. This value chain employs more than 20,000 smallholders. IDEPRO initially structured its intervention through tripartite agreements with both SPOs and the producers themselves (see step 1 in Figure 1-5 below). The initial arrangement was that IDEPRO would provide loans to the SPOs, which would then automatically distribute these funds to the families involved in harvesting activities (see steps 1, 2 and 3). Figure 1-5: IDEPRO brazil nut value chain mapping

Harvesting Families

Tripartite Payment Agreements

Problem: There was a misappropriation of funds by the cooperatives and delays providing funds to the families.

Support and technical assistance are provided to the cooperatives and the harvesters for a sustainable management of the forests.

Brazil Nut Cooperatives

Provision of resources to the cooperatives for disbursement of credits to the families

IDEPRO

4 Provision of credit to the families Provision of brazil nutand payment in cash

1 the familiesProvision of credit to^35

However, IDEPRO quickly identified a problem at step 3 - the SPOs were misappropriating the funds and delaying disbursement of loans to producers, leading to liquidity issues for the SHFs and to the non-repayment of loans from the SPOs back to IDEPRO. Thus, the institution decided to eliminate step 2 and to instead provide loans directly to producers (step 4), who continue to collect the Brazil nuts and sell them to the SPOs (step 5), the proceeds of which are then used to repay IDEPRO (step 6).

28 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector

Experience has shown that AVC lending models can work in nearly any productive sector, across a variety of ecological settings (high plateau, valley, and tropics) and demographic areas (urban, semi-urban and rural). That being said, FIs should consider a host of key factors in order to implement a successful AVCF strategy:

1. There should be a clear willingness on the part of the FI to develop such a com- prehensive and specialized offer. The decision to commit to AVCF should be made by the FI’s board of direc- tors, which should ensure buy-in by se- nior management and staff at all levels.
2. FIs should intervene only in strong and via- ble value chains that do not display structu- ral problems, adverse public policy and/or a negative trend in key economic indicators.
3. In their early stages, AVCF methodologies may require additional investments before becoming commercially viable. An FI mi- ght consider subsidizing such investments, using revenues from other products, while the value chain becomes self-sustaining.
4. Starting from the base of the va- lue chain by helping SHFs streng- then their relationships with providers and buyers, then diversifying the offer towards other segments can help pro- mote consolidation of the whole chain.
5. Implementing a system for monitoring key indicators is essential for systema- tizing and socializing impacts of the in- tervention. To optimize effectiveness, such information should be commu-

nicated for institutional strategy and decision-making at least twice a year.

6. Offering technical assistance services to SHFs alongside financing is not es- sential, but highly desirable since it can increase social impact and reduce risk.

Enabling inclusive AVCs is a difficult task that may require the cooperation of a wide range of actors, who at different levels and with different expertise, can boost the sustainability of AVC systems and their impact on smallholder market segments. A “super” chain facilitator enabling multi-stakeholder partnerships and strengthening intra-chain linkages; a SHF aggregator catalysing key extension services and formalizing SHF segments; and a financial institution providing access to tailored financial products and services, represent types of key enablers for inclusive AVC development.

FIs seeking to engage in AVCF should be prepared to invest considerable effort and resources to deeply understand AVC actors, relationships and financial needs at each level and along each segment of a chain. By working in collaboration with these players, FIs may benefit from the comparative advantage of having in-depth knowledge of the AVC, as well as market- based risk management mechanisms, which can contribute to the design of sounder AVCF strategies.

CLIMATE SMART

LENDING:

Innovations and opportunities

for increased resilience

The high vulnerability of smallholder farmers to climate change deeply increases the riskiness associated with agricultural financing, often discouraging FIs from offering viable services despite widespread demand from SHFs grappling with the consequences of extreme climate events. As the patterns of droughts, floods and tropical storms become more unpredictable, FIs see themselves potentially exposed to mass loan defaults, sharp deterioration of their portfolio quality and increased loan provisioning needs, which could be coupled with a decline in solvency and financial sustainability. The Latin America and Caribbean (LAC) region is extremely vulnerable to climate change, as are the 15 million family farms (controlling about 400 million hectares) operating in the region. The Intergovernmental Panel on Climate Change forecasts an increase

34 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector^ CLIMATE SMART LENDING: 35 innovations and opportunities for increased resilience

GIRAS compiles and processes weather data from local meteorological stations as well as satellite and other aerial imagery to produce a series of thematic maps geographically visualizing climatic risks. The system simultaneously processes agricultural production and client livelihood data from Sembrar Sartawi’s existing databases, aggregating the information to create a comprehensive and quantifiable measure of each client’s vulnerability and resiliency before a climatic event occurs. By merging the output of climatic risk analysis (step 1) with client-specific data on agricultural production and socio-economic vulnerability (step 2), Sembrar Sartawi is able to utilize data on agro-climatic risks at both the individual level, via its agro-climate risk index, and at the aggregate level, through agro-climate risk maps (picture above). Other factors such as (i) the institution’s most concentrated sectors of intervention, (ii) farmed areas by crop and (iii) state of production infrastructure are further analyzed and mapped. These different layers of data are then merged with information from non-performing clients in order to provide Sembrar Sartawi with a comprehensive view of clients’ and the institution’s risk exposure. Data behind the risk maps can be segmented to perform concentration analysis according to different criteria (for example, by level of risk, geographical area or crop), then used by senior management in day-to-day risk management activities and for long-term strategic operations. GIRAS has allowed Sembrar to more effectively monitor and mitigate the systemic risks linked to agricultural production both for the MFI and its clients. Adequately managing its overall exposure to agro-climatic risks has also enabled the institution to increase its agricultural outreach, to help its clients better understand the agricultural and climatic risks they face and to maintain an excellent portfolio quality.

The evident benefits from processing and analysing agro-climatic data include:

- Lower credit risk and improved portfo- lio quality. Anticipating climatic events and monitoring portfolio concentration can enable FIs to take preventive actions (such as reducing concentration in high- risk areas or crops) and therefore reduce financial losses. - Tailored financial and non-financial ser- vices. Based on agro-climatic information, loan officers can adapt the credit offered to specific production and risk exposure

SOURCING RELIABLE AND ACCURATE agro-climatic data

Accurate and reliable agro-climatic risk assessment tools are per definition “data- intensive”. Access to these data represent one of the biggest challenges for microfinance players, either due to the availability (or lack thereof) and accuracy of existing datasets or due to prohibitive costs related to their generation and/or collection.

patterns of the client in order to maxi- mize a client’s repayment capacity. Addi- tionally, sharing data with clients to in- form them about agro-climatic risks that may negatively affect their livelihood activities can allow them to put in place preventative measures.

- Responsible financial inclusion. Financial institutions can better profile their clients based on their exposure to agro-climate risks and better evaluate their repayment capacity in case of shocks, which can pro- tect the client against over-indebtedness.

While historically agro-climatic information has been provided solely by regional, inter- governmental organizations or specialized state-sponsored agencies, the increasing de- mand for tailored agricultural and climatic data has progressively driven private-sector players into the market. These companies

36 SUCCESSFUL MODELS FOR FINANCING^ the Rural and Agricultural Sector^ CLIMATE SMART LENDING: 37 innovations and opportunities for increased resilience

gather and process agro-climatic informa- tion, making it accessible to and actionable by end-users through early warning and/ or forecasting tools as well as through sec- tor-specific products and solutions. Box

2-2 below explains how CelsiusPro uses big data to offer innovative platforms for envi- ronmental risk analysis and evaluations.

Box 2-2:

CelsiusPro’s Environmental Monitoring System (EMS)

Recognizing the scarcity of weather risk assessment tools in the context of accelerating climate change, CelsiusPro, an award-winning Swiss company specialized in the design of tailored weather index products, developed the Environmental Monitoring System (EMS), a proprietary platform for gathering, processing and visualizing agro-climatic risks. Environmental Monitoring System (EMS) EMS is a system that enables organisations of all types, from corporations to farmers’ cooperatives, to access and visualize multiple sets of high-quality climatic and agricultural data (from satellites, ground measurement devices and additional data providers) and to run segmented analyses in order to quantify how, when and where the impact of climate events might be felt. In total, more than 21 databases relating to different technical criteria – such as rainfall, air temperature, soil surface temperature or soil moisture – are available through EMS. FIs may utilize this kind of platform to build on their risk assessments tools or to complement in-house datasets with more complete and accurate climate and agriculture data.

Figure 2-2: Celsius Pro’s Environmental Monitoring System