Agri-ProFocus Ethiopia

Batu Agri-Business

Finance Fair Reports

Batu

March 2015

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Colophon Report compiled by: Kebede Dhuga

Contact Information Agri-Profocus Ethiopia

Agri-ProFocus Netherlands

Gerrit Holtland Agri-Profocus Ethiopia Coordinator Visiting address Near Dreamliner Hotel, Behind United Bank Building (6th Floor) Postal address PO BOX 201319 Tel: 251 11467 1059 Addis Ababa, Ethiopia E : gholtland.agrihub@gmail.com Website http://agriprofocus.com/ethiopia

Jan Willem Eggink Agri-ProFocus network facilitator Visiting address Agri-ProFocus Jansbuitensingel 7 Arnhem Postal address Jansbuitensingel 7 6811 AA Arnhem T: +31 (0)26 7600397 M: +31 (0)6 52 68 41 92 E: jweggink@agri-profocus.nl S: jweggink1 Website www.agri-profocus.nl

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Table of Contents

1 Introduction ............................................................................................................... 3

2 Objectives of the Fair................................................................................................ 9

3 Scope/Components of the Fair ................................................................................. 9

3.1 Preparation of the Fair ............................................................................... 10

3.2 The Event/Finance Fair .............................................................................. 11

3.3 Reflections from core team members and other participants ................. 13

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1 Introduction The economy of Ethiopia is largely based on agriculture, but like elsewhere in Africa

the level of investment in agriculture has been less than 15% and this affects the growth

of agriculture seriously. Banks have for long considered farmers, agricultural coops and

rural SMEs as being not bankable as they lack organizational capacities and

professionalism, and also the lack of collateral is an issue. For those that do have a valid

business case, it was often impossible to get access to finance as Banks have little or no

means of managing the some risks related to agriculture. Moreover, since they have

sufficient demand from around cities and town, where infrastructures are relatively

available, banks do not have interest to go to rural areas, which increases transaction

/operational costs.

Many farmers in developing countries are too big to get support from microfinance

institutions, yet too small for commercial lenders. The result is a group known as the

“missing middle”: farmers who can’t get access to finance. Such farmers often have to

depend on private financiers who provide high-interest loans that are often not very

transparent and certainly not beneficial to the farmer. Banks interested in supporting

agriculture all aim at the same group of large, well established farms with a good track

record, credibility and collateral.

Transaction costs play a large role here: it is much more profitable to build long-term

relationships with big farms, which need big loans, than with many clients who need

smaller loans. Regardless of the size of the loan, a bank has to do the same amount of

work in assessing the risks involved and providing financial services. The marketing

process, the due diligence, the financial transactions and the monitoring process, all

take the same time, whether it is for a loan of US$ 10,000 or one of one million dollars.

In addition, bigger farms tend to be better managed; they can provide more information

about the work they do and the risks they take. It is not surprising that banks prefer to

work with them. At the same time, there are now microfinance institutions (MFIs) in

many parts of the world.

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They have been able to bridge this information gap by setting up social structures (often

groups of entrepreneurs) which are then responsible for the financial behaviour of

individual members. This significantly reduces the information and monitoring costs.

MFIs have also pioneered the way of dealing with collateral by accepting “soft”

collateral like contracts, links with other parties in the value chain, technical assistance,

or insurance. MFIs are often involved in creating soft collateral themselves, helping

their clients improve their business and thus securing their lending. This model has

dramatically changed the opportunities for many of those at the bottom of the pyramid.

However, this approach still follows a “relationship banking” model, which is time-

consuming and expensive. Though the model is replicable, it is difficult to scale it up

to reach those who are part of the “missing middle”. New risk-profiling approaches

offer the promise of helping the “missing middle”: farmers who are too small to attract

loans or be of interest to commercial banks, and too large to benefit from microfinance

institutes.

Bridging the gap

Only looking for collateral leaves a lot of people without finance

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While both the lower and the upper end of the finance market are served with

“relationship banking” models, the missing middle can be served with a

“transactional banking” model. With this model the bank bases its assessment of

the creditworthiness of a farmer on secondary sources of information. Farmers can

be assessed according to several indicators, which show how they are managing

their farm and thus the likelihood of them defaulting on a loan. This kind of

information is even more important when collateral is lacking, as is often the case

with farmers in the “missing middle”.

Parallel with these there is a need to work on commercial mind set: In Africa, too

many people depend on agriculture for their means of survival: Subsistence farming

culture reinforces the status quo. Only when companies produce more with less,

when we reward farmers displaying a commercial mindset, can we move from 10

per cent technology versus 90 per cent work, to the reverse. In order to achieve such

output levels, African farmers should rethink the way they do business. In Africa,

the agricultural sector has become obsolete. It suffers from low productivity and

delivers at an insufficient quality level, because of which it finds obstacles on its

way to the market. In essence, unorganized subsistence farmers should begin to

recognize the business potential of their everyday toil.

Traditionally, banks look at two C’s: collateral & capital. Without one of these, they

are not likely to provide loans. More progressive banks will also take into account

two more C’s: crops and contracts, which can function as soft collateral for loans.

However, those four C’s only look at the results of previous investments, without

giving a full idea of the possibilities of success in the future. Withholding loans to

farmers who can’t show one of these four C’s pushes them into a vicious circle:

without investments, they can’t improve their business and they will never get the

sufficient collateral, capital, contracts or crops needed to attract investment &

improve their business.

Farmers can escape this vicious circle if banks are willing to take other kinds of

collateral, or look at information which can show success in the future. Among this,

a few more C’s can be included:

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Capacity and character: what is the farmer’s capacity to manage her farm? Does

she have an entrepreneurial spirit? Does she receive technical assistance?

Competitiveness: does the farmer know her market and is she able to adapt

product, quantities and qualities to market demands?

Context and chain: how is the farmer embedded in the value chain? Does she have

long-term contracts with the same suppliers and processors or traders?

Certification: is the farmer certified, and does this enhance good agricultural and

management practices? Does the certification scheme generate a price premium?

Cash flow: what are the future cash flows? Does the farmer have a financial mgt

system?

Credibility: what is the farmer’s financial track record?

By scoring a farmer on the basis of these additional factors, banks can get a more

comprehensive insight, and this can serve as the necessary input for their own due

diligence process. Farmers who produce for the market need financing to maintain and

improve their agricultural production. Banks in developing countries are looking for

business investment opportunities. But what is needed to match the interests of farmers

and bankers?

To answer this question we need to understand, firstly, that agriculture follows the

seasons and that therefore most farmers have a seasonal pattern in their cash flow. Their

expenses are highest during the growing season, with peaks at planting and harvesting.

It is only when selling their produce after harvesting that cash will start coming in. This

seasonal pattern is also reflected in the prices: most farmers have no choice but to sell

when prices are at their lowest. Farmer organizations that have the ability to bulk

produce still need to balance the seasonal patterns with market opportunities. Farmers

and their organizations are therefore interested in financial services that can help them

overcome the seasonal constraints. Some farmers have themselves organized saving

and credit schemes for this purpose.

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On the other side are the banks and other financial institutions that look for

opportunities to sell their financial services. Often, however, they have difficulties

expanding into rural areas. First, transaction costs are higher due to poor infrastructure,

reduced value of land and livestock as collateral, and the fact that potential clients live

far apart. Secondly, the risks are higher due to the low level of capitalization of rural

entrepreneurs and the seasonal peaks in demand. The strategies that these banks use to

target poor consumers and small entrepreneurs in towns, may not apply to the

countryside. Banks, in short, need a better understanding of the agri-business. The Agri-

ProFocus network wants to help bring about a better match between farmers and

bankers. This is done through three main activities:

Help farmers improve their business so that they can qualify for the services that

banks have to offer.

Help banks improve their knowledge about agriculture and the financing needs of

farmers.

Initiate and coordinate exchange and learning events that bring together farmers,

bankers and other stakeholders. Value chain finance is an important subject for

such events. If done effectively, value chain finance will help to increase profits

and thus benefit both the actors in the value chain and the financial service

providers.

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Barriers to Adequate access to Financial Services for Agribusiness Development

Agricultural Production, Processing and Related Enterprises (ARE’s)

Intervention points to raise access to and reduce cost of financial services

Comprehensive Africa Agriculture Development Programme (CAADP), 2011

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2 Objectives of the Fair The overall objective of the Batu Agri-Business Finance Fair is to link the demand and

supply sides of financial services in agri-business/rural financing. Both partners; the

demand side (farmers, farmers’ organizations /Cooperatives &Unions, rural SMEs etc

and the supply side (Banks/MFIs/RuSACCOs/VSLAs/SILCs) could get opportunities

to come together, discuss & understand each other’s businesses along with operations.

Specifically, the finance fair has the following objectives:

To improve awareness and access of farmers to information on the financial

products and services in the market;

To promote agriculture/farming as a viable investment for financial institutions;

To provide space for the start of deal-making arrangements between farmers

and financial service providers;

To encourage the development of financial services targeting farmers, farmers’

organizations, Rural SMEs and others operational in the sector;

To encourage farmers, farmers’ organizations, Rural SMEs and others which

are active in wise use of financial services available to them;

To discuss on successes, challenges & recommendations stated for agribusiness

financing.

3 Scope/Components of the Fair The Batu Agri-Business Finance Fair had three major components: Viz. Exhibition,

related paper presentation and field visit. The exhibition was visited by all participants

of the fair. Six papers, selected from different sectors, were presented and discussions

were made on the same. In paper presentation session; farmers’ practices with financial

service providers and agricultural extensions services, challenges they have and their

needs for further operations were presented from horse’s mouth. The panelists

described that they are not satisfied with the services they get from MFIs like OCSSCO

in that it does not have social objectives and with serious rules and regulations. They

also indicated that the community members are not comfortable with group lending

modalities.

On the second day, Women Onion Seed Producers Group was visited. The seed

producers indicated that they have been working in collaboration with Woreda

Agriculture Office, Malkassa Agrcultural Research Center, Oxfam/RVWCDO,

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MFI/OCSSCO, Oromia Seed Enterprise, input suppliers/chemicals etc. The women

group indicated that OCSCCO was not in time, by which they have been subjected to

seed price increment. The producers also disclosed the fear they have on market for

their produces (seed). On the same date, Maki Batu Pack house, where green beans are

packed and sent to Addis for export, was visited. In here, value chains along with the

actors were briefed to the visitors. Maki Batu MP FCU indicated that the contract

farming to which it entered with private enterprise is not effective towards the union.

The current price and the price they two parties agreed is quite different; it is against

the union.

3.1 Preparation of the Fair The Batu Finance Fair was organized by APF-Ethiopia in collaboration with Oxfam.

These two organizers received back-stopping support from the other core team

members established for this purpose, at the two were the lead ones. The core team

members are APF/E, Oxfam, ANFEA, RVWCDO, & Oxfam America. The organizers

took the lead role in mobilizing participants, covering associated costs, arranging center

of the Fair at on campus of Batu Sher Flower Company and inviting all potential

participants.

Moreover, the two organizing core team members (Chairperson and Secretary),

arranged representative primary cooperatives and unions to be visited. The two shared

the associated costs at the basis of 50-50. APF/E managed preparation of catalogue,

flyers, factsheets, banners etc and catering, daily labourers DSA, & tent; whereas

ISSD/HU managed some portion of costs of catering, coffee ceremony, band and

transportation costs to field trips along with perdiem of farmers and officials.

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3.2 The Event/Finance Fair The Batu Finance Fair (March 27th and 28th 2015), organized with a motto “Improved

Farmers’ Access to Financial and Agricultural Extension Services” was attended by

about more than 300 participants from farmers’ organizations (cooperatives and

unions), governmental and non-governmental organizations and the private sectors.

Following the well-coming address from Mark (Oxfam GB) and Gerrit (APF/E), the

Finance Fair was opened by Mr. Gurmu Haminto-

Mayor of Batu town at 9:30 am. On the opening speech

he made, the mayor stressed the importance of such

gathering in bringing different key stakeholders in the

sector together and

enables them to discuss

about the sector and work. He also added that all

participants of the fair supposed to share ideas at the

exhibition, papers to be presented and field visit for

their further consumption.

Paper Presentation and Panel Discussions: Next to the key note address, the

participants went to the

meeting hall to attend the

paper presentation session.

Six related papers (to the

motto of the 8th AB FF in

the country) were presented

from different institutions and one live panel discussions from farmers was undertaken.

The farmers’ representatives on the stage touched participations/activities of all key

stakeholders like MFIs, Agriculture Office, Cooperative Promotion Agencies, Capacity

Builders, and Input Suppliers etc in the sector.

They had some critics on OCSSCO in that the MFI is not properly working on financial

literacy, they are not happy with its group lending modalities & serious rules and

regulations. The Farmers’ representatives also compared MFIs with RUSACCOs

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/RuSACCO Unions, and preferred RUSACCOs

/RuSACCO Unions to MFIs in that they manage the later

one by their own, profit/loss belongs them etc. They

representatives did not deny that the

RUSACCOs/RuSACCO unions lack loanable fund. The

paper session continued up to lunch.

Exhibition: After lunch up to 3:30 it was exhibition session. In here the mayor along

with his team visited all twenty two market places with

thorough discussions at each and every booth; and all

other participants visited the booths in the same manner.

At the exhibition, visitors and exhibitors shared their

experiences, products & services, flyers etc. There was

also coffee ceremony, which also beautified the event.

At 3:30 the second phase of paper presentation session

continued. Then certificates were provided to paper

presenters and exhibitors from APF/E by Mr. Gerrit and

Berhanu respectively. Eventually, the event was for the

day was adjourned by closing remarks from E/Showa

zone Cooperative Promotion Agency.

Field Visits: The second day of the event was field visit. The visit was made to Women

Onion Seed Producers’ Group and Maki-Batu MP FCU

pack house. Participants of the session (about 150

participants) were visitors from participants of the event

from different institutions and farmers, actively visited

what is going on at the two farms.

Up on the visit and following the

visits there were discussions. Finally, there were closing remarks

from APF/E-Mr. Kebede Dhuga and Oxfam-Rahel Bekele, at

which summaries of the event made and pieces of advices to the

farmers were conveyed.

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3.3 Reflections on the event (core team members and other participants) Strengths

The finance fair was successful

The fair was well-coordinated and properly managed

The exhibition was well-arranged and discussions were thoroughly made

among the visitors and the exhibitors

The composition and messages of paper presented were very attractive and

conveyed concrete messages for the audiences. All papers were focusing on

farmers’ access to financial service indicating successes, challenges, and

some sorts of recommendations in the sector. Representatives of farmers in

the rift valley areas presented their practices/lessons, challenges they had

and what they need to be for improvement; this makes the 8th AB FF of Batu

special from the previous ones. The papers were from representatives of:

Demand side (farmers) – farmers’ representatives themselves

Financial Service Providers (Supply Side): Buusaa Gonofaa MFI

Capacity Builders – CARE/GRAD, and LIVES

For some policy issues – ATA

N.B: Awash Intl Bank & OCSSCO attended the event through their representatives.

The participants of field visits also appreciated the strengths of the visited

Women Onion Seed producing Group and Maki Batu MP FCU (activities,

management, plan etc) and lessons were shared.

Weaknesses/Challenges

Many of the exhibitors came up with only documents like flyers, banners,

bulletins etc; they did not bring agricultural products, even it would have

been for sale.

Some of the potential participants of AB FFs are complaining that they did

not achieve some tangible results from the events along with their

participation, and lagged behind from participating to the event; like Buna

Intl Bank, Abay Bank etc. In here APF/E raised this issue as an agenda in its

regular monthly meeting and decided to work on it in particular and on the

AB FF approach in general.

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Contact Agri-Profocus Ethiopia Gerrit Holtland Agri-Profocus Ethiopia Coordinator Visiting address Near Dreamliner Hotel, Behind United Bank Building (6th Floor) Postal address PO BOX 201319 Tel: 251 11467 1059 Addis Ababa, Ethiopia E : gholtland.agrihub@gmail.com Website http://agriprofocus.com/ethiopia

Reports of Batu

Agri-Business

Finance Fair