Joey A. BermudezChairman, Maybridge Financial

Group

Managing Risks in Rural Finance

A Value Chain Perspective

The ultimate risks in rural finance are the risks that: (a) exposures may not be recovered and/or (b) exposures may not be properly priced. Both events will render the lending activity unprofitable in the short run and unsustainable in the long run.

Lessons from the pastThe risks in rural finance will be

unwieldy as long as value chains are weak.

A value chain is only as strong as its weakest link.

A value chain can be enhanced or damaged by the external environment.

Value chain financing requires a healthy risk appetite supported by the required skills set and a robust infrastructure

Manageable Risks in Rural Finance

Strong Value Chains

Failed value chains “actualize” risks

Credit enhancements and maverick structures are myopic solutions.

Weak value chains turn off supply.

The truth and nothing but the truth

Weak Value ChainsWeakest link: Capability not aligned

with the rest of the actorsNo strategic commitment by the

players; hence, inconsistency and under-investment in the chain

Misuse and abuse of market power; hence, under-development of the weakest link

The impact of the environmentInappropriate policy response; hence,

market distortionsAbsence of “contract” culture; hence,

no integrity in commercial arrangements

Hostile macro-economic and natural environment; hence uncompetitive value chains

Vulnerable institutional arrangements

Risk appetite, skills and infrastructureAppetite is short; so is expertise and

capabilitiesInfrastructure is inadequate;

technology is not fully deployedInformation is asymmetric; not enough

effort to use data to manage risksFinancial position of lender is impaired

RecommendationsStart operating CISA! Enrich the data

by using information accumulated by the key players in the value chain!

Private institutions must develop expertise, build capability and strengthen their risk management infrastructure.

Soundly-managed rural financial institutions should scale up; badly-managed ones should not be saved with taxpayers’ money

RecommendationsFocus on strengthening the weakest

link in the chain, not “babying” it!Only “strategic” value chains with

committed players should be encouraged.

RecommendationsGovernment

Focus intervention on capacity-buildingCheck abuse of market power in the

value chainFoster a macro-economic environment

that encourages investment and ensures fair play

Formulate rules that ensure the integrity of commercial arrangements and reduce the vulnerability of institutional arrangements

Alcoy Coffee ProjectCHMI Agro-Forest Development

Corporation

Strong Value Chains: Example

PLANTATION COMPANYProvides technical Provides financing

know-how & to Plantation Co.assistance to

Plantation Co. Buys green coffee beans Enters into joint venture

with CBFMA holders/farmer cooperatives

FARMERS COOPERATIVESJV Partner and Service Provider

Coordinates farmers' technical Buys cherries from farmers and process to training & assistance with Nestle produce green coffee beans

Arrange loan facility for the farmers;Deduct farmer's loan payment from sales

Buys green proceeds & remits directly to bankProvides coffee beans

technical know Provides

how and Provides seedlings, financing to the assistance fertilizers at discounted farmers thru the

prices initiative of Provides technical know Plantation Co.how thru farm technicians

Government guarantee

Supervised credit

NESTLE BANK

PLANTATION COMPANY

maintains a core plantation, wholly-owned but cooperating w/farmers

LGU

BANK

FARMER FARMER FARMER FARMER FARMER

NESTLE