Making financial markets work for the poor

The Status of Agricultural and Rural

Financial Services in Southern Africa

Zambia Country Report

Lemmy Manje, Melanie Newman Wilkinson

Taj Pomodzi Hotel

Friday, 13th December 2013

Background to and objectives of the study

• Adopted a structured analysis of the market to better understand environment, support frameworks, market players, and opportunities for growth

• Understand the context, and progress to-date in financial sector development; highlight developments up until December 2012

• Explore the nature, extent and causes of problems and challenges that are hindering sector growth, and realization of sector development goals

• Identify enabling and disabling factors in both supply and demand

• Draw out the implications for growth, and provide practical recommendations for strengthening sector support

• A practical point of reference for understanding the financial sector landscape

Market analysis

Financial

inclusion

analysis

Enablers and

disablers

analysis

Market

developments

Conclusions & recommendations

Presentation navigation

Market

analysis

Market

developments

Financial

inclusion

analysis

Enablers and

Disablers

analysis

Conclusions and

Recommendations

• Demand side

• Supply side

• Status

• Positive

developments

• Inclusion

status and

prospects

• Factors which

are hindering

inclusion, and

which can

influence

inclusion

• What can be

done?

Focus of the analysis

Enterprise/Household Needs, knowledge, access, consumption

Key sub sector representative institutions

Key players in the market: formal and informal

Financial sector development framework

Types and

status of policy

and regulatory

reforms

Presentation navigation

Market

analysis

Market

developments

Financial

inclusion

analysis

Enablers and

disablers

analysis

Conclusions and

recommendations

Demand side analysis

NeedsNeeds

Access Access

KnowledgeKnowledge

Implications on policy and

market development

Implications on policy and

market development

• Household needs• Enterprise needs• Nature and source of

income • Seasonality of income• Household money

management practices

• Infrastructure• Products and services• Affordability• Appropriateness • Distance

• Benefits• Value proposition • Costs • Perceptions

What we found on the demand side

Income analysis

• Farming is the main source of income

• 52 percent of households rely entirely on farming only

• 6.9 percent earn wages from public service or private

companies

• Income is erratic and prone to agricultural risks

such as pests, drought and floods

• For majority of households, cash

flow follows a typical seasonality

map

• Highest around the middle of year

(July-Sept)

• Lowest during the farming season

Jan Dec

Occasionally

(18%)

Only specific

months

(seasonally

(72%)

What we found on the demand side

Needs analysis

EmergencyEmergencyConsumptionConsumption ProductionProduction

Credit

Insurance

CreditInsuranceSavings

Savings

Credit

• Household investment

• Asset accumulation

• Smoothing cash flow

• Risk management

• Farming investments &

up-scaling

• Risk management

• Smoothing cash flow

TRANSACTIONS (Money Transfers, Remittances, Payments)

fun

cti

on

What we found on the demand side

Knowledge analysis

� Basic understanding of how credit and savings work

� Poor understanding of how insurance worksConcepts

Products

Perceptions

Practices

� Community financing : ‘ merry-go-round savings’, VSLAs

� Contract farming and outgrower schemes

� No or poor exposure to insurance

� Negative perceptions on formal savings: cost and access

factors

� Negative perceptions on formal credit: product

appropriateness (costs and requirements)

� Misconceptions of formal insurance: no exposure

� In-kind savings more common

� Poor credit culture

� Informal risk management mechanisms

What we found on the demand side

Access analysis

Financial access strands for Zambian adults, Finscope 2009

What we found on the demand side

Access analysis

Breakdown of the Zambian access strand, different income-generating activities,

Finscope 2009

What we found on the supply-side

Credit analysis

• Compared with GDP, credit levels are low compared to neighbouring

countries (Zambia - 12.3%, Tanzania - 17.8%, Botswana - 24.3%, and

Malawi - 19.8%)

• Only a handful of financial service suppliers are actively engaged in

rural and agricultural finance

• Credit flows are highly unevenly distributed across the sector, with the

bulk of finance going to commercial level agriculture

• There is a lack of appropriate products and services, particularly at the

lower end of the market

• Lack of information on overall market potential in most agricultural

sub-sectors

• Despite growth in market-led finance models – very few are working at

scale

What we found on the supply-side

Savings analysis

• Only a handful are deposit-taking developmental credit providers; and less again

are actively reaching out to low-income rural communities

• MFIs have been very slow to initiate deposit-taking services in rural areas

• Savings for low income individuals, including Youth, are reaching urban

populations only and are not being marketed in rural areas

• Little or no support to develop retail capacity across the industry, and to expand

reach to rural communities

• Traditionally, MFIs have required savings as a precondition for accessing credit, a

mandatory condition for urban and rural borrowers, including smallholder farmers

• Mobilization of cash has to provide tangible benefits and helps drive growth and

improve household economic security

What we found on the supply-side

Insurance analysis

• There are no insurance schemes developed specifically for rural households

• The only recent initiative is a ZSIC Life pilot in Southern province for a family life

plan with funeral cover

• Knowledge, exposure and experience is consequently very low in rural areas

• Opportunities to deliver insurance to rural areas lie in leveraging farmer groups,

agribusinesses, and outgrower schemes as distribution channels

• Unsurprisingly, the insurance culture in Zambia is very weak and therefore

requires consumer education tied to marketing and product availability

What we found on the supply-side

Transactions analysis

• Remittances to and from rural areas are mainly done through ‘city-city’ buses

and transfer services such as the POST Office’s money transfer service, Swift

Cash

• Mobile transactions are increasingly being used for transfer services. However,

liquidity problems particularly for rural based agents seems to be one of the

major challenges

Presentation navigation

Market

analysisMarket

developments

Financial

inclusion

analysis

Enablers and

disablers

analysis

Conclusions and

recommendations

Positive developments

• Extension of the Financial Sector

Development Plan through 2014

• Decision to establish a rural

finance unit within the MoFNP

• Commencement of DFID’s Access

to Finance programme in early

2013

• Design of a new Government /

IFAD rural finance programme

(starting 2014)

• Roll out of national strategy on

financial education

• Roll out of the microinsurance

development strategy

• Plans to develop a Unified

Collateral Agency

Policy and

regulationSupport Supply

• Development of Rural Finance Policy and Strategy – NOW APPROVED

• BOZ practice note on ‘KYC’requirements for rural banking

• Amendments to the Banking and Financial Services Act (branchless banking, e-money, payment systems)

• Amendments to the Agricultural Act (warehouse receipting, commodity trading)

• Amendments to the Insurance Act, with specific provision for microinsurance

• Development of legislation for the finance leasing sector

• Emerging group of commercial banks assuming a role as rural enterprise development bankers and financers

• Success in developing products and delivery channels directly targeted at agri-processors, emergent and smallholder farmers

• Four out of five lead MFIs licensed for deposit-taking

• Networking and deepening of community-based savings and credit providers

Presentation navigation

Market

analysis

Market

developments

Financial

inclusion

analysis

Enablers and

disablers

analysis

Conclusions and

recommendations

Financial inclusion analysis

Financial EducationFinancial

Education

Financial Inclusion Initiatives

Financial Inclusion Initiatives

Consumer ProtectionConsumer Protection

Effective use

Sustainable inclusion

Effective use

Sustainable inclusion

• Knowledge• Skills• Confidence

Policy and RegulationPolicy and Regulation

Human Resource and

Systems Capacity

Human Resource and

Systems Capacity

SupplySupplyAppropriate

financial services

Appropriatefinancial services

• Parallel• Complementary

initiatives• Innovative• Market-driven

Technical Know-HowTechnical

Know-How

Production and Market

Linkages

Production and Market

Linkages

Infrastructure and Support

Infrastructure and Support Pro-poor

growthPro-poorgrowth

• Market linkages• Retail

infrastructure• Technology

solutions

Presentation navigation

Market

analysis

Market

developments

Financial

inclusion

analysis

Enablers and

disablers

analysis

Conclusions and

recommendations

Supply-side: credit delivery innovations

Growing proliferation of

market-led financing

models

Enabling factors

Emergent and smallholder

finance

Outgrower and contract

farming arrangements

See uptake in the

commercial farming, trading

and processing sectors

Players monitor and

manage exposure according

to sector performance and

risk appetite

• Transparent pricing

• Use of lead firms as aggregators

• Timely access to inputs

• Degree of control over the production process

• Finance combined with technical production

support and even farm operation support

• Business management capacities are a critical

contextual factor

• Product and delivery channels are developed and

launched in collaboration with multiple partners

• Collective approach to intervention modelling - test

first, then refine, increasingly demand-driven

• A ‘facilitator’ in the background to bring together

private sector players, propose approaches and

time-bound incentives

Supply-side: credit delivery innovations

Growing proliferation of

market-led financing

models

Enabling factors

Lease financing

supports business expansion

of the contractor / farmer,

income smoothing, business

know-how

Warehouse receipting

inventory and commodity

trade financing against

warehouse receipts and

certificates

• Several pilot initiatives involve leading machinery

supply firms, leasing firms, commercial banks,

emergent and smallholder farmers

• Emphasis is on farmers as contractors; Income

revenue streams from contracting out the farm

equipment pays off the lease

• Risk reduction mechanisms include: partial credit

guarantee, and a strong technical support

component for robust business modelling

• Lead commercial banks working with farmers,

traders and millers

Supply-side: savings innovations

Community-based

financeEnabling factors

Growing numbers of

community-led savings

and credit groups

Members as decision-

makers, using credit for

household and

enterprise needs

A strong focus on

women

• Nascent network of partners providing technical

know-how

• Consolidating learning across the network and

groups

• Organic ‘bottom-up’ growth of different models,

not ‘one size fits all’

Supply side: innovations in design and

distribution of insurance

Insurance for rural

households and farmersEnabling factors

Growing interest of

insurers in

microinsurance

• Network of farmer groups and contract farming

mechanisms

• New entrants in brokerage and product

development

• Willingness of agribusinesses to use insurance as

loyalty incentives

• Interests from mobile network operators in

insurance distribution

Supply enablers

Micro Meso Macro

Transition of lead MFIs

to deposit-taking

institutions

• Leveraging mobile

technology for payments and

transfers

• Leveraging farmers groups

for distributing insurance

• Improving frameworks for

contract farming and

outgrower schemes

• Application of innovation in

product design

Appropriate and

supportive

regulation for

payments

Improved

regulation and

supervision

Supporting

development of

payment

infrastructure

Policy and

regulation

Support

Supply

Supply disablers

Micro Meso Macro

• Poor condition of storage

facilities and lack of

availability of facilities

• Lack of collateral, including

land title

• Lack of human resource

expertise

• Limited market

information

• Low levels of public sector

expenditure on the

agricultural sector

• Government interference

and subsidies

• Current tax implications Weak client service

delivery model

Lack of proactive

sector support

Policy and

regulation

Support

Supply

Demand enablers

Micro Meso Macro

Policy and

regulation

Support

Demand

Policy framework

for financial

education

Participation of

rural

households in

productive

agricultural

sectors

Presence of

productive farmer

clusters and

groupings

High mobile phone

usage and

acceptability

Appropriate

financial education

programmes for

farmers and rural

households

Demand disablers

Micro Meso Macro

Policy and

regulation

Support

Demand

Absence of

coherent rural

finance policies

Insufficient

collateral and

lack of credit

history

High levels of

financial illiteracy

Nature and level

of income

Poor financial service

infrastructure

Lack of consumer

protection

mechanisms

Presentation navigation

Market

analysis

Market

developments

Financial

inclusion

analysis

Enablers and

disablers

analysis

Conclusions and

recommendations

Recommendations

• Support to the sector must be demand-driven and effectively packaged to promote and significantly contribute to industry strengthening

• Incorporation of a research and development component within one or more national level programmes

• Introduce and support a framework for sector-wide knowledge management

• Short-term strategies for strengthening the sector should involve industry representative institutions; Support should focus on building capacity to identify market needs, strengthening business models and capabilities for supporting their membership

• Representative organisations need to equip themselves with the tools, resources and management capacities to effectively respond to membership needs

• Build industry level capabilities, extending to leadership and management at branch level, and to relationship managers and credit officers who are on the frontline of portfolio growth and management

• Over the long term, there is a need to build the pool of available expertise for commercial banks, MFIs and community-based financing partners, and to integrate curricula and learning into primary, secondary, and tertiary educational institutions. It remains the role of policy makers to determine which institutions are best positioned to do this

Sector strengthening

Recommendations

• A need to sharpen focus and quantify market development opportunities

• Increase flow of market information and feasibility studies on growth opportunities in specific agricultural market segments

• Increased investment in research and development, piloting and testing, and support for scale-up of successful pilots

• Increased emphasis on tailored support, business and finance models that propel growth in rural agriculture and enhance financial management skills of rural households, leading to economic strengthening at different economic levels

• Increase focus and support to grow informal community-based financial services

• Leverage recent developments in the use of mobile phone and other technologies and further engaging technology service providers to develop cost effective solutions to financial access and inclusion challenges

• Encourage and support the design and roll-out of risk reduction mechanisms and time-bound smart subsidies that are market-led and incentivize private sector engagement and innovation

Expansion, growth and inclusion

Making financial markets work for the poor

Thank you