Speech to SIIA 5thSingapore Dialogue on Sustainable World Resources (May 2018) by Julian Peach, Grow Asia, Director, Knowledge & Business Innovation
Thank you for organising this dialogue and asking me to contribute in this small way. My simple message is:
- Without agrifinance we will not have a future
- We already know enough about how to do it
- Financial institutions need help to innovate; to get ideas into practise:
- Governments should incentivise the growth of a competitive market
- National multi-stakeholder partnerships should be created on the long-term to help FIs that want to offer more agrifinance.
Let’s appreciate the good work that is being done, be inspired.
Introduction
Grow Asia is a network in five countries in the region with a small office of nine people in Singapore. We help smallholder farmers and business to prosper together in growing markets. We do this by influencing, convening, brokering partnerships and sharing knowledge. We do not design, fund or implement projects. We were established in 2015 by the World Economic Forum as part of its new vision for agriculture.
1/ Why are we talking about financing for smallholder farmers? Why does that matter?
We already have a problem with the way food and other products are produced, processed and consumed: the living planet is being laid waste in a disrespectful way with enduring consequences, and the production system is inequitable in that producers generally receive inadequate pay for their assets, risk and labour. It will get worse. As population and wealth increases, global demand for food continues to rise, driving increased production….. by this same system.
Insufficient capital is currently allocated to smallholder agriculture. This holds back the adoption of innovations which would increase efficiency and enable a saner mode of production. That is why we are talking about financing solutions for smallholder farmers.
2/ How are we to realise the opportunity presented by this crisis? What are the main issues?
The problem is often reduced to a simple statement ‘that financial institutions fail to provide credit to farmers because of their high-perceived risk’. You know that it is more complicated than this.
To reduce the well-known financing supply-demand gap[1], the World Bank[2]lists the following three challenges for financial institutions:[3]
- The high cost of reaching remote farmers.
- Staff of financial institutions don’t know enough about agriculture business and so don’t know how to assess risk.
- And, a perception of poor loan performance due to sector-specific risks such as variability in production due to the environment and the volatility of market prices.
I would add to this list that the small loan size is commercially unattractive to banks because of the low net profit for each loan.
In response to these challenges, the World Bank suggests some areas of focus if we are to improve financial services:
- Get to know the customer better; understand the different sub-segments in the market and cater accordingly.
- Discover ways to reduce specific and systemic risks in agricultural finance.
- Devise ways with partners to reduce service cost.
- And establish a supportive policy context.
I would add four more points:
- Firstly, ‘try harder/aim higher.’ Innovation is not easy in any business with incentives to focus on quarterly targets. Financial services is a competitive market and the smallholder agriculture segment is not particularly attractive. It also requires a long-term, community-based, multi-stakeholder approach to create and deliver innovations. So, let’s recognise Rabobank – it has been in the business in various forms since 1898!
- Why the focus on credit when there are so many other services that can be provided? The financial services industry is old and well-developed! Brokerage, factoring, trade finance, insurance, lease finance, and good old deposits.
- Thirdly, whilst we recognise the role of government in positively helping an equitable and growing agriculture financial services market to develop, we cannot ignore the negative aspects of government:
o Under-investing in rural roads and telecoms.
o Not providing sufficient public support to vocational business education in rural schools and colleges.
o Interfering in the operations of a financial institution, for example, using board positions or institutional power to direct banks to give credit to marginal constituencies to win votes.
o By wanting to do something obvious and direct, rather than something constructive and sustainable; for example: offering, but not always providing, subsidised credit through state-owned banks thereby crowding-out other banks and solutions from the market. This is neither sustainable nor scalable.
- My final addition to the World Bank list of hacks to improve financial services for farmers is for banks and bank regulators to coordinate the sector better; to develop transparent, inclusive multi-stakeholder partnerships: to set a common vision, mobilise combined resources and deliver accountably the change that is so badly needed. And on this point, in this region, Grow Asia is here to help.
3/ So, what is being done to help financial institutions to improve?
Smallholder agricultural finance is an established topic in the development agenda, and is well-served globally by several organisations:
- The Rural and Agricultural Finance Learning Labfosters knowledge creation, sharing and collaboration that leads to better financial solutions for smallholder farmers.
- The Initiative for Smallholder Financeis a multi-donor and investor platform for the development of financial services for the smallholder farmer market. {ISF collaborates with RAF and recently released a report, Inflection Point: Unlocking growth in the era of farmer finance. It suggests that while current efforts to expand financial inclusion are not sufficient to meet smallholder demand, concerted efforts around customer centricity, progressive partnerships, and smart subsidyhave the potential to change the sector’s growth trajectory to best serve the world’s smallholder farmers.}
- The Council on Smallholder Agricultural Financeis an alliance of social lending institutions, also referred to as impact-first agricultural lenders, targeting agricultural businesses in the “missing middle” in low-and middle-income countries.
- The AgriFininitiative is a rich source of information and experience drawing on the World Bank’s considerable institutional reach and expertise.
- And finally, CGAP (the Consultative Group to Assist the Poor) also has a large set of programmes relevant to smallholder agricultural finance.
There is no facility concentrating on agricultural finance in Southeast Asia for smallholder farmers, though the Asia-Pacific Rural and Agricultural Credit Association (APRACA) based in Bangkok does include the region, as does the Smallholder Agricultural Finance and Investor Network (SAFIN) administered from IFAD headquarters in Rome.
As you can see there are lots of organisations working so there is no lack of information for those that want it. 😊
4/ What is Grow Asia doing?
Our strategy for agricultural finance has four components but the main one is on value chain finance. Simply, we will provide technical support to multi-stakeholder partnerships in our focus countries to design and apply value chain solutions.
A final comment:
Grow Asia tried to attract investors to an oil palm replanting bond. The funds would have been loaned to farmers so that they could take advantage of modern varieties. This would increase their yield, reduce their labour, increase their profits, reduce farmgate prices, AND reduce pressure to open new land. Whilst we did not succeed, there is news from Indonesia that one oil palm company as part of a multi-stakeholder partnership including government and a foreign bank is negotiating a deal to raise $16 billion for the same purpose. This should encourage us. It shows that innovation in smallholder financial services can happen.
Thank you for organising this dialogue and asking me to contribute in this small way. My simple message is:
- Without agrifinance we will not have a future
- We already know enough about how to do it
- Financial institutions need help to innovate; to get ideas into practise:
o Governments should incentivise the growth of a competitive market
o National multi-stakeholder partnerships should be created on the long-term to help FIs that want to offer more agrifinance.
- Let’s appreciate the good work that is being done, be inspired.
[1]Over 270 million smallholder farmers in Latin America, sub-Saharan Africa, and South and Southeast Asia require over USD 200 billion in financing to grow their businesses and improve their livelihoods. Formal financial institutions (providing 14B) and value chain actors (providing 17B) meet less than a sixth of this need today (and only a quarter of the need when informal providers are included). Dalberg (study for Grow Asia) estimate a financing gap of $450 billion based on assumptions: 450m SHF, 50% not subsistence, each requiring $2K p.a. for harvest finance and capital enhancement. More is written about the size of the market failure than the causes of it.
[2]http://www.worldbank.org/en/topic/financialsector/brief/agriculture-finance
[3]To which could be added: the small loan size is unattractive commercially because of the low net profit/loan.