Agriculture financing is a risky business for many financial institutions. Under its agriculture finance services, MicroSave works with financial institutions (FI) to develop appropriate products and a quality agriculture loan portfolio. Amhara Credit and Savings Institution (ACSI), a leading MFI in Ethiopia, with support of MicroSave grew its loan book from 1,300 loans to 36,000 loan. The FI disbursed a total of US$ 2.25 Million and achieved zero portfolio at risk (PAR) in 12 months of engagement. ACSI supported smallholder wheat farmers in the Amhara region to access farm inputs through the coupon system in partnership with farmers’ primary cooperatives.
MicroSave recommends some 9 steps to develop agriculture financing products and services for smallholder farmers. The process can easily be reduced into three sub-sets i.e. Understanding, Designing and Test and rollout. But this product development process has to follow 9 cardinal rules.
1. Understand the market:
a. The client: The risks in agriculture are not perception, they are realities. As a matter of fact, there are some conditions that the farmers absolutely have no control over. Thus, it is important that Financial Institutions understand the farmers, the peculiarity of their business, be it cropping or animal production. What this does is to enable the Financial Institutions develop and offer products and services tailored to the need of the client.
b. Agro-value chain: This helps the financial institution identify and know the players in the sector the client is. Who are the buyers? What is the demand level? How effective are the other players in the value chain? An understanding of the clients and agro-commodity value chain enables the FI to build capacity to extend financial services to other value chains and the agriculture sector at large.
c. Risk profiles: With the risks involved in the agriculture sector, financial institutions need to develop appropriate risk management tools and systems to cushion themselves against loses while ensuring that the funds are rightfully applied to agricultural activities. Some of the approaches include (i) deployment of staff knowledgeable in agriculture (ii) linkages with agriculture services providers and (iii) collaboration with insurance companies to develop weather related insurance products. However, FIs must start by reviewing their financing programs and identify the risks involved in the target sub-sectors. In short, institute agriculture lending risk management framework.
2. Design the product:
a. Product and team: Product design is an iterative process. It requires an engaged multi-disciplinary product development team. The team reviews all possible facets of the product features and implications on the FIs business and target market. The 8Ps of marketing framework helps the team to product the product features, interrogating the core purpose and augmented services.
b. Linkages with agriculture service providers: FIs core business is provision of financial services. Linking farmers and agri-business to relevant agricultural organizations e.g. input dealers, commodity buyers, public and NGOs is important to ensure the agro-commodity value chain is functional. Farmers should maintain acceptable standards, adopt best practices and use new technology to sustain production and incomes. These linkages ensure market based Farmer training, provide feedback and monitor season vulgarities.
c. Demand creation: In-build in the product should be features that trigger and sustain demand. Farmer’s financial education is useful and enables the demand for additional financial services such as savings, insurance and investment vehicles. However, there is need to develop cost effective FE approaches and delivery methods such as personalized digital messages to complement traditional mass media campaigns.
3. Pilot test before rollout:
a. Pilot testing: MicroSave recommends that any new or refined products should be pilot tested. Using a 10 steps, FIs engage in a systematic testing of the product design, service delivery systems and staffing.
b. Knowledgeable field Officers: Recruiting credit officers with agriculture training is debatable. Experience has shown that officers trained in agriculture have better commitment and engagement with smallholder farmers. They build stronger relationships with clients (farmers/growers) that reduce risks and translate into better repayment rates.
c. Timely financing: Timely delivery is important due to the seasonality of agricultural ventures. Farm inputs, labour and harvesting are required at specific times in the season of specific agro-commodities. FI need to deliver their finances to farmers on time for example, through tranche disbursements. This averts funds diversion and mistiming due to long appraisal process for sub-sequent funding.