Finance for Food: Towards New Agricultural and Rural Finance
Doris Köhn
Business & Money
Finance for Food: Towards New Agricultural and Rural Finance

This book reflects the current state of discussion about agricultural and rural finance in developing and transition countries. It provides insight into specific themes, such as commodity value chains, farm banking, risk management in agricultural banking, structured finance, crop insurance, mobile banking, and how to increase effectiveness in rural finance. Case studies illustrate various aspects of agricultural and rural finance in developing economies. The book is based on one of the yearly financial Sector Development Symposia held by the KfW Development Bank.

About This Book
Table of Contents
PART I: The Big Picture: Global Trends Affecting Agricultural Finance
CHAPTER 1 Global Dynamics in Agricultural and Rural Economy, and Its Effects on Rural Finance
1 What’s New in Agricultural and Rural Environment?
1.1 Mega-Trends Impacting the Rural Economy
Liberalization of Trade in Agricultural Crops
Demography and the Place of the Youth
Migration as a Way of Life and a Capital Building Strategy
Awareness on Climate Change and New Opportunities
1.2 Mega-Trends Impacting the Agricultural Economy
Economic Growth in Emerging Countries and in the BRIC: Impact on Demand for Agricultural Produce
Emergence of an Urban Middle Class with New Consumption Patterns
1.3 Mega-Trend Impacting Both Agricultural and Rural Economy
Technology and the Cell Phone and Internet Revolution
The Agricultural and Rural Environment Today
2 Emerging Models in Agricultural and Rural Finance
2.1 Definitions and Lessons from the Old Agricultural Finance
2.2 Modern Rural Finance: An Emerging Model Drawing from Microfinance Best Practices
2.3 Value Chain Financing, Borrowing from Private Sector Financial Services to Small and Medium Farmers
Brief Definition of Agricultural Value Chains and Value Chain Financing
Role and Positioning of Financial Institutions
The New Agricultural and Rural Finance Paradigm
3 Potential Impact of New Agricultural and Rural Finance and Role of Major Stakeholders
3.1 Potential Impact at Micro, Meso and Macro Levels
3.2 Roles of Governments (Central and Local), Donors and Private Players in Supporting the New Agricultural and Rural Finance
Role for Governments
3.3 Role for Donors
Publications on Value Chain Financing
CHAPTER 2 Food Security and a Holistic Finance for Rural Markets
1 Commercialisation of Farming as an Opportunity
2 The Cross-Cutting Relevance of Transport Infrastructure
2.1 Food Which Is Never Produced
2.2 Post-harvest Losses as a Critical Factor for Food Security
2.3 Post-harvest Losses as a Factor for Farm Income
2.4 Efficiently Organised Value Chains Can Reduce Post-Harvest Losses
3 The (Potential) Contribution of the Financial Sector
4 Conclusion
PART II: Institutional and Process Innovations in Serving Rural Clients
CHAPTER 3 Finance Through Food and Commodity Value Chains in a Globalized Economy
1 Introduction
2 Increased Importance of Value Chains
3 Organization and Structure of Value Chains
3.1 Increasing Public and Private Standards
3.2 Increasing Consolidation in Processing and Retail
3.3 Vertical Coordination and Value Chain Finance
4 Small Farmer Participation in Value Chains
4.1 Small Farmer Inclusion and Governance
5 Value Chain Finance
6 Models of Private Sector VCF
6.1 Trade Credit
6.2 Interlinked Contract-Farming
6.3 Loan Guarantee Programs
6.4 Special Purpose Vehicles
6.5 Warehouse Receipt Finance
7 Importance of VCF
8 Impact of VCF on Productivity, Quality and Output
9 Policy Issues
CHAPTER 4 Agricultural Growth Corridors – Unlocking Rural Potential, Catalyzing Economic Development
1 Global Challenges
2 African Agriculture
2.1 African Challenges
2.2 Political Support
2.3 African Green Revolution
2.4 African Potential
3 Value Chains
4 Growth Corridors
4.1 Corridor Clusters
4.2 Corridors Established
5 The BAGC
6.1 Capital Requirements
6.2 Agro-Industries
6.3 Regional Integration
7 Infrastructure Backbone
8 Investment Opportunity
Grow Africa
9 Conclusion
CHAPTER 5 Innovative Microfinance: Potential for Serving Rural Markets Sustainably
1 Agricultural and Rural Microfinance
1.1 Definitions
1.2 The Subsidized Agricultural Credit Paradigm
1.3 The Financial Systems Approach
2 Microfinance Serving Agriculture and Rural Areas
2.1 Reasons for MFIs Expanding into Rural Areas
Overconcentration in Some Markets
Improve Efficiency and Sustainability
2.2 Required Adjustments in Methodology: Becoming Client Oriented
Product Design
Individual Lending
Decentralization and Staffing
Management Information Systems (MIS)
2.3 Successful MFIs Rerving Rural Areas and Agriculture
Three Acclaimed Pioneer Asian Institutions
ProCredit Bank El Salvador (Formerly Financiera Calpia)
Centenary Bank, Formerly Centenary Rural Development Bank Ltd. (CERUDEB), Uganda
Opportunity International Bank of Malawi
3 Member-Owned MFIs in Agricultural and Rural Finance
3.1 Four Cooperative Networks
3.2 Strengthening Rural Financial Cooperatives
4 The Role of Donors and DFIs in Overcoming Barriers
4.1 Political Interventions and Interest Rate Ceilings
4.2 Subsidize Institutions and Public Goods
4.3 Supporting Networks
4.4 Risk Mitigation
4.5 Measure and Evaluate
CHAPTER 6 Busting Agro-Lending Myths and Back to Banking Basics: A Case Study of AccessBank’s Agricultural Lending
1 Greenfield Small Business Bank in a Transitional Economy
2 Lack of Agricultural Finance
3 Typical Reservations Against Lending to Farmers
4 Launch of Agro Loan Product
5 Results After Introducing the Dedicated Agro Loan Product
6 Agro Loan Product Drives Regional Bank Expansion and Access to Financial Services
7 Agro Loans Providing Stability During Crisis
8 Busting Agro-Myths
9 Risk Management Approach
10 Conclusion
PART III: Dealing with Risks in Agricultural Finance
CHAPTER 7 Where Is the Risk? Is Agricultural Banking Really More Difficult than Other Sectors?
1 Introduction
2 Risks in Agricultural Finance
2.1 Definitions and Classifications of Risks
Risks in Agriculture Versus Risks in Agricultural Finance
Risks in Agriculture: Principal Risks Versus Specific Risks
Risks in Agricultural Finance
2.2 Principal Credit Risks
2.3 Specific Risks in Agriculture
Production Risk
Market and Price Risks
Level and Correlation of Production and Market Risks
2.4 Political Risks
2.5 Empirical Evidence on Actual Risks
3 Approaches to Risk Management in Agricultural Finance
3.1 Managing Principal Credit Risks
Typical Risk Management Mechanisms and Their Limitations
Asset-Backed Lending: Focus on Collateral
Expert-Based Appraisal of Repayment Capacity
Portfolio Management: Exposure Limits and Diversification
Building Risk Reserves: Loan Loss Provisioning
Lessons Learned from Successful Agricultural Lenders
Contractual Arrangements and Agricultural Value Chains
Lessons Learned from Rural Microfinance
Emergence of a New Paradigm in Rural Finance
3.2 Approaches to Manage the Specific Risks in Agriculture
Segmenting Risks into Layers
Risk Retention by Farmers: Prevention, Mitigation and Coping Strategies
Risk Pooling and Risk Transfer: Market Solutions and Instruments
Traditional Crop Insurance
Index-Based Insurance
Catastrophic Risk and Market Failure: Risk Transfer to Government
Synthesis: Structured Risk Management
Relevance for Financial Institutions
3.3 Political Risks Remain a Challenge
4 Implications and Perspectives for Agricultural Finance
4.1 Towards a Hybrid Model of Agricultural Microfinance
4.2 Innovative Insurance Instruments Need Further Study and Development
4.3 Diversification to Remain a Core Element of Risk Management
4.4 Improvements in Legal Framework and Financial Infrastructure
4.5 The Role of Government and Donors
5 Concluding Remarks
Appendix 1: Segmentation of Agricultural Risks
Appendix 2: Features of a Hybrid Model of Agricultural Microfinance
CHAPTER 8 The Potential of Structured Finance to Foster Agricultural Lending in Developing Countries
1 Introduction
2 Concept of Structured Finance
3 Risk-Based Differentiation Between Agricultural and Rural Finance
3.1 Investors’ Channels to Finance Agriculture
3.2 Agricultural Value Chain Finance
4 Agricultural Risks and Risk Management Strategies
4.1 Classification of Agricultural Risks
4.2 Risk Management Strategies and the Role of Structured Finance
5 Application of Structured Finance in Agricultural Lending
5.1 Agricultural Portfolio Guarantees
5.2 Are Agricultural Portfolio Guarantees an Appropriate Tool?
5.3 How Innovative Agriculture-Specific Guarantees Could Look
5.4 (No) Securitization in Agricultural Finance
5.5 Structured Funds Investing in Rural Finance
6 Finance Structures in Value Chain Finance
6.1 Receivables-Backed Finance
6.2 Warehouse Receipts Finance
6.3 Forward Contracts, Futures and Options
6.4 Contract Farming
7 Summary
8 Concluding Remarks
CHAPTER 9 New Approaches to Agricultural Insurance in Developing Economies
1 Ex-ante Versus Ex-post Risk Management Solutions
2 First Considerations When Setting Up Agricultural Insurance: System Approach Before Product Approach
3 SystemAgro: Framework and Structural Aspects of Agricultural Insurance Systems
4 Operational Aspects of Agricultural Insurance Systems
5 Insurance Products and the Overestimated Potential of Weather Trigger Policies
6 Portfolio Management and Underwriting
7 Distribution
8 Loss Management and Loss Adjustment
9 Administration and Data Management
10 Innovation: The Driving Force in All Development Phases
11 Current Status and Outlook
Exchange Rates
PART IV: Using Modern Technology for High-Quality Services in Rural Areas
CHAPTER 10 Reaching the Client in Geographically Adverse Conditions: Can Outsourcing Increase Effectiveness and Efficiency?
1 Introduction
2 Providing Financial Services to Remote Rural Areas: Specific Constraints and Costs
2.1 What Are the Constraints Faced in Remote Rural Areas?
2.2 What Is the Impact of Rural Finance on Cost Structures?
Information Costs Are the Main Cost Driver for Lending Operations
Cash Management Is the Main Cost-Driver for Deposit Services
... as Well as for Remittance and Payment Services
3 Increasing Outreach Through Branchless Banking
3.1 Branchless Banking: Banks’ Internal Solutions
Low-Cost Retail Outlets
Alternative Delivery Method: Roaming Officers
Staffless Delivery Channel: ATMs
SMS Information Services to Facilitate Data Exchange
3.2 Branchless Banking: How ICT Boosted Outsourcing Possibilities
Information Management
What Can Be Outsourced?
3.3 Branchless Banking: Different Types of Partnerships
Outsourcing by Partnering with Existing Financial Institutions
Outsourcing by Partnering with Existing Mobile Payment Systems
Conditions to Increase Outreach Through Partnering with Financial Services Providers
3.4 Setting Up a Bank-Led Mobile Banking System
Who Are Third-Party Agents?
The Bank – Agent Relationship
Managing the Cash
Setting Up an Own Third-Party Agent Network
Banking Correspondents: A Specific Type of Third-Party Agents
Relevance of Setting up a Bank-Led Mobile Banking System
4 Conclusions
4.1 Implications of Outsourcing on a Bank’s Operations
From the Use of Third-Party Agents to Tellerless Banking: Impact on a Bank’s Costs
Impact of Outsourcing on Outreach
Designing Products Differently: Impact on Quality of Service
4.2 When Should a Bank Contemplate Launching a Mobile Banking System?
Relevance of Mobile Banking Strategy
Bank-Related Pre-conditions
Environment Pre-conditions
4.3 The Role of Government and Donors
CHAPTER 11 Tameer Bank’s Experiences with Mobile Banking
1 Access to Finance: The Case of Pakistan
2 Mobile Penetration: Anywhere and Everywhere
3 Mobile Banking: Differentiated and Low Cost
4 Tameer-Telenor Partnership
5 EasyPaisa: Story So Far and Way Ahead
CHAPTER 12 Poverty-Sensitive Scorecards to Prioritize Lending and Grant Allocation with an Application in Central America
1 Introduction
2 Building a Scorecard
2.1 Risk Scorecard
2.2 Poverty Scorecard
Steps to Construct a Poverty Scorecard
3 An Application to a Grant Competition in Central America
3.1 Details of the Program in Central America
3.2 Risk Scoring
3.3 Poverty Scoring
4 Concluding Remarks
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