Agriculture Finance Diagnostic Zambia © 2019 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This report is a product of the staff of the World Bank Group. It is part of a larger effort by the World Bank Group to provide open access to its research and make a contribution to development policy discussions around the world. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. 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All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org Photo Credits: FSD Zambia, World Bank Photo Library, and Shutterstock.com FINANCEMENT AGRICOLE EN HAÏTI D Table of Contents Abbreviations and Acronyms........................................................................................ V Foreword............................................................................................................................ IX Acknowledgements........................................................................................................ XI Executive Summary......................................................................................................XIII 1. Introduction........................................................................................................... 1 Country Background.................................................................................................... 2 Macroeconomic Overview........................................................................................... 2 2. Agriculture and Financial Sector Overview.......................................................5 Agriculture Sector........................................................................................................ 5 Financial Sector.......................................................................................................... 10 3. Financial Inclusion of Farmers and Access to Finance for Agribusinesses.....................................................................................................13 Financial Inclusion of Farmers and Fisherfolk...................................................... 13 Access to Finance for Enterprises related to Agriculture and Forestry......... 19 4. Agricultural Finance Market, Policies, and Programs................................ . 23 Agricultural Payments............................................................................................. 23 Agricultural Credit and Investments..................................................................... 25 Agricultural Insurance.............................................................................................. 34 Public Sector Support for Agricultural Finance................................................. . 37 5. Challenges, Opportunities, and Recommendations......................................... 41 Key Challenges........................................................................................................... 42 Opportunities and Recommendations.................................................................. 43 Conclusion................................................................................................................... 49 References....................................................................................................................... 51 Annex A. Institutions and Individuals Consulted..................................................... 57 Annex B. Key Economic Indicators............................................................................. 61 Annex C. Major Agriculture Value Chains in Zambia.............................................. 63 Annex D. Innovation Pilots Supported by FSDZ, RUFEP and GIZ........................ 65 Annex E. Illustrative Leaflets Developed by Mayfair Insurance for WII Linked to FISP..................................................................................................... 69 Annex F. The Principles for Public Credit Guarantee Schemes (CGS) for SMEs.........................................................................................................................71 AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA I List of Boxes Box 1: Blockchain-based Agribusiness Payments to Farmers .............................25 Box 2: Lima Credit Scheme ......................................................................................... 30 Box 3: MFI Lending Activities in the Agriculture Sector ........................................ 31 Box 4: Weather Index Insurance for FISP Farmers (2017/18 Season).................38 Box 5: Crop Insurance Linked to the Lima Credit Scheme ...................................39 List of Figures Figure 1: Public Sector External Debt .......................................................................... 3 Figure 2: Distribution of Land Size according to Farmer Category (2016).......... 5 Figure 3: Trends in Maize Yields and Productivity .................................................... 7 Figure 4: Access to Financial Services by Population Segment ......................... 14 Figure 5: Saving Mechanisms (Percent of Savers in Population Segment)....... 15 Figure 6: Top 5 Drivers of Saving among Zambian Farmers and Fisherfolk (Percent of Savers)..................................................................................................... 16 Figure 7: Source of Credit (Percent of Borrowers)................................................... 16 Figure 8: Top 5 Drivers of Borrowing among Zambian Farmers and Fisherfolk (percent of borrowers)................................................................................................17 Figure 9: Access to or Usage of Insurance and Pensions (Percent of Population)...............................................................................................17 Figure 10: Gender-disaggregated Financial Access among Farmers and Fisherfolk ............................................................................................ 18 Figure 11: Access Trends among Agriculture Payment Recipients (2014 and 2017).......................................................................................................... 18 Figure 12: Access to Credit among Zambian Firms (Percent)............................... 19 Figure 13: Most Significant Obstacle affecting Business Operations (Percent) ..................................................................................................................... 20 Figure 14: Share of Enterprises with a Loan or Line of Credit from a Financial Institution (Percent)................................................................................ 20 Figure 15: Main Reasons Enterprises did not Apply for a Loan (Among Those That Did Not Apply)........................................................................ 21 Figure 16: Agricultural Credit – Share of Agricultural GDP and Share of Total Credit................................................................................................. 25 Figure 17: Agriculture Orientation Index (AoI) for Credit in African Countries....................................................................................................... 26 Figure 18: Agriculture Credit NPL Trends ................................................................ 26 Figure 19: NPLs by End-user Category..................................................................... 26 Figure 20: Agriculture and Non-farm Agribusiness Loans (Kwacha millions, outstanding loans).................................................................... 27 Figure 21: Proportion of Loans Accessed by Women (Percentage of Total Number of Loans Disbursed)................................................................................... 28 Figure 22: Types of Security by Number of Loans Disbursed (2016–2018, Percent)............................................................................................... 32 TABLE OF CONTENTS II Figure 23: Weather Index Insurance Policies and Aggregated Sums Insured in Zambia (2013/14 to 2017/18)............................................................................. 35 Figure 24: Premiums, Claims and Loss Ratios for Weather Index Insurance Policies (2013/14 to 2017/18).................................................... 36 List of Tables Table 1: Summary of Recommendations............................................................... XVII Table 2: Distribution of Financial Sector Assets ..................................................... 10 Table 3: Access to Credit ............................................................................................. 28 Table 4: Debt Financing Providers and Products.................................................... 33 Table 5: Relative Strengths and Weaknesses of Area Yield and Weather Index Insurance ......................................................................................................... 36 AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA III IV Abbreviations and Acronyms AFD French Development Agency AfDB African Development Bank AoI Agriculture Orientation Index AYII Area Yield Index Insurance BoZ Bank of Zambia CAADP Comprehensive Africa Agriculture Development Program CEEC CCredit Guarantee Scheme CMMR Credit Market Monitoring Report COMESA Common Market for Eastern and Southern Africa CPI Consumer Price Index CSO Central Statistical Office DAZ Dairy Association of Zambia DBZ Development Bank of Zambia DFA District Farmer Association DFI Development Finance Institution DFID Department for International Development (UK) e-FISP Electronic Farmer Inputs Support Program EU European Union FAO Food and Agriculture Organization FARMAF Farm Agricultural Risk Management in Africa FI Financial Institution FISP Farmer Input Subsidy Program AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA V FMA Farm to Market Alliance FRA Food Reserve Agency FSDP Financial Sector Development Plan FSDZ Financial Sector Deepening Zambia GDP Gross Domestic Product GIIF Global Index Insurance Facility GIZ German Corporation for International Cooperation HH Household IFAD International Fund for Agricultural Development IFC International Finance Corporation LCMS Living Conditions Monitoring Survey LCS Lima Credit Scheme MFI Microfinance Institution MLNR Ministry of Lands and Natural Resources MNO Mobile Network Operators MoA Ministry of Agriculture MoF Ministry of Finance MoLF Ministry of Livestock and Fisheries MPCI Multiple Peril Crop Insurance MSMEs Micro, Small and Medium Enterprises MT Metric Tons MUSIKA Making Agricultural Markets Work for Zambia (Zambian non-profit organization) NAIP National Agriculture Investment Plan NAP National Agriculture Policy NFIS National Financial Inclusion Strategy NGO Non-governmental Organization NPCI Named Peril Crop Insurance NPL Patents and Companies Registration Agency ABBREVIATIONS AND ACRONYMS VI PARM Platform for Agricultural Risk Management PIA Pensions and Insurance Authority PPG Public and Publicly- guaranteed RUFEP Rural Finance Expansion Programme SACCO Savings and Credit Co-Operatives SADC Southern African Development Community SEC Securities and Exchange Commission SIDA Swedish International Development Cooperation Agency SME Small and Medium Enterprise SRR Statutory Reserve Ratio SSA Sub-Saharan Africa TA Technical Assistance UAI Unit Areas of Insurance UK United Kingdom VAT Value-added Tax WB World Bank WBG World Bank Group WFP World Food Programme WII Weather Index Insurance ZABS Zambia Bureau of Standards ZAMACE Zambian Commodity Exchange ZATP Zambia Agribusiness and Trade Project ZCGS Zambia Credit Guarantee Scheme ZESCO Zambia Electricity Supply Cooperation ZIPSS Zambian Interbank Payment and Settlement System ZNFU Zambia National Farmers’ Union ZMD Zambia Meteorological Department ZSIC Zambia State Insurance Corporation AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA VII VIII Foreword Agriculture finance in Zambia presents a picture of contrasts. The share of the agriculture sector’s GDP financed by the banking sector is among the highest in Africa. However, over four-fifths of the institutional credit goes to the relatively small number of large commercial farms (approximately 1500) while less than five percent of small and medium scale farms (approximately 384,000) have any access to institutional credit. Similarly, Zambia achieved the largest outreach for agriculture insurance in Africa, reaching nearly 900,000 farmers in 2018, yet, design and implementation weaknesses seem to be severely limiting its benefits for farmers. Given the critical role the agriculture sector plays in the Zambian economy, employing nearly half of the working population, it is critical that access to finance for small and medium-scale farms is increased and the effectiveness of the agriculture insurance program is ensured. These outcomes can make an important contribution to breaking the low productivity trap in the agriculture sector, protecting livelihoods, and strengthening the sector’s contribution to economic growth and rural poverty reduction. The recent large gains in financial inclusion of farmers, driven by the rapid growth in access to mobile money, presents a key foundation on which to build. The Zambia Agriculture Finance Diagnostic identifies several key actions the Government can take to realize these opportunities. The high priority actions include providing incentives to the private sector to deliver financial services in rural areas, strengthening the capacity of the recently-established Zambia Credit Guarantee Scheme to effectively serve the agriculture sector, and strengthening the design and implementation of the weather index insurance scheme. The report also recommends that the Government consider developing an agriculture finance action plan that is adequately resourced and allocates clear implementation responsibilities. We sincerely hope this report makes a useful contribution to the national dialogue on how agriculture finance in Zambia can be strengthened. Sahr J. Kpundeh Madalo Minofu Country Manager Resident Representative World Bank International Finance Corporation Lusaka Lusaka AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA IX X Acknowledgments This report was produced by a team led by Ajai Nair (Senior Financial Sector Specialist) under the guidance of Lisa Kaestner, Practice Manager. The core team included Toshiaki Ono (Financial Sector Specialist), Musakanyakombe Mwape (Analyst), Andrea Stoppa (Consultant), and Jeffrey Allen (Consultant). Hans Balyamujura (Principal Investment Officer), Hazem Ibrahim Hanbal (Senior Agriculture Specialist) Zivanemoyo Chinzara (Economist), Samson Chabuka Kwalingana (Senior Economist), Christine Heumesser (Economist), Barry Maher (Senior Financial Sector Specialist), and Manohar Sharma (Senior Economist) contributed to the report. Uzma Khalil (Senior Financial Sector Specialist), Ellen Olafsen (Senior Private Sector Specialist), Willem Janssen (Lead Agriculture Economist), Zano Mataruka (Senior Investment Officer), Ngao Mubanga (Consultant) and Rachel Sberro (Financial Sector Specialist) provided review inputs. Juan Buchenau (Senior Financial Sector Specialist) provided overall technical guidance. Barbara Balaj copy-edited, Aichin Lim Jones designed and Brew Creative Ltd provided production services of the report. The report also benefitted from external review inputs which were provided by Julia Kirya (Project Coordinator, GIZ), Michael Mbulo (Program Coordinator, Rural Finance Expansion Programme [RUFEP]), and Betty Wilkinson (Chief Executive Officer and the team, Financial Sector Deepening Zambia [FSDZ]). The report was prepared based on extensive desk research of published literature and program reports, including analysis of key sources of data (including the World Bank Enterprise Survey 2013, Finscope 2015, Findex 2017, and Credit Market Monitoring data for 2016, 2017, and 2018); and information and insights shared by a wide range of public and private sector stakeholders in Zambia during a diagnostic mission undertaken in June 2018. The team would like to particularly acknowledge the value of data shared by the Bank of Zambia and the Pensions and Insurance Authority. The report also benefitted from and reflects inputs provided by participants in two consultation workshops held in Lusaka in October 2018. The workshops were organized jointly with the Rural Finance Expansion Programme, which serves as the Secretariat for the Rural and Agriculture Finance Working Group for the implementation of the National Financial Inclusion Strategy. Annex A provides the full list of institutions and individuals consulted. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA XI Lastly, this report could not have been produced funded African, Caribbean and Pacific Group of States without generous financial support from the Creating (ACP)-EU Africa Disaster Risk Financing Program, Markets Advisory Window of the International Finance managed by the World Bank’s Global Facility for Corporation (IFC) and the European Union (EU)- Disaster Reduction and Recovery (GFDRR). ACKNOWLEDGMENTS XII Executive Summary This report presents the main findings and a set of key recommendations based on the results of the Zambia Agriculture Finance Diagnostic. The objective of the diagnostic was to assess key opportunities for and constraints to the development of a commercially viable agriculture finance market. This report also makes recommendations for the main public and private stakeholders with the goal of enhancing farmer and agricultural Small and Medium Enterprise (SME) access to and use of financial services. Agriculture is a critical sector in the Zambian economy, but it has not sufficiently supported poverty reduction in rural areas. The agriculture sector employs 48 percent of the working population, but it’s contribution to the country’s gross domestic product (GDP) averaged just 5 percent between 2014 to 2018. Labor productivity in agriculture, as measured by annual value added per workers, has deteriorated from US$702 in 2004 to US$584 in 2015. Accordingly, rural poverty increased from 73.6 percent in 2010 to 76.7 percent in 2015. Strengthening agriculture finance markets, complementing other policy reforms in the agriculture sector, could yield substantial achievements given Zambia’s natural resources, an expected increase in demand in the near future, and its positioning in Southern Africa. Domestic food demand is expected to increase by three-fold over the next 15 years. The country’s membership in the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC) also provide access to the rapidly growing regional market. The favorable market prospect offers opportunities to achieve a more productive and commercial-oriented agriculture sector that would contribute to inclusive economic development. Among other factors, greater access to financial services is indispensable to enhancing resilience and increasing investments in transformational projects such as irrigation, storage, processing equipment, and high-quality inputs. The country’s potential is still largely untapped, with only one-fourth of arable land cultivated, and only one-third of irrigable land irrigated. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA XIII Increasing access to financial services for credit services delivered through mobile money small-scale farmers and agricultural SMEs accounts, including some tailored to the needs of can help to achieve transformation of the farmers, are just being launched. agriculture sector, improve financial inclusion, Most of the formal sector credit to the and contribute to poverty reduction. The 7th agriculture sector flows to large commercial National Development Plan (2017-2021) and the farms, whereas small and medium-scale National Financial Inclusion Strategy (NFIS) farmers still depend primarily on informal (2017-2022) include actions to support economic sources for credit. In 2017, 85 percent of the diversification for sustained growth and improve credit provided to the agriculture sector went to access to financial services in Zambia. The NFIS large commercial farms; non-farm agribusiness identifies agriculture finance as a priority area, were estimated to have received 7 percent and and its implementation arrangements include the small- and medium-scale farms received 8 a working group that focuses on rural and percent. The supply-side data from the Bank of agriculture finance. Zambia together with demand-side data from Access to the formal financial sector for farmers Finscope 2015 suggests that less than 3 percent seems to have substantially increased in recent of small- and medium-scale farmers have access years, including the use of payment services. to formal sector credit. On the enterprise side, a According to data from the Global Findex 2017, 2016 survey of growth-oriented, agro-processing 58 percent of adults who received any income SMEs confirms that access to finance and the cost from the sale of agricultural goods had access to of finance remain impediments to growth for agro- an account, up from about 35 percent in 2014. The processing SMEs. increase was driven by an expansion in access to Interest rates are high and most credit is mobile money in Zambia. In this context, between short-term. Despite the central bank’s policy 2014 and 2017, access to mobile money accounts rate declining from a high of 15.5 percent in among all adults increased from 12.1 percent to 2015 to 10.25 in May 2019, average nominal 27.8 percent, respectively. Findex data also shows bank lending rates remained stubbornly above 24 that between 2014 and 2017, the percentage of percent. In addition, the gap between the policy agriculture payment recipients who received rate and the average lending rate widened between payment in an account more than doubled, 2015 and 2019. With inflation hovering between increasing from 18 to 40 percent, respectively. 6-10 percent, the real interest rate has remained This was also driven by payments received into relatively high at 14-16 percent. Most loans to mobile money accounts. commercial farmers have tenors of less than 5 However, the increased access does not seem years, and those to small producers have tenors of to have translated into substantial gains less than one year. in usage of savings and credit services. The country’s agriculture credit portfolio While Findex data does not allow for the suffers from high levels of Non-Performing disaggregation of usage levels of savings and Loans (NPLs). The NPLs in the commercial bank credit services among agricultural clients, the lending to the agriculture sector have been steadily supply-side assessment suggests that increased increasing since 2015, reaching an alarming 28 levels of access are unlikely to have translated percent in 2018. Agricultural sector NPLs for the into proportionately higher usage of savings whole financial sector, which includes loans from and credit services. In this regard, savings and banks as well as non-banks (but not investment EXECUTIVE SUMMARY XIV funds), increased from 16.4 percent in 2016 to This report identifies several challenges to 24.3 percent in 2018. Three key factors in 2015 increasing access to financing within the are estimated to have contributed to the rapid agriculture sector. These relate to the enabling deterioration of the loan portfolio. These include environment (high levels of public sector borrowing the severe drought, the export bans that were put in leading to crowding out of private sector credit; place following a reduction in production, and the limited availability and quality of agricultural and devaluation of the Zambian currency, the Kwacha. weather data); demand-side challenges (low levels of agricultural productivity and limited financial Access to agriculture insurance increased capability of farmers and producer organizations); exponentially in the 2017/2018 season, driven and supply-side challenges (limited operational by the nationwide launch of an innovative capacity among financial institutions to serve weather index insurance (WII) product. The the agricultural sector, and limited availability of exponential scale-up was achieved by adding an medium-to long-term liquidity necessary for the index insurance cover to the Government’s Farmer business of agriculture). Input Subsidy Program (FISP). The number of policies sold and the sum insured increased from That said, Zambia has several key financial less than 20,000 policies and US$ 2 million in sector foundations to help scale up agriculture 2016/17 to over 900,000 policies and nearly US$ finance. These include a good mix of regulated 151 million, respectively, in 2017/18. A relatively financial institutions; a relatively modern payment small number of additional farmers are covered system; three major financial regulators that through other WII and indemnity products. supervise the banks and the microfinance institutions (MFI) sector, insurance providers However, the exponential scale-up also led to and the investment funds, respectively and; a major implementation deficiencies. The main robust legal and institutional credit infrastructure, deficiency was the failure of the program to make including a modern secured transactions timely claim payouts to the farmers. Although a framework and credit reporting law, as well as a substantial number (412,000) and value (US$ functioning collateral registry and a credit bureau. 5.9 million) of payouts were triggered during the 2017/18 season, payouts to farmers were not This report identifies three major opportunities issued in a timely manner. Although the insurance to further developing agriculture finance company transferred the amounts to the Ministry in Zambia, and recommends ten policy of Agriculture in May 2018, the Ministry did not and institutional actions to realize these complete the payment payouts to the farmers until opportunities. The three opportunities identified December 2018. Furthermore, the payouts were are: (a) expanding the financial inclusion of made in the form of e-vouchers that could only farmers; (b) broadening the agricultural credit be redeemed for agricultural inputs in the 2018/19 market; and (c) enhancing the quality and crop season. Thus, the delay in claim payouts effectiveness of agricultural insurance. Table 1 and the non-monetary nature of the payouts lists the recommendations, categorizes them by substantially reduces the benefits expected from high or medium priority, and proposes lead and an agriculture insurance program.1 supporting entities to implement them. 1 The insurance program has been continued in the 2018/2019 crop season. However, information on the uptake of the product during the season, claims triggered, and the distribution of payouts, if any, was not available at the time of issuing this report. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA XV Opportunity 1: Expanding the financial Opportunity 3: Enhancing the quality and inclusion of farmers. The high priority effectiveness of agricultural insurance. The high- recommendation to realize this opportunity is priority recommendation to realize this opportunity to incentivize delivery of financial services in is to strengthen the design and implementation of rural areas. Incentives provided could be: (i) the FISP-linked weather index insurance scheme. fiscal (lower taxation of services provided in The report recommends several actions under this rural areas and/or to target clients); (ii) policy- recommendation, including: (a) addressing key oriented (requiring that government and corporate program design-weaknesses; (b) appointing an agricultural payments, including agricultural independent third-party calculation agency; and insurance, be made directly into the farmer’s (c) strengthening product information and client accounts); and/or (iii) direct (funding for increasing education. The report also recommends building the banking agents in rural areas, electronic payments technical capacity of key public and private actors acceptance by rural merchants, building financial in agricultural insurance, as well as undertaking an capability of farmers and agricultural SMEs, and in-depth fiscal and market assessment of options for developing new products). Actions that need to be supporting agricultural insurance markets. taken in the medium term include strengthening The Government of Zambia may also want the agriculture, weather and financial inclusion to consider developing an agriculture finance data ecosystem. The large gender gap in access action plan to build on the recommendations of (10 percent) also suggests the need for targeted this report. This can be done under the leadership actions to support financial inclusion among of the Ministry of Finance with inputs and guidance women farmers. from the NFIS Rural and Agriculture Finance Opportunity 2: Broadening the agriculture Working Group. However, if the Government credit market.Two high-priority recommendations decides to develop an action plan, it is critical that are made to realize this opportunity, namely the plan is adequately resourced, allocating clear building the capacity of the Zambia Credit implementation responsibilities. Guarantee Scheme (ZCGS) to effectively serve The report is organized as follows: Chapter micro, small and medium enterprises (MSMEs) 1 presents a country background and in the agriculture sector, and ensuring that the macroeconomic overview. Chapter 2 provides an design and implementation of public sector credit overview of the agriculture and financial sectors. lines follow good practice principles. Both these Chapter 3 presents an analysis of financial inclusion actions are critical to addressing the extremely low of farmers and access to finance for agribusiness. levels of access to formal credit among small and Chapter 4 discusses the agriculture finance market, medium farms/farmers, including the high cost of policies and programs. Chapter 5 identifies key credit both for farmers and agribusiness SMEs. In challenges that are constraining the growth of addition, strengthening the commodity exchange agriculture finance. Finally, it also identifies major and warehouse receipts financing and enabling opportunity areas and provides key recommendations easier use of land as collateral are important actions to capitalize on the identified opportunities. that need to be taken over the medium-term. EXECUTIVE SUMMARY 2 XVI Table 1: Summary of Recommendations Lead Supporting Action Priority Entity(ies) Entity(ies) Opportunity 1: Expanding the outreach of financial services in rural areas Incentivize delivery of financial services and BoZ, PIA, FSDZ, High financial capability programs for farmers and MoF MUSIKA, agricultural SMEs. RUFEP, WBG, GIZ Improve the quality and availability of agricultural MoA, ZMD CSO Medium and weather data. Strengthen the quality and availability of data on CSO, BoZ, FSDZ, SEC Medium financial Iinclusion of farmers, as well as access to PIA financing for agribusinesses. Opportunity 2: Broadening the agricultural credit market Build the capacity of the ZCGS to effectively serve MoF WBG, AfDB High MSMEs in the agriculture sector. Strengthen the implementation of public sector MoF WBG, AfDB, High credit lines EU, AFD Strengthen the operations of the ZAMACE and MoA, MoF PARM/IFAD Medium warehouse receipts financing Enable the easier use of agricultural land as MLNR PACRA, WBG Low collateral Opportunity 3: Enhancing the Quality and Effectiveness of Agricultural Insurance Strengthen the dDesign and implementation of the MoA, PIA WBG High FISP-linked WII insurance scheme Undertake an in-depth fiscal and market MoF MoA, WBG, Medium assessment of options for supporting agricultural FSDZ insurance markets Build the technical capacity of key public and PIA, MoF FSDZ, WBG Medium private actors Note: AFD= French Development Agency; AfDB= African Development Bank; BoZ= Bank of Zambia; CSO= Central Statistical Office; EU= European Union; FSDZ= Financial Sector Deepening Zambia; GIZ= German Corporation for International Cooperation; IFAD= International Fund for Agricultural Development; MLNR= Ministry of Lands and Natural Resources; MoA= Ministry of Agriculture; MoF= Ministry of Finance; MSME= micro, small and medium enterprise; MUSIKA= Making Agricultural Markets Work for Zambia (Zambian non-profit organization); PACRA= Patents and Companies Registration Agency; PIA= Pensions and Insurance Authority; PARM= Platform for Agricultural Risk Management; RUFEP= Rural Finance Expansion Programme; SEC= Securities and Exchange Commission; SME= small and medium enterprise; WBG= World Bank Group; ZAMACE= Zambian Commodity Exchange; ZCGS= Zambia Credit Guarantee Scheme; ZMD= Zambia Meteorological Department. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA XVII XVIII 1. Introduction The Zambia Agriculture Finance Diagnostic was undertaken as an input to the National Financial Inclusion Strategy currently under implementation. The strategy identifies agriculture finance as a priority area. Implementation arrangements include the establishment of a Working Group that focusses on rural and agriculture finance. The diagnostic was undertaken by the World Bank Group (WBG) in consultation with the Ministry of Finance (MoF) and the Bank of Zambia (BoZ) and benefitted from inputs from a wide range of public and private stakeholders. In addition to the MoF and the BoZ, key public-sector stakeholders consulted included the Ministry of Agriculture (MoA), the Ministry of Livestock and Fisheries (MoLF) and the Pensions and Insurance Authority (PIA). Key private sector stakeholders consulted included the Zambia National Farmers Union, as well as select commercial banks, microfinance institutions, and investment funds. The full list of stakeholders consulted is included in Annex A. The objective of the diagnostic was to assess key opportunities and constraints to the development of a commercially viable agriculture finance market, as well as to make recommendations for the main public and private stakeholders. The overall goal is to contribute to enhancing farmer and agricultural small and medium enterprise (SME) access to and use of suitable, competitive and sustainable financial services. To achieve this objective, the team collected data and information from stakeholders and interviewed key respondents. The findings and recommendations were then validated through further consultations. This report summarizes the findings from this analysis and provides a set of recommendations that are expected to benefit the stakeholders. The rest of this chapter provides a brief country background and macroeconomic overview. Chapter 2 presents an overview of the agriculture and financial sector. Chapter 3 presents findings from a demand-side analysis regarding the levels of financial access and use of financial services by farmers, as well as access to financing for those firms engaged in business sectors most closely related to agriculture. Chapter 4 presents findings from a supply-side analysis of agricultural payments, credit and insurance. Lastly, Chapter 5 presents the key constraints AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 1 identified by the diagnostic. It also offers a set of growth and socioeconomic development. It also recommendations to address these constraints. includes a results-based performance management system to measure implementation progress. Country Background Zambia is a large, landlocked country in the Macroeconomic Overview center of southern Africa. It shares several of Zambia’s economy remains undiversified and its key geographic and economic features with its vulnerable to both domestic and external shocks. neighbors — including Victoria Falls, Lake Kariba External shocks emanate from its dependency on (and its hydroelectric capacity), and a stretch of the copper, which accounts for about 70 percent of total Zambezi River with Zimbabwe. It also borders the exports. As such, it has direct and indirect linkages southern tip of Lake Tanganyika with Tanzania, as with the performance of other key economic sectors. well as the Democratic Republic of Congo. Other Domestic shocks are traced to weather patterns, neighboring countries include Angola, Botswana, which also have a direct bearing on agriculture and Malawi and Mozambique. Its population is estimated electricity (for instance, 95 percent of Zambia’s at about 17.4 million (2019) and, given its large size, electricity generation capacity is linked to hydro- the country is relatively sparsely populated. plants).2 Zambia achieved lower middle-income status in The global commodity price shock in 2015 2011, following several years of robust economic highlighted Zambia’s vulnerabilities to these growth; however, growth has slowed since 2015. shocks. As global demand for copper decreased, Zambia grew at an average rate of 7.4 percent during copper export earnings (in US$) contracted by 42 2004-2014, benefitting from the commodity boom percent between 2011 and 2016. The impact of and a broadly stable macroeconomic environment. lower commodity prices was aggravated by El However, with the fall in global commodity prices Niño–related droughts that decimated rain-fed and buffeted by weather shocks, economic growth agriculture and lowered hydroelectricity generation, has significantly slowed in subsequent years, which in turn affected mining production capacity. averaging less than 4 percent. Further, poverty The current account balance deteriorated from a remains high, with a national average poverty rate surplus of 2.1 percent of gross domestic product of 54 percent and a rural poverty rate of 77 percent (GDP) in 2014 to a deficit of 3.3 percent of GDP (2015). in 2016, putting immense pressure on the Kwacha in late 2015. Meanwhile, procyclical fiscal policies The government launched its 7th National pursued during the commodity boom proved to be Development Plan, 2017–2021, calling for a unsustainable. Electricity, fuel, and agricultural fundamental shift in the way resources are subsidies, as well as growing interest payments could allocated. Its five pillars include: (a) Economic not be met with higher public revenues as economic Diversification and Job Creation; (b) Poverty growth slowed (to a low of 2.9 percent in 2015, 3.8 and Vulnerability; (c) Reduced Developmental percent in 2016, and 3.5 percent in 2017). Thus, low Inequalities; (d) Enhancing Human Development; copper prices undermined Zambia’s tax collection and (e) a Conducive Governance Environment performance, which was further exacerbated by a for Economic Diversification. The strategic goal low tax base and low compliance. of the 7th National Development Plan is to create a diversified and resilient economy for sustained 2 World Bank, “Powering the Zambian Economy,” Zambia Economic Brief 6. (Washington DC: World Bank, 2015). 1. INTRODUCTION 2 Figure 1: Public Sector External Debt 80.0 16,900 70.0 14,900 60.0 12,900 50.0 10,900 $9,485 36.7 40.0 8,900 $5,403 30.0 6,900 HIPC $4,258 Debt 20.0 4,900 $1,481 19.9 relief 7.5 7.3 2,900 10.0 $961 900 0 2005 2006 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Actual (US$ Millions) As a % of GDP Source: International Monetary Fund (2017); Government of Zambia (Ministry of Finance) (2018); and World Bank (2018). The failure of fiscal policy to respond to the Relative exchange rate stability and low inflation emerging revenue realities exacerbated Zambia’s permitted a successive easing of monetary policy copper and weather shocks. An expansionary fiscal between November 2016 and December 2018. stance was maintained, with an average primary Following reduction in Zambia’s inflation in 2017 deficit of 6.0 percent of GDP between 2015 and 2018. to 6.6 percent from a high of 17.9 percent in 2016, These large deficits were largely financed by both the Bank of Zambia gradually reduced its policy domestic and non-concessional external borrowing, rate from 15.5 percent in February 2017 to 9.75 with the latter further worsening the fiscal situation percent at the end of 2018. In addition, it lowered as exchange rate depreciation over the years has the statutory reserve ratio (SRR) to 5 percent from increased the Kwacha value of the country’s external 8 percent. However, exchange rate and food price debt service. In addition, weak commitment controls pressures in 2019 have seen the Consumer Price led to a build-up in domestic payment arrears, which Index (CPI) inflation rate breach the upper limit severely affected private sector development. In this of the central bank’s inflation target range of 6-8 context, arrears made the firms’ treasury situation percent in recent months, thereby leading the Bank more perilous, and the necessary tightening of the of Zambia to tighten its policy rate to 10.25 percent monetary policy crowded out banking credit to the in May 2019 and to 11.50 percent in November private sector, which has been contracting since 2016. 2019. Meanwhile, climate shocks in 2015 and 2016 also Public debt vulnerabilities have heightened, affected the financial sustainability of the state-owned and debt under the current policies is on electricity utility, ZESCO. As such, it was forced to an unsustainable path. Public and publicly- resort to more expensive energy sources not covered guaranteed (PPG) debt has risen from 20.5 percent by corresponding tariff increases. This and other of GDP in 2011 to 78.1 percent of GDP in 2018, operational borrowing led ZESCO’s debt (including driven by accumulation of both external and arrears) to nearly triple from US$693 million in 2012 domestic debt (Figure 1). External public and to about US$1.8 billion by the end of 2018, presenting publicly-guaranteed debt is estimated to have significant contingent liabilities and growth risks. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 3 risen to US$ 11.5 billion as of the end of March implemented. Reforms to reduce electricity 2019 from US$1.98 billion in 2011. The debt and fuel subsidies and improve the targeting composition has also significantly shifted toward and effectiveness of agricultural subsidies were commercial and Non-Paris Club bilateral creditors, undertaken. Also, Kwacha 6.4 billion in domestic thereby exacerbating the country’s exposure to payment arrears (US668.8 million equivalent) exchange rate and market risks. At the end of 2011 were cleared in 2017, but new arrears accrued in (before the first bond issuance in 2012), the share 2018. The Public Finance Management Act was of multilateral debt to total external public and passed in 2019. A medium-term debt management publicly-guaranteed debt was 62 percent. This share strategy was approved in 2017, but was not updated has significantly declined to about 16.8 percent in in 2018. Moreover, critical bills are pending, 2018. In addition, total guaranteed debt and arrears including a move to improve legal and regulatory of the state-owned electricity company, ZESCO, frameworks for financial supervision (Bank of were above US$1.8 billion at the end of March 2019. Zambia Bill), reduce the costs of government External PPG debt service obligations over 2019-21 procurement (Public Procurement Bill), improve are estimated to be US$4.6 billion, roughly over 40 public investment management (Planning and percent of domestic revenue per year. As a result, Budgeting Bill), and strengthen oversight of debt the 2019 World Bank/International Monetary Fund contracting (Loan and Guarantees Bill). In addition, (IMF) Debt Sustainability Analysis concludes that delays in strengthening the quality, timeliness and Zambia’s risk of overall and external debt distress comprehensiveness of debt reporting exposed remains very high. Furthermore, public debt under Zambia to second-guessing of debt numbers and the current policies is on an unsustainable path. allegations of debt misreporting. These continue to severely undermine market sentiment and increase Fiscal consolidation and structural reforms, the cost of external borrowing. which were planned for 2017 and 2018 and which could have supported further monetary loosening Annex B presents latest available key macro-fiscal and private sector lending, were only partially indicators. 1. INTRODUCTION 4 2. Agriculture and Financial Sector Overview Agriculture Sector Agriculture is a critical sector in the Zambian economy, but it has not sufficiently supported poverty reduction in rural areas. The agriculture sector employed 48 percent of the working population in 2017. While employment in the sector remains high, the agriculture sector’s contribution to GDP declined from about 17.3 percent in 2004 to 8.2 percent in 2017 (World Bank 2018). This coincides with a decline in agriculture’s labor productivity — measured as annual value added per worker — from US$702 in 2004 to US$584 in 2015 (in constant 2010 US$).3 The low share of the agriculture sector’s contribution to GDP and the large share of labor force employed in agriculture indicate that most people remain locked into low-productivity subsistence agriculture, which is characterized by lack of access to productive assets, improved inputs and technologies, and markets, as well as a low level of agricultural diversification and skills (World Bank 2018). Most of the working population in agriculture is comprised of smallholder farmers: about 98 percent of farmers are smallholder farmers (see Figure 2), with 71 percent cultivating less than 2 hectares (ha); 24 percent cultivating 2-5 ha and 5 percent cultivating between 5-20 ha. A large share of the rural population lives below the poverty line. While urban poverty percent in 2015 declined from 25.7Approximate 23.7 xpercent to: 122 Size 64mm in 2010, rural poverty increased from 73.6 percent in 2010 to 76.7 percent in 2015 (World Bank 2018). Figure 2: Distribution of Land Size According to Farmer Category (2016) Large Scale Currently estimated (>100 ha) +/- 3000 farmers Medium-Scale (20-100 ha) Smallholder Category C (5-20 ha) Smallholder Category B (2-5 ha) Smallholder Category A (0-2 ha) Source: Chapoto and Chisanga (2016). 3 Data are from World Bank’s World Development Indicators [accessed 21 June 2018]. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 5 The agriculture GDP is comprised primarily of wheat (40.9 percent) (IAPRI 2019). The decline crops (69.6 percent), dominated by maize4. The in the following production season (2018/19) was export of raw or semi-processed commodities is even more severe, with the maize crop dropping also notable. Within the crops sub-sector, maize by an additional 16 percent (Ministry of Agriculture accounts for more than 50 percent of the food crop. 2019). Cassava, vegetable, soybeans, groundnuts and Price volatility is the most significant market- wheat also contribute substantial shares. The main related risk facing farmers and other players in cash crops include sugar cane, cotton, and tobacco. the agricultural value chains in Zambia, thereby The livestock sub-sector includes dairy, beef, and reducing the incentives to invest in agriculture. poultry. The livestock sector has contributed to the Decreases in international prices are often rapidly growth of crops, such as soybeans, due to the increase transmitted to the local cotton market and affect in demand for livestock feed. The fisheries industry production for the following year. The volatility of employs over 300,000 people as fishers or fish maize prices from one year to the next has lessened farmers or indirectly along the value chain (Chapoto dramatically since the early 1990s, except in those and others 2017). The agriculture sector contributes years when the government intervenes in the around 35 percent to total non-traditional exports market. This happened in the 2017-18 marketing (that is, all exports other than copper and cobalt) and season, for example, when maize prices crashed about 10 percent of the total export earnings for the due to the introduction of an export ban. The country (Zambia Development Agency 2015). unpredictable involvement of the Food Reserve Agriculture in Zambia is exposed to significant Agency in procuring and disposing of the strategic production risks. Droughts, floods, and price maize reserves tends to cause price uncertainty as volatility are the principal risks affecting crop well (World Bank 2018).5 agriculture in the country. Pests and diseases can While agricultural production of maize in also cause significant losses. Drought and outbreaks Zambia has grown in past years, productivity has of animal disease are the principal risks affecting stagnated; furthermore, the focus on one crop livestock. In addition, with the impact of climate has had several adverse consequences.Between change, cycles of severe drought are occurring 2007 and 2017, national maize production increased more frequently than before, whereas the smaller by more than two million metric tons. At present, localized droughts and dry spells average once Zambia produces surplus maize. Maize continues every two to three years. The rain-fed agriculture to dominate crop production among smallholder and high poverty rates characteristic of smallholders households, with about 89 percent of households have increased their exposure to frequent weather cultivating it. It also occupies about 57 percent of shocks and limited their ability to cope with them. all arable land in Zambia. However, the production In 2017/18, agriculture production for most major growth in maize stems from increasing the area crops declined due to prolonged dry weather under cultivation rather than significant increases conditions across the southern half of the country in productivity (Figure 3). Maize productivity (maize 33.6 percent, sorghum 24 percent, soya has improved only modestly and remains lower beans 13.9 percent, Irish potatoes 57.3 percent and for poorer households (at 1.9 tons/hectare (t/ 4 Maize production suffered from additional challenges linked to the sporadic outbreak of the fall army worms, as well as bottlenecks in 3the launch of the electronic e-FISP. 5 For a detailed and effective analysis of the potential of risk management practices in increasing agricultural resilience, see World Bank (2018). 2. AGRICULTURE AND FINANCIAL SECTOR OVERVIEW 6 Figure 3: Trends in Maize Yields and Productivity 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 2007-08 2007-08 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Area Planted (Ha Million) Production (Tons Millions) Yield (Tons Per Ha) Source: World Bank (2017), based on data from Central Statistical Office. ha) compared to about 2.8 t/ha among non-poor of arable land, only around 11 million hectares are households (World Bank 2017). In addition to low cultivated. Zambia is also home to 40 percent of productivity, returns to maize production are low water resources in southern Africa. However, while compared to horticultural and high-value crops the country has 523,000 ha of irrigable land, only (Hichaambwa and others 2015). Furthermore, 155,890 ha (29 percent) are technically equipped non-diversified production systems are highly for irrigation (SNDP 2017). Thus, only 30 percent vulnerable to climate and market variability and of land is irrigated (World Bank 2018). Zambia has lead to environmental degradation. An undiversified 12 million hectares of water bodies and 8 million diet based primarily on maize also contributes to hectares of wetlands, which are in principle available Zambia’s unacceptably high rates of malnutrition: for fish farming. This is more than enough to produce indeed, 40 percent of children under five are stunted fish to cover the demand gap of 35,000 metric tons. and 15 percent are underweight.6 Lastly, Zambia shares borders with eight countries and is a member of regional bodies such as the Opportunities and Challenges Common Market for Eastern and Southern Africa Zambia has great potential to increase and (COMESA) and the Southern African Development diversify agricultural production away from Community (SADC), which provide access to the maize. Zambia has a diversified agro-ecological rapidly growing regional markets. environment, which permits the production of a wide Domestic food demand is expected to increase variety of products. It also has reasonably favorable by three-fold over the next 15 years. As income rainfall with one rain season in most areas, as well levels and urbanization increase, the composition as opportunities for diversification in crop farming, of food consumed is also expected to increasingly livestock and fisheries. Of the 44 million hectares shift to higher value commodities. The World Bank World Bank (2018). 6 AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 7 (2013) esti¬mated that urban food markets in Africa The sector also faces several challenges. These will increase fourfold and exceed a market value include climatic challenges (the country suffered of US$ 400 billion by 2030 (World Bank 2013). an El Niño in 2015); susceptibility to some major Trends toward a shifting dietary demand are agricultural pests (fall army worms and stock visible in Zambia. For instance, demand for poultry borers) and livestock diseases (foot and mouth tripled between 2012 and 2015 (that is, from 3 kg disease, contagious bovine pleuropneumonia per capita to 9 kg per capita). Between 1996 and and African swine fever); high transport costs to 2015, food expenditures for maize declined from markets due to Zambia being landlocked; and low 23 percent to 14 percent, and both urban and rural productivity of both crops and livestock compared households increased expenditures for perishable to their potential contribution. The cost of seeds and and processed foods (World Bank 2018). fertilizers is high because they are mostly imported from other countries. The challenges faced by the There is strong potential for the development livestock sub-sector include: heavy dependency of the agro-processing sector in Zambia, which on rain-fed pasture grazing (76 percent of national in turn can become a driver of Zambia’s structural herd owned by smallholders); the high cost of good transformation and economic development. The quality animal feed; the poor genetic performance changing domestic demand, the abundance of of local breeds due to exposure to diseases; and agricultural raw materials, relatively low-cost limited access to knowledge regarding livestock labor, and access to regional markets indicate management and agricultural extension services. a strong potential to further develop the agro- Lastly, most farmers do not have formal lease processing sector. Animal feed processing, grain documents, which limits their ability to use the milling, edible oil production, meat and dairy land as collateral.8 processing, honey and nut processing, etc. are some of the key areas considered to be of high Agricultural Policies potential. The agro-processing sub-sector already The Government acknowledges the important contributes to over half of the non-service jobs role of the agriculture sector and has shown in the formal sector. Likewise, it accounts for 60 a high level of strategic commitment to the percent of Zambia’s manufacturing sector (Zambia sector. The 2013 Zambia National Agriculture Development Agency 2015). The development of Policy (NAP) sets out the Government’s the agro-processing sector is expected to allow for policy commitments. The National Agriculture a reallocation of labor from the low-productivity Investment Plan (NAIP) 2014–2018 identified sectors, such as agriculture, to more productive specific areas of investment to help implement the activities in the manufacturing sector. This would NAP. The Zambian Government’s commitment be a sign of an effective structural transformation to the sector is also indicated by the increasing and economic growth.7 7 World Bank (2018). Structural transformation involves the reallocation of labor and capital from low-productivity sectors such as agriculture to more productive sectors or activities within a sector. The higher the productivity gap between the sectors, the larger the potential for aggregate productivity growth. Over time, the productivity gap between sectors declines and returns to labor, that is, wages,across sectors should be equalized. 8 All land is held either under the customary law under traditional chiefs (94 percent) or is owned by the State (6 percent), and farmers can only have lease rights over their land. 2. AGRICULTURE AND FINANCIAL SECTOR OVERVIEW 8 budget allocated to the sector. In line with the agricultural inputs at highly subsidized prices. As Comprehensive Africa Agriculture Development such, the farmers receive inputs worth Kwacha Program (CAADP), Zambia gradually increased 2000 against a contribution of Kwacha 300. The the share of agriculture in public spending from FISP and the FRA have helped to turn Zambia into less than 2 percent in the early 2000s to 10 percent a structural surplus producer for maize. However, in 2010-11. they have not managed to enhance productivity, ensure food and nutrition security or sustainably It has maintained this commitment to between 5.4 reduce poverty. Zambia spends less than 1 percent percent and 10 percent since then.9 The Government of its agricultural GDP on agricultural research also implements several donor-funded projects in and development, a level much lower than in the agriculture sector. countries that have successfully transformed their In the past several years, national policies have agricultural sector. (World Bank 2017). emphasized the need for enhancing agricultural In recent years, the Government has taken diversification. Agricultural diversification and some steps to reorient public spending on the development of private-led marketing systems agriculture. Starting in the 2015/16 season, the were already major objectives in the Sixth National Government initiated reforms in the FISP and the Development Plan (SNDP, 2011-2015), the NAP FRA to ensure that there is enough spending on and its implementing strategies. It continues to be other high-priority areas, and thereby ensure the emphasized in the Seventh National Development sustainable and diversified growth in the sector. Plan for 2017-21. A key component of the NAIP is It reduced the number of beneficiaries under the improved crop diversification and the introduction FISP, and initiated a flexible electronic voucher of different varieties adapted to the country’ agro- system to move the program to a market-based ecological zones and weather patterns to enhance and digitized system (Electronic FISP or e-FISP). resilience and food security. Additionally, it also The e-FISP aims at improving the targeting, includes the financing of improved extension efficiency, transparency, and input choice. It also services and increased facilitation of access to incentivizes crop diversification toward higher- inputs for smallholder farmers through improved value and resilience-enhancing commodities. In targeting of the Farmers Input Support Program addition, a weather index insurance (WII) program (FISP). was introduced to compensate farmers in case However, to support the agricultural sector to of weather-induced losses (for example, early or achieve its potential, there is a need to better late dry spells, excess rainfall). However, both balance the public spending on agriculture. programs have faced serious implementation Between 2008 and 2018, an average of 79 percent challenges. The e-FISP and the WII are discussed was spent on the FISP and the Food Reserve Agency in more detail in Chapter 4. The FRA reforms have (FRA). The FISP is the Government’s primary capped the volume of maize to be procured at program to support small-scale farmers. Under the 500,000 metric tons. However, delays in payments program, over 1 million farmers are provided with by the FRA are reported to still be an issue. 9 The CAADP is an initiative by African governments under the African Union/New Partnership for Africa’s Development. The CAADP seeks to achieve a 6 percent annual growth rate for the agricultural sector, with an allocation of at least 10 percent of the national budget to agriculture. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 9 Table 2: Distribution of Financial Sector Assets, (September2019) Number of Percentage Value of assets Financial share of total (Millions of Sector institutions (FIs) assets Kwacha) Banking Sector 18 73.3 88,047 Pension Funds 245 16.6 19,985 Microfinance Institutions 34 5.3 6,336 Insurance 29 2.0 2,460 Building Societies 1 1 1,170 Leasing and Financial Businesses 7 0.3 372 Development Banks 1 1 1,146 Savings and Credit Institutions (NatSave) 1 0.4 468 Other 75 0.1 87 TOTAL 411 100 120,071 Source: Bank of Zambia (2019). Financial Sector The financial access points have grown Zambia’s financial sector is dominated by the substantially and are supported by agents. As banking sector, but it consists of a broad array of December 2018, there were 372 bank branches, of financial institutions. The banking sector holds 302 non-bank branches, and 14,916 other access nearly 70 percent of financial sector assets, of which points (primarily mobile money agents). The over 80 percent are held by subsidiaries of majority insurance sector had 32 insurance brokers, eight loss foreign-owned banks. Other major financial sector adjusters, and 169 insurance agents. Over the past institutions include pension funds, microfinance three years, the number of active financial services institutions, insurance companies and building agents, mostly mobile money agents, has increased societies (Table 2). Of the 18 licensed commercial exponentially to over 46,000. banks, four are jointly owned by the government. Mobile money usage has grown rapidly in The sector listed as “other” includes 75 currency recent years. As of 2018, there were 3.9 million exchange firms, 11 savings and credit cooperatives, active mobile money accounts with services being 19 general insurers, 10 long-term insurers and 2 provided by the three MNOs (including Airtel, MTN public insurers; 3 public pension funds and 245 and Zamtel) (UNCDF 2019). The value of mobile private schemes; 2 payment system operators, 42 money transactions increased to $1.7 billion in 2018 payment service providers (including three Mobile compared to $729 million worth of transactions Network Operators [MNOs]) and 1 credit reference in 2017. During the same period, the volume of bureau. Additionally, the total market capitalization transactions increased to 304 million from 172 of the debt and equity capital market stood at million (BOZ Statistics 2018). Kwacha 56.8 billion (or US$ 4.19 billion). There are 22 listed entities on the Lusaka Stock Exchange, Credit to the private sector contracted sharply including government bonds and 26 corporate bonds since 2015, but it has since partially recovered. (LuSE, 2019). From a high of nearly 20 percent in 2015, the credit- 2. AGRICULTURE AND FINANCIAL SECTOR OVERVIEW 10 to-GDP ratio fell sharply to 11.2 percent in 2017, but Zambia Revenue Authority, and the Ministry it recovered to 14.4 percent in 2018. The slowdown of Finance’s Integrated Financial Management in the financial services sector was substantially Information System (Bank of Zambia 2018). Key impacted by the increase in non-performing loans pending reforms include providing access to the (NPLs) which stood at 11 percent as of December payment system for non-banks and inter-operability 2018. The average nominal Kwacha bank lending of e-money. rates decreased to 24 percent in May 2018 from a Recent secured transaction reforms have high of 29 percent in December 2016. Nonetheless, substantially strengthened Zambia’s credit the real interest rate is relatively high at 16 percent. infrastructure. In 2016, Zambia enacted the The high NPLs, high interest rates and increased Moveable Property (Security Interest) Act No. 3 of domestic borrowing by the Government are likely 2016 to enable the creation of security interests in to be limiting private sector credit growth. moveable property, harmonize secured transaction The insurance market in Zambia has a diverse laws, and minimize transaction costs. In 2017, in set of industry players, but insurance penetration line with this Act, a web-based Collateral Registry is well below the Sub-Saharan African (SSA) for moveable assets was established by the Patents average. After over two decades of the Zambia and Companies Registration Agency (PACRA). As State Insurance Corporation (ZSIC) operating as a of the end of February 2019, the registry reported government-owned monopoly insurer, the insurance over 4,000 registrations. Small- and medium-sized market was liberalized in 1992. Since then, foreign businesses accounted for most of the loans recorded and domestic insurers are again permitted to operate in the registry. Vehicles, machinery and equipment, (AXCO 2018). Currently, 20 insurance and 3 locally household goods, and agricultural equipment are licensed reinsurance companies operate in Zambia the main types of movable assets used as collateral together with a diverse set of industry players for loans. (including brokers, agents, adjustors, surveyors, and The recent passage of the Credit Reporting Act so on) (PIA 2019). The growth of premium income is expected to substantially strengthen Zambia’s in the non-life insurance market in Zambia is slow, credit reporting system. Zambia has a private and insurance penetration is weak, reaching only credit bureau (TransUnion), and it is supervised by 2.04 percent in 2017.10 the BoZ. Both banks and microfinance institutions Zambia has a relatively modernized national (MFIs) provide data to the bureau. Furthermore, payment system. The Zambian Interbank Payment the share of data provided by MFIs has steadily and Settlement System (ZIPSS) is the country’s increased over the years. However, usage (inquiries) real-time, gross settlement system for the settlement growth has been slower than expected, and the of interbank activities in the financial system. The bureau still does not collect data on non-financial system has commercial banks and the central bank payments such as utility payments. The enactment as direct participants. The ZIPSS is integrated into of the Credit Reporting Act of 2018 is a key reform the Bank of Zambia Central Securities Depository, and provides the legal framework to collect and the Zambia Electronic Clearing House Lt, the make available such data to both financial service providers and users. 10 Insurance penetration is defined as the ratio between Gross Written Premium (GWP) and Gross Domestic Product (GDP). In SSA, the highest insurance penetration rate is 16.99 percent (South Africa) and the lowest is 0.04 percent (Guinea) (Statista.com). AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 11 The Zambian financial system is supervised the rapid growth in access to mobile money, which by three major regulators. Banks and non-bank rose from around 12 percent in 2014 to 28 percent financial institutions are regulated and supervised in 2017. by the Bank of Zambia. The insurers and pension Zambia’s National Financial Sector funds are regulated by the Pensions and Insurance Development Policy and National Financial Authority, and the capital market is regulated by the Inclusion Strategy (NFIS) launched in 2017 Securities and Exchange Commission. The Bank of identify policy priorities and goals for the Zambia has separate departments for supervising financial sector. The policy and strategy build on banks and non-bank financial institutions, and both foundations laid by the previous Financial Sector departments carry out regular off-site and onsite Development Plans (FSDPs). The main goal of the inspections of the supervised entities. NFIS is to “achieve universal access to and usage Zambia has made substantial improvements in of a broad range of quality and affordable financial financial inclusion over the past decade. Data services that meet the needs of individuals and from Finscope surveys shows that the proportion of enterprises.” The overall, high-level targets for adults having access to the formal financial sector the NFIS are to have 80 percent of the population increased from 23.1 percent in 2009 to 38.2 percent financially included (formally and/or informally) in 2015. However, there is a large (25 percent) and 70 percent of the adult population formally gap in access between urban and rural areas, and financially included by 2022. The strategy is a substantial gender gap of around 10 percentage expected to help bring the unbanked and under- points between formal access levels of men and served populations into the formal financial women. Data from the 2017 Global Findex Survey system by exploiting technological advancements indicates that the adult population with access to which have created opportunities for expanding the formal financial sector has further increased access to and usage of financial services, among to 46 percent. This increase seems to be driven by other measures. 2. AGRICULTURE AND FINANCIAL SECTOR OVERVIEW 12 3. Financial Inclusion of Farmers and Access to Finance for Agribusinesses Financial Inclusion of Farmers and Fisherfolk The financial inclusion of individuals and enterprises in the agriculture sector is key to inclusive growth in the agriculture sector. There is now a global consensus that financial inclusion of individuals and SMEs is critical to inclusive growth and poverty reduction. Indeed, the first step towards this goal is access to a transaction account (that is, a bank, non-bank, or an e-money account). Financial inclusion of individuals and enterprises engaged in the agriculture sector needs attention since traditionally their levels of inclusion have been substantially less than that of individuals and enterprises in other sectors of the economy. This chapter utilizes data from Financial Sector Deepening Zambia (FSDZ) 2015 Finscope Survey and the World Bank (WB) 2017 Global Findex Database to analyze levels of financial inclusion among Zambian farmers and fisherfolk. The 2015 Finscope survey data allows for a detailed, comparative analysis of financial inclusion among those adults whose income derives primarily from farming and fishing and other Zambian adults.11 The WB Global Findex 2017 data, though not directly comparable to the Finscope 2015 data, provides more recent data that allows for additional comparative analysis (World Bank 2017). Tests of association were carried out to evaluate the statistical significance of the differences between the farmers and fisherfolk segment and the rest of the population for the indicators analyzed. A similar analysis of enterprises in the agriculture sector was not carried out because the national enterprise survey that would allow for a similar analysis is not available. 12 11 Findex defines The Bank of Zambia who adultsand receivedSector Financial agriculture payments Deepening as “respondents Zambia conducted thewho report survey Finscope personally receiving money in 2015, any source frominput with for the Trust. The survey reflects 8,570 interviews with a 99 percent response rate. from FinMark See FSD Zambia (2015), Finscope 2015, http://www.fsdzambia.org/finscope-2015/ for the findings, and DataFirst, Open Data Portal: Zambia-Finscope (2015), https://www.datafirst.uct.ac.za/dataportal/index. php/catalog/619 for the data catalogue. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 13 Figure 4: Access to Financial Services by Population Segment (Percent) 100 3 16 17 7 90 18 27 80 11 24 11 10 70 14 60 23 23 23 50 20 40 30 67 50 49 20 49 38 10 0 Farmers Non-Farmers Farmers Fisherfolk Rural Non-farmers & Fisherfolk & Fisherfolk & Fsherfolk Financially Excluded Informal Only Non-bank Formal Banked Source: Financial Sector Deepening Zambia (2015) Note: Data description: Figure 4 categories within each population segment are mutually exclusive. The underlying variables are drawn from the FSDZ’s access strand (fas) variable, which aggregates survey respondents who: (1) have or use banking services; (2) don’t use bank services, but have or use non-bank formal services (for example, MFIs, Savings and Credit Co-Operatives [SACCOs], microlenders, insurance); (3) don’t have or use formal services, but use informal services; and (4) are financially excluded. Tests of significance: Proportional differences between each segment and its population complement are statistically significant. For example, differences between farmers and fisherfolk and non-farmers/fisherfolk are significant. Proportional differences between rural non- farmers/fisherfolk and rural farmers/fisherfolk are not statistically significant. The 2015 Finscope survey found that 21.5 of the population (Figure 4). Farmers and percent (1.75 million) of the Zambian adult fisherfolk had decisively lower access than other population’s main source of income derived from Zambians to formal financial services. Only farming and 1.3 percent (108,147) from fishing about 27 percent of farmers and fisherfolk had activities, whereas the 2017 Findex data finds access to formal financial services compared to that 29 percent (2.77 million) of Zambian adults 42 percent Zambians employed in other sectors. report receiving agricultural payments.12 While In 2015, the gap between farmers and fisherfolk a larger proportion of the Zambian population (48 and other Zambians in access to banking services percent) is involved in agriculture than the groups exceeded 10 percent. In aggregate, 18 percent of on which the Finscope and Findex surveys focus, farmers and fisherfolk had access to or used non- this chapter analyzes those segments addressed in bank formal financial services compared to 32 the two surveys. In this regard, these respondents percent of other Zambians. About 17 percent of have a higher potential to be reached through non-farmer/fisherfolk had mobile money access in financial inclusion interventions based in the sector. 2015 compared to less than 5 percent of farmers and fisherfolk. Access to other formal channels, The 2015 Finscope survey found substantial including MFIs, cooperatives, and microlenders, gaps in levels of financial inclusion of Zambian was comparable between the two groups, at farmers and fisherfolk compared to the rest around 4 percent. Zambians generally have low 12 Findex defines adults who received agriculture payments as “respondents who report personally receiving money from any source for the sale of agricultural products, crops, produce, or livestock in the past 12 months.” World Bank (2017), Global Findex Glossary. 3. FINANCIAL INCLUSION OF FARMERS AND ACCESS TO FINANCE FOR AGRIBUSINESSES 14 Figure 5: Saving Mechanisms (Percent of Savers in Population Segment) Cash (At Home or On Person) 59 42 Buying Farming / Fishing Inputs in Advance 21 6 Bank 16 35 Family Members / Friends Keep Money Safe 15 11 Groups (Saving Groups, Chilimbas) 13 22 Buy Business Stock or Materials 8 7 Other Formal (MFIs, SACCOs) 4 2 Pension / NAPSA 1 7 Keep on Mobile Phone 1 5 0 10 20 30 40 50 60 70 Farmers & Fisherfolk Non-Farmers & Fisherfolk Source: Financial Sector Deepening Zambia (2015) Note: Data description: Figure 5 categories are not mutually exclusive. Underlying data are drawn from the FSDZ survey question 4.3, which asks respondents to indicate which savings products they have. Tests of significance: Proportional differences between farmers and fisherfolk and non-farmers/fisherfolk are statistically significant for all saving mechanism categories, except buying business stock or materials. access to MFIs and cooperatives. Unlike in many Farmers and fisherfolk saved more than the rest other African countries, the MFI and financial of the population in 2015, but they had much cooperative sectors do not have a large outreach lower access to formal savings channels (Figure in Zambia. 5). According to the 2015 Finscope survey, about 68 percent of farmers and fisherfolk saved Fisherfolk had strikingly low levels of financial as compared to 62 percent of other Zambians. access in 2015. Although fisherfolk represent a Substantially more farmers and fisherfolk saved in relatively small proportion of the adult population cash at home or in person or with family and friends (1.3 percent), the gap between their levels of financial (59 percent and 15 percent, respectively) than the access and even those with agriculture as their rest of the population (42 percent and 11 percent, primary income source is striking. Only 10 percent respectively). In contrast, farmers and fisherfolk of fisherfolk were formally served in 2015, which is saved considerably less frequently through banks nearly one-third the level for farmers, and one-fourth (16 percent) than other Zambian savers (35 the level for others. Given the relatively small size percent). Among non-banks, farmers and fisherfolk of the fisherfolk population, disaggregated analysis saved less frequently through pensions and mobile for this group is only done for financial access (and money, but more frequently through MFIs and not for usage of specific services). Financial access Savings and Credit Co-Operative (SACCOs) than among farmers and other rural Zambians was largely the rest of the population. indistinguishable, which suggests that the financial inclusion status of farmers may be strongly linked to their geographic circumstances. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 15 The most common drivers of savings among As with other Zambians, farmers and fisherfolk farmers and fisherfolk were not farming related primarily borrow from family and friends (Figure (Figure 6). Perhaps not surprisingly, living expenses 7). Farmers and fisherfolk and other Zambians and non-medical emergencies were much larger borrowed at a statistically indistinguishable rate of drivers than savings specifically for farming. This about 30 percent of the population in 2015. Among suggests the importance of increasing the general these, 81 percent of farmer and fisherfolk borrowed access to formal savings services for farmers and from family and friends, as compared to 68 percent fisherfolk rather than savings products that are tied of other borrowers. The access to formal sources of to farming activity. credit was generally very small, but it was marginal Figure 6: Top 5 Drivers of Saving among Zambian Farmers and Fisherfolk (Percent of Savers) 40 34.8 35 30 24.7 25 20 15 12.9 10.1 10 5 3.4 0 Living Expenses Non-medical Farming Expenses Education or Medical Expenses for When You Do Emergencies Such as Seeds School Fees (Either Planned Not Have Money or Fertilizer or Emergency) Source: Financial Sector Deepening Zambia (2015) Note: Data description: Figure 6 categories are mutually exclusive. Underlying data are drawn from the FSDZ survey question 4.5, which asks respondents to indicate which one of a series of categories is the main reason they save. Figure 7: Source of Credit (Percent of Borrowers) Family / Friends 81 68 Informal (Saving Group, Kaloba, 13 Community Organisation) 13 Other formal 2 7 (Microlender, MFI, SACCO) 1 Bank 5 0 Employer 5 0 10 20 30 40 50 60 70 80 90 Farmers & Fisherfolk Non-Farmers & Fisherfolk Source: Financial Sector Deepening Zambia (2015) Note: MFI= microfinance institution; SACCO= Savings and Credit Co-Operatives. Data description: Figure 7 categories are not mutually exclusive. Underlying data are drawn from FSDZ survey question 5.4a, which asks respondents to indicate which loan sources they have accessed in the last 12 months. Tests of significance: Proportional differences between farmers and fisherfolk and non-farmers/fisherfolk are statistically significant for all borrowing sources except informal sources. 3. FINANCIAL INCLUSION OF FARMERS AND ACCESS TO FINANCE FOR AGRIBUSINESSES 16 for farmers and fisherfolk. Only about 1 percent of credit for farming or fishing. Living expenses and farmer and fisherfolk borrowers accessed bank credit, school fees are the largest drivers of borrowings. and just 2 percent of farmers and fisherfolk borrowed This also reinforces the need to increase access to from other formal sources, such as microlenders, formal savings channels for farmers and fisherfolk. MFIs, and SACCOs as compared to 5 and 7 percent Although the usage of insurance and pensions of other Zambian borrowers, respectively. are low among all Zambians, farmers and Farming expenses are the third largest driver of fisherfolk have particularly constrained usage borrowing after living expenses and education levels (Figure 9). In 2015, only 0.63 percent and (Figure 8). As in the case of savings, this suggests 0.92 percent of farmers and fisherfolk, respectively, that there is generally a greater need to increase had access to or used insurance and pensions. The access to credit from formal sources rather than just rest of Zambians had low but considerably higher Figure 8: Top 5 Drivers of Borrowing among Zambian Farmers and Fisherfolk (Percent of Borrowers) 20 18.8 17.6 18 15.8 16 14 11.4 12 10 6.7 8 6 4 2 0 Living Expenses Education or Farming Expenses Medical Expenses Non-medical for When You Do School Fees (E.g. Seeds, (Either Planned Emergencies Not Have Money (Self or Others) Fertizer, Land or Emergency) Source: Financial Sector Deepening Zambia (2015) Preparation) Note: Data description: Figure 8 categories are mutually exclusive. Underlying data are drawn from FSDZ survey question 5.6, which asks respondents to indicate which one of a series of categories their largest source of credit went toward. Figure 9: Access to or Usage of Insurance and Pensions (Percent of Population) 0.63 Insurance 3.47 0.92 Pensions 4.60 0 1 2 3 4 5 Farmers & Fisherfolk Non-Farmers / Fisherfolk Source: Financial Sector Deepening Zambia (2015) Note: Data description: Figure 9 categories are not mutually exclusive. Underlying data are drawn from FSDZ variables: insurance (have or use insurance); and pensions (have or use pension services). Tests of significance: Proportional differences between farmers and fisherfolk and non-farmers/fisherfolk are statistically significant for insurance and pensions. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 17 Figure 10: Gender-disaggregated insurance and pensions usage in the same period. Financial Access Among Farmers Among insured farmers and fisherfolk, more than and Fisherfolk (Percent) 50 percent reported using agriculture insurance. Women farmers and fisherfolk had substantially 100 lower levels of access to formal service providers 12 90 19 than men in 2015 (Figure 10). Only about 21 9 80 percent of women farmers and fisherfolk were 12 70 26 formally included in 2015. They lagged men in 60 22 access to formal financial services by about 10 50 percentage points.13 The gap in banking access was 40 particularly wide, at about 7 percent. 30 53 48 The 2017 Findex data indicate considerable 20 progress in expanding access for farmers over 10 the past few years. In 2017, 58 percent of adults 0 Women Men who received agriculture payments had access to an Financially Excluded Informal Only account, up from about 35 percent in 2014 (Figure Non-bank Formal Banked 11). The Findex data further indicate that 35 percent Source: Financial Sector Deepening Zambia (2015) of adults who receive agriculture payments into a Note: Data description: Figure 10 categories within each population segment are mutually exclusive. Underlying variables are drawn financial account opened their first account for that from the FSDZ access strand (fas) variable, as described in Figure 1. particular purpose. Additionally, between 2014 Tests of significance: Proportional differences between financial access for women and men are statistically significant. and 2017, the percentage of agriculture payment Figure 11: Access Trends among Agriculture Payment Recipients (2014 and 2017) Adults with an Account (Percentage of Channel for Receiving Agriculture Agriculture Payment Recipients) Payments (Percentage of Agriculture 70 Payment Recipients) 58 90 60 80 80 50 70 60 54 40 35 50 40 30 40 30 20 18 20 10 10 0 0 Payment in Cash Only Payment into an Account 2014 2017 2014 2017 Source: World Bank Global Findex (2017) Note: Agriculture payment recipients denotes “respondents who report personally receiving money from any source for the sale of agricultural products, crops, produce, or livestock in the past 12 months” (World Bank, Global Findex Glossary, 2017). 13 The gender breakdown in Zambia is 51 percent female, and 49 percent male. The gender breakdown among farmers and fisherfolk is 41 percent female, and 59 percent male. 3. FINANCIAL INCLUSION OF FARMERS AND ACCESS TO FINANCE FOR AGRIBUSINESSES 18 Figure 12: Access to Credit Among Zambian Firm (Percent) Percentage of Firms with a 8.8 Bank Loan / Line of Credit 21.6 Percentage of Firms Whose 34.1 Recent Loan Application Was Rejected 15.1 44.7 Percentage of Firms Not Needing a Loan 37.4 Percentage of Firms Identifying 27.4 Access to Finance as a Major Constraint 39.2 0 5 10 15 20 25 30 35 40 45 50 Zambia Sub-Saharan African Source: World Bank (2014) recipients who received their payment in an account forestry and fishery.’ These include the food more than doubled, increasing from 18 to 40 processing sector (62 enterprises) and the wood percent. The increase was driven by an increase in and furniture manufacturing sector (75 enterprises). access to mobile money accounts. The percentage The discussion below presents results for these two of agriculture payment recipients who received groups compared to the rest of the enterprises in the payments in a mobile money account increased from survey (under the category “other enterprises”). 2.1 percent in 2014 to 27.2 percent in 2017, whereas The 2013 Zambia Enterprise Survey results payments into a financial institution account rose showed that Zambian firms have much lower from 16.2 percent to 21.8 percent. This corresponds access to credit compared to the average for to an increase in access to mobile money in general Sub-Saharan African firms (Figure 12). The in Zambia. Specifically, between 2014 and 2017, proportion of firms in Zambia that reported having access to mobile money accounts among all adults access to credit was less than half of the average for increased from 12.1 percent to 27.8 percent. Sub-Saharan African firms. In addition, Zambian firms reported more than double the rate of rejection Access to Finance for Enterprises of loan applications. However, a much higher related to Agriculture and Forestry proportion of firms in Zambia reported not needing a This analysis primarily utilizes data from the loan, and a much lower proportion reported finance World Bank’s 2013 Zambia Enterprise Survey. as a major constraint — an indication of key binding The Survey is a firm-level survey of a representative constraints outside of the financial sector. sample of 720 Zambian enterprises. The analysis undertaken for this report focuses on the survey’s The 2013 Enterprise Survey reveals that Zambian business sector classifications most closely agribusiness enterprises consider access to associated with the economic sector ‘agriculture, finance a substantial obstacle (Figure 13). Access AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 19 Figure 13: Most Significant Obstacle Affecting Business Operations (Percent) Corruption Electricity Access to Land Access to Finance Practices of Competitors in the informal sector 0 5 10 15 20 25 30 35 Wood and Furniture Food Processors Other Enterprises Source: World Bank (2014) Note: Data description: The underlying data are drawn from the 2013 Enterprise Survey’s question m1a, which asks respondents to indicate the “biggest obstacle affecting the operation of this establishment.” Test of independence: The assumption of independence between obstacle and enterprise sector cannot be rejected. to finance is the most commonly reported ‘most report access to finance as a “major” or “very severe” significant obstacle” among wood and furniture business obstacle. manufacturers, whereas food processors report this as Access to credit is low among all Zambian the second most significant obstacle after “practices enterprises (Figure 14), including food processors of competitors in the informal sector”. In total, more and wood and furniture manufacturers; a than a third of wood and furniture manufacturers relatively small share of enterprises applies for a and about 20 percent of food processors report loan. About 14 percent of food processors reported access to finance as the most significant obstacle having access to a loan or line of credit from a affecting the operations of their businesses. In terms financial institution, whereas just under 10 percent of of relative severity, 50 percent of wood and furniture wood and furniture manufacturers reported having a manufacturers and 28 percent of food processors Figure 14: Share of Enterprises with a Loan or Line of Credit from a Financial Institution (Percent) 20 18 16 13.9 14 12 9.8 10 8.4 8 6 4 2 0 Other Enterprises Food Processors Wood and Furniture Source: World Bank (2014). Note: Data description: The underlying data are drawn from the 2013 Enterprise Survey’s question k8, which asks respondents, “At this time, does this establishment have a line of credit or a loan from a financial institution?” Test of independence: The assumption of independence between credit access and enterprise sector cannot be rejected. 3. FINANCIAL INCLUSION OF FARMERS AND ACCESS TO FINANCE FOR AGRIBUSINESSES 20 Figure 15: Main Reasons Enterprises did not Apply for a Loan (Among Those that Did Not Apply) (Percent) Collateral of Requirements were Too High Interest Rates were Not Favourable Application Procedures were Complex No Need for a Loan - Establishment Had Sufficient Capital 0 10 20 30 40 50 60 Wood and Furniture Food Processors Other Enterprises Source: World Bank (2014) Note: Data description: The underlying data are drawn from the 2013 Enterprise Survey’s question k17, which asks respondents, “What was the main reason why this establishment did not apply for any line of credit or loan?” Test of independence: The assumption of independence between the reason cited and enterprise sector cannot be rejected. credit line. For the fiscal year preceding the survey, sufficient capital. This included over 40 percent of 14 percent of wood and furniture manufacturers food processors and nearly 30 percent of wood and and 12 percent of food processors reported using furniture manufacturers. By contrast, less than 20 bank loans to finance at least some share of their percent of food processors and wood and furniture working capital. Less than 10 percent of enterprises manufacturers cited high interest rates, collateral in all three segments reported applying for a loan in requirements and complex application procedures the fiscal year preceding the survey. Among those as the main reasons for not applying for a loan. enterprises that applied for a loan, over 40 percent A 2016 survey of growth-oriented agro-processing in all three segments reported that their applications SMEs confirms that access to finance and the had been rejected. cost of finance remain impediments to growth Many more agribusiness enterprises indicate not for agro-processing SMEs.14 Forty-two percent of applying for a loan because they had sufficient agro-processing SMEs cited the cost of finance as capital as compared to those that cite other one of the three biggest obstacles to growth, and 20 factors (Figure 15). Among those enterprises that percent cited access to finance as a constraint. The did not apply for a loan in the last fiscal year, all cost of finance was the second most widely cited three enterprise segments report that the main impediment, behind utility problems. reason for not applying was because they had 14 This was a World Bank survey of 50 purposively selected (non-representative ) sample of agro-processing SMEs conducted in 2016 to inform the preparation of the World Bank’s Zambia Agribusiness and Trade Project. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 21 22 4. Agriculture Finance Market, Policies, and Programs This chapter provides a market overview of agricultural payments, credit and investments and insurance. The section on agricultural payments discusses the major payment initiatives that can lead to more complex financial products through accumulation of financial transaction information. The section on agricultural credit and investments discusses the recent trend and performance of bank and non-bank lending to the agricultural sector, as well as financing to the sector from investment funds. Lastly, the section on agricultural insurance discusses the growth and performance of indemnity and index insurance products in the agricultural sector. There is no dedicated section for savings as there are no major agriculture sector-specific products, apart from some examples mentioned in various sections in this paper. Agricultural Payments Agricultural payments that have been digitized — or that have the potential to be digitized — deserve closer attention because of the potential benefits from digitization. In this regard, digitization of farmer payments can benefit the government, agribusinesses and farmers. For the government and agribusinesses, the digitization of payments reduces costs and provides transaction records that ensure that the recipients receive the full amount of intended payments within the expected time. For farmers, digitizing payments helps them to be compensated quickly and securely, thereby enabling access to value-added financial services. Furthermore, electronic payment transaction information allows financial service providers to better estimate the potential demand for other financial products, such as savings, credit, and insurance. Thus, digitization of agricultural payments can help deepen financial inclusion among farmers. The major agricultural payment flows from the public sector and the private sector, and the extent of their digitization, are discussed in this section. Electronic Farmer Inputs Support Program (e-FISP): Following pilots in the 2015/16 and 2016/17 seasons, the electronic FISP (e-FISP) was implemented AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 23 countrywide during the 2017/2018 season. The dairy sub-sector is the other major Around 750,000 farmers were paid Kwacha 2,000 sub-sector with a substantial volume of (including the farmer’s contribution of Kwacha agricultural payments. There are around 67 300) through pre-paid Visa cards or mobile phone- dairy cooperatives with 6,300 members, most of based e-vouchers, for an estimated total of Kwacha whom are smallholders. The milk they produce is 1.5 billion (US$ 150 million). The farmers could sold to cooperatives, which then sell to processors use these cards or e-vouchers to obtain agricultural or to consumers. The milk producers are paid inputs of equivalent value from designated input monthly for the milk supplied. In contrast to the dealers (for more details, see Kuteya and others payments in the cotton sub-sector, some portion 2018).15 of the payments to producers in the diary sector –approximately one-fourth – is reported to be Food Reserve Agency (FRA): FRA payments are paid digitally through transfers to producers’ the second largest source of government payments accounts with the local banks, such as ZANACO, in the agriculture sector. In 2018, FRA reported Atlas Mara, FNB and NATSAVE. The estimated procuring 174,685 metric tons of maize and 19 valuation of producer payments in the dairy sector metric tons of soya beans from nearly 33,812 is US$30 million. (Mwale 2018). farmers.16 Although the value of the payments was not reported, it is estimated to be nearly Kwacha All these agricultural payments, if digitized 280 million (US$ 28 million). All payments were through bank and mobile accounts, could offer made to the accounts of the farmers held at financial an effective entry point for formal savings service providers. The main issue reported about products. Such savings products can be a generic the FRA payments is the delays in the payments and used for various purposes. Alternatively, they being credited to the farmer accounts. In this could be tied to specific needs in the agriculture context, providing the option to receive all or part sector, such as a layaway savings product for the of the payments into e-wallets can increase the future purchase of inputs. myAgro, a layaway ease of use of these payments. savings product developer and provider in West Africa, recently started a pilot in Zambia. Several Payments by cotton ginneries are the largest of financial service providers are exploring business agricultural payments from the private sector. models to offer holistic financial solutions starting Seven cotton ginning companies comprise about from payments to savings and eventually credit. 90 percent of the cotton market, and together This approach would allow financial institutions to have about 250,000 – 300,000 out-grower get to know their customers as records of financial cotton farmers. These ginners are reported to transactions accumulate. make payments of about US$50 million per year (AgriFin Accelerate Program. 2017). However, The most innovative digital payments are notwithstanding several efforts at digitizing these occurring in the cassava value chain. In 2018, payments, nearly all these payments continue to Zambia Breweries started paying around 2,000 be made in cash. farmers through a blockchain-based digital platform (Box 1). 15 The prepaid cards were distributed by eight financial service providers, and mobile phone e-vouchers were distributed by the three main mobile network operators. 16 This is a substantial reduction from the previous year. In 2017, FRA reported procuring 517,959 metric tons of maize and 3,240 metric tons of soya beans from nearly 75,000 farmers. 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 24 Box 1: Blockchain-based Agribusiness Payments to Farmers A key challenge for most farmers in Zambia is that their produce is sold using cash, leaving them without an electronic transaction record. This means that they do not have an electronic payment history, which can be critical in obtaining access to savings, credit and insurance services from formal financial service providers. A partnership between AB InBev, the parent company of Zambian Breweries, BanQu, a blockchain- based platform, and Musika, a local non-profit market development company, is aiming to change this. The platform creates a decentralized digital ledger of each transaction for the produce bought on the platform. Instead of cash, each farmer can choose to receive a digital payment through either Airtel or MTN, the two largest mobile money providers in Zambia. The platform also tracks the volume of goods delivered, the quality of those goods, and the prices paid. Both the agribusinesses and the farmers benefit from increased traceability and transparency in their supply chains. In 2018, around 2,000 cassava farmers in Zambia began selling their harvests to Zambian breweries through the platform. The company added a mark-up to the payment due to farmers to offset the cost of withdrawing cash from the mobile money agents. In 2019, all farmer payments in Zambia are expected to be made through the platform. Further, building on the Zambian experience, InBev is currently expanding its digital payment initiative to India and Uganda. Source: https://www.fastcompany.com/90328012/this-digital-ledger-helps-small-farmers-get-a-fair-deal and communication with Katie Hoard, Global Director, Agricultural Innovation and Sustainability, AB-Inbev Agricultural Credit and Investments Figure 16: Agricultural Credit – Share of A relatively large share of Zambia’s agricultural Agricultural GDP and Share of Total Credit GDP is financed by the formal financial sector. 6,000 80% As Figure 16 indicates, over the past five years, 70% 5,000 nearly 30 percent of the agriculture sector’s GDP 60% was financed by commercial banks.17 This is nearly 4,000 50% double the ratio of total private sector credit to GDP, 3,000 40% which was about 16 percent during the same period. 2,000 30% 20% Data for 2016 and 2017 from the BoZ’s Credit 1,000 10% Market Monitoring Report (CMMR) database 0 0% suggests that the share of agricultural GDP financed 2013 2014 2015 2016 2017 2018 by the formal financial sector will increase by 1.3 Agri Loans in Banks - Outstanding (Kwatcha Million) percentage points, if MFIs and other non-banks are % of AG GDP Financed % of Total Credit added. It would be even higher if financing from investment funds is included. The share of banking Sources: BoZ for Ag loans; World Bank for Ag GDP. 17 Commercial bank lending to agriculture includes lending for agricultural production and non-farm agribusiness, including processing, trading, storing, and so on. The spikes in this ratio in 2015, 2017 and 2018 are caused by the substantial fall in the agricultural GDP, driven largely by the drought which reduced the production of major crops such as maize. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 25 Figure 17: Agriculture Orientation The quality of the financial sector’s agricultural Index (AoI) for Credit in African portfolio has been steadily deteriorating. Non- Countries performing loans in commercial bank loans have 4.0 been steadily increasing and reached an alarming 28 percent in 2018 (Figure 18). The NPLs pertaining 3.5 to agriculture loans from MFIs and other non-banks 3.0 (for example, the Development Bank, NatSave and 2.5 VisionFund, and so on) are also estimated to be 2.0 relatively high. The CMMR data shows that NPLs 1.5 for all agricultural production loans, which includes 1.0 loans from banks as well as non-banks, increased 0.5 from 16.4 percent in 2016 to 24.3 percent in 2018. 0 ia es ana wi ola bia dan isia nda cco nia In addition, the level of NPLs of agriculture loans mb ell la g m Su un ga oro nza Za eych otsw Ma An Na T U M Ta from commercial banks became significantly higher S B than that of the NPLs on total bank credit in 2016, Source: FAO Statistics (2018) Note: All data for 2016, except for Uganda for 2015. 2017 and 2018. The CMMR data shows that the loan quality of sector financing received by the agriculture sector small agriculture seems to reflect the crop cycle relative to its contribution to GDP exceeds 3.5 and is of the major crops in the country. The NPL ratio one of the highest in the world according to the Food decreases during the harvest season and increases and Agriculture Organization (FAO) Agriculture around the planting season (Figure 19). The NPLs Orientation Index (AoI) for Credit18 (Figure 17). in the large agriculture category presented a rather Figure 18: Agriculture Credit NPL Figure 19: NPLs by End-user Category Trends 35 30 30 25 25 20 20 15 10 15 5 10 0 5 Q1 - Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 - Q1 - Q2 - Q3 - Q4 - 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 0 2013 2014 2015 2016 2017 2018 Business - Large Business - MSME Agriculture - Large Agriculture - Small & Emergent Total Bank Loans NPLs Agri NPLs (Banks) Households & Individuals Source: Bank of Zambia (2018). Source: CMMR database, Bank of Zambia (2018). Note: NPL= non-performing loan. Note: MSME= micro, small and medium enterprises. 18 The AoI is calculated as the share of credit to agriculture over the agricultural share of GDP. An AOI of less than 1 indicates that the agriculture sector receives a credit share that is less than its contribution to the economy, whereas an AOI that is greater than 1 indicates a credit share to the agriculture sector greater than its economic contribution. Germany, Belgium and France are among the highest in the world, with an Index of 6.8, 5.1 and 3.8, respectively. 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 26 flat pattern from 2016 to the middle of 2017, which However, this could also be an underestimate due might indicate a higher level of diversification to misclassifications in the reporting (lending to and risk management capacity of both lenders and agribusinesses is reported under other categories, borrowers. However, the NPL ratio increased since such as manufacturing and trade).21 the second half of 2017. The share of credit flow to small farms is also very low. Credit from the formal sector provided to Credit Supply to Key Client Segments small farms in 2016 and 2017 is estimated to be 7 Most agricultural credit goes to large commercial percent and 8 percent (that is, Kwacha 267 million farms. The data from the 2016 and 2017 CMMR and Kwacha 386 million), respectively (Figure database and BoZ annual reports suggests that 20). This estimate includes credit reported to be most agricultural credit from the formal sector goes provided to farms of sizes less than 50 hectares, to the large commercial farms. In 2016 and 2017, as well as individuals and households, where the this segment is estimated to have received about purpose is noted as farming. There could be some 91 percent and 85 percent, respectively (that is, underreporting of agricultural credit going to the Kwacha 3.7 billion and Kwacha 4.4 billion) of the latter category.22 Nonetheless, most of the financing total formal sector credit provided to the sector.19 The credit supply to non-farm agribusinesses Figure 20: Agriculture and Non- is surprisingly low. Credit provided to non-farm farm Agribusiness Loans (Kwacha agribusinesses from commercial banks is estimated Millions, Outstanding Loans) at 3 percent and 7 percent (that is, Kwacha 124 6,000 million and Kwacha 379 million) for 2016 and 2017, 5,000 respectively.20 There are various possible explanations 4,000 for this. For example, non-production agribusiness 3,000 activities are indeed rather small in the economy. 2,000 Other sources of finance, such as supplier finance 1,000 and financing from parent companies, are available 2016 2017 to agribusiness companies. In addition, some of the large farms are vertically integrated and financing Small Farms Large Farms Non-farm Agribusiness Source: Authors’ depiction based on the CMMR database, and the is available to them for value-addition / processing. BoZ Annual Report data Bank of Zambia (2018) 19 The CMMR defines credit for agricultural production as “Corporate entities (large-scale farmers), households and individuals (smaller scale farmers) whose primary source of income is from farming activities and who receive credit for the purpose of agricultural production”. The 2017 CMMR reports a portfolio of Kwacha 4.4 billion in lending to large farms, defined as farms above 50 hectares, as well as a portfolio of Kwacha 0.26 billion million in lending to small farms, defined as less than 50 hectares. 20 The CMMRs disaggregate lending to small and large businesses, but do not identify the economic sector in which they operate. Hence, it is not possible to directly obtain credit being provided to non-farm agribusinesses from the CMMRs. Therefore, this report estimates credit allocated to this segment as the difference between commercial bank loans outstanding for agriculture production in the CMMRs (small and large agriculture) and loans outstanding with the agriculture sector data according to the BoZ annual reports (which define the agricultural sector to include lending for agricultural production, processing and trade). The difference indicates commercial bank loans outstanding to non-farm agribusinesses. 21 If 10 percent of loans reported under the manufacturing and trade category are for agribusiness, the loans outstanding for non-farm agribusiness would increase from Kwacha 379 million to Kwacha 844 million. 22 Data regarding the loan portfolio of individuals and households that identifies farming as the purpose is not directly available from the CMMR. However, it is estimated by multiplying the proportion of disbursements that report farming as the purpose with the total portfolio outstanding under the individual and household category. There could be underreporting of loans under this category. This may be the case if the purpose for some loans is not reported as farming even when all or a share of the lending is for farming. For example, the 2017 CMMR data shows that while Kwacha 61 million is reported in loan disbursements to individuals and households for the purpose of farming, Kwacha 2.7 billion is reported with the purpose of ‘Other’. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 27 Table 3: Access to Credit (Disaggregated by Farm Size) Estimated # of Farms # of Loans (2017) Access to Loans Smal Farms 384,000 13,982 3.6% Large Farms 1,500 1,359 90.6% Source: Authors’ calculation based on the CMMR database (number of loans). The information about farm numbers was gathered from the field interviews Bank of Zambia (2018). for small farms is likely to be coming from own- formal sector to this client segment is negligible as source financing and financing from informal compared to the potential demand. sources, except for select sub-sectors, such as cotton, Women farmers have much lower access to where off-takers (agribusinesses buying the product credit as compared to their male counterparts. from farmers) are a major source of financing. The CMMR database shows that, on average, Data regarding the number of loans and farms female borrowers were less than 20 percent of the confirms that most small farms do not have access total borrowers in the agriculture segment (Figure to credit from formal financial service providers. 21). The ratio sometimes decreased to 10 percent or When taken together, the data regarding the number lower. The lower access to credit for women seems of loans outstanding from the CMMR database with to be common in other loan categories as well. estimates of the number of small farms from Horus (2015) shows that just 3.6 percent of these farmers Major Providers have access to credit. By contrast, over 90 percent of Commercial Banks large farms receive financing (Table 3). This data is Commercial banks provided almost all the loans also corroborated by demand side data discussed in for large farmers, whereas MFIs and other non- Chapter 2 that shows that just one percent of farmers banks dominated the small agriculture category report borrowing from banks and two percent from in terms of numbers. According to the CMMR non-banks. This suggests that lending from the 2016 and 2017 data, about two-thirds of the loans Figure 21: Proportion of Loans Accessed by Women (Percentage of Total Number of Loans Disbursed) 35 30 25 20 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 Agriculture Credit Small Businesses Credit Household Credit Source: CMMR Database, Bank of Zambia (2018) 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 28 for small agriculture were from MFIs. However, in the limitations that the commercial banks face is terms of the value of the small agricultural loans, the tenor of the loans. While commercial banks can commercial banks had the largest share, with offer long-term loans of up to 5 years and sometimes over 70 percent, suggesting their involvement reaching 7 - 10 years, some interviewees mentioned and interest in larger loans in this segment. Other that their agriculture clients would require even financial institutions which occupied about 20 longer loans, especially for investments and crops percent of the loan value were represented mainly that require longer periods for maturity. by the Development Bank of Zambia (DBZ) and the Compared to their lending operations for National Savings and Credit Bank (NatSave). large commercial farmers, commercial bank Several commercial banks are involved in exposure to smaller farmers is minor. The Lima financing commercial agriculture. Three credit scheme used to be a promising entry point commercial banks (Stanbic, FNB and ZANACO) for commercial banks to provide credit to smaller together held about 60 percent of the total farmers, but it collapsed several years ago (See Box agricultural lending assets in 2017. Others such 2). Nevertheless, some banks are currently reviewing as Standard Chartered and Barclays also lend to the opportunities in this space. For example, Zanaco commercial agriculture. These banks mainly target and Atlas Mara are exploring new approaches and a small number of large-scale farmers and offer partners to reduce the transaction costs in reaching various lending products (short, long and overdraft), out to dispersed small farmers. most of which are in US dollars. For instance, one Development Banks of the leading banks has 90 percent of its agriculture The Development Bank of Zambia (DBZ) and portfolio in US dollars. The borrowers engage in the National Savings and Credit Bank (NatSave) agricultural production and agribusiness activities have substantial portfolios in the agriculture such as processing, mostly in export-oriented value sector, but their share of total financing to the chains including cotton, soybean, sugar, macadamia sector is negligible. The DBZ and NatSave together nuts, passion fruits, and avocado. The loans can go had a share of just 2.6 percent of total financing to beyond US$5 million and the interest rate is around the sector in 2017. The DBZ lends to large farmers 8-10 percent for the US dollar loans as of June 2018. and agribusiness companies in select value chains, The smallest loans can be as small as a couple of such as maize, sugar, and poultry. The size of its thousand dollars, but typically they are much larger. 2017 agribusiness portfolio was US$25 million. The preferred collateral are land and buildings, However, it also had a high level of NPLs of about although physical assets such as machinery are also 50 percent. In addition to its direct lending, the DBZ considered. These banks generally have specialized partners with development finance institutions such agriculture teams comprised of loan officers with an as the African Development Bank and technical agriculture focus. assistance (TA) providers such as RUFEP to The portfolio quality varies by lender. Some report provide wholesale loans to MFIs and other financial suffering from high NPL ratios of as much as 50 institutions for rural and agriculture lending. percent, which seem to be caused by a small number NatSave provides savings products and smaller of borrowers experiencing systemic problems, such loans (of up to US$5,000) to agricultural SMEs and as drought, devaluation of the local currency, and small farmers. The bank covers all the provinces in export bans as well as isolated issues. Some banks the country with a total of 38 branches, of which that had experienced an increase in NPLs in recent 17 are in rural areas. Some of the financial services years reduced their exposure to the sector. One of are provided through partnerships with the Food AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 29 Box 2: Lima Credit Scheme The Lima credit scheme started in 2008/2009 with 200 farmers, and it expanded to over 18,000 farmers with a loan portfolio of US$13.7 million in the 2014/2015 season. Zanaco, the largest lender in the scheme, disbursed US$15.5 million to about 14,000 farmers in 2014, of which 65 percent of the amount and 96 percent of the borrowers were from the Lima scheme. Under the scheme, the Zambia National Farmers’ Union (ZNFU) organized farmers into District Farmer Associations (DFAs) and provided agronomic and management training. Zanaco and Banc ABC provided the input loans that were secured through cash collateral, equivalent to 50 percent of the input costs, as well as the joint guarantees between the farmers. The banks transferred the funds to input providers and the inputs were delivered to the DFAs. The loan duration was typically for 9 months. The ZNFU played a key facilitating role in the scheme by organizing and training the farmers, and the related costs were covered by the donor funds. Despite the early success of the scheme, anecdotal evidence suggests that the repayments declined significantly when the Food Reserve Agency delayed the payments for maize, resulting in lost credibility for the scheme. Other reasons for the failure included limited facilitation of market linkages, a concentration on maize, and governance issues at the ZNFU. In addition, increases in the interest rates were made without properly informing the DFAs and borrowers. Source: Interviews with key respondents. Reserve Agency (FRA), the Farmer Input Support companies that comprise about 90 percent of the Programme, MUSIKA and other partners. NatSave cotton market. Before the planting season, these has a lower NPL ratio of 14 percent as compared companies advance high-quality inputs to cotton to DBZ, but it is still higher than what is generally farmers, including seeds, fertilizers, and pesticides. considered reasonable. Over 99 percent of cotton farmers receive inputs from ginning companies on credit under contracts MFIs (Kabwe and others 2018). The scheme is estimated Microfinance institutions (MFIs) in Zambia are to cover about 250,000-300,000 cotton farmers, and not major providers of agriculture credit, but the value of in-kind credit is estimated to be around a select few are active in the sector. The leading US$20-25 million. This is four times the reported MFIs in the sector include Vision Fund, Madison disbursements from the formal financial sector to Finance, Agora, and EFC. The MFI Loans are small farms (about US$5.3 million in 2018). While typically in the local currency with high interest side-selling was once widely observed due to price rates ranging from 35 to 75 percent. The loans changes and the absence of cooperation between are secured mostly by movable assets and group ginners, in recent years the contracts are reported guarantees, but immovable assets are required for to be generally respected, and the repayment rate is larger loans. Details of the lending activities of the reported to be close to 90 percent. leading MFIs in Zambia are provided in Box 3. The dairy sub-sector is another relatively well- Agribusinesses and Equipment Suppliers organized sub-sector and some suppliers offer The largest source of credit to smallholder farmers inputs on credit. The Dairy Association of Zambia in Zambia, outside of informal credit, are cotton (DAZ) links milk producers with input suppliers ginneries. The out-grower scheme in the cotton that provide chemicals, equipment, medicines and sub-sector in Zambia is one of the largest input credit animal feed, sometimes on credit. The main suppliers schemes in Africa. As previously described, the are Livestock services, CAMCO, SARO, National sub-sector mainly consists of seven cotton ginning 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 30 Box 3: MFI Lending Activities in the Agriculture Sector Vision Fund has 15-20 percent of its portfolio allocated to the agriculture sector. It has three loan products for small-scale farmers (seasonal loans, irrigation equipment loans, and dairly sector loans). The average loan size is about US$ 2500 for working capital loans and US$ 1500 for investment loans. Madison finance offers both working capital and asset financing products for farmers focusing on dairy and poultry, as well as agricultural SMEs such as agro input dealers. EFC identified lending opportunities in livestock and dairy value chains, and it expanded its agriculture portfolio to about 8.5 percent of its portfolio in recent years. The agriculture loans are larger than other loans, ranging from US$2,500 to US$4,600. Agora is developing an agriculture lending product that allows for seasonal repayments. Source: Interviews with providers. Milling and Rent-to-Own. In most cases, the including the promotion of small-scale suppliers Association facilitates payments, although in other and employment generation as well as financial instances farmers have had direct dealings with the returns (Debt is about 8.5-10.5 percent, and equity suppliers. It facilitates payments in two ways. First, is about 10 percent). it facilitates payments through processors who pay GroFin, a sector-neutral SME fund backed milk collection centers for their milk sales, less the by development finance institutions (DFIs) amount that needs to be paid to the supplier. Second, and private foundations, also has a substantial DAZ pays the suppliers on behalf of the members, portfolio in the agriculture sector. In 2018, nearly and receives postdated checks in favor of DAZ. half of its Zambian portfolio was in the agriculture For example, if a farmer receives a chuff cutter to sector, mainly in the integrated operations combining be paid in 3 months, DAZ pays the installments livestock/crop production and processing. All of on behalf of the farmer when due, and it recovers Grofin’s agri-related investments of US$4 million are money via postdated checks. The value of the credit in local currency debt. The investment size is about provided by suppliers to farmers is estimated at US$100,000 to US$1.5 million. GroFin charges an about US$300,000 annually (Mwale 2018). interest rate equivalent to that of commercial banks, currently at about 27 percent. Investment Funds Investment funds have emerged as a substantial Investment funds seem to prefer debt over equity. source of financing for the agriculture sector in The reported reasons were reliable financial return Zambia. In 2018, AgDevCo, a United Kingdom and easier exit options. Their debt exceeds 5 years Department for International Development (DFID)- and requires lesser collateral coverage compared to funded agriculture-focused fund in Africa, had six that of banks. These funds provide a considerable investments totaling about US$16 million. The amount of technical support to the investee investments range from US$1 to US$8 million companies, part of which is financed by donors. The with a mix of equity and debt. Most of the investee funds report that such technical support is one of the companies engage in the production of livestock most important tools for them to detect and address and crops such as maize, groundnuts, and potato numerous business challenges their investees face. seeds. AgDevCo pursues development impact AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 31 Figure 22: Types of Security by Number of Loans Disbursed (2016–2018, Percent) 100 80 60 40 20 0 HHs SMEs Agri Small Agri Large Large Biz Mortgage Leases and Other Asset-backed Loans Unsecured Loans Revolving Credit Faciilies Source: CMMR Database Bank of Zambia (2018) Note: HHs= households; SMEs=small and medium enterprises. Products and Terms were used to secure (at least) about 70 percent of the Large farms enjoy a wide variety of loan small and large agriculture loans disbursed in terms products, whereas short-term loans dominate of the total number of loans in 2017-2018. This small farm lending. Financial institutions provide figure is very similar to that of the large business various loan products to large farms, such as short- loans. However, it is very different from the SMEs term loans for working capital and medium-term and household (HH) loans, where most loans were loans for acquisition of fixed assets. The loan unsecured or relied on cashflows and/or other means conditions including terms, repayment schedule and of security. The same analysis in terms of loan collateral requirement can be adjusted according to values indicated that close to 60 percent of the SME the creditworthiness of the borrowers and nature loans and over 90 percent of the small agriculture of the business. In contrast, most small farms are loans are secured by hard assets. This suggests the financed through household and consumption loans potential for lending to small- and medium-scale that require frequent repayments. Tailored loan agriculture clients to build on lending practices to products, including input loans and term-loans, SMEs. Revolving credit facilities, such as overdraft are mostly confined to commodities in which risk facilities, were mainly available for large farms and and transaction costs in lending can be controlled. businesses. However, there are several ongoing efforts to Loans for large-scale agriculture producers broaden the financial products available for small- tend to have longer durations than those for scale agriculture production (Box 43 and Annex C). small producers. Some loans for large agriculture Most agriculture loans from the formal financial producers covered 5 years and occasionally up to sector are secured through movable and 10 years, especially when they were secured by immovable collateral, as well as guarantees. immovable assets. Most of the other loans (leases, Immovable and movable assets (“mortgage” and asset-backed, unsecured and other loans) were “leases and other asset-backed loans” in Figure 22) either less than 12 months or from 2-5 years. The 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 32 Table 4: Debt Financing Providers and Products Providers Products Target Typical loan Size Interest rate Collateral borrowers requirements Commercial Short and Mostly large US$200,000 or 8 – 10 Land, Banks long-term farms larger. However, percent buildings loans (In some banks (US$) and US$ and provide smaller 20 – 50 equipment Kwacha) loans (as small percent as US$1,000) (Kwacha) for famers and SMEs. MFIs Short- SMEs, small Up to around 35 – 75 Buildings, term farms and US$5,000 percent equipment, loans in farmer groups cash Kwacha collateral Investment Long- SMEs Varies Debt: Debt: Funds term and large (US$100,000– Similar to Similar to loans and farms (both more than US$5 commercial commercial equity processing million) bank rates. banks. and Equity: 10 Equity: NA production) percent < Agribusiness Short- Farmers in Varies, but often Included NA companies term certain value limited to the in the loans value of inputs transactions chains Source: Authors based on interviews with key respondents Note: NA= not applicable; MFI= microfinance institution; SME= small and medium enterprise. loans for small producers tended to be shorter. Most interest rates ranging from 35 to 75 percent (with a loans were for 12 months or less. Although the real interest rate of 27-67 percent). The major debt loans backed by hard assets could go up to 5 years finance providers and their lending products and or sometimes longer, the number of these secured conditions are summarized in Table 4. loans accounted for only 3.5 percent of the total The warehouse receipt finance system in the small agriculture loans in 2016-2018. Thus, these country is still in its infancy. The Zambian long-term loans were the exceptions. Commodity Exchange (ZAMACE), a local Interest rates for most borrowers, both nominal commodity exchange and warehouse certification and real, are very high. In 2018, the interest rates service provider, was launched in 2015 as a public- of commercial banks to the agriculture sector on private partnership. Five leading commodity traders local currency loans usually exceeded 25 percent in the country allocated parts of their warehouses for and could reach 50 percent, depending on the risk the third parties including SME traders and farmers. profile. After considering inflation, the real interest They have a total capacity of 400,000 tons to store rate is about 17-42 percent. The US dollar loans cost their crops. ZAMACE certifies these warehouses around 8-10 percent. Reflecting their higher unit and the partner traders manage the warehouses. transaction costs owing to smaller loan sizes and However, ZAMACE has so far failed to attract high-risk client profile, MFIs charge even higher substantial participation from the stakeholders AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 33 including traders, farmers, and financial institutions. insurance is best suited to production risks, but not to The trading was mostly conducted through small addressing price volatility issues, which are also very pilots. The warehouse receipts were issued for some relevant in the Zambian environment. Agricultural of the transactions and some financial institutions insurance can also play a key role in facilitating provided finance. However, these cases remain as access to credit due to its risk-transfer function. isolated attempts.23 However, its ability to do so is strongly influenced by the type and the quality of the insurance coverage.24 Some initiatives were undertaken to pilot leasing In general, agricultural insurance has the highest products for small farmers, however, they have not development impact when it is well integrated into been up-scaled. One notable example is a financing the value chains (Mukherjee 2017). scheme involved NWK Agri-services (off-taker), commercial banks, a local farm equipment provider, Agricultural insurance has been sold in Zambia and MUSIKA. The farmers selected by the off-taker since approximately 1980. However, the bulk of received tractors through a leasing arrangement by growth has occurred in the last 10 years. The drivers the equipment provider and financiers guaranteed of the more recent growth have been donor support, by MUSIKA. The scheme failed due to several development of index insurance products, and the factors, including the depreciation of the Kwacha pro-active response by insurance industry players, and side-selling, which made it impossible for including non-governmental organizations (NGOs) financiers to subtract the lease payments from the involved in promoting agricultural insurance. transactions between the farmers and the off-takers. The main insurance companies participating in Although leasing products are available for other agricultural insurance are: Acacia Insurance; Africa industries, the application in the agriculture sector Grey; Africa Pride; Focus General Insurance; has been rather limited due to the high perceived Madison Insurance; Mayfair Insurance; Nico risk among the financial institutions, as well as a Insurance; Professional Insurance; and ZSIC lack of capacity and experience on the part of the General Insurance. stakeholders (Nathan Associates 2017). Traditionally, the focus of agricultural insurance in Zambia has been on large commercial farms Agricultural Insurance who are offered indemnity products, such Insurance is a key tool for transferring as Named Peril Crop Insurance (NPCI) and agricultural production risks. Empirical evidence Multiple Peril Crop Insurance (MPCI). Crops shows that risk is one of the key factors hampering covered by indemnity products are mainly maize, investments in agriculture. If farmers are provided wheat, sugar cane, soybeans, tobacco and bananas. with insurance products that cover the main Risks covered in the NPCI policies are essentially catastrophic risk, they can find resources to increase hail (for tobacco, in particular), fire and lightning, expenditures for their farms (Karlan and others whereas MPCI policies more comprehensively 2014). However, a comprehensive risk management cover the main agricultural production risks (with strategy should also include risk-mitigation and risk- some exclusions). The market size for indemnity coping solutions (World Bank 2018). Agriculture agricultural insurance products in Zambia in 2017 23 Since the inception and until mid-2018, the company traded about 30,000 tons of maize, wheat and soya beans. In 2018, the warehouse management fee consisted of a onetime handling charge of Kwacha 28/ton and Kwacha 48/ton per month. ZAMACE charged for the warehouse certification and the issuance of the warehouse receipts (Kwacha 4.2/ton). 24 For example, in index insurance products, high levels of basis risk will strongly reduce the ability of the insurance cover to pay when required. Consequently, the confidence of lenders or of input retailers will be also reduced, impairing the potentially virtuous effects of the insurance transaction. 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 34 Figure 23: Weather Index Insurance Policies and Aggregated Sums Insured in Zambia (2013/14 to 2017/18) 1,000,000 150.9 160 907,504 900.000 140 800.000 120 700.000 600.000 100 500.000 80 400.000 60 300.000 40 200.000 100.000 20 61,489 6,610 1.9 4,992 0.5 6.0 18,499 2.0 0 0 2013 / 2014 2014 / 2015 2015 / 2016 2016 / 2017 2017 / 2018 Policies Sold (Left Axis) Total Sum Insured (Right Axis) Sources: Global Index Insurance Facility, Pension and Insurance Authority (Personal communication to Report team, 2018). was estimated to be of 600-800 farms with an million, respectively, in 2017/18. Figure 24 shows annual premium volume of Kwacha 40-50 million the premiums, claims and loss ratio trend for the (US$ 4-5 million).25 Average premium rates same period. In 2018, this represented the largest ranged from between 1 percent to 4 percent of the coverage for WII in any country in Sub-Saharan value insured, depending on production activities Africa. The exponential scale-up of WII in Zambia and risks covered. Some insurance companies also was achieved by adding an index insurance cover to offer livestock indemnity insurance products to e-FISP, the digitized agricultural subsidies program. large livestock production operations. Livestock This “Drought and Excessive Rainfall” index cover insurance policies cover various causes of (Box 4) was offered by Mayfair and represented mortality loss such as accidents, diseases and, nearly all (over 99 percent) of the agricultural in some cases, epidemics. Policy extensions for insurance policies sold. In addition, Mayfair operated calving risks, theft, transit risk and third-party a WII project with the R4 initiative of the World liabilities are also available. Food Programme and Oxfam. This project covered 3,800 farmers during the 2017/2018 crop season. Weather index insurance (WII) for small-scale Focus Insurance has also been implementing WII farmers was piloted in the early part of this by partnering with input suppliers and processors decade, but the coverage increased exponentially (such as NWK, Pioneer, and Monsanto), as well as in the 2017/2018 season. Figure 23 shows that with the Zambia National Farmers’ Union (ZNFU), the number of policies sold, and the sum insured reaching over 50,000 policies sold in the 2015/2016 increased from less than 20,000 and US$ 2 million crop season. However, business was reduced in the in 2016/17 to over 900,000 and nearly US$ 151 following crop seasons. 25 These estimates have been developed on the basis of a partial set of market data that, together with specific knowledge of the Zambian agricultural insurance sector, have been used to roughly infer the actual size of the market for indemnity insurance products for agriculture. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 35 Figure 24: Premiums, Claims and Loss Ratios for Weather Index Insurance Policies (2013/14 to 2017/18) 10,000,000 400 356% 9,000,000 9,205,946 350 8,000,000 300 7,000,000 5,930,095 250 6,000,000 234% Percent USD 5,000,000 200 4,000,000 150 3,000,000 100 2,000,000 760,903 11% 64% 50 1,000,000 130,966 19% 40,959 145,871 324,930 212,695 25,003 24,015 0 0 2013 / 2014 2014 / 2015 2015 / 2016 2016 / 2017 2017 / 2018 Total Premium (USD) Total Claims Paid (USD) Loss Ratio Source: Global Index Insurance Facility and Pension and Insurance Authority (Personal communication to Report team, 2018). While the linkage with the e-FISP helped of Agriculture, the Ministry then transferred these exponentially scale-up WII insurance payments to the farmers only at the beginning of the coverage, the rapid scale up also led to major following crop season.26 Furthermore, the payments implementation challenges. In 2018, the Ministry were transferred in the form of e-vouchers, which of Agriculture prepaid the insurance company could only be redeemed for agricultural inputs. for the premiums of 900,000 farmers. However, The Zambia State Insurance Company (ZSIC), only 805,000 farmers paid the insurance premium. the public insurer, operated an Area Yield Index Hence, only these farmers were effectively covered Insurance (AYII) product connected to the Lima by WII. More importantly, although a substantial credit scheme from 2008 to 2015. Starting from number of payouts were triggered, and the insurance 600 farmers and 600 hectares in 2008, it reached company transferred the amounts to the Ministry over 16,000 farmers and over 36,000 hectares by Table 5: Relative Strengths and Weaknesses of Area Yield and Weather Index Insurance Area yield index insurance Weather index insurance All perils covered (droughts, excess rainfall, Single peril (sometimes multiple peril) cover floods, pest infestations, and so on). (droughts, excess rainfall, low temperatures). Easy-to-design index Technical challenges in index design (estimated aggregate yields in a given area). (peril, crop, farming practices, agro-meteorological zone, and so on). Low start-up costs High start-up costs High loss assessment costs Lower loss assessment costs Slow claims settlement Faster claims settlement Source: Mahul and others, 2012. 26 The implementation challenges facing the insurance program are reported to have continued in the 2018/19 season, although no detailed information about the performance of the product is available for this season, along the lines of that Kuteya and others (2018). 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 36 2014. The scheme was formally labelled a MPCI Bank of Zambia (BoZ): The BoZ is responsible policy, but it operated de facto as an AYII scheme for regulating agricultural credit provided by (Box 5). This experience is very relevant since the commercial banks, development banks, MFIs, and re-introduction of AYII in parallel with the existing building societies. However, it is not responsible for WII programs is under consideration. As such, it regulating agriculture credit provided by investment would provide a more comprehensive insurance funds, which fall within the regulatory mandate coverage against agricultural production risks. Table of the SEC. Zambia does not have any dedicated 5 provides a summarized description of the relative regulation for agriculture credit. Traditionally, the strengths and weaknesses of AYII and WII.27 It primary role played by the BoZ in agriculture credit should also be noted that use of technology has the was one of monitoring and reporting on credit flows potential to reduce the cost of loss assessment and to the sector, including its performance as part of shorten claim settlement time. its annual reports. However, since 2016, it has also been undertaking a more detailed monitoring of the Public Sector Support for credit market and has been publishing the Credit Agricultural Finance Market Monitoring Reports. These reports, referred Public sector support for agricultural finance can to extensively earlier in this chapter, present an be broadly viewed as either fiscal, regulatory, or economy-wide, detailed analysis of credit. Taken developmental. The fiscal support relates to direct together with the data available from the BoZ subsidies and tax incentives offered to individuals annual reports, it allows for further disaggregated and enterprises. The regulatory support is typically analysis of financing of the agriculture sector from provided by the relevant regulators, such as the the formal financial sector. Central Bank for agriculture credit and the insurance Pensions and Insurance Authority (PIA): The regulator for agriculture insurance. These kinds of PIA is responsible for regulating agricultural support can be offered in terms of either providing insurance. Agricultural insurance is covered under special regulatory treatments of the agriculture finance the regulations that govern non-life insurance. business or in requiring service provisions to specific Up to 2016, the PIA did not collect specific segments. In some countries, the regulators also data for this class of products. With the recent take on a developmental role whereby they provide market growth following the expansion of index liquidity facilities or technical assistance financing. insurance products, the PIA has activated specific This section briefly discusses the fiscal role data collection procedures. However, there are no played by the Zambian government, as well specific regulations targeting agriculture insurance as the regulatory role played by the Zambian or index insurance products. regulators. It also addresses market development Fiscal Policies: Zambia does not provide any direct activities supported by donor-funded projects. In fiscal incentives, such as interest rate discounts or addition, it describes a recent market development of premium subsidies to agriculture sector clients. It the Government in supporting the establishment of also does not provide any tax incentives specifically the credit guarantee scheme. The support provided by targeted at financial institutions providing services the Government for scaling up agriculture insurance to agriculture sector clients. One fiscal measure through the FISP-WII scheme was discussed in the that does seem to have had an adverse effect on previous chapter. The cases of India and Kenya are good references for the implementation AYII and WII. See Mahul and others (2012), Leach and others 27 (2014) and Stoppa and Dick (2018) for information about the issues and lessons learned in the implementation of index insurance products for agriculture. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 37 Box 4: Weather Index Insurance for FISP Farmers (2017/18 season)28 The WII coverage retailed in connection to the FISP scheme was designed by Risk Shield Consultants Ltd. It was underwritten by Mayfair Insurance, and it was reinsured by Swiss RE in the crop season of 2017/2018. The WII policy covers droughts (“dry spells”) and excessive rainfalls. The index underlying the policy is based on remote sensing estimation of rainfall from the TAMSAT data base. The spatial resolution of TAMSAT rainfall estimates is approximately 4 kilometers (km) x 4km. As is often the case with WII products, the policy linked to FISP has a “dynamic” start of the coverage period, meaning that the coverage starts automatically when a minimum of 15 millimeters (mm) of rainfall is recorded over a period of 10 days. The window for the dynamic start is between November 21 and December 20, whereas December 21 is the latest possible starting date for the insurance coverage (that is, if 15mm of rainfall in any 10-day period have not been recorded in the specified window, the coverage will nevertheless start on December 21). The policy is composed of three kinds of sub-coverages, each of which have different coverage periods as follows: 1) Early dry-spell cover, from the “automatic start date” to January 10; 2) Late dry-spell cover, from January 11 to March 31; and 3) Excess rainfall cover, from the “automatic start date” to March 31. The two dry-spell cover payouts are triggered if within a 20-day period the total rainfall recorded is below 60mm. The maximum payout is provided if no rainfall is recorded (0 mm). The initial payout is 5 percent of the sum insured, and it progressively increases as rainfall decreases, reaching a maximum of 30 percent of the sum insured at 0mm of rainfall recorded. The excessive rainfall cover payouts are triggered if rainfall is above 150mm, up to a maximum payout if rainfall reaches 250mm. The initial payout is 5 percent of the sum insured, and it progressively increases as rainfall increases, reaching a maximum of 30 percent of the sum insured. Farmers can receive payouts from each of the three different sub-covers. The unit area of insurance of the FISP scheme (that is, the specific area in which rainfall is recorded and payouts are triggered) is set at ‘Camp’ level, an administrative subdivision at which the Camp Extension Officers (CEO) operate. The premium cost is Kwacha 100 per farmer and the maximum possible payout is Kwacha 1700, that is, the value of the FISP subsidy. The premium payments are collected from the farmers and transferred to the Ministry of Agriculture as part of the contribution required to be paid by the farmers to receive the FISP subsidy. The Ministry then transfers the aggregate premium payment to the insurance company. If payouts are triggered, the insurance company makes the payment to the Ministry along with details of ‘camps’ where payouts were triggered. The Ministry is responsible for transferring the amounts to the farmers. Source: Authors, based on review of documents interviews with key respondents Note: TAMSAT stands for “Tropical Applications of Meteorology using Satellite data and ground-based observations” and is developed by the University of Reading, UK. A product description leaflet for the WII cover retailed in the FISP scheme is presented in Annex A. . 28 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 38 Box 5: Crop Insurance Linked to the Lima Credit Scheme To secure the lending operations of the Lima Credit Scheme (LCS), the Zambia State Insurance Company (ZISC) partnered with the Zambian National Farmers’ Union (ZNFU) and the participating credit institutions to offer insurance protection to smallholder farmers enrolled in the scheme (see Box 2 for a description of the LCS). The insurance scheme was formally considered a Multiple Peril Crop Insurance (MPCI) product. It offered coverage against droughts, floods and fires for food and cash crops (mainly maize). However, it operated as an Area Yield Index Insurance (AYII) policy since the loss adjustment was carried out by inspection teams composed of representatives of ZISC, ZNFU and the Ministry of Agriculture that randomly sampled crops of different farms in a specified area of insurance. Premiums paid by farmers were initially set at 5 percent of the loan amount, but they were later reduced to 4 percent. According to stakeholders involved in the scheme, the strengths of the insurance product connected to the LCS loans were represented by the in-field loss adjustment procedures that, although carried out by samples in the reference areas, provided farmers with evidence of a direct assessment of the losses. The main weaknesses of the insurance product were the extended time required to settle the claims and the cost of the coverage (that, however, proved later to be in the same range or lower than for other insurance products offered to farmers). Source: Farm Agricultural Risk Management in Africa (FARMAF). some banks is the withholding tax of 15-20 percent indicated by the relatively small contribution they charged to funds mobilized from overseas. make to total agriculture credit in Zambia and the The fiscal treatment of insurance in Zambia has high NPLs suggests that they have had limited improved in recent years. Up to 2015, a 16 percent success in this role. Again, as noted, ZSIC General value-added tax (VAT) levy was applied on all recently implemented an area-yield index insurance insurance premiums collected. However, since program, and this experience is relevant to the 2016, this has been replaced with a 3 percent future. premium levy. In comparison with several other Credit guarantee scheme: The Government of SSA countries, taxation treatment of insurance in Zambia, through the Ministry of Finance, recently Zambia is favorable.29 established the Zambia Credit Guarantee Scheme Development banks and the State-owned as a private company. The company is tasked with insurer: As noted, agriculture is among the developing a guarantee scheme for SMEs that will sectors targeted by the development banks — serve as “a platform for financial institutions to including DBZ and NatSave. The scope of this offer affordable financial products and services at diagnostic did not include a full assessment of the reduced risk.”30 The company will target the SMEs effectiveness of the market development role played in the productive sectors with at least two years by these institutions. However, a limited assessment of operations and five or more employees. In this 29 The taxation of insurance premiums for agricultural insurance and index products varies significantly across African countries. It goes from full tax exemptions (for example, Senegal), to double-digit tax rates as in Burkina Faso (12percent) or Malawi (16.5 percent). See, for example, FANRPAN (2016) for a discussion on taxation on WII in selected African countries. 30 Zambia Credit Guarantee Scheme Limited. (2018). “Prospectus”. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 39 regard, agro-processing and trading are among the “Promotion of agricultural finance for agri-based sectors to be covered. However, primary agriculture enterprises in rural areas”. On the supply side, the is not expected to be covered, at least in the early project supports selected financial institutions with years. The target loans are divided into two groups: the development of financial services adapted to the Tier one (from Kwacha 500,000 to 10 million) target group needs. It provides capacity building for and Tier two (from Kwacha 250,000 to 499,000). the management and staff regarding the specifics Rabobank, Netherlands has provided technical of the agricultural sector. On the demand side, assistance to design the scheme including the risk farmers and agri-based entrepreneurs are trained coverage, the pricing of the guarantees, as well to economically analyze their businesses and to as the decision-making process and operational evaluate their financing options. The project is part procedures. One distinctive feature of the scheme is of the Special Initiative “One World no Hunger” by the involvement of “business coaches” who provide the German Government, and it is one of five GIZ tailored technical assistance and coaching to the projects in the agriculture and food security sector beneficiary SMEs. The government has committed in Zambia. US$5 million to establish the scheme, and it plans to MUSIKA, a non-profit company supported by the raise US$50 million from the development financial Government of Sweden, partners with agribusiness institutions and other public entities. companies to involve smallholders in commercial Donor-funded initiatives. The Financial Sector agriculture. Digitization of agricultural payments Deepening Zambia (FSDZ), a non-profit company and warehouse receipt financing are among the supported by the United Kingdom (UK) Aid and the activities related to agriculture finance that MUSIKA Swedish International Development Cooperation supports. Agency (SIDA), is working to catalyze greater The World Food Programme (WFP) is currently financial inclusion and deepening, plays a key role formulating the Farm to Market Alliance (FMA), expanding agriculture finance. $It has played an a public-private partnership for market linkages instrumental role in the production of the Finscope and access to finance for smallholders for several Surveys (which are the primary source of information crops such as soya. The FMA in Zambia builds on financial inclusion for agricultural households). on the early success in Rwanda and Tanzania. The It is also involved in supporting the development program supported and linked farmer organizations of the agricultural insurance market, providing with off-takers and financial institutions. However, capacity development support to select financial in Zambia, the WFP plans to work with agribusiness institutions involved in agricultural insurance. SMEs as a conduit for channeling inputs to farmers The International Fund for Agricultural Development and aggregating the produced crops. The WFP (IFAD) currently implements the Rural Finance together with Oxfam is also supporting the linkage of Expansion Programme (RUFEP). Among other their R4 Rural Resilience Initiatives with dedicated things, the RUFEP provides competitive grants to index insurance programs for smallholder farmers. financial institutions and other service providers Lastly, the World Bank Group, through its Global (MNOs, and so on) to facilitate improved delivery Index Insurance Facility (GIIF), has also played a key of financial services to agricultural producers. A key role in the expansion of WII in Zambia. Specifically, focus area for RUFEP is strengthening the use of it has provided technical and financial support to mobile applications in agricultural payments. Mayfair, the insurance company providing the WII The German Corporation for International product, that is linked to the e-FISP. Cooperation (GIZ) implements the project for the 4. AGRICULTURE FINANCE MARKET, POLICIES AND PROGRAMS 40 5. Challenges, Opportunities and Recommendations The data and analysis presented in Chapters 3 and 4 shows that agricultural finance in Zambia is a picture in contrasts. On the one hand, a relatively large proportion (over 30 percent) of the agriculture GDP in the country is financed by the formal financial sector. On the other hand, nearly 40 percent of farmers and fisherfolk do not have any access to an account, and less than three percent report receiving any credit from the formal sector. The extremely low levels of access and usage of formal financial services among farmers and fisherfolk call for high-level policy attention to addressing this issue. The growth in mobile money in recent years seems to have contributed significantly to an increase in access to and use of financial accounts, including among agricultural producers. As discussed in Chapter 3, the 2017 Global Findex indicates that 58 percent of agricultural producers had access to an account, a steep increase from 35 percent in 2014. During the same period, the proportion of producers receiving payment for the sale of agricultural goods into an account more than doubled, increasing from 18 to 40 percent. The proportion of farmers with an account is likely to have further increased in 2018, given the continuing increase in the number of active mobile money accounts (UNCDF 2019). Access to formal credit for small-scale agricultural producers is however extremely low, as the cost of credit is very high; most of the available credit is short-term. The demand-side data analysis in Chapter 3 and supply-side data analysis in Chapter 4 suggest that access to formal sector credit for small- scale agriculture is extremely low, at around 3 percent. Also, as discussed in Chapter 4, commercial banks charge about 20-50 percent (with a real interest rate of 12-42 percent) and MFI interest rates are even higher31. At these rates, borrowing would not be a viable financing option for most economic activities in the sector. Lastly, most of the limited amount of credit available for small- scale agriculture is for working capital (with tenors of less than 12 months). 32 31 For example, The payouts annual inflation for the rate “early in 2017 drought and trigger” 2018 was 6.6cannot provide percent the and 7.5 expected percent, benefit if not respectively, transferred in real time, that according to the Bank of Zambia. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 41 There is little availability of the kinds of longer operations of weather index insurance schemes on tenor credit needed to make productivity-enhancing a national scale, there is full dependence on remote capital investments (such as for small machinery or sensing data for the WII insurance product. All these micro-irrigation). data limitations constrain the ability of the private sector to develop solutions that are tailored to the Access to agricultural insurance was localized needs of geographic regions, value chains, exponentially scaled up in the 2017/2018 crop and client segments. season; however, key design features and significant implementation challenges are likely Weaknesses and gaps in key real sector to have resulted in limited development impact. infrastructure: The limited coverage of road, As discussed in Chapter 4, the rapid scale-up in telecommunications, and power infrastructure agricultural insurance due to the country-wide roll- constrain the effective supply of formal financial out of the e-FISP-linked WII scheme resulted in services. Limited access to electricity is a constraint an over 40-fold increase in access. However, the both for enterprises and individuals; access to in-kind nature of payouts and the extreme delays electricity is the third largest constraint cited by in paying the claims are likely to have resulted in enterprises in the 2013 Enterprises Survey. Indeed, limited development impact. The Government only about 4 percent of the population in rural needs to urgently strengthen both the design and areas has access to electricity. The share of the implementation of the WII program to ensure the rural population that lives within 2 km of a road in intended development impact. good condition is estimated at 17 percent, and it is estimated to take more than 1 hour to travel to the This Chapter identifies key challenges that nearest input market. The penetration of Internet need to be addressed. It identifies three main services has improved in recent years, but access opportunities and makes recommendations to remains low in rural areas (World Bank 2018). leverage these opportunities. Another key gap that is particularly relevant Key Challenges to agricultural credit is the limited availability The limited availability of good quality value- of formal land records (both titles and lease chain, enterprise and meteorological data documents), which limits the use of rural land is a key challenge at multiple levels. Data on as collateral. According to recent research, only agricultural production, productivity, commodity about 6 percent of smallholder farmers in Zambia prices, and profitability for major value chains indicated having some form of land documentation. is not available at a granular enough level. This Most land in Zambia is under the traditional land prevents the data being used by financial institutions regime, whereby village chiefs and their council of to establish unit costs of financing, as well as risk- headmen exercise nearly exclusive power (granted premiums that reflect the actual risks to production through their tribes and system of succession) over in a homogenous agro-climatic area. There is also customary land administration (Hall and others limited data available about farmer organizations 2017). Financial institutions in Zambia do accept and agribusiness SMEs — either survey-based or formal lease documents as collateral if the lease administrative. There seems to be no public database documents exceed the loan term, and if such leases of active farmer organizations and agribusiness are transferable. However, this still does not help SMEs in Zambia, and no enterprise survey has much with the collateral issues since most of the been conducted recently. Lastly, since the existing customary land is not on title issued by the Ministry network of weather stations would not allow for the of Lands. Conversion from customary land to 5. CHALLENGES, OPPORTUNITIES AND RECOMMENDATIONS 42 statutory land is possible, but it is costly for most of public borrowing have increased rapidly in recent the owners of this type of land. years. This directly impacts both the availability and cost of credit for the private sector. Given the Capacity constraints in the private sector. On the relatively higher real and perceived risks of the credit side, most financial institutions do not possess agriculture sector, this impact is exacerbated for adequate capacity to finance small-scale farmers. clients in the sector. The duration of the small agriculture loans is mostly limited to 12 months, with some exceptions. While the loans and repayment schedules are structured Opportunities and according to the crop cycles, they are too short for Recommendations capital investments to promote business expansion. Opportunity 1: Expanding the Outreach of Further, the interest rates are very high, especially Financial Services in Rural Areas for local currency loans for small farmers. The Three key actions are recommended. The high commercial banks charge from 20 to 50 percent priority recommendation relates to providing interest depending on the nature and size of the incentives to financial institutions to provide businesses, whereas the MFI interest rate ranges financial services to farmers and agricultural SMEs. from 35 to 75 percent per year. Finally, the high Other recommendations relate to strengthening the NPLs in the agriculture portfolio are likely to be availability of data for cost-effective market analysis partially caused by the limited capacity among and customer acquisition by financial institutions, financial institutions to more effectively manage as well as for improved monitoring and analysis their credit risks. of financial inclusion of farmers and agricultural After the failure of the Lima credit scheme, some SMEs. All three recommendations are expected financial institutions, including both commercial to enable broader financial inclusion of farmers, banks and MFIs, have been exploring new ways providing improved access to both business and to re-engage with small farmers. Some of them non-business-related financial service needs. have received or are receiving technical support Incentivize the delivery of formal financial from donor projects to develop tailored financial services and financial capability programs for services, including lending products (see Annex D). farmers and agricultural SMEs. There are several However, such assistance is still limited. actions that can be considered in this area. The On the insurance side, few insurance professionals first priority incentives should ideally be sector- have expertise in designing, underwriting, wide and can be fiscal in nature (lower taxation of and implementing indemnity and index-based financial services provided in rural areas/to specific agricultural insurance products. This includes client-segments) and policy-oriented (requiring service providers, such as crop loss assessors and government and corporate agricultural payments, inspectors with experience in agricultural insurance. including agricultural insurance, directly into the Such service providers are needed to support the farmer’s financial accounts). offering of multi-peril crop insurance products, as The second priority would be to scale-up capacity- well as expertise in designing and implementing building support to high potential service providers index insurance products. for increasing banking agents in rural areas, as Crowding out of the private sector credit due well as electronic payments acceptance by rural to high levels of domestic public borrowing: merchants, new product development, client As discussed in Chapter 1, the levels of domestic segmentation (including a needs assessment), the AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 43 development of client financial capability, and so on. contributing to an increase in the financing available There are several ongoing pilot initiatives funded by for agriculture. The weather index insurance schemes donors, such as the GIZ, IFAD/RUFEP, FSDZ and currently operating in Zambia are based solely on the Mastercard Foundation/AgriFin Accelerate (see remote sensing estimations of precipitation. This Annex D). Additional pilots, including the scaling- orientation has been taken because of the lack of up of successful pilots, need to be supported. appropriate ground measurements for both weather variables and crop yields. The improved availability Direct support to financial institutions should of weather data can provide synergies with remote target comprehensive capacity development of sensing data, for example, it could allow for the high potential institutions. Digital approaches will development of insurance products with payment be required to effectively reach out to small-scale triggers that combine both sources of data. The farmers while managing the risk and transaction availability of improved granular yield data could costs. Commercial banks and MFIs in Zambia that also facilitate the introduction of AYII programs. already consider small-scale agriculture as viable businesses and that are strategically committed to Improved data about farmers and agribusiness SMEs the sector need to be identified and supported. Key is critical for the delivery of all financial services to areas of support include: (i) building institutional these target segments. The farmer database of the capacity to better leverage the information available FISP program in the Zambia Integrated Agriculture about farmers and agribusiness SMEs from key Management Information System (ZIAMIS) can financial infrastructure (including retail payment be combined with the available databases of the systems, moveable collateral registries, and credit agribusinesses and industry associations linked to bureaus); (ii) building adequate internal domain specific value chains. This would help to build a knowledge at the operational and management robust, digitized database of agricultural producers levels; (iii) developing products and services that in Zambia. Similarly, the database of the 1,300+ meet business and non-business needs of the target agricultural input dealers involved in the e-FISP clientele; and (iv) establishing partnerships with program and the agricultural SMEs supported by agribusinesses, MNOs, and Fintech’s to leverage MUSIKA and the World Bank-supported Zambia their respective strengths. Agribusiness and Trade Project (ZATP) can be brought together as a national digital database of Lastly, the drivers of saving and borrowing among agribusiness SMEs with key performance metrics. farmers and fisherfolk identified in Figures 6 and 8 These databases can be used by public service in Chapter 3 clearly show the need to also provide providers to better target public services, as well as saving and borrowing options for non-business private service providers. In so doing, they can better needs, such as general living expenses, health, and target the delivery of financial and non-financial education. services to farmers and agricultural SMEs. Such Improve the quality and public availability of efforts can build on lessons learned from ongoing weather, agricultural, farmer and agribusiness efforts in several countries to use digital platforms SME data. Better availability of granular data about for improved service delivery (Box 1 provides an agricultural risks, production and prices for major innovative example in Zambia). value chains could allow financial institutions to Apart from technical advisory services, such develop credit products tailored to specific value databases can also be leveraged to build financial chains and regions based on expected profitability. capability of farmers and agricultural SMEs. The This could also help financial institutions in better national demand-side assessment of financial managing the risk in financing the sector, thereby 5. CHALLENGES, OPPORTUNITIES AND RECOMMENDATIONS 44 capability carried out in 2017 provides a good strengthen data on access to finance for agricultural baseline against which to measure the impact of such SMEs. Inclusion of a comprehensive access to efforts. The technical note on financial capability of financing module in national enterprise surveys SMEs offers lessons that would be very relevant for can provide such data. A key action that is needed developing and implementing a financial capability is inclusion of formal enterprises involved in program targeting agricultural SMEs in Zambia. agricultural production, in addition to those engaged in agricultural processing. Strengthen the quality and availability of data about the financial inclusion of farmers, as well as Lastly, there is an urgent need to improve the access to financing for agribusinesses. As Chapter quality and availability of supply-side data 3 demonstrates, the Zambia Finscope surveys collected by the BoZ and the PIA to allow for provide good data about the financial inclusion of better analysis of agricultural finance. The farmers, which is supplemented by data available immediate opportunity is in improving the from the Global Findex. The next Finscope survey quality of data available from the Credit Market would be an opportunity to strengthen the coverage Monitoring Report, and in making the underlying of small-scale farmers, possibly building on the data publicly available in an anonymized digital segmentation used in BoZ’s CMMR. However, since form. The CMMR is an excellent initiative, and these surveys are focused on financial inclusion, it it has produced very useful data regarding the provides a limited amount of real-sector data. Such Zambian agriculture credit market. However, the data is typically available from the national Living report can be further strengthened by improving Conditions Monitoring Survey (LCMS) undertaken the data related to small-scale agriculture (under by the Central Statistical Office (CSO). Adding a the current individual and household section, as comprehensive financial services module to the well as the small agriculture segment). In addition, LCMS survey can substantially improve the quality it can be strengthened by identifying primary of data and analysis about financial access and the economic sectors of companies covered under use of financial services by farmers in different the small and large agribusiness segments. This value chains. The Economic Social Survey Report will help policymakers to better analyze access produced jointly by the Ethiopian Central Statistical to finance for these important client segments Agency and the World Bank is a good example. in Zambia. The report should also include in its The LCMS survey should also collect data about coverage credit provided by investment funds and inputs that small-scale farmers may be receiving agribusinesses. Neither entity type is regulated from commercial farmers and agribusinesses, as by the BoZ, but both provide significant credit to well as the produce they may be selling to these enterprises and farmers, respectively. entities. This information can be very useful for The PIA also has an opportunity to expand the assessing the potential for financial services in data it collects about index insurance products in specific geographies and value chains. The Ministry agriculture, including data on indemnity products. of Finance can support the CSO in this initiative As such, it could offer a complete overview of the through its Rural Finance and Financial Sector agricultural insurance market. As in the case of the Policy Units. CMMR, it should also aim to make the underlying To compliment efforts to strengthen data on data available to the market after anonymizing it financial inclusion of farmers, there is also need to as appropriate. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 45 Opportunity 2: Broadening the Finance in Uganda and the Private Agriculture Agricultural Credit Market Sector Support (PASS) in Tanzania, which are partial Four actions are recommended in this area. The credit guarantee facilities for the agriculture sector, high priority actions relate to ensuring effective use have grown over the years in terms of the volume of key public initiatives. This includes strengthening of guarantees and the number of partner financial the institutional capacity of the Zambia Credit institutions. Their experiences would be useful for Guarantee Scheme and strengthening design the ZCGS in developing a transparent governance and implementation of public credit lines. scheme, managing risks and expenses, building trust Other recommended actions are to strengthen among financial institutions, and effectively serving the agricultural commodities exchange and the agricultural sector. warehouse receipts financing system that have been Strengthen the design and implementation of underperforming for several years now. This would public sector credit lines. Given the extreme scarcity also include putting into place the appropriate of formal-sector credit for small- and medium-scale infrastructure, policies, processes and incentives that agriculture, public-sector credit lines can play a key would allow for the effective use of land as collateral role in the short-to-medium run to fill these gaps once the Government completes its ambitious land and encourage private financial institutions to lend titling program. to the sector. However, to do so, it is critical that Strengthen the institutional capacity of the ZCGS they are well designed and effectively implemented to effectively serve MSMEs in the agriculture following generally accepted good practice sector. The recent government initiative to principles. Key good practice principles to follow establish a partial-credit public guarantee scheme include: (i) publishing clear eligibility criteria for provides a good opportunity to promote lending to financial intermediaries interested in participating creditworthy MSMEs in the agriculture sector and in the credit lines; (ii) publishing clear eligibility small- and medium-scale farmers. However, for the criteria for potential final borrowers; (iii) requiring ZCGS to be able to effectively and sustainably do financial intermediaries to fully or substantially this, it needs to have adequate capital. The ZCGS share the final credit risk; (iv) allowing the financial should also operate according to the international intermediaries to fully recover their operating best practices summarized in the Principles for costs, risk-premiums, and profit margins; and (v) Public Credit Guarantees for SMEs by the World requiring regular and timely public reporting about Bank (see Annex E). The scheme should carefully the performance of the credit lines (Goldberg 2015). develop and implement an operational strategy The effective implementation of public-sector credit that ensures a cost-effective guarantee origination lines may also require substantially strengthening and appropriate management approach necessary the institutional capacity of the Development Bank to achieve scale. It should also include risk-based of Zambia and re-defining its role as primarily one pricing and appropriate portfolio diversification of a wholesale lender. to ensure that risks are not highly concentrated. In Strengthen the operations of the agricultural addition, a transparent and speedy claim process is commodities exchange and the warehouse required. receipts financing market. As noted in the The Government should consider bringing in previous chapter, the warehouse receipt system and international DFIs as investors, which can bolster the warehouse receipts financing market in Zambia the financial strength of the facility and contribute have not achieved substantial scale. In 2018, to strengthening its corporate governance. The aBi the Platform for Agricultural Risk Management 5. CHALLENGES, OPPORTUNITIES AND RECOMMENDATIONS 46 (PARM), an initiative managed by IFAD, conducted Opportunity 3: Enhancing the Quality and an in-depth assessment of the warehouse receipt Effectiveness of Agricultural Insurance system. The government and key stakeholders Three actions are recommended in this area. The should follow its recommendations to address critical high-priority recommendation is to strengthen the bottlenecks in the system including: upgrading the FISP-linked WII program; several specific actions commodity trading platform; reviewing the timing are included under this recommendation. Other of maize stock rotations, and aligning FRA with recommendations are to undertake a comprehensive the commodity market and the warehouse receipt assessment of options to support agricultural system; reviewing and amending the Securities Act insurance in Zambia and build the capacity of of 2016 that fails to recognize trading of warehouse key public and private sector actors involved in receipts as a legal transaction; unifying the standards agricultural insurance. of the Zambia Bureau of Standards (ZABS) and Strengthen the FISP-linked WII insurance ZAMACE; strengthening the financial, managerial scheme. Notwithstanding the design issues and and operational capacity of ZAMACE; and raising implementation challenges, this program still awareness of the stakeholders about these issues, presents an immediate opportunity to reach especially financial institutions. many small-scale farmers in a cost-effective and Facilitate the easier use of agricultural land as potentially sustainable manner. However, to realize collateral. A key constraint that will need to be this opportunity, the Government needs to undertake addressed to enable the growth of the agricultural some key actions. credit market in the long run, particularly for medium • Address key design-related weaknesses of the and long-term capital needs, is to ease of use of program. As discussed in Chapter 4, several agricultural land as collateral. The Government’s design-related weaknesses are likely to have plan to title approximately eight million properties limited the development impact of the program. in the next five years, along with the planned These include the intermediation role of the associated measures (improving the Zambia Government in managing the collection and Integrated Land Management Information System, transfer of premiums to the insurance company; updating and digitizing the cadastral map, and collecting and transferring claim payouts to implementing a nation-wide sensitization program), farmers; and the in-kind nature of the payouts. is expected to lay the foundation to strengthen land- The speed of the payout delivery is one of the tenure rights. However, to effectively enable the major expected strengths of a WII insurance use of agricultural land as collateral, these actions program. Delays experienced in the 2017/2018 must be accompanied by infrastructure, policies, season prevent the intended benefit from processes and incentives that would simplify accruing.32 The reported delays in transferring procedures by which a security interest against land the premiums collected from farmers to the could be created, secured and executed. Given the insurer in 2018/19 demonstrate the risk of having recent establishment of the web-based moveable the Government play an intermediary role in collateral registry, there is an opportunity for the premium payments. To improve the effectiveness Government to build on the lessons from these of the program, it is critical that the Government efforts in establishing/strengthening a registry of is not directly involved in these functions. secured interests against land. 32 For example, payouts for the “early drought trigger” cannot provide the expected benefit if not transferred in real time, that is, shortly after the 10th of January. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 47 Farmers can still make the premium payments • Appoint an independent third-party together with the FISP matching contributions, calculation agency that, on behalf of the but the financial service providers can separate insured parties, can verify the accuracy of the the premium payments and deposit them directly payouts triggered. In sophisticated insurance into the insurer’s account. The insurer should schemes, such as index products based on data also be required to directly make the claim collected via satellite, the stakeholders involved payouts to farmers within a reasonable time- do not have the means to assess whether the frame when the claims are triggered. Lastly, settlement of the contract has been carried out the payouts should be made in a monetary form correctly. Hence, it is a recommended practice to into the farmer’s bank account or e-wallet. The appoint an independent agency that can conduct full inter-operability of Zambia’s retail payment the required calculations on behalf of the insured system expected to be achieved on completion parties. This particularly applies to schemes of the National Financial Switch project, that involve large numbers of clients and those combined with rapidly increasing access to in which the governments are facilitating the accounts, makes this a feasible option. Also, the transaction.33 timely availability of the pay-outs will provide Undertake an in-depth fiscal and market the much-needed additional liquidity to farmers assessment of the options that the Government during adverse weather events. could consider for supporting agricultural • Strengthen product information and client insurance markets. Agriculture finance can education. The multimedia marketing and play a key role in the commercialization and dissemination materials for the FISP insurance transformation of the agricultural sector. As part of scheme, developed in English and several local a broader support package from the Government to languages, are quite effective in illustrating the the agricultural finance sector, an assessment could concepts underlying index insurance, However, be carried out to identify key areas of public support they require further improvement. They should to agricultural insurance. Such an assessment allow the customer to clearly identify the actual would be based on the Government’s policy sum insured, and when and how the potential priorities. The Government could offer additional payouts should be provided, as well as who support including the provision of yield data; the to contact with any complaints. Given that enabling of outreach initiatives; the facilitation of poor awareness of insurance tends to generate access to reinsurance; the development of technical misunderstandings and dissatisfaction with capacity in country; and support for an enabling insurance, the Government can support targeted legal and regulatory environment. The assessment initiatives to strengthen farmer understanding could also include a fiscal costing analysis that of the product, including their consumer rights would assess the potential cost of public support related to the product. The PIA, as the relevant to enable the Government to make an informed regulator, should also ensure that marketing decision about potential options to be implemented. materials present all relevant information and This would include an assessment of the interest that the materials be delivered in an accessible of the insurance market in developing potential form to all insured farmers. coinsurance pooling agreements. 33 An interesting reference case is the Kenya Livestock Index Program (KLIP). 5. CHALLENGES, OPPORTUNITIES AND RECOMMENDATIONS 48 The assessment should be informed by dedicated and on how it can be handled.35 Given the dramatic technical investigations to: (i) review the expansion in the number of farmers enrolled in effectiveness of the FISP-linked WII product; (ii) index insurance products, and the past experience support the private sector in assessing the value with basis risk events in Zambia, it will be important of potential alternative remote sensing indices to raise awareness about basis risk. Developing for WII; (iii) assess the technical feasibility of guidelines on how to potentially prevent such implementing AYII (also in combination with WII) events and how to deal with them once they have in terms of data availability and data collection materialized would also be extremely relevant. procedures; and (iv) test the use of remote sensing methodologies for the identification of Unit Areas Conclusion of Insurance (UAI) in index insurance programs. Increasing demand for high-value food A technical review of the 2017/2018 and 2018/19 products offers unprecedented prospects for FISP-linked WII coverage is in order. It would be the transformation of the Zambian economy; critical to assessing how effectively the product agriculture finance is one of the key factors would have covered the weather risks they were for its potential success. The demand for animal exposed to, as well as addressing farmers’ needs if it products, horticulture, and processed foods has been had not been constrained by the design weaknesses increasing due to population and income growth previously discussed.34 and urbanization, accompanied by a shift in dietary patterns in Zambia and neighboring counties. This Build the capacity of key public and private shift provides significant opportunities for the actors. On the public side, the Pension and Insurance Zambian agriculture and agribusiness sectors, which Authority can benefit from capacity building and can serve domestic as well as international markets. knowledge sharing. This would help the PIA to be The African urban food markets are forecasted more proficient in handling the new set of index to exceed US$ 400 billion by 2030. Similarly, the insurance products. Implementing capacity-building Zambian food market is expected to grow to over activities would also be useful at the ministerial US$25 billion in the next 15 years. level. As such, the Government would be able to more effectively interact with private sector players Access to financial services is vital, especially for that participate in governmental schemes related small farms and agribusiness SMEs. With greater to agricultural insurance. Similarly, on the private financial inclusion, they can seize the growing sector side, dedicated capacity-building activities business opportunities and enhance their resilience for the design, underwriting, and implementation in the face of market and climate challenges. of both indemnity and index-based agriculture Financial services enable other transformational insurance products would significantly enhance the investments such as irrigation, high-quality inputs, effectiveness and the sustainability of agricultural storage, and processing equipment. In addition, insurance products. A key aspect of capacity they can contribute to risk management strategies, building for both the public and private sectors is the including climate-smart agriculture and insurance. needs to strengthen the understanding of basis risk 34 As an example, see the review of the index-based weather insurance initiatives that Financial Sector Deepening (FSD) of Kenya commissioned to assess their pilot experiences between 2008 and 2012 (Leach and others 2014). 35 Basis risk can be defined as the difference between the payout, as measured by the index, and the actual loss incurred by the insured when caused by the peril for which the policy is underwritten. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 49 Implementing the recommended actions nature of agriculture finance, close collaboration would require concerted and coordinated across key ministries and public agencies, as well action. There are several challenges including as private stakeholders is critical. The Government resource constraints, conflicting priorities, a lack may want to consider developing an Agriculture of coordination among key stakeholders, and the Finance Action Plan to be implemented under the broader political economy. Many activities require leadership of the Ministry of Finance in consultation financial and human resources backed by strong with the Ministry of Agriculture, regulators, the political will. In addition, given the cross-sectoral private sector, and development partners. 5. CHALLENGES, OPPORTUNITIES AND RECOMMENDATIONS 50 References African Development Bank (AFDB). 2018. Available at: https://www.afdb.org/en/news-and-events/afdb-leverages-support- to-zambias-agriculture-sector-12935/ AgBIT (2015): Horticulture Sub-Sector Study Report 2015. Mapping Investment Opportunities in the Horticulture Sub-Sector: The Case of Vegetable Value Chains in Zambia. AgriProFocus, Agribusiness Incubation trust (AgBIT), SNV. 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United Nations Capital Development Fund Links within the document: (UNCDF). 2019. https://www.uncdf.org/bfldcs/ home 7th National Development Plan, 2017–2021, http:// extwprlegs1.fao.org/docs/pdf/zam170109. pdf World Bank. 2018a. “Increasing Agricultural (2017) Resilience Through Better Risk Management in Zambia.” 2013 Zambia National Agriculture Policy (NAP) https://www.agriculture.gov.zm/?wpfb_dl=51 Washington DC: The World Bank. (2013) ______. 2018b. “Zambia: Harvesting Agricultural Moveable Property (Security Interest) Act No. 3 Potential.” of 2016 https://www.pacra.org.zm/MPRS/docs/ Available at: https://www.worldbank.org/en/about/ Guide%20to%20the%20Movable%20Property%20 partners/brief/zambia-harvesting-agricultural- (Security%20Interest)%20Act%20No.%203%20 potential of%202016.pdf ______. 2018c. World Development Indicators. Collateral Registry https://www.pacra.org.zm/mprs ______. 2018d. “Zambia Systematic Country Credit Reporting Act of 2018 https://zambialii. 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Washington, D.C. : World Bank Financial Sector Deepening Zambia (FSDZ), (2019) Group. http://documents.worldbank.org/curated/ http://www.fsdzambia.org/ en/443321509643632935/Enhancing-financial- capability-and-inclusion-in-Zambia-a-demand- Rural Finance Expansion Programme (RUFEP) side-assessment (2019) https://www.rufep.org.zm/ Zottel, Siegfried; Khoury, Fares; Varghese, Minita World Bank (2015). Principles for Public Credit Mary. 2018. Investigating the financial capabilities Guarantee Schemes (CGSs) for SMEs https://www. of SMEs : lessons from a 24-country survey - worldbank.org/en/topic/financialsector/publication/ technical note (English). Washington, D.C. : World principles-for-public-credit-guarantee-schemes- Bank Group.http://documents.worldbank.org/ cgss-for-smes curated/en/884291527663849364/Investigating- the-financial-capabilities-of-SMEs-lessons-from-a- 24-country-survey-technical-note AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 55 56 Annex A. Institutions and Individuals Consulted Providers Organization Name Name Farmer and Zambia National Farmers Union Ms. Ella Chembe Industry Organizations Cotton Association of Zambia Mr. Joseph Nkole Poultry Association of Zambia Mr. Dominic Diary Association of Zambia Mr. Kapoche Mwale Mr. Jeremiah Kasolo Business Service Chase Resources Ms. Nyeji Chilem Providers eMsika Mr. Gilbert Mwale ZAMACE Commodity Exchange Mr. Jacob Mwale Payments Service Zoona Mr. Brett Magrath Provider Mr. Randall Williams Commercial Banks ZANACO Mr. Chali E. Mwefweni Ms. Kaluba Kaulungombe Inampasa Mr. Edwin Goli Mulega Barclays Mr. Patrick Mutenda, Mr. Remmy Kantumoya Mr. Lance Sinkala AB Bank Mr. Nurullo Mashrabo Ms. Muze Syachaba FNB Mr. Cheyo Mwenechanya Mr. Chanda Busuma Standard Chartered Mr. Theo Mukenani Atlas Mara Mr. Betsy Nkhoma Mr. Nicholas Muneku Investrust Mr. Crispin Daka Bank Mr. Simangolwa Shakalima Mr. Patrick Zimba AGRICULTURE FINANCE DIAGNOSTIC - ZAMBIA 57 Insurance Mayfair Mr. Mweene Moonga Companies ZSIC Ms. Bridget Mulenga Focus Mr. Solomon Ngwenya Professional Insurance Ms. Ndayanja Bola Majata African Grey Mr. Benny Sakala MFIs Entrepreneur Financial Center Mr. Beddah Salasini Agora Mr. Abduqodir Sattorov Ms. Susan Chibang Madison Finance Mr. Freddie Kandiwo Development Development Bank of Zambia Mr. Robert Mookola Malasha Finance Institutions Mrs. Mwati Sike Mr Francis Musonda, Ms. Diana Mwendaweli Investment Funds GroFin Mr. Ernest Kando AgDevCo Chris Bishop (Senior Agricultural Advisor) Ministries Ministry of Finance, Financial Sector Ms. Mercy Chiluba Munoni, Policies & Management Unit Mr. Katongo Musonda, Mr. Mwale Ministry of Agriculture Ms. Kezia Mbita Katyamba Ministry of Livestock Mr. David M. Mundia Regulators Bank of Zambia Mr. Chisha Mwanakatwe Mr. Richard Chirwa Ms. Mankolo Beyani Mr. Musapenda Phiri Ms. Beatrice Kalale Mr. Banji Milambo Pension and Insurance Authority Ms. Namakau Ntini Ms. Yizaso Musonda ANNEX A. INSTITUTIONS AND INDIVIDUALS CONSULTED 58 Donor/Donor- MUSIKA Mr. Joshua Munkombwe funded Support Entitie Mr. Dean Lihonde Mr. Rob Munro, Mr. Andrew Sinyangwe FSDZ Ms. Betty Wilkinson Mr. Joackim Kasonde and Mr. Mauwa Lungu RUFEP - IFAD supported program Mr. Michael Mbulo, Mr. Caiaphas Habasonda, Mr. Gareth Evans GIZ Agricultural Finance Project Ms. Julia Kirya Mercycorps Ms. Christabel Makokha World Food Programme Mr. Stanley Ndhlovu Research Institution Indaba Agricultural Policy Research Mr. Chance Kabaghe Institut Mr. Antony Chapoto Mr. Paul Chimuka Sambok Mr. Auckland Kuteya Namubi Ms. Rhoda Mofya-Mukuka AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 59 60 Annex B. Key Economic Indicators 2016 2017 2018 2019f 2020f 2021f Real GDP Growth, at Constant Market Prices 3.8 3.5 4.0 1.8 2.6 2.6 Private Consumption -2.5 12.5 1.2 2.3 3.1 3.6 Government Consumption 9.3 -8.6 -14.9 0.4 -2.9 -7.3 Gross Fixed Capital Investment -1.7 10.2 9.9 -17.9 -2.2 2.5 Exports, Goods and Services 1.7 -3.8 8.7 10.5 10.4 10.3 Imports, Goods and Services -14.8 10.9 4.9 2.2 6.4 10.5 Inflation (Consumer Price Index) 17.9 6.6 7.5 9.1 12.9 11.5 Current Account Balance (% of GDP) -3.3 -1.7 -1.3 -3.2 -2.8 -2.3 Net Foreign Direct Investment (% of GDP) 2.0 0.9 -0.9 0.4 0.4 0.3 Fiscal Balance (% of GDP): Cash Basis -6.1 -7.7 -8.3 -8.0 -5.5 -4.6 Fiscal Balance (% of GDP): Commitment Basis -9.0 -7.0 -10.7 -9.7 -4.8 -3.9 Debt (% of GDP) 60.5 64.5 73.1 80.3 84.9 86.4 Primary Balance (% of GDP) -2.4 -3.7 -4.0 -2.2 1.0 2.8 Poverty Rate International Poverty Rate ($1.9 in 2011 PPP)a,b 57.2 57.1 56.8 56.5 56.1 55.9 Lower Middle-income Poverty Rate 74.1 74.0 73.9 73.7 73.5 73.2 ($3.2 in 2011 PPP)a,b Upper Middle-income Poverty Rate 87.1 87.0 86.9 86.7 86.6 86.5 ($5.5 in 2011 PPP)a,b Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Notes: e = estimate, f = forecast. (a) Calculations based on 2015-LCMS. (b) Projection using neutral distribution (2015) with pass-through = 0.87 based on GDP per capita in constant LCU. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 61 62 Annex C. Major Agriculture Value Chains in Zambia Maize is the primary food crop produced in the country and is grown in all the provinces of the country. As noted, the small and medium-scale farmers contribute 80 percent of Zambia’s maize production. The commercial farmers involved in maize production grow it for production of livestock feed or to bridge production gaps. They grow it during the winter season. The maize value chain has a large number of actors in its value chain functions (including input suppliers, producers, millers, traders and consumers). Cotton is one of the most organized value chains, with exporters, traders, ginneries and farmers working as out-growers. Over 350,000 farmers are estimated to be contracted to ginneries who provide inputs on credit in return for the farmers commitment to sell the crop at harvest time. For example, there are more than 100,000 farmers reported to form part of the out-grower’s schemes with NWK Agri-Services (Chitah 2016; Makokha 2017). However, while the tightly organized cotton value chain has traditionally provided access to inputs and assured markets to smallholder cotton producers, the Cotton Association of Zambia considers that the dependence on the ginneries has also had deleterious effects. These include pricing being fully determined by the ginneries, and the cotton seed not being available in the open market. Soybean production has grown in recent years, fueled by the demand from the livestock feed industry and oil extractors. Soybean production is dominated by commercial farmers (85 percent), and Zambia is a net exporter of soybeans. The current production stands at 351,000 metric tons and the level of production is expected to continue increasing as the integration within the value chain continues to improve. The sugar industry is dominated by Zambia Sugar Plc (Illovo Sugar). Zambia Sugar produces around 92.5 percent of the sugar in Zambia, followed by Kafue Sugar (Consolidated Farming Ltd.) and Kalungwishi Kasama Sugar. Sugar producers (independent producers and out-growers) have a highly managed relationship, and they have access to extension services and input supplies. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 63 The livestock sector accounts for about 30 Products PLC 2018). Parmalat and Finta Danish percent of agricultural production. The level Dairies are dominant players in dairy, but only less of commercialization is relatively low, and most than 30 percent is consumed in Zambia. livestock is held by smallholder households. The horticulture sector has been growing According to the Rural Agricultural Livelihoods rapidly in past years, but several improvements Survey (RALS) survey (IAPRI 2016), more than are needed to allow smallholder farmers to 80 percent of the households reported having participate and reap the benefits from the at least one chicken, 35 percent owned goats, sector. It is estimated that about 20 percent 31 percent owned cattle, and only 16 percent of Zambian smallholder farmers engage in reported owning pigs. In 2017, the Livestock and horticulture production (AgBIT 2015). There Aquaculture Census confirmed that among large has been steady growth in the production, sales livestock, cattle is the most dominant type (about and consumption of horticultural products in 3.6 million heads) followed by goats (3.4 million Zambia over the years. A recent study estimated heads) and pigs (nearly 1 million heads), of which that annual consumption was 1 million metric more than 90 percent are held by households tons (MT), worth over US$330 million. This is (Chapoto, Chisanga and Kabisa 2018). The expected to increase to 1.4 million MT worth, or smallholder livestock sector is characterized by US$500 million, by 2020. Production is estimated limited disease management, low productivity, at 1.4 million MT, worth US$235 million, and is and relatively high livestock mortality. Also, the projected to increase to 2.2 million MT by 2020 level of commercialization is low. The level of (Chapoto, Chisanga and Kabisa 2018). Despite commercialization and participation in the cattle these trends and favorable production conditions, and pig markets seems to correlate positivity with Zambia has continued to import vegetables and the level of the household head’s education, and fruits, specifically through major retail stores. negatively with the level of commercialization in Local supply falls below the quantity and quality crops or off-farm income diversification (Lubungu, requirements of the major retail stores. The Chapoto and Tembo 2012). constraints are well known. Smallholder farmers The livestock processing business is dominated often lack capital, knowledge and entrepreneurial by Zambeef. It has a range of products such as skills necessary for production and marketing to meats, poultry products, dairy products, leather participate in horticulture value chains (AgBIT products, and animal feed (under Novatek). It 2015). The sector is also confronted with high also has a large marketing network in Zambia supply inconsistencies, resulting in high price consisting of over 75 retail stores. In addition, volatility and huge post-harvest losses due to it has franchise agreements with Shoprite limited cold chain facilities. supermarkets in Ghana and Nigeria (Zambeef ANNEX C. MAJOR AGRICULTURE VALUE CHAINS IN ZAMBIA 64 Annex D. Innovation Pilots Supported by FSDZ, RUFEP and GIZ FSDZ Partner Pilot Agora Digitization of loan processes. This involves the use of tablets and blue tooth Microfinance portable printers that are linked by WiFi to the branches. This pilot intends to increase the efficiency of the credit officers in assessing, disbursing and collecting loans. It also increases trust and confidence among clients as loan repayment receipts are issued in real-time in the field. Alliance Advance cash payment: Cotton farmers under the outgrower/contract farming Ginneries Ltd. scheme receive advance cash payments (Kwacha 200) during the hungry season (that is, the period between planting and harvesting). The advance cash payment is recovered through deductions from harvest sales. The intentions are to smooth consumption during the hungry seasons, increase yields, and instill loyalty. The rationale is that during the hungry season, farmers engage in desperate coping strategies that contribute to low yields and side-selling, for example, they abandon their financed field crops to go and work for food. In addition, they obtain cash credit at exorbitant interest rates. IDE Zambia Invoice discounting bundled with credit guarantee: The bank supports horticultural SME aggregators with working capital finance using invoices as collateral. The availability of working capital enables the aggregators to pay the suppliers (smallholders) on time, thereby not disturbing production and increasing incomes. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 65 Zazu Digital financial education: This entails the dissemination of financial education Africa Ltd. materials to low-income groups (smallholders and poor rural households) through SMS and voice using feature phones. FSDZ is working with agribusinesses, development organizations and other organizations that interface with low-income groups on a regular basis. RUFEP New Apostolic Free savings accounts for smallholder farmers: The pilot aims to digitize Church Relief payments to 5,159 smallholder farmers who are engaged in the tomato value chain Organization in Chibombo. NACRO engaged Atlas Mara to act as the financial service provider (NACRO) and for the project and to offer a cost-free savings account for the smallholders. NACRO Atlas Mara provides training to the smallholder farmers regarding the use of improved tomato varieties, direct purchases of produce from the farmers, and processes to turn the tomatoes into a variety of products, such as tomato paste and dried tomatoes. Payment is made by NACRO to the smallholder mobile money accounts/bank accounts. There is potential to use the data from both the smallholder production yields and savings behaviors to develop additional products and services with Atlas Mara in the future. Rent to Own, Innovative asset-based lending to smallholder farmers: RUFEP is supporting the hire purchase company in improving its agent network and sales, distribution and maintenance of company equipment including irrigation, milk production and agro-processing to smallholder farmers. The project has seen agent income more than double, enabling the agents to work full time with Rent to Own, and provide improved access to products and services for the smallholders in rural areas. RUFEP is also supporting Rent to Own to test a pay-as-you go model for solar products. Rent to Own intends to increase mobile money payments from 30 percent of all transactions at present to at least 70 percent in the coming years. Rent to Own has reached over 7,000 clients with their innovative asset-based lending approach. ANNEX D. INNOVATION PILOTS SUPPORTED BY FSDZ, RUFEP AND GIZ 66 Medeem Zambia, Improving lending decisions using land data: RUFEP has supported the company a land mapping in testing how to utilize information collected during the land mapping process company with 500 clients. Medeem works primarily with customary land in rural areas and charges customers around US$50 to map (via the global positioning system- GPS) their land and provide customary land documents signed and recognized by the Chief, Headman, family members, their neighbors and other traditional leaders in the communities. When collecting the data, Medeem also collects a number of socioeconomic data points, including whether land has been improved, what crops are farmed, crop yield data, as well as household size and composition. Medeem is in the process of finalizing relationships with financial service providers to test the data in order to make better lending decisions. GIZ VisionFund Improving financial service offers to smallholder dairy farmers: In Zambia, Zambia there are approximately 10,000 small-holder dairy farmers. GIZ is working with VisionFund Zambia on financial product development for the agricultural sector, as well as developing staff capacities to handle agricultural lending. VisionFund has redesigned their product offerings to the dairy sector focusing on the needs of the farmers, including loan products for irrigation of fodder production, improved breeds, as well as other small assets used in dairy farming. VisionFund is also piloting a loan product on synchronized artificial insemination. MFinance Agro input dealers as service providers beyond the provision of inputs: There is a wide network of agro input dealers in Zambia providing services to the rural communities and especially farmers. GIZ identified and documented the business case for input dealers offering mechanized production and other value-added services for small-scale farmers. GIZ has worked with MFinance to develop specialized financial products for agricultural SMEs, such as aggregators. It is also supporting MFinance in strengthening the capacities of their staff and middle management. AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 67 68 Annex E. Illustrative Leaflets Developed by Mayfair Insurance for WII Linked to FISP AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 69 ANNEX E. LLUSTRATIVE LEAFLETS DEVELOPED BY MAYFAIR INSURANCE FOR WII LINKED TO FISP 70 Annex F. The Principles for Public Credit Guarantee Schemes (CGS) for SMES Legal and Regulatory Framework • Establish the CGS as an independent legal entity • Provide adequate funding and keep sources transparent • Promote mixed ownership and treat minority shareholders fairly • Supervise the CGS independently and effectively Corporate Governance and Risk Management • Clearly define the CGS mandate • Set a sound corporate governance structure with an independent Board of Directors • Design a sound internal control framework to safeguard operational integrity • Adopt an effective and comprehensive enterprise risk management framework Operational Framework • Clearly define eligibility and qualification criteria for SMEs, lenders, and credit instruments • Ensure the guarantee delivery approach balances outreach, additionality, and financial sustainability • Issue partial guarantees that comply with prudential regulations and provide capital relief to lenders • Set a transparent and consistent risk-based pricing policy • Design an efficient, clearly documented, and transparent claim management process Monitoring and Evaluation • Set rigorous financial reporting requirements and externally audit financial statements • Publicly disclose nonfinancial information periodically • Systematically evaluate the CGS performance and publicly disclose the findings Source: World Bank (2015). AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 71 72 AGRICULTURE FINANCE DIAGNOSTIC — ZAMBIA 73