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Table of Contents Foreword................................................................................................................................................. iii Acknowledgements.................................................................................................................................. v List of Abbreviations.............................................................................................................................. vii Executive Summary.................................................................................................................................. 1 Background, Objectives, and Methods..................................................................................................... 5 Background...............................................................................................................................................................................5 Study Objectives.......................................................................................................................................................................7 Research Methodology.............................................................................................................................................................7 Case Study Selection.................................................................................................................................................................9 Current Practices and Lessons................................................................................................................ 11 Institutional Structure and Management................................................................................................................................13 Client Segmentation, Products, and Services...........................................................................................................................15 Institutional Performance........................................................................................................................................................23 Enabling Environment and External Support...........................................................................................................................26 Conclusions and Next Steps................................................................................................................... 27 Good Practices and Success Factors........................................................................................................................................27 Taking MFI Smallholder Lending to the Next Level.................................................................................................................29 Implications for Donor Involvement........................................................................................................................................30 Case Studies........................................................................................................................................... 33 Case 1: Banco ADOPEM, the Dominican Republic...................................................................................................................35 Case 2: Bancamía, Colombia...................................................................................................................................................42 Case 3: Financiera Confianza, Perú.........................................................................................................................................47 Case 4: Caja Huancayo, Perú...................................................................................................................................................55 Endnotes................................................................................................................................................. 61 References.............................................................................................................................................. 65 Annex – Desk Review List of Examples.................................................................................................. 69 Table of Contents i access to finance for smallholder farmers List of Boxes Box 1. The hidden agricultural loan portfolio—risks and missed business opportunities..........................................................7 Box 2. Main forms of collateral reported in the study.............................................................................................................18 Box 3. Coffee rust in the central region: Financiera Confianza’s proactive risk management strategy....................................51 List of Tables Table 1. Years serving microfinance, smallholder, and rural clients by institution (March 31, 2013)..........................................9 Table 2. Portfolio outreach by institution (September 30, 2013).............................................................................................10 Table 3. LAC MFIs and agricultural lending.............................................................................................................................12 Table 4. India MFIs and agricultural lending...........................................................................................................................12 Table 5. MFI sustainability and efficiency................................................................................................................................23 Table 6. Portfolio at risk > 30 days (September 30, 2013).......................................................................................................24 Table 7. Agricultural loan portfolios by MFI (September 30, 2013)..........................................................................................33 Table 8. Institutional performance by MFI (December 31, 2012).............................................................................................34 Table 9. ADOPEM portfolio composition (September 30, 2013)..............................................................................................36 Table 10. ADOPEM credit products..........................................................................................................................................37 Table 11. ADOPEM savings and insurance products................................................................................................................37 Table 12. Bancamía portfolio composition (September 30, 2013)...........................................................................................42 Table 13. Financiera Confianza portfolio composition (September 30, 2013)..........................................................................47 Table 14. Financiera Confianza total agricultural portfolio by loan size (September 30, 2013)...............................................48 Table 15. Financiera Confianza credit products.......................................................................................................................49 Table 16. Financiera Confianza savings and insurance products.............................................................................................49 Table 17. Caja Huancayo portfolio composition (September 30, 2013)...................................................................................55 Table 18. Caja Huancayo total agricultural portfolio by loan size (July 31, 2013)...................................................................56 Table 19. Caja Huancayo credit products................................................................................................................................56 Table 20. Caja Huancayo savings and insurance products......................................................................................................57 ii Table of Contents Foreword A griculture remains the main economic activity and employs the majority of the people in most low income countries. Globally, there are approximately 450 million households whose main activity is agriculture. Agricultural producers in they operate. While the majority of studies so far have focused on commercial smallholder farmers in value chains served primarily by banks or through value chain firms, this is a relatively narrow part of the market, representing only an estimated 7% of developing countries, particularly those in low income smallholder farmers. Research to date has said little countries, face a number of hurdles including low about how smallholder farmers outside value chains productivity, limited access to markets for their products, and less commercially-oriented farmers access financial lack of adequate risk management products and services services of any kind, or the kinds of products and and limited access to finance. While agriculture remains services they demand. At the same time, there is a a key economic activity in Africa employing about 55% recognition of a missing middle in agrifinance in that of the population, only approximately 1% of bank there is limited understanding of what happens outside lending goes to the agricultural sector. Furthermore, the commercial farmer and tight value chain segment only 4.7% of adults in rural areas in developing countries when it comes to financing models for farmers. globally have a loan from a formal financial institution and only 5.9% a bank account, according to Findex data. Microfinance institutions and other financial service providers with presence in rural areas could be part Access to financial services, while not a means to an of solving this puzzle, and organizations like CGAP end, is critical to provide funds for farm investments and IFC are making important contributions to this in productivity, improve post harvest practices, smooth changing market. This IFC study looks into selected household cash flow, enable better access to markets and microfinance institutions in Latin America to gain a better promote better management of risks. Access to finance understanding of the market environment in which can also play an important role in climate adaptation these microfinance institutions operate and the types of and increase the resilience of agriculture to climate clients they serve. The report comes up with lessons change, thus contributing to longer term food security. learned from their experience that could potentially Access to a comprehensive range of financial services is apply to other microfinance institutions wanting to a significant challenge for smallholders, who constitute focus more on the agricultural sector and address the vast majority of farmers in developing countries. the access to finance gap facing smallholder farmers. Smallholder farmers are quite a heterogeneous group, IFC takes an ecosystems approach to agricultural differing in their resource base and choice of crops development through holistic investment and advisory and livestock, links to markets, the relative importance solutions to financial institutions as well as agribusinesses. of agricultural income, and other dimensions. As Agrifinance is a critical part of IFC’s strategic priority such, solutions regarding access to finance need to to support agriculture in emerging markets, helping to better understand the various profiles of smallholder achieve the World Bank Group’s twin goals of reducing families and the conditions and market context where poverty and creating shared prosperity. IFC is currently Foreword iii access to finance for smallholder farmers actively implementing 23 agrifinance and 84 microfinance Pakistan, Tanzania, and Mozambique, planning national advisory projects. This study’s lessons learned make a surveys of smallholder households to explore their solid contribution to guide future initiatives under the agricultural and non-agricultural activities and demand broad financial inclusion efforts of IFC and its partners. for financial services, and developing collaborations with financial service providers and human-centered CGAP works on a wide and evolving range of financial design firms to create products tailored specifically inclusion topics, including how to better meet the to the needs of smallholder households. These financial needs of smallholder families. To contribute and other efforts related to financing smallholder to the evidence base about smallholder households, families are an important complement to IFC’s CGAP is conducting financial diaries projects in work and the critical research presented in this study. Tilman D. Ehrbeck Peer Stein Director, Consultative Group to Assist the Poor Director, Finance and Markets Global Practice iv Foreword Acknowledgements T his report is a product of International Finance Corporation’s (IFC) Financial Institutions Group and represents a joint effort of its Microfinance and Agrifinance global programs. The report was prepared by a team led by Panos Varangis the following individuals and their respective teams for sharing their experiences through the in-depth case studies: Mercedes Canalda, Eva Carvajal and Lori Diaz from ADOPEM; Margarita Correa Henao and Mabel Diaz Casallas from Bancamía; Martín Santa and Makanda Kioko and core team members Martin María Fernández Stoll from Financiera Confianza; Spahr, Gaamaa Hishigsuren, and Heather Miller. A team and Ramiro Arana Pacheco from Caja Huancayo. We from Chemonics International including Eve Hamilton, greatly appreciate the efforts of these organizations Lorna Grace and Roberto Munster worked with IFC to share their experiences to enrich this study. to carry out the desk research, survey and case study analysis. Carlos Cuevas acted as senior technical advisor Our appreciation is extended to Katherine Scott for and co-authored the final report with the rest of the team. editing, Juan Guillen for Spanish translation, and Aichin Lim Jones for design and production services. IFC thanks the individuals and organizations who This publication was made possible thanks to funding responded to the questionnaire and provided insights from the Government of the Wallonia region of Belgium through surveys and interviews. IFC especially thanks and the Government of the Flanders region of Belgium. AcknowledgementS v access to finance for smallholder farmers vi List of Abbreviations CGAP Consultative Group to Assist the Poor DCA Development Credit Authority FAO Food and Agriculture Organization of the United Nations GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH GPFI Global Partnership for Financial Inclusion ICT information and communications technologies IFAD International Fund for Agricultural Development IFC International Finance Corporation LAC Latin America and the Caribbean MIS management information system MFI microfinance institution NGO non-governmental organization NPL non-performing loans PDA personal digital assistant POS point-of-service ROE return on equity SME small and medium enterprise USAID United States Agency for International Development WWB Women’s World Banking List of Abbreviations vii access to finance for smallholder farmers viii Executive Summary O f the three quarters of the world’s poor that live in rural areas, 80 percent directly or indirectly depend on agriculture as their main source of income and employment (IFC 2011). These smallholders also play a key role in increasing food supplies, more diminishes as the farmer clientele becomes smaller in scale, and as value chains become less defined. The relative importance of different channels for different segments, however, is for the most part unknown. In particular, the evidence of microfinance institution so than large farms in poor countries. Despite their (MFI) involvement in financing commercial and semi- socioeconomic importance, smallholders tend to have commercial smallholders remains anecdotal and lacks little or no access to formal credit, which limits their specifics on what makes MFI lending to these segments capacity to invest in the technologies and inputs they feasible, and what restricts their reach and effectiveness. need to increase their yields and incomes and reduce hunger and poverty, both their own and that of others. Against this background, the International Finance Corporation (IFC) conducted this study to identify Financial institutions interested in serving this market face and disseminate the best practices of MFIs that myriad risks and challenges associated with agricultural have successfully implemented agricultural lending production and lending, including seasonality and the operations targeting agricultural smallholders in Latin associated irregular cash flows; higher transaction costs; America and the Caribbean (LAC), particularly those and systemic risks, such as floods, droughts, and plant in loose value chains and subsistence farmers in order diseases. While these challenges apply generally to to support replication and expansion of scalable smallholder lending (in fact to all agricultural lending), approaches. Summarized here are the findings of the it is more challenging to serve some smallholders than research, including a list of good practices for new others. With smallholders in “tight” value chains— market entrants to consider, suggestions for MFIs where a strong relationship between the farmer and interested in taking existing lending operations to the buyer exists—such relationships can be leveraged to next level, and a set of recommendations for assistance. reduce the costs and risks of agricultural lending through shared credit screening, monitoring and collection, and/or use of alternative collateral, such as sales contracts. The challenges become greater when trying Good Practices and Success to provide financing to smallholders in “loose” value Factors for New Market chains, particularly for low-value staple crops, where Entrants farmers do not have strong relationships with other value chain actors. The challenges are compounded The lessons from this study indicate that introducing when trying to provide financing to subsistence farmers. agricultural lending in an MFI requires careful planning, preparation, and adaptation of systems and resources. It clearly goes beyond introducing just another product; The spectrum of financial institutions involved in it requires high-level management commitment, setting financing agriculture is broad, and seemingly reflects realistic growth targets, and being ready to adjust terms the farmers’ segmentation as the importance of banks and practices. On the other hand, there seem to be Executive Summary 1 access to finance for smallholder farmers incentives to consider entering the agricultural market, Customization of marketing materials to reflect the as MFIs already have agricultural clients and agri- target market. Incorporating images of target clientele related loans in their existing rural clientele, and there can help overcome the mistrust that smallholders often are indications of potential gains in portfolio quality have of financial institutions and their presumption that and profitability. The factors required for successful financial institutions are not interested in serving them. introduction of agricultural lending in an MFI are: High-level buy-in. Successful smallholder lending Knowledge of the client. While this is important for requires products, approaches, and systems that are any lending operation, it is particularly critical for MFIs distinct from those for microcredit, which in turn, interested in entering the smallholder lending market require different mindsets and investment in new tools to understand the differences between their traditional and systems. In short, it requires a strong institutional urban and rural clientele, and smallholder farmers. commitment and support by the most senior level management. Flexible products. Smallholder lending is not one size fits all. Loan tenor, disbursement, and payment A strong customer service orientation. By providing terms need to be adaptable to the diverse profiles of rapid loan processing and disbursement, personal smallholder borrowers. attention to clients, and customization of products, terms and services to match client needs, as well as Cash flow analysis of the household production providng non-financial services, MFIs can compete unit. Analyzing the household production unit both effectively with subsidized credit from agricultural allows for matching payment terms to cash flow, and development banks and differentiate their offerings provides a more accurate analysis of the payment among themselves. capacity and true risk of lending to the smallholder. Diversified risk management tactics. Agricultural Taking Smallholder Lending lending risks are diverse and need to be mitigated in a variety of ways. Close, field-based client monitoring; to the Next Level portfolio diversification; conservative cash flow The four MFIs that this study covered in great detail, analysis; and credit bureaus and credit scoring are all while with relatively low exposure to agricultural clients, tools MFIs can use in risk management. In addition, the provided highly useful insights into what it takes to study findings suggest that an MFI’s collateral should be expand the smallholder agricultural portfolio. Adjusting commensurate with loan sizes and other risk factors the product terms, improving information systems to MFI considers, such as client repayment history, crop properly record and analyze agricultural loans, and diversification, and non-agricultural sources of revenue. exploring ways of improving the profitability of the smallholder client stand out as important considerations. Use of specialized credit officers. Hiring credit officers with a background in agriculture is generally Consider risk-based loan pricing for crops and considered critical. Introduction of additional, products. In some cases, this might lead to lower rates specialized staff positions to support portfolio quality for certain combinations of clients, crops, geographies, may also be necessary. or financial products. In other cases, this might lead to higher rates as the probability of loss increases. Adaptation of loan officer remuneration to incentivize smallholder lending. Establishing distinct Introduce or expand product costing. Few MFIs are targets for agricultural and commercial portfolios, analyzing the cost of lending to smallholders. Improved and/or adjusting the agricultural targets for seasonal costing could better inform discussions around product variations, may help to incentivize agricultural lending. design, lending methodologies, and sales and risk management strategies, and lead to additional innovation. Automation of data capture and credit analysis. Prudent agricultural lending requires the collection and Evaluate opportunities for cross-selling. A focus on analysis of a significant amount of client, production, the broader financial needs of smallholder clients could and price data. Automation can reduce errors, increase help reduce client vulnerability and contribute to the efficiency, and support faster portfolio growth, as well economic advancement of low-income clients, while as improve loan application assessment. improving profitability at the individual client level. 2 Executive Summary access to finance for smallholder farmers Explore opportunities to introduce or expand value 7. Support for non-financial services, such as financial chain finance. Value chain finance could be used both education and/or technical assistance programs for to serve the “missing middle farmers”—commercial smallholders, to complement credit services. smallholders in existing value chains—and to reach larger groups of smaller farmers more efficiently. Potential areas for further research Research topics that emerge from the study are Explore lower-cost delivery channels. Agent and suggested in Chapter III. They focus on the viability ATM networks, mobile phone banking, and debit cards of long-term lending to smallholders, exploring value can all be used to reduce the costs of lending to rural chain financing, alternative delivery channels, and the and agricultural clients, while making it easier for clients role of government and donor guarantee plans. to access financial services. Consider introducing or expanding availability of longer-term financing for asset acquisition. To meet the investment needs of smallholders, MFIs may wish to consider their maximum loan terms and lending methodologies, and use of value chain finance and other mechanisms, to reduce the risk of long-term finance. Implications for Donor Involvement The study findings underscore areas of technical assistance and other forms of donor support that may affect MFIs’ effectiveness in reaching smallholders. They also highlight areas in which further research may be warranted. Technical assistance and training 1. Design and implementation of market research (demand and supply analyses) to help MFIs understand different smallholder segments and their needs. 2. Product design and piloting to reduce the costs and risks of new market entry and innovation. 3. Systems improvements to adapt MIS/core banking systems and use technology solutions, such as automation of data capture and analysis to accommodate tailored credit assessment, portfolio monitoring requirements, and loan repayment schedules. 4. Design of staff incentive plans to promote agricultural lending. 5. Introduction of product-costing practices to inform product and program design and to help to make the business case for new market entrants. 6. Design and piloting of new delivery channels to reduce the costs and risk of lending. Executive Summary 3 access to finance for smallholder farmers 4 Background, Objectives, and Methods A gricultural development is critical to achieving the Millennium Development Goal of reducing poverty and hunger. With an estimated 850 million people worldwide who are undernourished and a growing global population, it is expected that the Background Agricultural finance: demand and supply. There are no precise numbers on the demand for agricultural finance. A very rough estimate by Dalberg Development demand for food will continue to increase. At the same Advisors (2012) suggests that demand may be as high as time, food price spikes in recent years have intensified $450 billion in financial services ($225 billion in short- global concerns about current levels of agricultural term finance and $225 billion in long-term finance). production (Food and Agriculture Organization of The percentage of smallholders with access to finance the United Nations (FAO) 2013). These trends have is equally difficult to quantify. According to estimates, resulted in a spotlight on food security and agricultural even promising approaches to expanding smallholder development—and on the role of financial institutions lending, such as value chain finance, are reaching fewer in increasing agricultural producers’ access to finance. than 10 percent of smallholders, primarily those in well-established value chains dedicated to higher value An estimated 500 million agricultural smallholders cash crops (the Consultative Group to Assist the Poor farm up to two hectares of land, with 2 billion to 2.5 (CGAP) 2013). billion people living in these smallholders’ households worldwide (Hazell 2011 and Christen and Anderson The challenges to increasing access to finance are 2013). These farms feed a great number of the rural numerous and well documented. Financial institutions poor. According to IFC (2011), of the three quarters interested in serving this market face myriad risks and of the world’s poor that live in rural areas, 80 percent challenges associated with agricultural production depend on agriculture as their main source of income and lending, including seasonality and the associated and employment. These smallholders also play a key irregular cash flows, high transaction costs, and systemic role in increasing food supply, more so than large risks, such as floods, droughts, and plant diseases. While farms in poor countries, and increasingly supply large these challenges apply to agricultural lending in general, conglomerates and corporations with inputs for their they impinge on smallholder lending in particular, given products (Carroll et al. 2012). Despite their socio- the relatively higher transaction costs of provision and economic importance, smallholders tend to have little smallholders’ limited ability to mitigate risks. or no access to formal credit, which limits their capacity to invest in the technologies and inputs they need to IFC’s inquiry into agricultural finance. Against increase their yields and incomes and reduce hunger and this background, IFC has been engaged for poverty, both their own and that of others. several years in learning efforts through diverse partnerships to obtain insights into the challenges of agricultural finance. Outcomes of this work have been a better understanding of the different market segments in agricultural finance, and of the roles Background, Objectives, and Methods 5 access to finance for smallholder farmers (actual and potential) of different types of financial and collection, and/or the use of alternative collateral, institutions in addressing agricultural finance issues. such as sales contracts. The challenges become greater when trying to provide financing to semi-commercial Market segmentation. A complete segmentation smallholder farmers in loose value chains, particularly framework was developed for IFC and the G20’s for low-value staple crops, where farmers do not have Global Partnership for Financial Inclusion (GPFI) strong relationships with other value chain actors, “Innovative Agricultural Small and Medium Enterprise and selling is more opportunistic rather than based (SME) Finance Models” report, using land size, labor on longer-term relationships with buyers. This greatly use, technology, and other criteria to delimit farmers reduces opportunities for risk sharing and use of segments (IFC 2012). An important contribution alternative collateral, and increases exposure to market from this work was addressing the diversity of the risks. The challenges are compounded when trying to smallholder segment, which was in turn categorized into provide financing to subsistence farmers who do not three levels: commercial smallholders, semi-commercial have much in the way of marketable crop surpluses, but smallholders, and subsistence farmers. Commercial who may have income from other sources. smallholders were defined as those that generally sell higher-value crops, and operate in “tight” value MFIs in agricultural finance. The spectrum of chains with strong and well-established relationships financial institutions involved in financing agriculture is with buyers and input suppliers. Semi-commercial broad, and seemingly reflects the farmers’ segmentation smallholders are those that generally grow staple crops as the importance of banks diminishes, as the farmer and sell surpluses in local markets, while subsistence clientele becomes smaller in scale, and as value chains farmers are those that produce for household become less defined. Input suppliers and buyers are consumption only. Commercial and semi-commercial perceived to become more relevant as financing channels smallholders combined are estimated to include roughly for commercial and semi-commercial smallholders, 460 million farmers (165 million and 300 million, along with cooperatives and MFIs (IFC 2012). The respectively) supporting 2.3 billion people. Subsistence relative importance of different channels for different farmers number about 40 million supporting 0.2 billion segments, however, is for the most part unknown. In people (Christen and Anderson 2011). particular, the evidence of MFI involvement in financing commercial and semi-commercial smallholders remains One of the principal distinctions between commercial anecdotal and lacks specifics on what makes MFI and semi-commercial smallholders is the relationship lending to these segments feasible, and what restricts between the farmer and buyers. Where a strong their reach and effectiveness. At the same time, MFIs relationship between the farmer and buyer exists, it can that do not distinguish agricultural clients or activities be leveraged to reduce the costs and risks of agricultural may run risks in their portfolio and miss opportunities lending through shared credit screening, monitoring, in their business, as Box 1 explains. 6 Background, Objectives, and Methods access to finance for smallholder farmers Box 1. The hidden agricultural loan portfolio—risks and missed business opportunities MFIs’ expansion in Peru into medium-size towns in rural areas started at least 10 years ago. Most institutions have not adjusted their credit methodology and instead only offer loans to the traditional, well-known sectors in urban areas: trade, services, and some small factories. Agricultural activities and livestock farming are usually not eligible. But the reality is that micro entrepreneurs in rural areas have diversified businesses with different sources of income and quite complex risk profiles and financial needs. Since money is fungible, clients apply for loans by presenting the loan officer with an eligible activity—for example, a small grocery shop or transportation service firm—but also use the funds to finance their agricultural activities, which are not evaluated by the loan officer. This has two different effects that need to be considered. First, there is a hidden risk, because if the client has a problem in his agricultural activity, it will affect his overall repayment capacity. Second, because the loan officer only considered the eligible activities, the client’s profile (and hence his potential needs) are not registered and cannot be evaluated and used for cross-selling activities or any other commercial targeted campaign. It is important to draw MFIs’ attention to this critical issue and create awareness of the hidden risks and the missed business opportunities they have in their loan portfolios. In some branches, 30 percent to 50 percent of their loan portfolio is affected by this phenomenon, according to interviews with loan officers. Source: IFC, Smart Lessons: “Avoiding Altitude Sickness in the Andes of Peru: Implementing a Rural Agricultural Microcredit Product in Urban- Focused Microfinance Institutions”, M. Spahr, A. Tarazona and F. Portocarrero, May 2013. Study Objectives a global context, informs the design of the survey targeted to LAC MFIs, and provides inputs to define This IFC study aims to identify and disseminate hypotheses for the four in-depth case studies. The lessons emerging from the work of MFIs that survey (administered by mail and telephone) compiles a have implemented agricultural operations targeting first approximation of operational models and practices agricultural smallholders in LAC to support replication of LAC MFIs, and helps further define the research and expansion of scalable approaches. LAC was chosen tools (interview guides, data collection sheets) for the for the study due to its historically leading and innovative in-depth case studies. In what follows, we refer to these role in the microfinance industry, the maturity of the as “the case studies.” MFI industry in many LAC countries, and the number of examples of MFIs that have expanded beyond The desk research entailed a review of the existing urban markets to reach more rural clients, relative to literature on the provision of financial services to other regions. Through this research, IFC seeks to smallholder farmers worldwide, including broad survey understand the motivations of MFIs that venture into reports and desk-review of 40 studies of specific agricultural finance, how the products they offer have innovations and products (see Annex 1 for a list of been structured, and how they were implemented, with these), in order to establish what is known about serving a specific focus on agricultural finance programs and this market and identify where knowledge gaps remain products that are designed for smallholders in loose to be filled. The knowledge gaps are summarized below: value chains and non-commercial (subsistence) farmers. ■■ Smallholder segmentation and crops financed. Most of the literature focuses on commercial Research Methodology smallholders, with much less focus on semi- The IFC Access to Finance team worked with commercial smallholders and almost no coverage Chemonics International to carry out this study, using of subsistence farmers. Similarly, there is little three research methods in sequence: (1) desk research information regarding why certain types of crops (also referred as desk reviews); (2) a survey of LAC are targeted over others and what makes those value MFIs; and (3) in-depth case studies including field visits chains or markets, and/or the smallholders producing to four MFIs—one in Colombia, one in the Dominican them, significantly different from others. Republic, and two in Perú. The desk research provides Background, Objectives, and Methods 7 access to finance for smallholder farmers ■■ Products and services. Product design is the ■■ Motivation. While not always thoroughly area with the least gaps, as numerous models are documented, the motivating factors to lend to these described. However, few, if any, cases document market segments tend to fall into two categories: distinctions between products for commercial and organizations whose mission specifically targets the semi-commercial smallholders. Non-credit products rural and/or agricultural sector, and those that enter and non-financial services are not as thoroughly the agricultural finance market due to saturation of covered as credit products. the urban and peri-urban markets and/or as a way to ■■ Lending approaches. Even where the case literature reduce risk through portfolio diversification. includes both commercial and semi-commercial ■■ Internal success factors. Internal success factors farmers, few, if any, details are provided on how are associated with the ability to diversify portfolios approaches to the two markets may differ. across client segments, geographies, crops, and ■■ Delivery channels. There are significant gaps in sectors. Recruiting staff with agricultural training the literature regarding delivery channels. The use of seems correlated with successful lending but the mobile phones and other technologies is not widely practice is not broadly reported. Internal credit documented in the literature, which may be a function policies are generally not covered thoroughly in the of the age of the case studies and the more recent literature. increase in the use of these technologies by MFIs. ■■ External success factors. External sources of ■■ Profitability, sustainability, and scalability. Very funding or technical assistance and the enabling little quantitative data is available on the profitability environment also need more analysis in order to of smallholder lending. Similarly, there are only a better understand the circumstances necessary for few cases documenting products that have reached replication and scalability. scale, and most of the available case studies focus on relatively early stages in product implementation. 8 Background, Objectives, and Methods Case Study Selection Following the desk research, a targeted survey was created to better understand why and how a select group of LAC MFIs are serving rural and smallholder clients. The survey, which covered a wide range of questions on the operational models used by MFIs to reach smallholders, was sent to 19 MFIs in LAC, including (microfinance) banks, non-governmental organizations (NGOs), and non-bank financial institutions. These 19 MFIs were chosen because they are operating in rural areas and IFC had prior information regarding their activities and interest in the agricultural sector. A total of eight MFIs responded to the survey. It must be noted that we use the term “MFI” here to refer to financial institutions that may have diverse legal status, from licensed banks, such as Banco de Ahorro y Crédito ADOPEM, to NGOs authorized to deliver financial services, such as Women’s World Banking (WWB) Popayán. In between these two extremes, there are municipal savings and credit banks with a different their overall portfolios also varies significantly, from 2 charter than commercial banks, such as Caja Huancayo, percent to 19 percent, as does the number of smallholder and finance companies, such as Financiera Confianza, agricultural clients they serve, ranging from 2,915 to technically a non-bank financial institution. 46,244, as of March 31, 2013. However, in analyzing the survey data, it is important to understand that the The sample includes three banks (ADOPEM, selected institutions are not a representative sample of Bancamía, and Los Andes ProCredit); four non-bank MFIs in LAC, nor were they chosen randomly, since the financial institutions (Caja Huancayo, CMAC Sullana, original group of 19 was biased towards MFIs that have Financiera Confianza, and Eco Futuro); and one NGO a greater focus on agriculture and the rural sector. (WWB Popayán). All but one (the NGO) are deposit- taking institutions. As can be seen in table 1, the eight From those eight respondents, four were selected respondents reflect diverse levels of experience with for in-depth, field-based case studies: ADOPEM smallholder agricultural lending (from 1 to 25 years). The (Dominican Republic), Financiera Confianza and Caja size of their smallholder lending portfolios in relation to Huancayo (Perú), and Bancamía (Colombia). Again, Table 1. Years serving microfinance, smallholder, and rural clients by institution (March 31, 2013) Microfinance Commercial Semi-commercial Subsistence Rural clients clients smallholders smallholders farmers (other) ADOPEM 30 10 10 Not Served 13 Bancamía 5 Not Served 2 Not Served 4 Los Andes ProCredit 18 1 1 Not Served Not Served Caja Huancayo 25 12.5 12.5 Not Served 25 CMAC Sullana 26 20 20 Not Served 20 Financiera Confianza 20 20 14 20 20 Eco Futuro 14 5 5 5 No response WWB Popayán 28 25 25 Not Served 25 Source: IFC LAC MFIs in Agriculture Study survey, July 2013. Background, Objectives, and Methods 9 access to finance for smallholder farmers the selection was not random. ADOPEM, Financiera have specific products, approaches, organization, and Confianza, and Caja Huancayo were chosen because systems adapted to agricultural finance; and (3) agreed their survey responses indicated that they (1) make to be visited. Bancamía was chosen in addition because efforts to segment and serve agricultural clients; (2) it appeared to be serving semi-commercial smallholders with an adapted microfinance strategy. Table 2. Portfolio outreach by institution (September 30, 2013) Institution Smallholder agricultural portfolio Smallholder agricultural clients (percentage of total portfolio) (percentage of total clients) ADOPEM 2.7% 2.1% Bancamía* 13.4% 14.2% Caja Huancayo 3.9% 3.5% Financiera Confianza 10.6% 10.7% *Data is from March 31, 2013. Source: case studies. 10 Background, Objectives, and Methods Current Practices and Lessons T his section describes and analyzes the current practices of the four case study MFIs. Where possible, these practices are compared against regional and global trends gleaned through the targeted survey and desk research. Lessons learned and success The Indian MFIs surveyed reported that they did not differentiate between farmer segments. They appear to be serving mostly subsistence farmers, where perhaps specific agricultural finance products, services, systems, and processes may be less critical. Furthermore, Indian factors are highlighted. MFIs rely heavily on group lending and standardized products and procedures that do not require advanced As a preamble, and taking advantage of recent risk assessment on individual loans. preliminary research work in India, it seems useful to draw a comparison between selected features of the Latin America MFIs that replied to the targeted survey and those emerging from India using a fairly similar survey. It must be kept in mind that while the India MFIs are typically “mainstream” MFIs, those responding to the LAC survey (eight out of 19 receiving the survey) self-selected to participate in an exercise already known to focus on agricultural lending. Tables 3 (LAC) and 4 (India) summarize the comparison. From the two tables, one could argue that the India picture is closer to what one would find in a comprehensive survey of MFIs, perhaps a bit biased towards the non-existence of an agrifinance business line. The LAC MFIs, on the other hand, show a predisposition to serve smallholder farmers. For example, several of them have specific loan products for farmers. They are far, however, from having a heavy involvement in agriculture, as only one of the LAC MFIs had close to a 20 percent exposure and all others were less than 13 percent. In addition, as will be shown and discussed below, both third-party lending (i.e., through buyers or input suppliers) and value chain financing are relatively new areas for LAC MFIs. Another reason for the differences between the LAC and Indian MFIs could be attributed to agriculture in LAC being more commercially driven, even among smallholder farmers. Current Practices and Lessons 11 access to finance for smallholder farmers Table 3. LAC MFIs and agricultural lending AreAreas ADOPEM Bancamía Bancos Caja CMAC Financiera WWB Los Andes Huancayo Sullana Confianza Popayán Farmer segmentationa Y Y Y Y Y Y Y Loan officer background in agriculture Y Y Y Y Y Y Y Training of staff in agriculture Y Y NA Y NA Y NA Specific agri-lending product(s) Y Y NA Y NA Y NA Separate credit risk assessment in N Y N N N N N agriculture MIS identifies agriculture loans Y Y N N Y N N Provision of non-financial servicesb Y Y Y NA Y NA NA Use of mobile banking N N N N N N N Individual/group lending both individual individual individual individual both individual Insurance (accident, life, funeral) Y Y NA Y NA Y Y Insurance (crop, weather) N N N N N N N Agriculture portfolio > 10% of total N Y N N Y Y N Agriculture NPLs compared to about the about the lower lower NA higher higher total NPLs same same a “Ex-post” segmentation, in response to survey. b Financial literacy. Source: IFC LAC MFIs in Agriculture Study survey, July 2013. Table 4. India MFIs and agricultural lending Areas MFI 1 MFI 2 MFI 3 MFI 4 MFI 5 MFI 6 Farmers segmentation N N N N N N Loan officer background in agriculture N N N N N N Training of staff in agriculture N N N Y N N Specific agriculture lending product(s) N N N N N N Separate credit risk assessment in N N N N N N agriculture MIS identifies agriculture loansc Y Y Y Y Y N Provision of non-financial services d N Y Y Y Y Y Use of mobile banking N N N N N N Individual/group lending both group group both both both Insurance (accident, life, funeral) Y N N Y Y N Insurance (crop, weather) N N N N N N Agriculture portfolio > 10% of total Y NA NA NA Y NA about the about the Agriculture NPLs compared to total NPLs NA NA NA NA same same c MIS systems refer to the MIS classification per end use of loan/purpose. d Non-financial products refer mostly to financial literacy and/or farmer training. Source: India MFIs in Agriculture: Preliminary findings in IFC internal report. January 2014. Note: individual institutions not publicly disclosed. 12 Current Practices and Lessons access to finance for smallholder farmers Institutional Structure and Organizational structure and human Management resources The need to make staffing adjustments to support agricultural lending programs is seen in all four MFIs. Managerial motivation All introduced specialized training for officers managing Agricultural lending is often seen as necessary because agricultural credit. Three of the MFIs introduced of socio-economic concerns and thus some MFIs specialized agricultural credit officers, and three also engage in this activity because of a mission that includes introduced specialized supervisory or risk management a focus on rural development and/or poverty alleviation. staff, albeit special attention to certain loans seems However, the desk research, targeted survey, and deep- driven by loan size rather than by loan purpose (e.g., the dive case studies indicate that MFIs serve smallholders case of Caja Huancayo described below). Two MFIs also for both mission and market reasons. introduced new staff incentive policies for agricultural lending, while a third may do so in the future. The double bottom line: agricultural lending is both mission and market driven. The eight LAC MFIs Use of specialized loan officers. Use of credit officers surveyed were consistent in indicating that their with agricultural backgrounds is generally considered a movement into the agricultural sector was or is driven significant success factor for agricultural lending. More both by a strategic interest in agricultural and/or rural broadly, the importance of “agronomic due diligence” development (their institutional mission), and by growth in lending to farmers is generally acknowledged opportunities in these sectors. To a lesser extent, the among commercial banks with meaningful exposure two other reasons cited are to diversify their portfolios to agriculture (i.e., in the neighborhood of 15 percent and to expand to rural markets due to increasingly to 20 percent of total portfolio). Whether this kind of competitive and saturated urban markets. due diligence is carried out in-house or outsourced is a different question. The desk review, the survey, and The desk research suggests that there is a distinction the case studies indicate that MFIs specifically prefer at a global level between those who enter the sector the “in-house” approach and hire loan officers with for mission versus market reasons. Only 22 of the backgrounds in agriculture. The LAC survey results 40 examples reviewed in the desk research included support this finding, with nearly all respondents answers to the reasons that motivated the microfinance indicating that they hire loan officers with prior institution to serve smallholders in loose value chains. agricultural lending experience and a degree in a related Those institutions for which information was available field (i.e., agriculture, agribusiness, rural development). generally fall into two different camps: those whose mission specifically targets the rural and/or agricultural Among the case studies, three of the four MFIs sector, and those who enter the agricultural finance studied consider agricultural experience important market due to saturation of urban and peri-urban for credit officers serving agricultural clients. There is markets and/or as part of a strategy to reduce risk the perception that while an agricultural credit officer through portfolio diversification. Half of MFIs in the would have no problem evaluating a commercial loan, review seem to focus on financing agricultural activities a commercial credit officer does not have the technical because of their institutional mission. knowledge to evaluate and monitor an agricultural loan. Financiera Confianza, however, favors a more generalist Whether motivated by mission, market reasons, or background, complemented by specialized agricultural a double bottom line, both the desk research and the training, as an appropriate balance for its loan officers, case studies suggest that MFIs with portfolios including as they serve both agricultural and non-agricultural loans to smallholders hold the expectation of those clients. loans being profitable. As will be documented later, that expectation is yet to be translated into proper accounting Familiarity of the loan offices with the geographies and to verify the profitability of such loans. communities they serve is generally seen as a positive factor, both because of the officer’s knowledge of the area’s agriculture, and because of the cost economies of covering a limited territory. The main caveat to this Current Practices and Lessons 13 access to finance for smallholder farmers staff allocation is that social ties with clients may create Caja Huancayo introduced an agronomist in its risk conflicts of interest in loan assessment and monitoring. management department to review agricultural loans MFI managers appear ready to strike a balance between valued at $35,920 or more, and a credit analyst, working this possible conflict and the advantages of geographic under the credit manager, who oversees the agricultural concentration. lending portfolio. The former position was created because many of Huancayo’s agricultural loans were Provision of specialized loan officer training. more than $35,920 (particularly in the central eastern All four case study MFIs consider it important to region) and required special attention, as Caja Huancayo’s provide specialized training to credit officers managing policy requires loans over this threshold to go to the agricultural loans, regardless of the individual’s risk management department. Before they hired an professional background, and in addition to general agronomist in 2012, the risk specialist would evaluate training on lending practices and procedures. In all cases, an agricultural loan like any other commercial loan, but the training consists of both classroom instruction and then send the credit file to an outside agronomist for an practical, field-based training under the supervision of external opinion. a seasoned loan officer, and/or as interns in branches. In all cases, training takes place during an initial For its part, Financiera Confianza employs product (probation) period of up to six months, and includes specialists with an agronomy background to support specific training on agricultural and rural themes with loan officers managing agricultural loans. There is different degrees of depth. one product specialist assigned to each of Financiera Confianza’s main geographic regions. Introduction of other specialized staff. Whether or not one chooses to use specialized loan officers, the Loan officer incentives: differentiating targets for experiences of the four MFIs suggest that it is important agricultural and commercial portfolios. In all four to have staff with specialized agricultural backgrounds of our case studies, loan officer remuneration is a to support the agricultural portfolio. In addition to hiring combination of base salary and incentive payments. The specialized credit officers and/or providing specialized specific indicators vary slightly by MFI, but all include agricultural training to officers, both ADOPEM and the number of clients and delinquency. While each MFI Caja Huancayo have found it necessary to create new takes a different approach, the experiences of three staff positions to support their agricultural lending of the four suggest that differentiating the targets for programs. ADOPEM introduced an agricultural lending agricultural and commercial portfolios may be valuable specialist and a value chain specialist. The agricultural for MFIs interested in incentivizing agricultural lending. lending specialist was introduced in 2012 to provide The case studies show that recognizing in the incentives additional support to agricultural credit officers in the structures, and providing for, the differences in labor- branches, and encourage branch managers to get more intensity, risk profiles, and seasonality of agricultural involved with their agricultural portfolios. The value lending, are accepted good practices to support a chain specialist joined ADOPEM in 2012 to support healthy and growing agricultural portfolio. the new value chain program. 14 Current Practices and Lessons access to finance for smallholder farmers Client Segmentation, and semi-commercial and commercial smallholders (served through an individual lending product). That is, Products, and Services basic segmentation is followed by an allocation driven by the loan product. Otherwise, we find few distinctions Client segmentation in the products and approaches for commercial and In analyzing client segmentation, we consider not only semi-commercial smallholders. how MFIs segment the clientele they serve, but also the overlapping issue of segmentation as a basis for A focus on both commercial and semi-commercial understanding the approaches used to serve different farmers, and on direct lending. The literature suggests smallholder segments. In the first instance, we do that “agricultural lenders” have mostly focused on observe in the MFI case studies the use of segmentation “…diversified farmers, often with off-farm income and tools and metrics based primarily on loan size, and irrigation” (Deutsche Gesellschaft für Internationale the adoption of individualized approaches to client Zusammenarbeit GmbH (GIZ) 2011), which suggests segmentation based on cash flow analyses. an overall emphasis on medium-sized farmers and, in some cases, semi-commercial farmers. While most of When presented with the IFC segment definitions the 40 examples reviewed through the desk research introduced previously (IFC 2012), it seemed easy for the do not distinguish the type of smallholders served respondents to recognize those segments within their based on IFC’s segmentation, in a majority of them, clientele. While there appears to be some immediate it appears that the anchoring financial institution (not distinction between commercial and semi-commercial always clearly an MFI) has targeted farmers who are smallholders on the one hand, and subsistence farmers part of tight agricultural value chains and have reliable on the other, differentiation between commercial and relationships with buyers. In contrast, all respondents semi-commercial smallholders seems to be minimal. In to the targeted survey, including the four case studies, terms of who is being served, while the literature on report serving primarily the semi-commercial farmer smallholder lending suggests there is a greater focus segment through individual direct lending. on lending to commercial smallholders by MFIs, all of the targeted survey respondents are serving semi- commercial smallholders. Only two respondents identify subsistence farmers as part of their clientele. Among the four MFI cases, three of the four reported serving both commercial and semi-commercial farmers, while the fourth (Bancamía) serves only semi-commercial farmers. Use of diverse segmentation criteria. Reconciling the way in which MFIs in the case studies categorize their farmer clients with IFC’s segmentation framework is somewhat challenging. Overall, we find that these MFIs segment their clientele by factors such as loan size, crop diversification, and level of indebtedness, and generally take an individualized approach to client assessment based on cash flow analyses. In other words, the lender does not start by profiling the farmer borrower as commercial, or semi-commercial, or subsistence, and then assigning that client a loan package. Instead, a dominant driver in loan application analysis seems to be loan size, which does not necessarily align with IFC’s segmentation profile. An exception can be cited in the case of Financiera Confianza, which distinguishes between subsistence farmers (served through a solidarity group-lending product that is also used for non-agricultural clients), Current Practices and Lessons 15 access to finance for smallholder farmers Rather than considering our Latin American sample as Although there does not appear to be a strong emphasis a group of outliers, the opposite can be argued. The on cross-selling, a variety of non-credit products are pervasive examples of commercial smallholder lending available, including deposits, transfers, and insurance in the literature may be reflecting a preference among (credit life, accident, funeral expenses, general damages). researchers to document those cases, and in any event None of the four MFIs offers crop insurance, but two do not reflect the practices of MFIs, but instead those of them expect to introduce it next year (ADOPEM and of a diverse set of financial institutions. The findings Financiera Confianza). The only non-financial service from the case studies suggest that value chain finance is listed by the survey respondents is financial education, in the testing/piloting stage (ADOPEM and Bancamía), which appears to be a later-stage addition to agricultural and is not likely to become a major component of their lending. agricultural lending in the near future. Predominance of working capital loans. The scarcity of long-term financing for investing in fixed assets and Products and services cash crops with long gestation periods is an often-cited factor inhibiting greater productivity and profitability in Whether we look at the desk research, survey results, smallholder agriculture. Yet, short-term working capital or the case study MFIs, working capital loans are the loans dominate the portfolios of all four MFIs, even predominant type of credit disbursed. Among our case although on paper they offer both working capital and study subjects, we also find that there is a trend toward fixed asset loans. While in one case this may be an issue adoption of a single, flexible agricultural credit product, of loan classification (in ADOPEM, the maximum loan and flexible payment terms, matched to agricultural term for fixed asset loans is the same as that for working production cycles. Collateral requirements for these capital loans: 18 months), this does not explain why products vary, but typically include movable assets or the same holds true for the other MFIs, all of which individual solidarity guarantees (a personal guarantor). offer longer terms for fixed asset loans (48 months for Value chain finance and use of alternative collateral, Bancamía and Financiera Confianza, 10 years for Caja such as accounts receivables, is not widespread. Huancayo). 16 Current Practices and Lessons The greater risk inherent in longer-term lending is likely to be an obstacle, but other factors may explain the scarcity of fixed assets loans, including risk aversion on the demand side and additional requirements associated with medium/long-term loans. Value chain arrangements associated with perennial crops may enable access to long-term financing (i.e., integrating smallholders into value chains with secure market relationships, access to technical assistance, and the like), but this would be more the exception than the rule to what value chain finance can do to finance fixed assets. Emphasis on a single, flexible agricultural credit product. If the four case study MFIs are an indication, the current trend is to have one flexible agricultural credit product adaptable for various market segments. Both ADOPEM and Caja Huancayo serve their agricultural clientele with a single product that can be customized with flexible tenor and repayment arrangements. While Financiera Confianza has two products—“AgroPuro” and “AgroMix”—it is transitioning to a single product, AgroMix. The AgroMix product allows for irregular loan payments based on the cash flow of the household production unit. For its part, Bancamía has adjusted its service model for the rural sector, along with products and services, to better meet the client demands and ADOPEM found that requiring fixed monthly payments market conditions. Given the small size of our sample greatly limited its ability to reach a large number of and the silence in the literature on the number of smallholders: many farmers simply did not have the agricultural lending products typically offered by MFIs, diverse cash flows necessary to make the payments. it is not possible to conclude whether this is a global It adapted its credit product and MIS accordingly to trend and/or emerging good practice. However, the accommodate flexible payment terms. For its part, well-known experience of directed credit, and common Bancamía has found that even farmers with diversified sense, suggest that flexible agricultural products are income sources—the target market for its “Credimía” preferable to diverse, rigidly defined agricultural loan product—have difficulty paying monthly. products each with specific eligibility conditions. All of the deep-dive case study MFIs have at least one Flexible payment terms linked to cash flow. The product that allows some flexibility in establishing most common good practice product design feature payment terms. Under ADOPEM’s “Agrocrédito” mentioned in the literature is to match loan terms to product, principal payments are completely customized the harvest cycle for the crops being financed. While to the preferences and capacity of the individual farmer. the commercial activities financed by microcredit loans Interest payments must be made monthly, however. typically generate cash flows appropriate to monthly Similarly, Financiera Confianza’s AgroMix product payments, months or even years can pass between allows for either monthly or irregular payment terms, planting and harvesting of agricultural commodities, while AgroPuro (being phased out) has a single balloon making monthly payment terms problematic at best for payment of capital and interest when the loan is due. many farmers, even those with diversified incomes. The At Caja Huancayo, irregular payments are allowed, but few institutions without much experience in agricultural a balloon payment is most common. Bancamía has credit, or that for other reasons attempt to collect fixed, equal payment terms (principal and interest) of monthly payments, learn very quickly the importance of two, three, or six months under Agromía, or monthly the farmers’ cash flows. ADOPEM, for example, was payments under Credimía. In sum, the key seems to be unable to offer flexible payment terms when it began to customize the repayment terms to the cash flow (and smallholder lending, due to the limitations of its MIS. preferences) of clients. Current Practices and Lessons 17 access to finance for smallholder farmers Collateral and/or guarantee requirements vary can be registered and enforced) when there is no title; significantly. Financial institutions often require or they can be unsecured. Joint liability of a third party land or other fixed assets as collateral for agricultural (with pledgeable fixed or movable assets, or a regular loans, thus excluding a large percentage of agricultural salary) is also used. None of the MFIs visited is using producers from access to finance. The experiences of joint-liability groups (i.e., some form of solidarity our case study MFIs, and of a number of other financial group) to guarantee loans to smallholders, although institutions referenced in the desk research, however, there is some solidarity group lending for subsistence suggest that successful agricultural lending need not rely farmers. Box 2 summarizes the main forms of collateral on land or fixed assets as collateral, at least not for loans reported by the MFIs both in the survey and then in the below a certain threshold. Both the desk research and deep-dives, and the English terms the study adopts as the survey findings reveal a wide range of collateral and/ closest translation from the Spanish. or guarantee requirements in use, with requirements seemingly correlated with loan size. Loans can be As captured in the desk research, alternative types of secured with movable assets and fixed assets backed collateral, such as warehouse receipts and purchase by a clear legal title; or with movable assets (including orders, are also being used by a few MFIs. While these household items) backed by a valid pledge (i.e., one that alternatives are effective at overcoming a key obstacle Box 2. Main forms of collateral reported in the study Spanish term English term and description Garantía real (or hipotecaria) Real collateral, or fixed-assets collateral. Secured with fixed assets backed by clear legal title. Garantía prendaria Movable property collateral. Secured with pledge on movable assets, such as equipment, inventories; it may include warehouse receipts. Garantía solidaria Joint-liability collateral. Secured by a co-signer, usually someone with fixed assets or movable property to pledge. It does not necessarily imply a solidarity group, and in this study there is only one case of solidarity group lending (Financiera Confianza with subsistence farmers) Sin garantía Unsecured Source: IFC LAC MFIs in Agriculture Study survey, July 2013. 18 Current Practices and Lessons access to finance for smallholder farmers to accessing agricultural finance—lack of traditional products, including demand and fixed-term deposits, collateral—opportunities to use these mechanisms intra-bank transfers, and, in some cases, insurance with semi-commercial farmers are somewhat limited products, to meet the diverse financial needs of because of the types of crops they grow, the nature smallholder households. While these products are not of their engagement with regular buyers/markets, specifically designed for agricultural clients, there appear and/or limited infrastructure (bonded warehouses, to be unexploited opportunities for greater cross- for example). While the use of this type of collateral selling, both to maximize the profitability of agricultural appears to be increasing in Latin America, none of the clients, and to deepen the socio-economic impacts of case study MFIs is leveraging these types of alternative increasing access to finance among smallholders. collateral, although ADOPEM expects to use sales contracts as collateral in its lending to value chain actors. Five of the eight LAC MFIs surveyed offer some form of insurance to their clients. Products include Value chain finance is not widespread. While life insurance, personal accident insurance, and general value chain finance receives significant attention in risk insurance. None of the insurance products they the literature and is increasing in Latin America, there offer are specific to agricultural clients or differentiate is limited integration with buyers, input suppliers, or among the types of clients. However, both Financiera other value chain actors taking place within the eight Confianza and ADOPEM hope to introduce agricultural LAC MFIs surveyed. Two of the four case study MFIs, production insurance in the next year. however, are actively pursuing value chain finance opportunities. ADOPEM introduced a value chain Non-financial services: a valued proposition by program 1.5 years ago that has worked with three value farmers. In the LAC targeted survey, the MFIs were chains to date. For its part, Bancamía is conducting asked to identify the principal constraints to smallholder studies of several value chains of interest as a means to lending (by segment). The clearest constraint appears to mitigate risk and reduce the costs of agricultural lending, be clients’ lack of financial education, not the difficulty and plans to pilot mobile banking for rural clients in of covering costs or high default rates (in fact, none value chains in 2014. Within Financiera Confianza’s of the surveyed MFIs indicated that the latter was portfolio, there are some former Caja Nuestra Gente a constraint). Nonetheless, only four of the eight loans in which producer associations provide a partial institutions surveyed are offering financial education. guarantee for loans to their members, but this is limited Based on our small sample, the importance of financial to certain products, such as coffee, milk, and cocoa. education appears to be a key lesson learned in lending Overall, however, we found little focus on value chain to smallholders, as it appears to be a service that is finance among the MFIs surveyed. Even if there are added after the MFIs have worked with the segment commercial smallholders served by these MFIs, most for some time. By looking at the responses from the of them seem to be in loose value chains where strong India MFI survey, we see that the provision of financial linkages with large commercial buyers do not appear to education and even skill development is a key part of exist. the non-financial services offering in almost all Indian MFIs surveyed. Arguably, although MFIs are knowledgeable about their smallholder clientele, they are poorly equipped to engage While not highlighted in the survey responses as a in value chain financing because their customer base key constraint to smallholder lending, at least one of does not include the anchor firms—buyers, processors, our case study MFIs and several financial institutions aggregators—that often drive the value chain business. identified in the literature review also provide technical Leading value chain lenders in Latin America typically assistance to smallholders, either directly or through rely on cost- and risk-sharing arrangements with partnerships. Under its new value chain consolidation these anchor firms, which are the ones handling the program, ADOPEM is partnering with buyers, donors, downstream contracting and financing. To further and other actors to address smallholders’ technical engage in value chain financing, MFIs may need to go assistance, as well as financial needs. Whether and how up-market to strategically important partner clients. the provision of financial education and/or technical assistance affects the provision of smallholder lending, Non-credit products: opportunities for cross- from both an institutional performance and client selling. The MFIs surveyed—most of which are impact perspective, could be valuable areas for future deposit-taking institutions—offer several non-credit research. Current Practices and Lessons 19 access to finance for smallholder farmers Tailoring products and marketing and newspaper advertisements, as well as radio and television spots, are all commonly used, as are roving As described earlier, we see a trend among our case announcement vehicles. Massive promotional efforts study MFIs toward a single, flexible credit product. on the part of loan officers and branch staff are also More generally, whether the MFI adopts a single product common. The principal difference between urban and or multiple products, we see evidence that over time, rural/agricultural marketing efforts is in the imagery products evolve to incorporate customized terms. We used, and in the case of television or radio spots, the also see MFIs incorporating financial education once timing they show. Bancamía, for example, places spots at their lending operations are relatively established, along 5 a.m. to accommodate farmers’ schedules. ADOPEM, with substantial investment in marketing efforts. Bancamía, and Caja Huancayo all note the importance of using pictures of agricultural clients and/or activities Products evolve to incorporate more customizable in their print materials for smallholders, or highlighting terms. In each of our four case studies, the MFIs them in the “telenovelas”/ infomercials they broadcast have modified or are in the process of modifying their in their branch offices (ADOPEM and Bancamía). They agricultural lending to incorporate more customizable consider this to be an effective practice for overcoming terms (loan amounts, tenor, payment schedules, even the perception of potential smallholder clients that interest rates). This seems to reflect both system financial institutions are not interested in serving them. limitations and the learning process of the institutions, i.e., the process of getting to know the needs and payment capacity of the client. The former was the case of ADOPEM, which began with a fixed monthly Lending methods, policies, and payment schedule for agricultural loans due to the limits procedures of its MIS. Subsequent investments in the system have Three general trends stand out: the predominance of allowed ADOPEM to provide flexible payment terms. individual lending, focus of credit analysis on cash flows of the household production unit, and automation of Marketing: traditional methods and materials data capture and credit analysis. adapted to agricultural clientele. All four of the case-study institutions appear to invest heavily in Predominance of individual lending. Group lending marketing efforts, using a wide variety of print and is an approach commonly used in microfinance to electronic media tools and methods. Brochures, posters, reduce the risks and costs of lending to underserved 20 Current Practices and Lessons access to finance for smallholder farmers populations who often lack traditional collateral. A both provides a more accurate analysis of the payment handful of cases of group lending for agriculture were capacity and a true picture of the risk of lending to the found in the desk literature, including one in Latin smallholder. It also enables customizing of the payment America: FUNDEA in Guatemala, where loans were schedules to the individual ability and preferences of extended to farmer/entrepreneur groups (“grupos the smallholder borrower. asociativos”) primarily selling to export markets. It is not common among the Latin American MFIs surveyed, Automation of data capture and credit analysis. however, or among our case study subjects. Financiera Automation of data capture and credit analysis is a clear Confianza serves agricultural as well as commercial good practice trend among the four case study MFIs. (non-agricultural) clients through its group-lending ADOPEM is the only MFI with a fully automated product. However, in agriculture, the group-lending system. Data is captured in the field using a personal product is used for subsistence farmers, while AgroMix digital assistant (PDA) or smartphone with an Android- and AgroPuro, both individual credit products, are used based cash flow application. The application, in turn, with commercial and semi-commercial smallholders. It is linked to ADOPEM’s core banking system. While may be interesting to note that among the Indian MFIs data capture and analysis of commercial clients is surveyed, group lending is very prevalent and in several also automated, the efficiency gains have been most cases, co-existing with individual lending. However, significant for agricultural lending. Responsible, both group and individual loans are not specific to successful agricultural lending requires the capture agriculture but apply to other types of clients. and analysis of a greater volume of information than commercial lending and also requires loan officers to Focus of credit analysis on the household be out in the field and to cover greater distances to visit production unit. All of the case study MFIs analyze clients than other commercial loan officers. Automation the cash flow of the entire household unit, not just of of these processes has contributed to faster loan the agricultural activity to be financed, to determine application, approval, and disbursement, and enabled creditworthiness and establish loan amounts and ADOPEM to reduce the interest rate on loans of payment terms. Analyzing the cash flow of the $1,175 or less by 2 percentage points in 2013. agricultural activity allows financial institutions to match payment terms to the activity’s irregular cash flow. Given Bancamía and Caja Huancayo have semi-automated cash the diversified income generating activities of most flow tools. Bancamía captures client information in the smallholder and low-income households, analyzing field using its “Banca Portátil” system, which consists Current Practices and Lessons 21 access to finance for smallholder farmers of a tablet equipped with a modem. Introduction of approach. At ADOPEM, credit officers spend roughly Banca Portátil allows credit officers to consult the credit 90 percent of their time in the field and are required bureaus and the bank’s reserve lists while in the field, to visit their agricultural clients at a minimum monthly and respond quickly to clients regarding their credit (they usually visit more often). Since they travel daily in application. However, it has not had an impact on credit their assigned zone of operation, officers note that they officers’ productivity to date, as the limited connectivity may actually greet the farmer informally in the street in the field forces credit officers to return to a bank almost on a daily basis, which serves as a reminder to branch to submit loan applications. Both Bancamía and the farmer of his or her commitments to ADOPEM Caja Huancayo plan to improve their respective cash and contributes to the farmer feeling supported as well flow tools, integrate them into their MIS, and/or link as affording the loan officer opportunity to casually note them to their core banking systems in the next year. anything unusual about clients. With only about 3,000 Finally, Financiera Confianza has a manual cash flow clients, and 40 agricultural loan officers (a ratio of 75:1), tool but plans to introduce “BancaMóvil,” a system ADOPEM may be able to afford this approach for the similar to Bancamía’s Banca Portátil, in 2014. time being, but such a labor-intensive and probably costly approach is unlikely to be scalable. In contrast, Bancamía manages its agriculture portfolio with about Delivery approaches and channels 150 loans per credit officer, which indicates a higher operational efficiency and probably lower transaction Few differences were observed among the MFIs in costs per loan than those of ADOPEM. their delivery approaches and channels, and in the smallholder segments they serve. Direct lending is Limited but increasing use of ICT to reduce the the predominant approach for delivering financial costs and risks of agricultural lending. ICT can services to smallholders. There is limited use of agent be used in a variety of ways to reduce the costs and networks, although there is one imminent pilot among risks of agricultural lending, including for data capture our case study MFIs. Similarly, as detailed below, there and analysis and product delivery. As indicated above, is minimal—albeit growing—use of information and ICT use among the case study MFIs is limited to data communications technologies (ICT) to reduce the costs capture and credit analysis. In environments where and risks of agricultural lending. mobile-phone banking and point-of-service (card- based) transactions are becoming widespread, such as Direct to the client: direct lending vs. indirect those where the four MFIs operate, electronic delivery lending (through producer groups, buyers, of services should be an attainable target for the MFIs etc.). According to the desk research, as well as the in the sample. case studies, direct lending is the most commonly documented lending methodology or delivery approach Many of the survey respondents list a lack of appropriate for reaching semi-commercial smallholders. This is delivery channels as one of the main constraints accomplished through mobile loan officers who travel to smallholder lending. Use of branchless banking from traditional bank branches to rural clients, typically appears to be an underutilized channel for reaching following an established routine and itinerary. Financing rural and agricultural clients. While the targeted survey smallholders through input suppliers and buyers is also reveals that five MFIs have agent networks, at least two common in the literature (“through lending” or “third- of those networks are located in urban and peri-urban party financing”). This modality, however, much like areas. Caja Huancayo appears to have rural agents value chain finance, was practically non-existent in our within its network. Financiera Confianza has a pilot four case studies. Even where the MFIs are leveraging designed to establish a small network of rural agents value chain relationships, they are disbursing loans in 2014. In the Dominican Republic, a law allowing use directly to smallholders. of non-bank agents has just taken effect. ADOPEM has applied for approval to introduce agents, although Reliance on branches with mobile loan officers. its pilot efforts will initially target urban areas. As agent Seven of eight survey respondents list this approach networks in rural areas become more common and to service delivery, as do all four of our deep-dive expand, mobile banking may become more common. case study MFIs. While this contributes to the close While none of the survey respondents are using mobile monitoring of clients, it also contributes to the high banking for financial transactions at present, Bancamía cost of agricultural lending. Assigning mobile officers to has plans to pilot mobile banking with targeted rural clear, distinct operational zones can create efficiencies value chains in 2014. and other positive externalities in this labor-intensive 22 Current Practices and Lessons access to finance for smallholder farmers Institutional Performance connection can be made with their agricultural activity, given the relatively low percentage of agricultural finance in their portfolios and the fact that none of Profitability and sustainability them keeps track of costs and revenues specific to their According to our survey respondents, covering costs agricultural lending. and generating profits are both feasible in smallholder lending. However, given the limited availability of Few MFIs are costing their agricultural lending profitability data specific to smallholder credit products activities. While several of the deep-dive case study and portfolios, both in the literature and among the MFIs note that agricultural lending can be expensive, deep-dive case study MFIs, it is not possible to assess all consider their agricultural portfolios profitable. the actual profitability of agricultural lending directly. ADOPEM notes that the profit margin is narrower for Nonetheless, a review of performance data at the the agricultural credit than the commercial portfolio, institutional level, and the delinquency rates of the with a rough estimate placing it around 4 percent to smallholder lending portfolios of the deep-dive case 6 percent. Senior management at Bancamía similarly study MFIs, provide some insight into the profitability considers its rural and agricultural products profitable, and sustainability of agricultural lending operations. although not with large margins. According to the Although crop-related (systemic) shocks and over- business manager of Caja Huancayo, agricultural credit exposure to those crops may make the delinquency is among its most profitable products. rate for agricultural lending spike from time to time, in general, the case study MFIs have been able to maintain However, only three of the eight LAC MFIs surveyed low delinquency rates, an essential element of profitable reported having MIS that help them monitor the costs agricultural lending. of serving agricultural or rural clients. ADOPEM introduced costing last year. Bancamía is not costing, but MFIs that lend to the agricultural sector can be plans to systematize a cost management structure at a profitable. Information on portfolio performance later date. Financiera Confianza is developing its costing that can help assess profitability and sustainability of a capacity, and can cost branches, but not its products. financial product is documented on a very limited and Caja Huancayo costs product lines at a broad level (i.e., inconsistent basis in the literature on agricultural lending. savings, credit, insurance), but not individual products, The cases presented in CGAP and the International such as agricultural lending. Overall, we find that the Fund for Agricultural Development (IFAD) (2006) MFIs surveyed lack data to enable them to cost their provide some useful information on return on assets, agricultural products and determine their profitability. return on equity (ROE), operational self-sufficiency, and financial self-sufficiency, and demonstrate that even In the absence of cost data, it is not possible to institutions with 50 percent or more of their portfolio assess the profitability of MFIs’ agricultural lending in agricultural lending can be profitable and sustainable. operations. Interestingly, on the revenue side, the Although all of our deep-dive MFIs display positive interest rate on agricultural loans is sometimes higher sustainability and efficiency levels (see table 5), no than and sometimes lower than the interest rate for Table 5. MFI sustainability and efficiency ADOPEM Bancamía Financiera Caja Huancayo Latin America & Confianza* Caribbean average (weighted average) Return on assets 5.9 5.1 1.4 2.8 2.1 Return on equity 23.9 20.8 8.4 17.5 12.5 Profit margin 20.0 24.7 N/A 20.1 13.9 Operational self-sufficiency 125.0 132.8 N/A 127.1 116.3 Operating expense/loan portfolio 28.7 19.3 N/A 11.7 14.3 *Data for Financiera Confianza is as of September 30, 2013 reflecting institutional performance after the merger with Caja Nuestra Gente. All data for the other institutions are from December 31, 2012, the reporting period offering the most complete data set from MIX Market. Current Practices and Lessons 23 access to finance for smallholder farmers microcredit loans. Again, in the absence of cost data, it Risk management is not possible to evaluate if these interest rates allow for cost recovery, although the management of the MFIs Agricultural lending risks are diverse and need to be surveyed mentioned that interest rates make lending to mitigated in a variety of ways. Current risk mitigation the agricultural sector profitable. practices include (1) intensive, field-based client monitoring; (2) limitations on the number of loans Low delinquency rates that support profitability are per credit officer; (3) portfolio diversification (by achievable. Data from our survey respondents suggest clientele, geographical location, sector, and/or crop); that in the absence of systemic events, delinquency (4) leveraging of credit bureaus and credit scoring; (5) rates are comparable for smallholder agricultural and use of “real” collateral (i.e., secured with legal title on commercial lending (sometimes lower, sometimes fixed assets and certain movable assets); and (6) use of higher, although generally not by much). This counters insurance products. A number of MFIs also use external the belief that farmers are inherently bad payers, even portfolio guarantees to reduce their credit risk. in environments where highly subsidized agricultural credit has been and is available (the Dominican Republic Intensive, field-based client monitoring. To manage and Perú, for example) and debt forgiveness programs agricultural lending risk, a pre-emptive monitoring exist (Perú). In five of the six surveyed LAC MFIs approach is generally considered a necessary complement that provided data on the delinquency rates of their to careful credit analysis. However, in establishing the smallholder lending portfolios (as of March 31, 2013), optimal frequency of field visits, MFIs must balance the the portfolio at risk over 30 days was within 3 percent associated costs against the risk benefit. ADOPEM credit to 5 percent, except in one case where it was higher. officers visit clients at least monthly to ensure the loan Three of the four deep-dive case study MFIs also fell is being used as intended and good production practices approximately within this range. The fourth did as well, are being followed. The effectiveness of ADOPEM’s until a recent crop disease common among its clients intensive loan monitoring seems to be supported by the led to a spike in the delinquency rate. low delinquency rate of the smallholder loan portfolio. Credit officers at Bancamía are required to visit clients As indicated in table 6, the delinquency rate for with investment (fixed asset) loans and working capital smallholder loans at ADOPEM was 2.7 percent, more loans with quarterly or semi-annual payment terms at than a percentage point less than the overall portfolio least one month before a payment is due. In addition, delinquency rate of 3.8 percent as of September 2013. branch managers are required to visit at least 20 percent For Bancamía, the difference was 0.9% in favor of the of agricultural clients monthly, while the rural banking smallholder portfolio (4.5% versus 5.4% in the total management team visits a random sample of that 20 portfolio). At Financiera Confianza, the smallholder percent. At Caja Huancayo, credit officers visit clients at lending delinquency rate was 5.4 percent as of least 60 days and 30 days before the loan is due to assess September 2013 (4.8 percent for the total agricultural yields. In the case of Financiera Confianza, proactive portfolio), versus 3.3 percent for the overall portfolio. agricultural loan monitoring and management recently Caja Huancayo’s smallholder lending delinquency rate helped prevent a significant deterioration in its portfolio spiked recently, reaching 12.5 percent at the close of quality when coffee rust disease threatened Peruvian September, up from 4.9 percent in July (due to the smallholders’ coffee production. Staff conducted a coffee rust disease that affected the crop and therefore preemptive review of all their coffee loans by visiting loan repayments). The overall portfolio delinquency is most clients that grow coffee, established the nature and 3.88 percent. Table 6: Portfolio at risk > 30 days (September 30, 2013) Institution Smallholder agricultural portfolio (%) Total agricultural portfolio (%) Total portfolio ADOPEM 2.7 N/A 3.8 Bancamía 4.5 N/A 5.4 Financiera Confianza 5.4 4.8 3.3 Caja Huancayo 12.5 N/A 3.91 1 July 31, 2013. 24 Current Practices and Lessons access to finance for smallholder farmers extent of the disease on the plantations, and designed Leveraging of credit bureaus and internal credit plans to repay the loans through production from ratings. ADOPEM, Bancamía, Financiera Confianza, existing healthy stock or other sources of income. and Caja Huancayo all consult credit bureaus to control for risk at the client level. Bancamía and Financiera Limitations on exposure to specific crops. Limiting Confianza also use internal credit rating systems and exposure to individual crops can also be used to do some pricing for risk as clients with higher scores mitigate the systemic risks associated with agricultural may be eligible for interest rate reductions. Financiera lending. Within our group of case study subjects, none Confianza introduced credit rating approximately seven are limiting their exposure to individual crops directly. years ago to promote client loyalty through better Certain MFIs in LAC with relatively higher exposure rates and loan terms for good clients. While the rating to coffee have witnessed increased NPLs because of system has been adapted over the years, it rates clients coffee rust disease. At the same time, limitations in MIS according to their tenure as a client, average payment and lack of awareness on the part of some of the MFIs history, credit bureau credit score, and the number of may inhibit their ability to monitor these exposures in institutions from which the client borrows. real time. In the case of MFIs like ADOPEM, with regional or national coverage, exposure to individual Under Bancamía’s credit rating system, the borrower is crops at the branch level is balanced through regional rated based on credit repayment history and tenure with diversification: ADOPEM has branches throughout the bank; clients with higher ratings are candidates for the Dominican Republic, representing the country’s better than average loan renewal and loan rescheduling diverse agricultural zones. terms and conditions. Clients in rural areas are given slightly more leeway than urban clients in terms of Portfolio diversification and exposure limits. qualification for these grades. For example, a rural client Portfolio diversification, an important risk mitigation can be up to eight days late with a payment and still qualify strategy for any financial institution, is particularly for the highest score possible. In comparison, an urban important for institutions engaged in agricultural client must pay within four days to receive that rating. lending, and is a hallmark of many of the MFIs with successful agricultural lending programs highlighted Conservative approach to establishing loan in the literature. MFIs can diversify based on a variety amounts. Another beneficial and common practice of factors, such as clientele (large, small), geographic for mitigating risk is conservative estimation of cash regions, and sectors (agricultural, commercial). flow as the basis to set the qualifying loan amount. Institutions such as CMAC Sullana in Perú diversify Caja Huancayo and Financiera Confianza use a very their portfolios by creating institutional policies setting conservative scenario when estimating crop yields and a maximum percentage that can be concentrated in prices. ADOPEM bases cash flow on average crop agricultural lending. Similarly, Financiera Confianza prices over the previous 12 months. While this approach limits the size of its agricultural portfolio relative to its helps to mitigate credit risk for both the MFI and the level of institutional equity, and Caja Huancayo caps individual, it can also result in loan amounts that are total agricultural lending to no more than 5 percent of lower than clients’ expectations—which was noted by its outstanding portfolio. For its part, Bancamía limits farmers during the focus group discussions. the concentration of lending in any given activity to no more than 20 percent of the outstanding portfolio. Use of real collateral. Not surprisingly, use of portfolio While ADOPEM has not established a cap on diversification techniques, credit bureau reports, and agricultural lending, the bank stresses the importance internal credit ratings does not eliminate the need for of portfolio diversification (between agricultural and real collateral for “large” loans. ADOPEM requires real commercial loans) both at the bank and individual credit collateral for loans of more than $1,175 (and an individual, officer levels. Finally, a number of MFIs are diversified solidarity guarantee for lower amounts). Financiera regionally, which can help to mitigate systemic risks, Confianza requires collateral guarantees for loans of such as extreme weather or natural disasters, as well. For more than $7,184, however, it does not require collateral example, BANRURAL, a large rural bank reviewed in the with clear legal title for loans of less than $21,550. Caja literature, operated in every department in Guatemala Huancayo takes a similar approach, requiring secured with an average of 15 branches per department, which collateral for loans of more than $10,775. minimizes the portfolio risks of weather and natural disasters (Trivelli and Tarazona 2007). Current Practices and Lessons 25 access to finance for smallholder farmers Use of insurance products. ADOPEM, Financiera somewhat common, but does not appear to be a Confianza, and Caja Huancayo all offer credit life significant obstacle (as traditional thinking goes), at insurance. This life insurance is mandatory for least not for these particular MFIs. As the case study ADOPEM clients with loans of more than $1,175. All MFIs report, smallholders are not only interested in low Financiera Confianza clients receive a policy when they interest rates. In Perú, Financiera Confianza reports that take out a loan. Financiera Confianza also has some its ability to process loans within three business days experiences in portfolio insurance to guard against the (significantly faster than the state development bank, systemic risks of the El Niño phenomenon. which takes at least one month), allows it to compete with the development bank’s lower interest rate. Similarly, Use of external portfolio guarantees. Bancamía and Caja Huancayo reports that rural clients are aware of Financiera Confianza have both availed themselves the lower rates offered by the agricultural development of guarantee funds to protect themselves against bank, but prefer the rapid service, minimal paperwork, the risks of lending to the agricultural sector. Both and friendly interaction with staff offered by the Caja. have received United States Agency for International In the Dominican Republic, ADOPEM reports a similar Development (USAID) Development Credit Authority phenomenon. While ADOPEM lowered its interest (DCA) guarantees, covering up to 50 percent of the rate for semi-commercial smallholders by 2 percentage loss of agricultural loans. The DCA guarantee allowed points—partly to compete with the lower rates offered Financiera Confianza to reduce its interest rate on by the agricultural development bank—the MFI reports agricultural loans, reflecting the reduced risk to the that its agricultural credit product remains profitable MFI of lending to the sector. Bancamía is also using and attractive to its clientele. Colombian governmental guarantee funds, including the Fondo Nacional de Garantías, although these do not apply to agricultural credit. External support According to our research, many MFIs have been able to successfully serve smallholders with external funding Enabling Environment and and/or technical assistance from multilateral or bilateral External Support donors and other organizations. Five of the eight LAC MFIs surveyed have received or continue to receive support for expansion into rural or agricultural markets: Enabling environment ADOPEM, Bancamía, Financiera Confianza, WWB The enabling environment can be an essential element Popayán, and CMAC Sullana. Bancamía and Financiera for the success of financial institutions in reaching Confianza both have USAID DCA guarantees. In the smallholders, but it is not mentioned in most of the case of Financiera Confianza, the guarantee allowed the desk review examples and was not a main focus of this MFI to lend to smallholders at a lower rate than it would study. Yet, certain key points are worth noting in the have otherwise, as a result of the lower risk. Other areas findings. Both the eight LAC survey respondents and where external support is reported include technical four deep-dive case study MFIs split 50/50 on whether assistance for product design, MIS adaptations, staff the regulatory environment represents a challenge training, and market research. to smallholder lending. Interestingly, MFIs operating in the same country come down on different sides While much of the funding and technical assistance of the issue. Regardless of whether our case study appears to have been provided for start-up operations MFIs indicated that the regulatory environment was a and guarantee funds, it is unclear how much of the challenge, it did not appear to be a major factor limiting success of these MFIs is owed to such support. Almost the success of their lending programs. This may be an all MFIs surveyed found that support from external indicator of advances in the regulatory environment in institutions was critical in launching agricultural many countries in the last decade, including elimination lending. Rural training programs for microfinance of interest rate caps and other policies that hindered loan officers, assistance in development of mobile agricultural finance. banking/delivery channels, product needs assessment, and specific product design were considered among the Subsidized lending from agricultural development important areas of external support that helped them banks, the one specific enabling environment challenge with their decision and ability to enter the smallholder mentioned by our deep-dive case study MFIs, remains lending market. 26 Current Practices and Lessons Conclusions and Next Steps T his study aimed at identifying lessons and insights emerging from the work of MFIs that have implemented agricultural operations with smallholders in LAC. The study purposefully approached MFIs with an interest in and actively it is critical to understand the cash flow of smallholder households in order to design appropriate loan terms and risk management strategies. It is necessary to consider not only the profile of loan officers managing agricultural loans, but also whether specialized staff is operating with smallholder farmers, using loan products needed in the risk management or other departments. designed for that clientele. The practices highlighted Where loan officers manage both agricultural and below, and their implications, are therefore to a large commercial loans, MFIs need to consider how officers extent determined by the context in which this selected will be remunerated and incentivized to maintain group of MFIs operates, the types of farmers they serve, a focus on sound agricultural lending. In addition, and the agricultural and rural activities these farmers it is necessary to evaluate and determine how the carry out. Many MFIs—in LAC and elsewhere—may unique and diverse risks of agricultural lending will see different degrees of contextual similarity with those be mitigated. In the remainder of this section, we this study analyzed, and thus will find the products, summarize good practices related to these and other practices, systems, and processes of this small group of program and product design elements. interest, and perhaps consider them useful benchmarks for their own operations. Others, however, such as Knowledge of the client. While all lenders should those surveyed in India, will see themselves functioning know their clients, it is particularly critical for financial in substantially different environments, and for these institutions entering the smallholder lending market to the findings and conclusions of the study would serve understand the differences between their traditional as a frame of reference, albeit not necessarily a path to urban and rural clientele, and smallholder farmers. follow in the near future. The irregularity of agricultural cash flows calls for distinct product terms and risk management strategies. Understanding the diversity of the smallholder market is also highly valuable for further customizing Good Practices and Success product terms, delivery channels, and risk management Factors approaches. Knowing your client involves not only This section provides a summary of established and up-front market research to inform product design, emerging good practices—identified through the desk but also ongoing attention to client feedback and a research, targeted survey, and deep-dive case studies— commitment to being a learning organization and to that MFIs interested in entering the smallholder adapting products. lending market should consider. Agricultural lending is inherently risky, and it becomes more challenging Flexible products. Smallholder lending is not one when working with small farmers, particularly those size fits all. Some smallholder households have highly with weak ties to buyers and/or lower value crops. As diversified income streams, while others do not. Crop described throughout this report and highlighted below, cycles can vary significantly. In order to meet the diverse Conclusions and Next Steps 27 access to finance for smallholder farmers needs of smallholders, and manage risk effectively, this the targets for agricultural and commercial portfolios variability needs to be addressed through adaptation may be valuable for MFIs interesting in incentivizing of loan tenor, disbursement, and payment terms to the agricultural lending. Establishing distinct targets for diverse profiles of smallholder borrowers. the two portfolios, and/or adjusting the agricultural targets for seasonal variations, may help prevent credit Cash flow analysis of the household production officers from favoring commercial loans—which are unit. Analyzing the cash flow of the agricultural activity easier to disburse and monitor—and minimize staff to be financed allows financial institutions to match rotation by ensuring that agricultural credit officers are payment terms to the irregular cash flow of that activity. compensated more consistently throughout the year. Given the diversified income generating activities of most smallholder and low-income households, Automation of data capture and credit analysis. analyzing both agricultural and non-agricultural cash Prudent agricultural lending requires the collection and flows provides a more accurate picture of the repayment analysis of a significant amount of client, production, capacity and true risk of lending to the smallholder. and price data. Investments in the automation of the data capture and analysis process—including use of Diversified risk management tactics. Agricultural ICT for data collection in the field and integration of lending risks are diverse and need to be mitigated cash flow tools with the core banking system—can in a variety of ways. Tactics used by our case study reduce errors, increase efficiency, and support faster subjects to good effect include close, field-based client portfolio growth. monitoring; portfolio diversification (by clientele, geographic locations, crop, and/or sector); conservative Marketing materials customized to reflect the cash flow analysis (projecting crop yields and prices target market. MFIs use a diverse range of media that are lower than best-case scenario); use of credit to market their products to this traditionally excluded bureaus and credit ratings; and requirement of different population, incorporating images of their targeted types of collateral (commensurate with loan size). clients in their marketing materials. This can help to While agricultural production insurance is another overcome the mistrust smallholders often have of potential risk mitigation technique, our deep-dive MFIs financial institutions and their presumption that these demonstrate that it is possible to successfully lend to institutions are not interested in serving them. this sector without this protection. High-level institutional buy-in. Successful Specialized credit officers. For the most part, both smallholder lending requires approaches that are distinct the literature and our case study analysis support the both from general microcredit and commercial lending. importance of hiring credit officers with an academic It requires products tailored to the irregular cash flows and/or practical background in agriculture, or an that characterize agricultural activities, specialized staff agriculture-related field. Where labor markets make it and/or training, close monitoring of individual loans challenging to find individuals with this profile, such as and the portfolio as a whole, and a willingness to adjust in the Dominican Republic, establishing relationships and adapt practices and approaches over time. All of with universities and technical institutes specializing in this also requires different mindsets and investment agriculture can be an effective way to identify and recruit in new tools and systems; in short, it requires a strong qualified candidates. Whether or not specialized credit institutional commitment that starts at the top and is officers are hired, specialized training for loan officers maintained at all levels. managing agricultural loans is critical. Introduction of additional specialized staff positions to support Strong customer service orientation. The analysis of portfolio quality may also be necessary. the experiences of the four MFI case studies suggest that by providing rapid loan processing and disbursement Adaptation of loan officer remuneration to and personal attention to clients, MFIs can compete incentivize smallholder lending. While each MFI takes effectively with agricultural development banks running a different approach, the experiences of three of the four subsidized credit programs. deep-dive case study MFIs suggest that differentiating 28 Conclusions and Next Steps access to finance for smallholder farmers Taking MFI Smallholder Introduce or expand product costing to more accurately assess the profitability of smallholder Lending to the Next Level lending. While all four case study MFIs consider their This section presents a series of recommendations agricultural lending operations profitable, in most cases, addressing the remaining challenges to and opportunities product-level profitability data is not available. Product for expanding smallholder lending. While these costing could better inform discussions around product recommendations may be particularly relevant for MFIs design, loan procedures, and sales and risk management already successfully engaged in smallholder lending, any strategies, and likely lead to additional innovation. For MFI considering lending to the sector may also wish to example, through improved costing, some MFIs may incorporate these concepts. find that their agricultural lending is less profitable than thought, which might lead to new thinking Consider risk-based pricing for crops and around delivery channels (to reduce costs) or cross- products. There is some degree of risk-based pricing selling strategies (to increase the overall profitability occurring within our case study MFIs. However, this of smallholder clients). Alternatively, discovery of activity primarily focuses on the repayment history of higher-than-expected profitability might lead to further the client—those with a strong repayment history may expansion of smallholder lending. receive a lower interest rate. There does not appear to be pricing based on the distinct risks associated with Evaluate opportunities for cross selling. Cross different crops and financial products. Introducing selling is quite limited and consists primarily of selling risk-based pricing for crops and products might lead to life, accident, and funeral insurance with the loans. lower rates for certain combinations of clients, crops, Taking a more holistic approach to smallholder clients geographies, or financial products. It might also lead could support both MFIs’ mission in serving this sector to higher rates but greater risk coverage, as projected and their commercial objectives. Like other vulnerable interest income should better compensate in cases of groups, smallholders require a broad range of financial higher probability of default and potential for loss. products and services (such as consumer or education loans, savings, transfers, and insurance) to reduce their Conclusions and Next Steps 29 access to finance for smallholder farmers vulnerability and support their economic advancement. At the same time, cross selling can improve profitability Implications for Donor at the individual client level. Involvement The study findings underscore areas of technical Explore opportunities to introduce or expand assistance and other forms of donor support that may value chain finance. Value chain finance, which can affect MFIs’ effectiveness in reaching smallholders. be used to reduce the costs and risks of agricultural They also highlight areas in which further research may lending, is not widespread among the MFIs surveyed. be warranted. Importantly, value chain finance could be used to serve “missing middle farmers”—commercial smallholders in existing value chains that may be too small for banks Technical Assistance and Training to finance but larger than MFIs’ typical clients. This Design and implementation of market research can allow MFIs to both diversify their clientele and and demand and supply analyses. Understanding reach larger groups of smaller farmers more efficiently. the differences between their traditional clientele The latter could be done by, for example, integrating and smallholders, as well as the differences between smaller farmers into value chains or by lending to smallholders themselves, is essential to developing smallholders through a larger buyer. Value chain finance appropriate products and programs. tends to work better with tight value chains, where the relationship between the buyer and smallholders is close Product design and piloting. By providing critical and the possibility of side selling is negligible (e.g., in know-how and reducing the cost and risk of new the sugar sector). However, in tight value chains, MFIs product development, donors can encourage both new would likely be competing with banks that may lend market entrants and product innovation in MFIs already indirectly through the lead buyer (e.g., the sugar mill). lending to the sector. Nevertheless, there could be opportunities to finance smallholders in dairy, poultry, fruits and vegetables, and Systems improvements—adaptation of MIS/ higher value cash crops, using appropriate aggregation core banking systems and automation of data models for smallholder farmers. capture and analysis. Management information, or core banking, systems and other tools for data Explore lower-cost delivery channels. Agent and capture and analysis often require costly adjustments ATM networks, mobile phone banking, and debit to accommodate the tailored credit assessment and cards can all be used to reduce the costs of lending to portfolio monitoring requirements and loan repayment rural and agricultural clients, while making it easier for schedules of agricultural lending. clients to access financial services. While a number of initiatives are underway among the MFIs surveyed, the Design of staff incentive plans. Setting appropriate use of these alternative channels is still minimal. staff incentives for agricultural lending is essential for achieving growth and portfolio targets, particularly Consider introducing or expanding availability of when loan officers manage mixed portfolios of long-term financing for asset acquisition. Long- agricultural and commercial loans. The distinct term cash crops and investments in productivity- requirements and risks of agricultural and commercial enhancing tools and equipment require long-term loans and the seasonality of agriculture make setting finance. However, while both working capital and fixed targets for agricultural lending complex, particularly for asset loans are available, MFIs seem to focus more on new market entrants. short-term financing. To meet the investment needs of smallholders, MFIs may wish to consider evaluating Introduction of product-costing practices. Clear their maximum loan terms and lending methodologies. costing can help MFIs identify the need for cost- One option for mitigating the risk of long-term finance reducing modifications to their lending methodologies, is to leverage value chain relationships associated with price products appropriately, and inform sustainability perennial crops and/or anchored by large manufacturers strategies. The increased availability of information on and exporters. Working in partnership with a large the cost of diverse agricultural lending models may also manufacturer helps reduce the risk of these loans by help to make the business case for new market entrants. ensuring that smallholders receive technical assistance (from the manufacturer) and have a guaranteed market for their products. 30 Conclusions and Next Steps Design and piloting of new delivery channels. The lack of appropriate delivery channels is one of the principal challenges to smallholder lending, according to the MFIs surveyed for this study. Assistance in this area could have a significant impact on the size and profitability of agricultural lending programs. Support for financial education programs for smallholders. The LAC MFIs surveyed for this study identified lack of financial education as a main constraint to smallholder lending, yet few are offering these services. Support for design or expansion of financial education programs may be worth considering. Potential Areas for Further Research The study revealed a number of additional research topics to build upon and broaden the existing knowledge base on effective smallholder lending. The topics are outlined below. Access to finance for smallholder agricultural producers in Africa, Asia, and the Middle East. Replication of this research study globally would allow for regional comparison, identification of more successful experiences in lending to semi-commercial smallholders and profitability in smallholder agriculture. Additional and subsistence farmers, and greater generalization research on both the diverse reasons that MFIs are regarding good practices. Our desk research found that not providing long-term credit, and the methods and most of the research in Asia focused on India, while experiences of those that do venture into long-term in Africa, the research was concentrated in East Africa. lending, could help identify effective practices and Focusing on a broader range of countries and sub- encourage greater long-term lending. regions could contribute significantly to the literature. Agricultural production insurance. None of the Follow-up research on promising smallholder initiatives. LAC MFIs surveyed is providing agricultural production A key limitation of the current literature is that it insurance. Given the inherent riskiness of agricultural often focuses on innovative lending programs in their lending, documentation and dissemination of early stages of operation. Additional research on successful models for providing agricultural production these initiatives, once they have matured, is needed to insurance—specifically to smallholders—could lead draw conclusions regarding the scalability of diverse to product replication and innovation, and ultimately agricultural lending approaches. contribute to expansion of smallholder lending. Lending to subsistence farmers. Most of the Profitability of smallholder lending, directly or existing literature on lending to smallholders focuses on through third parties. Research directed at costing commercial smallholders, with much less focus on semi- diverse MFI agricultural lending products and programs commercial smallholders and almost no coverage of could contribute a great deal to our understanding lending to subsistence farmers. Further field studies to of sustainable lending models, including the relative analyze lending practices to this market segment would cost-effectiveness of direct lending relative to lending be important. through anchor firms. This research would explore why, in any given market, one MFI chooses to pursue value Long-term finance for smallholder farmers. The chain finance and another does not, and could provide scarcity of long-term financing for investing in fixed insight into methods through which value chain finance assets and cash crops with long gestation periods is could be promoted. an often-cited factor inhibiting greater productivity Conclusions and Next Steps 31 access to finance for smallholder farmers Role of government and donor guarantee programs in encouraging agricultural lending. It is not uncommon that MFIs, along with other financial institutions, benefit from government and/or other types of guarantees aiming at promoting lending to the agricultural sector. While there are descriptions of the various government and donor guarantee plans, there is relatively little to assess their impact. Research could shed light on the effectiveness and performance (e.g., additionality and costs) of the guarantee schemes in promoting lending and ensure the sustainability of an agricultural lending system in the long run. The research should be able to determine the elements of good design for such guarantees. Related to this, there should be an examination of the impact of government policies that set minimum portfolio lending targets for agricultural lending, such as in India. 32 Conclusions and Next Steps Case Studies I n this section, we present the complete case studies for Banco ADOPEM (the Dominican Republic), Bancamía (Colombia), Financiera Confianza (Perú), and Caja Huancayo (Perú). In the tables below, we provide a snapshot of the lending operations and overall institutional performances of the four MFIs. Their case studies follow. Table. 7 Agricultural loan portfolios by MFI (September 30, 2013) ADOPEM Bancamía Financiera Confianza Caja Huancayo Clients Total number of clients 174,082 544,782 226,956 155,261 Number of smallholder clients 3,638 57,433 24,363 5,405 Portfolio Outstanding loan portfolio $78,556,656 $484,063,638 $465,070,386 $427,560,803 Portfolio in smallholder agriculture (%) 2.7% 14% 10.6% 3.9% Portfolio at risk > 30 days 3.8% 5.4% 3.3% 3.9% Total portfolio Agricultural clients N/A N/A 4.8% N/A Smallholder clients 2.7% 4.4% 5.4% 12.5% Source: case studies. Case Studies 33 access to finance for smallholder farmers Table 8. Institutional performance by MFI (December 31, 2012) ADOPEM Bancamía Financiera Caja Huancayo Latin America & Confianza* Caribbean** Outreach Number of loans outstanding 159,718 451,259 230,543 155,241 59,957 Gross loan portfolio $73,213,365 $524,490,177 $465,739,551 $418,765,004 $93,751,423 Average loan balance per $458 US$1,291 $2,052 $2,722 1,679 borrower Average loan balance per 8.8% 21.4% 40.5% 53.7% 36.6% borrower / GNI per capita Sustainability/Profitability Return on assets 5.9% 5.1% 1.4% 2.8% 2.1% Return on equity 23.9% 20.8% 8.4% 17.5% 12.5% Profit margin 20.0% 24.7% N/A 20.1% 13.9% Operational self sufficiency 125.0% 132.8% N/A 127.1% 116.3% Operational efficiency Operating expense/ loan 28.7% 19.3% N/A 11.7% 14.3% portfolio Personnel expense/ loan 16.8% 10.0% N/A N/A 6.2% portfolio Borrowers per staff member 183 154 94 125 125 Loans per staff member 183*** 171 96 126 147 Portfolio quality Portfolio at risk >30 days 4.1% 4.3% 4.2% 4.7% 5.5% Write-off ratio 0.7% 3.9% N/A N/A 2.8% * Source: MixMarket Data. Data for Financiera Confianza as of September 30, 2013, reflecting indicators after merger with Caja Nuestra Gente. All indicators from other institutions as of December 31, 2012. **Weighted averages. *** 420 per credit officer 34 Case Studies access to finance for smallholder farmers In the near term, ADOPEM is increasing the flexibility of its agrocrédito product, with the introduction of a single balloon payment at loan maturity, and is piloting Case 1: a long-term credit product. To better meet the broader Banco ADOPEM, range of needs of rural and agricultural clients, the bank also hopes to introduce a preventative health insurance the Dominican Republic product, and is speaking with local insurance providers about establishing a price point appropriate to the MFI’s Background clientele as well as an agricultural insurance product. An The Dominican Republic falls in the average range for initial study to assess the viability of introducing the LAC for percentage of the adult population with an latter was scheduled for late 2013. account at a formal financial institution (38 percent in the Dominican Republic, 39 percent average in LAC), In the future, ADOPEM plans to introduce loan but the country ranks among the lowest in the region products for agricultural SMEs. The bank also plans for agricultural credit per inhabitant. Smallholders, in to work more with agro-industry and other actors particular, have difficulty accessing credit, especially in value chains to overcome the bottlenecks that with appropriate terms. Banco ADOPEM, a leading affect agricultural productivity and incomes for all Dominican MFI, is working to fill this gap. stakeholders, but particularly smallholders. Banco ADOPEM has its origins in the NGO ADOPEM, While ADOPEM’s targeted agricultural lending which was founded in 1982 to promote the economic program is relatively new, and the portfolio is still development of Dominican women through access to small—3,638 clients representing approximately 2.1 training and credit. After nearly 20 years operating as an percent of the total portfolio as of September 30, 2013 NGO, ADOPEM’s leadership concluded that it could (See table 9)—the high growth rate of the portfolio, better achieve its mission to increase banking services and its low delinquency rate, are indicators of its initial to the poor as a regulated, deposit-taking bank, while success. According to bank staff, agricultural credit is retaining the NGO. In 2003, the NGO purchased a small their fastest growing product. The delinquency rate for bank and in December 2004, Banco ADOPEM received the smallholder agricultural portfolio is 2.7 percent, authorization to operate as a savings and loan bank with compared to 3.8 percent for the non-agricultural a mission to promote the development of Dominican portfolio. families by incorporating them into the formal economic and financial system. The NGO ADOPEM, a primary shareholder in Banco ADOPEM, along with the BBVA Microfinance Foundation, continues to operate as an NGO, collaborating with Banco ADOPEM through support for training to the bank’s clients. Seeing a market opportunity in underserved rural areas, and as part of its mission, Banco ADOPEM began lending to agricultural smallholders in 2009. ADOPEM has one principal but highly flexible agricultural loan product, agrocrédito, which allows for payment schedules based on each smallholder’s preferences and payment capacity. However, this credit product is only one element in an integrated long-term strategy for serving agricultural smallholders, and the agricultural sector more broadly, with a comprehensive package of financial and non-financial services. This package includes financial education and micro-insurance (life, accident, and funeral expenses), and an incipient value chain consolidation program for high potential crops, as well as a savings product that is accessible to low-income households in both urban and rural areas. Case Studies—Banco ADOPEM, the Dominican Republic access to finance for smallholder farmers Table 9. ADOPEM portfolio composition (September 30, 2013) Total Microcredit SME portfolio Other portfolio Micro/ SME portfolio agricultural portfolio Number of active loan clients 174,082 167,661 265 2,518 3,638 Number of loans outstanding 174,082 167,661 265 2,518 3,638 Portfolio outstanding ($) 78,556,655 71,702,323 2,292,003 2,414,752 2,147,579 Portfolio at risk (>30 days) 3.8% 3.9% 3.3% 0.5% 2.7% Source: IFC LAC MFIs in Agriculture Study survey, July 2013. Products and Approaches portfolio and efficiency gains in its operations resulting from automation of client data collection and analysis. Segments and Products ADOPEM’s credit products and programs specifically Interest payments must be made monthly. Principal for the agricultural sector include agrocrédito and the payments, however, are programmed according to the value chain program. In both cases, loans are disbursed payment preferences and capacity of the individual directly to individuals, not groups. farmer. For loans up to $1,175, ADOPEM typically requires only a solidarity guarantee (an individual Agrocrédito. The agrocrédito product is available for guarantor). However, for larger amounts, or where there both commercial and semi-commercial smallholders, are concerns about a given client, the Bank requires with the loan amounts and payment terms adapted to movable property collateral. the individual farmer. The product allows for a loan term of up to 12 months for both working capital Value chain program. The value chain program and fixed asset loans. Loan amounts vary from $470 focuses on value chains and/or crops with significant to $1,175 for semi-commercial farmers, to $1,175 to market potential and potential for the incorporation of $2,350 for commercial farmers. The interest rate is 32 smallholders with approximately one hectare of land. percent for loans up to $1,175 and 34 percent for larger This is a new program and ADOPEM has worked with loans. In comparison, their interest rate for rural clients only three value chains to date. While loans under this not engaged in agricultural activities is 38 percent. program will ideally use sales contracts as collateral, this The lower rates for agricultural loans are attributed to is not a requirement. In addition to financial support, the need to compete with the highly subsidized rates the program provides technical assistance and training, offered by the Dominican agricultural development as needed, by value chain actors in partnership with bank, (Banco Agrícola and the Special Fund for external partners, such as processors and technical Agricultural Development), and are possible due to the consultants. According to a representative of the Spanish low delinquency rate of ADOPEM’s agricultural loan organization, CODESPA Foundation, which is working with ADOPEM on this program, ADOPEM originally tried to manage both the financial and non-financial aspects of the value chain program itself. However, it found that this did not work well, as evidenced by the slow growth of the program. Subsequently, in keeping with its core expertise, ADOPEM chose to concentrate on providing financial services while outsourcing group formation and consolidation, technical assistance, and their associated costs to program partners. Program partners may include buyers, technical assistance providers, donors, and others. Loans under this program are limited to 12-month terms (per the agrocrédito product terms). However, ADOPEM is developing a long-term credit pilot with Comercializador la Loma, a leading Dominican manufacturing and export company. Case Studies—Banco ADOPEM, the Dominican Republic Other credit products. ADOPEM’s agrocrédito product is designed for all small farmers. According to the bank, the IFC definition of a subsistence farmer (farmers that produce for consumption only) does not apply in their market. All farmers produce small surpluses that they sell in local markets. For ADOPEM, clients living at the subsistence level have commercial income-generating activities, such as selling ice cream, not farming. For these clients, ADOPEM offers a solidarity group product, “Préstamos Grupo Solidario,” with loan amounts ranging from $20 to $250, and an interest rate of approximately 49 percent. Other products for the commercial rural and urban markets include “Micro Micro” loan, another solidarity group- great deal. As one client said, “Before this training, I had based product for somewhat better-off clients, with no idea what over-indebtedness meant!” loans ranging from $250 to $750. Beyond financial education, ADOPEM offers its clients Financial education. In August 2013, ADOPEM the following additional non-credit products: launched a financial education program for its agricultural clients consisting of weekly training sessions held every ■■ Money transfers/remittances Saturday. The program, designed with support from the ■■ A system to pay the tax (or fee) for the renewal of CODESPA Foundation, is implemented by external, vehicle registration locally-based consultants and the cost is covered by the NGO ADOPEM. The latter also participates in ■■ Saleof airtime for mobile phones (a service for the the design and development of training materials, and Orange phone company) contributes trainers to the program. Anecdotal evidence ■■ Microinsurance that covers life, accident, funeral ex- to date suggests that clients appreciate this program a penses and illness for low income persons Table 10. ADOPEM credit products Product Maximum term Rates Amounts Collateral Clients Other key features Agrocrédito One year for both 32% $470-$1,175 for Unsecured Commercial Irregular working capital and -34% semi-commercial below and semi- principal fixed asset loans smallholders $1,175 and commercial payments $1,175- $23,500 secured smallholders allowed for commercial above smallholders $1,175 Table 11. ADOPEM savings and insurance products Product Rates Clients Other key features Savings account 2.5% All clients N/A Fixed-term deposit 6.25% All clients N/A Credit life insurance $5 All clients with loans Maximum coverage is $835; includes life, above $1,175 accident, and funeral expenses Voluntary life, accident, and funeral $5- All clients Coverage $1,058-$2,822 expense insurance $18 Case Studies—Banco ADOPEM, the Dominican Republic 37 access to finance for smallholder farmers Lending Methodology and efficiency of these tasks and is considered a key factor in the success of ADOPEM’s agricultural lending. As noted above, agrocrédito uses an individual lending methodology. To determine the creditworthiness of ADOPEM found that the original design of the clients, ADOPEM evaluates income and expenses product greatly limited its ability to reach a large number related to both the agricultural activity to be financed of smallholder farmers: many small farmers did not and the overall household production unit, using an have the diversified income flows necessary to make automated cash-flow tool. The cash flow analysis the fixed monthly payments. With support from the takes into account historical yields in the region for CODESPA Foundation, phase two began in 2010, with the agricultural activity to be financed, as well as the the introduction of irregular payments and expansion farmer’s historical yields for the crop. In addition, credit into the southern region of the country, through a pilot officers collect and analyze price tendencies for the crop in the San Juan province. Introduction of irregular over the previous 12 months and use an average price payments during this phase was made possible by in their calculations. This information is captured in ADOPEM’s decision to acquire a new core banking a database linked to the cash-flow analysis tool, such system. that calculations are done automatically. Loans are typically evaluated and ready for disbursement within ADOPEM entered a third phase in its agricultural three days. According to ADOPEM staff, the speed of lending program in 2012, with ongoing support from loan processing allows the bank to compete with Banco CODESPA. During this phase, ADOPEM automated Agrícola, which can take months to disburse a loan. the capture and analysis of client data and credit analysis The flexibility of its loan product allows ADOPEM for agricultural clients (2012), launched its value chain to compete effectively with its closest private sector consolidation program (2012), and introduced a financial competitor, ADEMI. education program (2013). During this ongoing phase, ADOPEM and CODESPA are hoping to design and The credit analysis methodology for agricultural introduce preventive health insurance and agricultural lending to value chain actors is the same as that for insurance, both of which they consider critical to any agrocrédito loan, with responsibility for the credit meeting the needs of smallholder families, although the analysis remaining with the bank. former would not be limited to their agricultural clients. Organizational Structure and Human Resources Product Implementation To date, ADOPEM has made two significant changes Product Design and Roll-Out in its organizational structure and human resources to ADOPEM has introduced agricultural lending through better support agricultural lending: introducing a unique a phased approach. The first phase began in 2008, with profile for agricultural credit officers, which the bank the selection of a target region for a pilot, a demand study did at the outset; and creating two new staff positions, to understand the profile and needs of smallholders, and which was done more recently. design of the first iteration of the agrocrédito product, with support from WWB. Due to the limitations of Loan officers managing agricultural portfolios must have the Bank’s MIS at the time, the product required fixed an academic degree either in progress or completed in monthly payments of interest and capital. As such, an agriculture-related field, and agricultural experience. agrocrédito was essentially a microcredit product during Most of ADOPEM’s 40 agricultural credit officers this phase, the main differences being the activities come from farming families. They are also generally financed, the cash flow analysis, and the profile of the from the area served by the branch, and therefore have credit officer. Lending began in 2009 in the pilot region a good understanding of the local agricultural economy, of La Vega. although they are not assigned to their own communities to avoid social pressures that could interfere with their During this phase, cash flow information for agricultural carrying out their duties fully and therefore undermine clients was collected and processed manually. However, portfolio quality. during this time period, WWB helped ADOPEM systematize and automate the capture of commercial Finding candidates with the requisite background has client data and credit analysis using PDAs. In a later proven difficult, however, as investments and interest phase, ADOPEM would do the same for its agricultural in the agricultural economy in the Dominican Republic clients, which, as described below, improved the accuracy declined over the years, with a corresponding decline in 38 Case Studies—Banco ADOPEM, the Dominican Republic access to finance for smallholder farmers both the number of young people studying agricultural Delivery Approaches and Channels engineering and related fields, and the number of ADOPEM has two product delivery channels: branch universities offering these degrees. Consequently, offices and mobile credit officers on motorcycles, ADOPEM established agreements with universities equipped with PDAs or smart phones to collect and and agricultural training institutes under which they process client information in the field. The bank plans send the bank the names of students with appropriate to introduce some type of branchless banking in the backgrounds. near future, but will pilot this first in urban areas. Loan disbursements are made at a bank branch. Payments To keep staff rotation down and build institutional may be made at a branch or with the credit officer capacity, ADOPEM has created a career path for credit during visits, where travel to the branch is a burden on officers and other staff and invests heavily in staff the client for reasons of distance or cost. training. Credit officers, both agricultural and others, receive significant training, including both classroom Marketing and practical field-based training. As one credit Promotional efforts are carried out on a regular basis officer said, “ADOPEM is a school,” noting that the by credit officers, who go door-to-door and attend opportunity to learn constantly, both on-the-job and community or neighborhood meetings to distribute through the regular classroom training program, was brochures and explain the products available. The a key factor attracting him to the bank. In addition to brochures include photos of existing clients so training, ADOPEM offers a wide variety of financial that small producers understand that the product is and non-financial incentives to keep staff rotation designed specifically for them. Branch offices broadcast down and promote strong staff performance. For a mini soap opera highlighting the products on a TV financial incentives, credit officers receive both a base mounted on the wall. On September 4, 2013, the salary and performance bonuses based on the number official wide-scale launch date for the agrocrédito of loans disbursed (new and renewed), number of product, ADOPEM held an event where clients told clients, portfolio outstanding, and delinquency rate. their stories in an environment decorated to look like Performance targets are distinct for loan officers’ a rural community. The bank also plans to launch a agricultural and commercial loan portfolios. A related radio program with a jingle in rural areas, in addition incentive is the provision of mobile devices for data to its current dissemination via mobile lous speakers. capture that facilitate the field work. However, to date, the best promotion has been through word of mouth. Being designated as a senior or master credit officer, based on performance, is also highly valued by staff (new and lower-performing credit officers are designated as junior). There is an established institutional career Risk Management path that allows credit officers to plan their future in ADOPEM applies several other strategies to minimize ADOPEM, a feature highly valued by the staff. Other the risk of lending to this market, in addition to its non-financial incentives for individual performance thorough cash flow analysis that takes into account the include public recognition through plaques and parties household unit as well as historical yields and prices and sponsorship to external training. Staff of the of the crops financed. It also matches loan amounts branch winning the quarterly award for efficiency and and payment terms with the payment capacity of the passion for customer service receive a weekend trip to farmer, to mitigate risks. Furthermore, ADOPEM’s a local resort. credit manager stresses the importance of the profile of agricultural credit officers as the first element in the In addition to introducing specialized credit officers, bank’s successful risk management approach. ADOPEM created two new staff positions: an agricultural lending specialist and a value chain Additionally, ADOPEM only finances farmers with a specialist. The former was introduced in 2012 to minimum of two years of general farming experience provide additional support to agricultural credit officers and a minimum of one year of experience cultivating the in the branch offices and to encourage branch managers crop to be financed. ADOPEM assesses their payment to get more involved with their agricultural portfolios. history through a credit bureau and, taking a page out The value chain specialist joined ADOPEM in 2012 to of microfinance best practices, credit officers check support the value chain program. social and business references of the credit applicant in the community. Case StudieS—Banco ADOPEM, the Dominican Republic 39 access to finance for smallholder farmers Very close monitoring of the farmer in the field is also portfolio in smallholder agriculture thus far. The bank critical. Credit officers spend 90 percent of their time may revisit this in the future, as its agricultural portfolio in the field visiting and observing clients. Did they plant grows. Similarly, the bank has not placed any limits the crop? Are they following good practices? Did they on the crops to be financed, which vary according to apply fertilizer at the right time? If not, the officer will the agricultural profile of each of the zones in which make “casual” inquiries and suggestions, being careful it operates. While portfolio limits have not been set, not to assume the role of an extension worker (whom ADOPEM’s core banking system allows for tracking the farmer might hold responsible should a crop fail). the number and percentage of agricultural loans at the The frequency of these formal visits may vary from levels of the individual credit officer, branch, and bank, every few days to a minimum of once per month, and both the business department and risk management depending on the farmer and the crop cycle. However, department monitor exposure at the branch level. ADOPEM officers are assigned a zone of operation. Since they travel in that zone daily, credit officers note Finally, where ADOPEM has experienced delinquency that they may actually greet the farmer informally in problems, it has increased its emphasis on the the street on a daily basis, which serves as a reminder to importance of the smallholder’s household unit having the farmer of his or her commitments to the bank, and income sources outside of the crop financed. This contributes to the farmer feeling supported and taken approach seems to have worked well. into account. Portfolio diversification, at the level of both the overall Profitability and Sustainability portfolio and the individual credit officer’s portfolio, ADOPEM analyzes profitability at the product, client, is also a key risk management strategy for the bank. and branch levels, as well as for the bank as a whole. The Individual credit officers manage a mixed portfolio agricultural loan portfolio is profitable, although it has of agricultural and commercial loans. Portfolio a lower profitability margin than the non-agricultural diversification targets for officers vary by branch, portfolio, at roughly 6 percent. The low delinquency but tend to range between 40 percent and 60 percent rate of the agricultural portfolio and the efficiency of agricultural (by value), with the remainder in commercial the data capture and analysis process are important loans. At the bank level, ADOPEM has set a target contributing factors to the profitability of the portfolio. of having 30 percent to 40 percent of its outstanding The cost of financial education is not factored into the portfolio invested in agricultural loans. However, it has bank’s costs or interest rate, as it is provided free of not set any formal limits. As staff noted, this has not charge to Banco ADOPEM by NGO ADOPEM. been necessary as the bank is still in the early stages of targeted agricultural lending, with only 2.7 percent of its According to ADOPEM, governmental policies do not currently interfere with the bank’s agricultural lending activity in a significant manner. Lessons Learned, Good Practices, and Success Factors Lessons Learned While ADOPEM has been serving the agricultural smallholder sector for a relatively short period of time, it has identified and incorporated a variety of lessons learned into its agricultural lending. The lessons include the following: ■■ To reach a critical mass of smallholders, it is essen- tial to offer variable payment terms. Since introducing this flexibility into the credit product, the agricultural portfolio has grown more quickly and is the bank’s fastest-growing product, along with housing loans. Case Studies—Banco ADOPEM, the Dominican Republic access to finance for smallholder farmers ■■ Tooffer smallholders an appropriately flexible credit Use of a wide variety of risk mitigation strategies and product, costly investments in modifications to the tools, starting with the profile of the loan officers, has MIS were necessary. helped ADOPEM maintain a delinquency rate for its ■■ Agricultural lending requires intensive follow-up and agricultural portfolio that is lower than that of its non- monitoring, including frequent visits to clients. agricultural portfolio. Among these tools and strategies are analyzing household cash flow along with the cash clients are complex and require an inte- ■■ Agricultural flow of the agricultural activity to be financed, requiring grated package of financial and non-financial prod- farmers to have experience in the activity financed, ucts to improve their well-being. This includes credit, conducting field-heavy follow-up with and monitoring savings, and insurance products, as well as financial of clients, and diversifying the portfolio of both loan education and technical assistance. officers and the bank as a whole. Establishing distinct ■■ Smallholder clients are loyal and meet their obliga- performance targets with associated incentives for these tions. Various ADOPEM staff noted that farmers two portfolios further supports a low delinquency rate, would rather borrow from friends and family or go as well as portfolio growth, along with fostering a close hungry than be in bad standing with the bank. This relationship with customers. represents an opportunity to serve this sector sus- tainably and profitably, but also highlights the impor- Assigning credit officers to specific areas of operation tance of sound credit analysis to avoid over-indebt- (zones) has contributed to the efficiency of officers’ ing the client. work and facilitated the close monitoring of clients that ■■ It is possible to serve agricultural smallholders profit- is required. As noted above, because officers concentrate ably, at least with the financial product. However, sub- their time in a single area, they often see clients on a sidization of non-financial services may be required daily basis. And because the loan officers are from the in the short, medium, or long term. area they serve, they are familiar with the microclimate and with the crops their clients cultivate. Good practices and success factors Beyond offering a flexible loan product adapted to the The systematization and automation of data capture and agricultural cycle and payment capacity of the client, credit analysis has led to greater operational efficiency a wide variety of good practices and factors have and faster portfolio growth. Responsible agricultural contributed to the success of ADOPEM’s agricultural lending requires the capture and analysis of a greater lending activities to date. volume of information than commercial lending does. Automation of these processes has contributed to faster First and foremost, ADOPEM leadership emphasizes loan application, approval, and disbursement, and has the importance of investing up front in a thorough enabled ADOPEM to reduce the interest rate on loans understanding of the market and the characteristics of of $1,175 or less by 2 percent in 2013. the target population in order to design an appropriate product. During the initial design and pilot phase, Finally, while the vision and motivation of ADOPEM’s ADOPEM evaluated a variety of regions and selected leadership is clearly a key factor in the success of the the one that appeared to be relatively low risk, based institution, external support has played a key role in on its economic and demographic profile. The bank assisting the bank in developing its agricultural credit also conducted an in-depth assessment of demand. and training programs, including support for product In subsequent phases, ADOPEM has drawn on this design, associated technological platform modifications, information and supplemented it through focus groups and training program design and implementation. to inform adaptation of its agricultural credit product, According to the senior management, the bank could as well as the design of new products. not have designed and implemented the agricultural lending program without significant external support in ADOPEM also stresses the importance of hiring credit the form of technical assistance. officers with a background in agriculture. According to ADOPEM staff, while an agricultural credit officer can easily carry out the credit analysis and monitoring of commercial loans, the reverse is not true. Technical understanding is required to collect and analyze agricultural information. Case Studies—Banco ADOPEM, the Dominican Republic 41 access to finance for smallholder farmers lending methodology. At the end of September 2013, the bank had approximately 59,888 agricultural loan clients representing $69.124 million, or just over 13.7 percent Case 2: of its total portfolio. The average loan size disbursed Bancamía, Colombia is $1,600 and the average size of rural loans disbursed is $1,400. Bancamía finances a number of agricultural Background activities, including coffee, dairy cows, potatoes, and pigs. It also finances other types of livestock raising and Bancamía was formed from the partnership of two of plantains and beans, among other crops. the WWB affiliates in Colombia: Corporation Mundial Mujer Bogotá and Corporation Mundial Mujer Medellín. The smallholder agricultural portfolio performance These two entities, along with an investment stake by compares favorably to the overall portfolio, with 4.75 BBVA Microfinance Foundation (51 percent), became percent of the former more than 30 days past due, Bancamía in 2008. In 2010, IFC become a shareholder compared to 5.68 percent for the overall portfolio. with a 6.3 percent stake. Bancamía’s mission is to improve the quality of life for low-income families. It is one of the members of Products and Approaches BBVA Microfinance Foundation’s network of nine Segments and Products investees in seven countries in Latin America, including Bancamía’s agricultural lending is done primarily through Financiera Confianza in Perú and Banco ADOPEM in two credit products: “Agromía” and “Credimía.” Both the Dominican Republic. are designed according to the cash flow from the farmers’ activities. Agromía is structured for a mono Colombia still exhibits a significant percentage crop cycle, in which the borrower has only one crop. of rural poverty (49.8 percent) and extreme rural Agromía loans are disbursed in a single tranche, with poverty (28.8 percent). The rural areas of Colombia payments every two, three, or six months. In this case, are characterized by a high degree of informality in to renew the credit, the client must have paid businesses, low presence of the state and state services, the outstanding balance of the credit. Credimía is poor rural infrastructure, and considerable insecurity. for farmers with multiple crop cycles or agricultural Financial services in rural areas are limited: there are activities with regular cash flows. The initial interest rate few wholesale funds appropriate to the conditions is the same as that of Agromía. However, loans under of smallholders, virtually no insurance options, and Credimía require equal, regular payments (principal and limited guarantee funds. interest). Both loan products have working capital and investment versions differing only by the term (up to Bancamía has included lending operations to the 24 months for working capital and up to 60 months for agricultural sector since its founding and, with support investment capital). Credimía, however, has an added from IFC, has strengthened the development of its rural benefit of a simple renewal process once 80 percent Table 12. Bancamía portfolio composition (September 30, 2013) Total Microcredit SME Potfolio Micro/ SME Portfolio Agricultural Portfolio Number of active loan clients 394,923 394,851 71 59,888 Number of loans outstanding 440,185 440,111 73 63,417 Portfolio outstanding (US$ million) 506.85 504.96 1.89 69.31 Portfolio at risk (>30 days) US$ million 28.77 28.33 0.44 3.29 Portfolio at risk (>30 days) % 5.68 5.61 23.45 4.75 Source: Bancamía (data provided in million pesos); 1900 pesos per US$1. 42 Case Studies—Bancamía, Colombia access to finance for smallholder farmers of the loan has been repaid, which may also entail an Lending Methodology interest rate reduction for clients with a strong loan Both Agromía and Credimía loans are disbursed directly repayment history, and a client score or rating of either to clients. Under both products, the credit analysis 4 or 5, according to Bancamía’s internal credit scoring considers the cash flow of the household production system (See Risk Management on page 45). unit, not just the financed agricultural activity, using a semi-automated cash flow tool. Credit officers enter For new clients, the effective rate charged by Bancamía the data in the field, using the bank’s “Banca Portátil” is 7 points less than the government-controlled rate for system: a small laptop with a modem. Introduction of microcredit. For loan renewals, Bancamía charges 10 the Banca Portátil allows credit officers to consult the points less than the controlled rate, depending upon the credit bureaus and the bank’s reserve lists while in the client payment behavior and number of renewals. field, and to respond quickly to clients regarding their credit application. Bancamía is not offering a value chain finance product and there is limited integration with buyers, input The current version of the cash flow tool, developed suppliers, or other value chain participants. However, in-house, is intended to forecast the sources and uses the bank has recognized the need to mitigate risk and of cash at the household production unit level. It reduce costs by engaging the value chain and is studying relies on input from the credit officers, although it several value chains of interest. does give parameters of price and input units required, which the officers are able to adjust and/or override Other products under development by Bancamía as necessary. The tool produces a series of cash flows, include different types of insurance for the clients and which are useful, but do not necessarily inform loan their families: a life insurance product, a funeral cost terms (installments, repayment period, etc.), because of insurance, and a general insurance product to cover limitations in the breadth of the client data captured. damages. The general insurance product will support clients in rural and agricultural areas, as well as in urban The updated version of the tool—while still requiring areas. The insurance to cover damages includes the use by credit officers with experience in the activity structure, contents, crops, and animals as a part of the being financed—will be tied directly to the core household production unit. It also will cover events banking system, and together with changes in that such as earthquake, excess rain, and avalanches. The system and changes in the product structures, will allow product itself is simple and priced attractively. It can be the payments system to automatically recommend priced attractively because it has limited coverage and is the repayment terms. This type of disbursement and simple to manage both pre- and post-claim. It does not repayment loan pattern will approximate the true needs vary by size of insured business or investment. It is a of the client. flat payout, less a deductible, and will pay up to $2,500. Registration for the product is streamlined, there is Bancamía responds to competition using an approach no visit to the business being financed, and the claim stressing excellent customer service, including strong process is also simple. client management skills and a standard of service approach. They process loans from application to An additional service is financial education. The training disbursement in an average of three days. To do so, they is being developed from a series of modules based on the sometimes hold as many as two credit committees per work of the NGO Microfinance Opportunities, and has day, but it is rare to have all advisors involved in each been supported by the Colombian government through credit committee. The committees can take multiple its Banca de las Oportunidades program. Bancamía had forms: full office participation, one or two advisors and modified the current modules to better approximate the the branch manager, or a senior credit officer and the language and the preferences of the targeted producers. branch manager. In this way, Bancamía maximizes the Bancamía considers that providing this training is part of amount of time that each advisor spends in the field. its corporate sustainability and social responsibility. As such, it will be offered free of charge to clients. The cost of the training will be covered by the bank itself, or by partner organizations that form client or beneficiary groups. Case Studies—Bancamía, Colombia 43 access to finance for smallholder farmers Product Implementation number of new clients, and value of disbursements. They are also rewarded based on how the branch Product Design and Roll-Out performs in terms of savings balances and increases in As a result of its experience in the agricultural sector, overall portfolio. Bancamía has tailored its products to smallholders, in response to the needs of its clients and the requirements Credit officers have a clear career path within the of the market. organization. A significant number of branch managers have been credit officers in the past, and a significant While Bancamía does not appear to pilot its agricultural number of zone managers have been branch managers. products, the bank does pilot its delivery channels, Credit officers have levels within their posts, depending which are tested in several locations prior to full roll-out. on seniority and performance, and this has helped refine This includes its point-of-service (POS)-equipped agent their pay structure and change their roles, giving more network, Offices of Promotion and Investment, and senior officers more responsibility and authority. This forthcoming mobile banking pilots linked to specific has contributed to the expansion of the bank in rural value chains (See Delivery Channels on page 44). areas, as many senior credit officers, termed “executive masters with authority”, have some credit approval Organizational Structure and Human Resources authority where there are no branch managers, such Bancamía has more than 1,100 credit officers, 35 as in the Offices of Promotion and Information. This percent of whom have an agricultural profile. Agromía refinement in the maturity and seniority levels has helped and a number of Credimía loans are almost always Bancamía to lower its staff rotation rate. It has also managed by officers with a background in land and/ helped to ensure quality customer service, as these senior or animal sciences. Bancamía prefers credit officers to executives with authority serve to backstop credit officers also have work experience and/or be from the zone to on vacations or leaves. A dedicated team of roaming which they will be posted. Most importantly, however, credit officers has been developed to take over portfolios the officers must have an understanding of the field and for a short period of time, to maintain customer service what it takes to interact personally with clients in rural and performance when staff takes leave. areas. The screening process for potential credit officers includes an evaluation of their capabilities to provide Credit officers are deployed based on a zone spiral, with services to rural clients. Once selected, potential credit officers covering their routes on motorcycles. Growth officers go into the field with existing staff in order to is conducted around the branch in an expanding spiral, experience the nature of the required field work. This and then subdivided as the client load becomes too large, procedure helps to confirm that the credit officers which is normally around 400 rural clients (agricultural or selected have the right profile for the required work non-agricultural). There is no overlap in the areas being before they continue with the following stages of served, so this zoning provides increased efficiency. the training. This also has proven to be a good way to prevent staff rotation, which lowers overall investment Delivery Channels costs in new staff. Bancamía has a presence in 29 of the 32 departments in Colombia through its network of 180 branch In the second stage, the new officers undergo classroom offices, including three Offices of Promotion and training, in which they cover the core banking system, Information which conduct most services apart from use of the Banca Portatil, policies and procedures, risk cash transactions. Bancamía also has 54 non-bank norms, and financial education. At the end of each day, correspondents who use POS devices to take payments they are tested. Finally, they intern for 30 days in a branch from Bancamía clients in rural areas. The bank expects under the tutorship of a senior credit officer (whose to increase to 60 correspondents by the end of 2013. expected performance targets are reduced while they are Starting in early 2014, the correspondents will be able training the new officer). The entry level credit officer to offer withdrawal and payment services. has certain minimal targets for that month, primarily for presentations to the credit committee about prospective The bank also offers services through“Lineamía,” which loans, but also for opening new savings accounts. is a form of telephone banking available to all clients. This service can take an application over the phone, Credit officers are paid a base salary plus a bonus related hear requests and complaints, and sell certain types of to factors including delinquent loans, number of clients, financial services. 44 Case Studies—Bancamía, Colombia access to finance for smallholder farmers In 2014, Bancamía will pilot a new way to access services an applicant has too many loans from different sources. aimed primarily at rural users: “Banca Móvil,” which Using these tools, the bank eliminates an average of 5 will allow clients to make payments and withdrawals percent of applicants. using their cellular phone. Banca Móvil—which is supported by Bancamía, the government Banca de There is some pricing for risk, as clients with a longer las Oportunidades program, and IFC—should help tenure and good performance can benefit from an Bancamía reduce the external cost of transportation interest rate reduction. Monitoring of agricultural and security for its clients. loans through pre-emptive field visits is also used to control risk at the individual client level. During a Marketing visit, the credit officer evaluates the state of the crop Bancamía has a sophisticated marketing department and the corresponding ability of the client to make the that covers market research as well as marketing and payment. Office managers also visit a percentage of promotion. It conducts a number of research studies agricultural credit clients monthly. Furthermore, the using secondary and primary information sources. management team for rural banking visits a random sample of those clients to confirm the findings of the Bancamía has campaigns for agriculture embedded in office manager. Bancamía also analyzes the behavior of overall marketing campaigns. It tweaks the campaign different activities in its portfolio. The bank is able to to appeal to different producers by using different identify its exposure to certain crops or activities and photos in marketing materials. Bancamía also uses has established a 20 percent cap (as a percentage of radio to promote to producers; radios often accompany the total outstanding portfolio) for any one particular producers to, from, and on the farm. The bank has activity. Its risk management department also tracks key television spots as well, sometimes as early as 5 a.m., information that may affect sector performance, such as again to capture producers. Bancamía also uses prices, weather, government policies, and competitors, “infomercials,” in which it pays for televised spots to help forecast risk. This practice informs proactive about its clients, and has televisions and posters in every management responses to events that can affect sectoral branch which often promote agricultural clients. The performance. bank also promotes its services and products using booths at local agricultural fairs. It offers prizes for In the event of a particular sectoral disturbance, such referring a neighbor or friend to Bancamía. However, as recently happened with a series of strikes and the bank’s most successful marketing and promotion political demonstrations affecting many rural routes, is during office events, which it promotes by phone, the risk management department develops an operating brochures, and word of mouth. During these events, plan to forestall any serious delinquency and provides the bank raffles prizes and promotes its products. guidelines about how restructuring might take place and under what conditions. Risk Management In addition to the cash flow tool—which Bancamía thinks is important to measure risk at the client level— it also manages risk through consultation with credit bureaus and its internal credit scoring system, which analyzes character and financial information. The bank considers the credit bureau system quite good; the two private credit bureaus include commercial references (from input providers, for example). In the internal scoring, clients in rural areas are given slightly more leeway than urban clients because of the rural clients’ distance from branches. For example, a rural client can be up to eight days late with a payment and still be qualified as a 5, the highest rating possible. In comparison, an urban client must pay within four days to receive that rating. Collateral terms are also a bit more lenient for rural clients than for urban clients. To prevent indebtedness, the bank also limits eligibility if Case Studies—Bancamía, Colombia 45 access to finance for smallholder farmers Finally, Bancamía has a USAID guarantee for ■■ Lending to smallholders can involve different risks; it approximately $25 million, covering agricultural is important to be aware of these risks and to attempt lending in 15 of Colombia’s departments. In addition, to mitigate them through product adaptations, moni- it is piloting a Colombian government guarantee fund, toring, and pre-emptive management. “Fondo Nacional,” in two departments, although this appreciate personalized attention and advice ■■ Clients guarantee does not cover agricultural credit. from staff. Good Practices Profitability and Sustainability Bancamía is a strong, regulated institution with a Bancamía has been profitable as a bank. Reports to number of departments supporting the overall rural the MIX Market show that in 2012, it had a return on and agricultural program, including: systems, marketing, assets of 5.07 percent and a return on equity (ROE) of operations, infrastructure, and product development. 20.77 percent. The management team believes that the Each of these departments customizes its activities and agricultural and rural products are profitable. Although functions to appeal to agricultural clients. The bank has they are a bit more expensive to administer because of a focused growth strategy going forward, with the goal the transportation costs involved and the time dedicated of increasing the percentage participation of rural and by credit officers (which directly affects productivity), agricultural loans in its portfolio. they present lower risk. Bancamía is a learning organization that is prepared to To determine the cost per product, the bank uses a adapt to the needs of its clients. It has recognized both methodology based on estimations of time dedicated the internal and external limitations in the agricultural monthly by the credit officers (which is the same for finance field and is quick to make changes and better both rural and urban credits). The methodology adapt products and services to clients, while enhancing involves calculating the time used for administration client access. This is driven not only by its rural product and disbursement, and then applying proportionally the manager, but also by senior management and the board. expenses of the year divided by the total number of credits disbursed and administrated. The bank uses a cash-flow-based evaluation tool that recognizes the household production unit, which The interest rate for both urban and rural credits is the allows credit officers to better assess business flows same, primarily based on the application of the same and determine the best product fit. The tool is being funding costs to both scenarios. improved and linked to the core banking system. This will provide a flexible product for the client, eliminating the need to hold excess liquidity, and thereby reducing the Lessons Learned, Good Practices and overall interest cost to the client and the risk to Bancamía. Success Factors Bancamía has a robust staff training program, with Lessons Learned additional focus on agricultural and rural activities during ■■ A smallholder’s business is integrated into their the classroom training, complemented by an extensive household. Therefore, in order to provide an appro- on-the-job training period. In addition, it has reduced priate credit product to smallholders, it is necessary to its average staff rotation and has implemented ways develop a different manner of evaluating the house- to improve job satisfaction, for example by deploying hold production unit. senior credit officers as replacements during vacation ■■ Adaptation of the financial institution’s systems— periods, to ensure consistency in client management such as human resources, marketing, and MIS—is and retention. important to deliver the most appropriate products. Bancamía says that its clients inspire its strategy. The ■■ A logical form of deployment and respect for each development of products, services, or channels all serve credit officer’s zones will result in more cost-effective to know the client, the environment, and their habits and consistent service. better, allowing the bank to give better and differentiated ■■ To expand outreach to smallholders and provide more treatment to clients and their proposals. accessible service, they must be provided with more cost-effective ways of making transactions, such as agent networks and mobile banking. 46 Case Studies—Bancamía, Colombia access to finance for smallholder farmers Case 3: Financiera Confianza, Perú Background In May 2013, Financiera Confianza completed a merger with Caja Rural de Ahorro y Crédito Nuestra Gente (which itself had been formed by the fusion of two Cajas Rurales and one Edpyme), with investment and other support from the BBVA Microfinance Foundation, IFC, Financiera Confianza’s founding NGO SEPAR, and other shareholders. The new financial corporation operates under the name Financiera Confianza, S.A.A. Financiera Confianza started as an NGO and all institutions that formed part of Nuestra Gente were rural Cajas or Edpymes. Over the last two years, the new organization— formed by the two specialized, rural MFIs—has been working through the challenge of integrating different policies, products, staff, and practices. The composition of the new institution brings together outreach and increase clients’ wealth over the longer diverse organizational and staff backgrounds. The general term (as measured by intergenerational changes). manager characterizes the new Financiera Confianza as mission driven. Agricultural finance is a key target area, Financiera Confianza’s strategy is directed toward going because of the saturation and over-indebtedness found “down market” and lowering its present average loan in urban markets, and because of the MFI’s competitive size from approximately $1,800 to $1,125 by the end advantage in rural areas, resulting from the historically of 2016, while at the same time doubling its number of rural focus of many of the Cajas that merged to form it. clients from a quarter million to a half million. Rural and Financiera Confianza faces competition from the state agricultural areas will play a significant role in achieving agricultural bank, Agrobanco, on a national level, and these objectives. Currently, 10.6 percent of Financiera from a number of non-bank financial institutions, which Confianza’s portfolio is dedicated to smallholder vary by region. However, many financial institutions agriculture (See table 13) and 17.5 percent to agricultural are not able to reach agricultural producers on the same overall (See table 14). As observed in table 13, while the scale as for urban or commercial rural clients. In this portfolio at risk is higher for the agricultural portfolio context, Financiera Confianza has a long-term strategy than for the overall portfolio (5.4 percent for the for financing agriculture as part of its goal to expand smallholder lending portfolio and 4.8 percent for the Table 13. Financiera Confianza portfolio composition (September 30, 2013) Total Microcredit SME portfolio Other portfolio Micro, SME portfolio agricultural portfolio Number of active loan clients 226,956 168,936 21,154 40,475 24,363 Number of loans outstanding 250,867 182,408 26,638 41,821 26,109 Portfolio outstanding ($) 465,070,386 210,313,353 182,436,534 72,320,498 49,501,737 Portfolio at risk (>30 days) 15,293,238 7,564470.19 6,305,714 1,423,053 2,683,000 Portfolio at risk (>30 days) 3.3% 3.6% 3.5% 2.0% 5.4% Case Studies—Financiera Confianza, Perú 47 access to finance for smallholder farmers Table 14. Financiera Confianza total agricultural portfolio by loan size (September 30, 2013) Portfolio outstanding $ PAR No. of clients No. of accounts <718 1,510,043 11.7% 3,476 3,887 718-1,796 18,108,501 6.7% 13,475 14,140 1,796-3,592 18,435,356 5.1% 6,598 6,901 3,592-7,184 20,023,457 4.7% 3,707 3,904 >7,184 23,260,206 2.8% 1,634 1,800 Total 81,337,563 4.8% 28,890 30,632 total agricultural portfolio, versus 3.3 percent for the AgroMix (originating from Financiera Confianza) overall portfolio), it is still at an acceptable level. is designed for clients with less than $7,184 of total indebtedness, with loan sizes ranging from $107 to The high delinquency rate for loans of less than $718 $7,184. is attributed to a program that has been discontinued since the merger, but that still has outstanding loans. AgroPuro (originating from Caja Nuestra Gente) is designed for clients of more than $7,184 of total indebtedness, with loan sizes ranging from $107 to $107,760. Products and Approaches Both products offer a loan term of up to 12 months Segments and Products for working capital loans and two years for fixed asset Financiera Confianza finances a wide range of agricultural loans. Similarly, for both products, there is generally activities, including livestock and crop cultivation, a single disbursement, but two disbursements may be through two main agricultural credit products that made if the loan covers crops that are planted at different reflect Caja Nuestra Gente’s and Financiera Confianza’s times. However, the interest rates, payment terms, and agricultural lending methodologies and primary markets maximum loan amounts vary as noted in Table 15. The prior to the merger, with the latter traditionally targeting average interest rate for AgroMix loans is 32 percent smaller farmers: annually; for AgroPuro loans it is 26 percent. By way of comparison, the average interest rate on a microcredit loan is 36 percent. However, Financiera Confianza may reduce the interest rate for clients with strong payment histories. AgroMix loans allow for either regular monthly payments, or irregular payments (interest and capital), depending on the estimated cash flow, while AgroPuro loans involve a single balloon payment. This difference may be attributed in part to the different profiles of the target markets for the two products: AgroMix clients, while smaller in size, typically have greater crop and income diversification than AgroPuro clients, which allows for greater variability in payment terms. However, as described below (See Lending Methodology on page 50), the difference can also be attributed to the different credit analysis approach applied under the two products. Regardless of the loan product, for loans of less than $7,184, Financiera Confianza does not require collateral. For loans between $7,184 and $21,550, the MFI accepts Case Studies—Financiera Confianza, Perú access to finance for smallholder farmers Table 15. Financiera Confianza credit products Product Maximum term Rates Amounts Collateral Clients Other key features Palabra de One year 60% $108-$7,184; with Unsecured Subsistence Group lending for Mujer total indebtedness farmers and other agricultural and $108-$7,184 rural clients non-agricultural activities AgroMix One year for 32% $108-$7,184, with Unsecured Semi-commercial Irregular working capital total indebtedness smallholders payments may be loans; two years $108-$7,184 allowed; finances for fixed asset working capital loans and fixed assets AgroPuro One year for 26% $108-$107,760, Secured Commercial Balloon payment working capital with total starting at smallholders of principal and loans; two years indebtedness $21,550 interest; finances for fixed asset above $7,184 working capital loans and fixed assets Education One year 84.78% $36-$1,796 Unsecured All clients N/A loans Housing Five years 26.82% $359-$17,960 Unsecured All clients N/A loans untitled property as collateral (no proof of ownership Confianza staff say that given the location of the client of the collateral asset is required). For loans of $21,550 base, a substantial percentage is agriculture related. or more, clients must provide collateral with legal title. As part of its rural expansion strategy, the MFI plans to expand the Palabra de Mujer product to 30 new Financiera Confianza also offers an entry-level solidarity branches in the next year. Financiera Confianza also product, “Palabra de Mujer,” which includes agricultural plans to develop a consistent and conscious approach and non-agricultural clients. It involves groups of at to transitioning mature, agricultural clients to AgroMix least 10 women, although loans for group members are in the next year. individual. The initial loan amount ranges from $144 to $1,796, with a loan term of between 6 months and 12 All loan products have a mandatory credit life insurance months, and an interest rate of 3.8 percent to 5 percent policy included. Other products are available to monthly, depending on the number of disbursements. agricultural clients, such as intrabank transfers, savings Little information is known about the exact mix of accounts, and insurance. Credit is Financiera Confianza’s activities financed, as it is not tracked, but Financiera priority, and it is not aggressively cross selling products, Table 16. Financiera Confianza savings and insurance products Product Rates Clients Other key features Savings account 0.75% All clients N/A Fixed-term deposit 2.75%-7.25% All clients N/A Credit life insurance 0.085% monthly of All clients Covers outstanding loan balance outstanding loan balance Personal accident insurance #1 $1.04 monthly All clients Covers as much as $7,184 Personal accident insurance #2 $1.99 monthly All clients Covers as much as $14,368 Case Studies—Financiera Confianza, Perú 49 access to finance for smallholder farmers although it is looking for ways to increase cross selling, the field, to facilitate rural and agricultural operations. particularly of insurance products. In conjunction with the underestimation of prices and productivity, Financiera Confianza believes that this Financiera Confianza also has a number of products approach to analyzing creditworthiness helps to mitigate in the design phase, including production insurance the direct lending risk by allowing the MFI to determine and a product linking credit to remittances. The pilots the sources and uses of cash in the productive unit. are expected to be delayed until at least this year as the new MFI focuses on the final integration of the two Under both lending methodologies, Financiera institutions and the implementation of the new core Confianza uses a standard of service approach to loan banking system launched in 2013. analysis and disbursement that is publicly promoted and attempts to keep loan processing to within three days Lending Methodology of receiving a client’s paperwork. This is consistent with Both AgroMix and AgroPuro credits are lent directly to the timeframes of many of its close competitors and individual farmers. Under Caja Nuestra Gente, there are is significantly faster than Agrobanco—which takes a a few cases in which producer associations guarantee minimum of one month to process loan applications— a certain proportion or all of a loan to its producers, and allows the MFI to compete with the state bank’s but this is limited to a small number of crops, such as much lower interest rates. coffee, milk production, and cocoa. There are also a few marketing partnerships under which input providers might refer clients to Financiera Confianza and vice Product Implementation versa, or allow for advertising in each other’s branches, Product Design and Roll-out but credit is not channeled through these partners. Financiera Confianza follows a product development There is neither a strategic nor a systematic integration process that includes secondary source research and with value chains partners at a national level. competition scans as inputs to inform product design. The product concept and testing often come from the AgroMix follows the lending methodology of the institution and the client is not consulted at this stage. pre-merger Financiera Confianza, which involves A product development committee reviews the MIS an integrated credit analysis of all income sources, needs as well as other elements of the products, such expenses, and farming activities, resulting in a loan with as formats required, processes, product terms, and flexible payments. The AgroPuro product follows marketing. In most cases, they will do a pilot of between the methodology of Caja Nuestra Gente, focusing six months and nine months. on the financed crop or activity, a traditional project- based agricultural financing, usually with a balloon end As described above, as part of the merger process, payment of capital and interest. However, according to Financiera Confianza is rolling out the AgroMix the agricultural credit product manager in the central product and lending methodology in all of its regions region, Financiera Confianza plans to phase out this and branches. This involves training all credit officers methodology in 2014. Because AgroMix can be used to perform credit analysis under both methodologies. for both small and large farmers, it will be the prevailing methodology. Credit officers in the north and south regions, where Nuestra Gente was operating with the Organizational Structure and Human Resources AgroPuro methodology prior to the merger, have Financiera Confianza has a strong organizational already been trained in the AgroMix methodology. structure, particularly in regions where there is a territorial manager who oversees regional managers and For both products, Financiera Confianza takes a an agricultural product manager for the territory (the conservative approach to assessing the creditworthiness MFI operates in 11 regions, grouped into 4 territories). of a farmer by using low market prices and productivity This level of decentralization has allowed Financiera expectations in its evaluations. It has a manual cash Confianza to rapidly target new challenges in its rural flow tool, combined with cost information sheets per and agricultural portfolio, where management reaction crop per region, which it uses to evaluate the size of to a coffee rust problem has been quick and effective the loan that is feasible and the ability of each client to (See box 3). repay. In 2014, Financiera Confianza plans to pilot an automated tool, “BancoMóvil,” which will equip credit Credit officers are well-educated, with most holding officers with small tablets allowing them to enter data in university degrees. Some credit officers serving 50 Case Studies—Financiera Confianza, Perú access to finance for smallholder farmers Box 3. Coffee rust in the central region: Financiera Confianza’s proactive risk management strategy A decentralized organizational structure has helped Financiera Confianza prevent a significant deterioration in its portfolio quality when Perú recently fell prone to roya (rust) disease, which has besieged a certain variety of coffee in Central and South America in the last few years. When problems were first noted, middle (regional) management and local branch administrators in affected areas teamed up to launch a preemptive review of all coffee loans. Under the direction of middle management, including the product specialist, staff made visits to most clients growing coffee and established the nature and extent of the disease on the plantations, as well as a plan to repay the loan through production from existing healthy stock or other sources of income. While the full extent of the potential risk is not entirely known, of an approximately $13.65 million exposure to coffee, $10.78 million is expected to be repaid according to the normal repayment schedule. The remaining $2.88 million will be subject to various mutually agreed measures of repayment, such as restructuring and/or refinancing. Financiera Confianza sees this personal attention to helping clients through difficulties as a strategy to engender loyalty, ensuring that clients will return to the MFI when the opportunity arises to replant. agricultural clients have relevant degrees in agronomy Having decentralized product specialists has proved to or veterinary science, but it is not a requirement and be helpful, as they can provide surge support to branch a significant proportion of credit officers coming managers and loan officers when in need (See Box 3). from Financiera Confianza have a general background because they serve both agricultural and non-agricultural To support strong performance, Financiera Confianza clients. Credit officers coming from Caja Nuestra Gente has defined incentive plans for credit officers linked are mostly agronomists because they served agricultural to the total number of loans disbursed, the total value clients exclusively. Staff that deal directly with the of the portfolio outstanding, and the overall portfolio product Palabra de Mujer have a different profile, more at risk. The performance targets associated with the along the lines of social workers. incentives are not disaggregated for agricultural and commercial loans: achieving the target number of loans Financiera Confianza is moving to a less specialized disbursed triggers payment of the incentive, regardless model while still expecting a certain level of technical of how many of those loans are agricultural and how skill at the credit officer level. Given the shift to less many are commercial. However, credit officers with specialization, loan officers from Caja Nuestra Gente agriculture-heavy portfolios have lower performance will be trained accordingly: those with agricultural targets related to the portfolio outstanding during the backgrounds will be trained to serve commercial harvest season than they do during the planting season. clients, and vice versa. Training of the credit officers The lack of disaggregated performance targets is an area takes place over four months, with the first two months that some in Financiera Confianza have acknowledged primarily classroom training (the institution has four needs improvement, as it does not create sufficient training units) and the remaining months in the field, incentives for agricultural lending, given that it may be under the wing of a more senior advisor. Courses that easier and less risky to meet the performance targets by are tailored to credit officers who deal with agriculture- disbursing commercial loans. related activities and clients include: “Agriculture Credit Technology,” “Agriculture Credit Regulations,” and In addition to the performance incentive system, credit “Main Features of Target Crops.” officers are generally aware of the career path available to them since Financiera Confianza prefers to hire from These credit officers are supported by a product within, have clearly defined paths for moving from specialist (one in each of the four regions) who is junior to senior credit officer, and a good idea of what responsible for ensuring the quality of the agricultural they need to do to achieve those objectives. As part of product, as well as compliance and on-the-job training this career track, the MFI promotes additional training for credit officers. The product specialist usually has opportunities for its staff, including online training an agronomy background and in the central region, courses developed in conjunction with the “Tecnológico the product specialist is a former branch manager. de Monterrey.” Case Studies—Financiera Confianza, Perú 51 access to finance for smallholder farmers Delivery Approaches and Channels Marketing Financiera Confianza provides its financial products Marketing channels used by Financiera Confianza and services through a network of 118 branches with an that are applicable to agricultural clients tend to be an additional association with Banco Nación (a state-owned offshoot of the overall rural approach. One or two bank with national branch coverage) which allows the times a month, each Financiera Confianza branch does MFI to use its 50 branches within Financiera Confianza’s a massive push, usually targeting one area, with all staff territorial outreach. In addition, Financiera Confianza leaving the branches to promote products. It has also has six Offices of Promotion and Information, which used roving announcement vehicles, daily newspapers, are small permanent offices that allow the MFI to create referral incentives, and radio, which are effective in rural a promotional presence in a new area, although financial areas. Clients also play their part by providing word-of- products and services are not provided directly through mouth referrals. these offices. Offices of Promotion and Information depend on branches located within three hours to four hours of the office. If they capture enough clients, these Risk Management offices eventually can become branches. In addition to risk management at the credit evaluation level, using the cash flow tool, checking credit histories Financiera Confianza also has an agent relationship with through credit bureaus, and controlling the portfolio size KasNet and its 1,160 points of service. In these points of loan officers (Financiera Confianza does not like to of service, the client can withdraw as much as $180 and see its credit officers manage more than 300 agricultural repay as much as $360. However, these points of service clients), the MFI has collateral requirements for loans of are located primarily in urban and peri-urban areas. To more than $718. Because the legal standing of land titles expand its outreach in rural areas and make products is variable in Perú, often the collateral taken does not and services more accessible to clients, Financiera have a legal basis and is characterized as symbolic rather Confianza has developed a pilot with Resonance, an than true risk compensation. As noted above, however, information technology company, to establish 20 points loans of $21,550 or higher require secured collateral. of service specifically in rural areas. At these service points, clients will have the ability in the initial phase Risk is also managed through an overall limit on to withdraw and deposit up to $72. Service points are portfolio exposure to agriculture, which Financiera likely to be small shops and the pilot will take place in Confianza says should not go higher than the equity of the Tarma area in central Perú. the institution. The MFI also holds portfolio insurance, indexed to sea temperature, to protect itself against the Financiera Confianza credit officers reach rural clients El Niño phenomenon. by motorcycle. Deployment of officers to rural areas is subject to some zoning, but the extent of this is Financiera Confianza tracks its exposure to specific determined by the branch manager. crops under AgroPuro, but it is not able to do so under Agromix and Palabra de Mujer. The MFI expects to be able to do this in the next year, with implementation of the new core banking system, and hope to have a more refined identification system under which specific crop varieties can be identified. Financiera Confianza monitors some prices of certain types of agricultural products as part of its risk management. However, interest rates are not adapted to the overall risk of the primary crop or crops being financed. Interest rates do reflect risk in terms of the client history and payment patterns, where the interest rate may be reduced if the client has performed well according to Financiera Confianza’s internal credit rating system. Approximately seven years ago, the MFI introduced a system to promote client loyalty through better rates and loan terms for good clients. While the rating system has been adapted over the years, it rates clients according to their tenure as a client, average payment history, credit bureau Case Studies—Financiera Confianza, Perú access to finance for smallholder farmers credit score, and the number of institutions from which Lessons Learned, Good Practices, the client borrows. and Success Factors Financiera Confianza also relies on a Development Lessons Learned Credit Authority (DCA) guarantee for production loans While Financiera Confianza is a new institution, the disbursed in offices located in drug eradication zones, MFIs that formed it bring between 10 years and 20 such as San Martin, Huanuco, and Ucayali. They have years of experience operating in rural and agricultural a $3 million DCA and plan to apply for a DCA of $10 markets. With that experience comes a variety of lessons million once the original DCA is exhausted. The DCA learned: typically covers up to 50 percent of the net loss on principal for guaranteed loans. The DCA has allowed ■■ Itis important to analyze the cash flow of the entire Financiera Confianza to lend at a lower interest rate to household production unit. This lesson reflects the farmers, reflecting the reduced risk of lending. integrated nature of smallholder household and farm economies and provides a more realistic risk profile of smallholder borrowers. Financiera Confianza is Profitability and Sustainability using the AgroMix methodology to take all these ex- penses and revenue source into account when analyz- Before the merger, Financiera Confianza had undergone ing credit for smallholders of less than $7,184. Larger some costing studies, but did not find them relevant; farmers are assessed based on the main activity under post-merger, the MFI is developing the ability to cost the AgroPuro methodology. products and branches to better understand profitability. While it has costed its branches, it is unable to cost ■■ Lower-cost, accessible delivery channels are needed products, with the exception of Palabra de Mujer to expand outreach to smallholders. Setting up points (which is easier to measure due to the separate field of service specifically targeting rural clients has been management structure). Palabra de Mujer shows a small identified as a new priority to reach out to a greater profit, but it only considers direct costs. In general, number of smallholders. Financiera Confianza considers agricultural products ■■ Agriculturalclients are more loyal than other clients profitable, but it does not have data to demonstrate this. in the portfolio. They appreciate quick service and At the institutional level, according to MIX Market data personalized attention. They also appreciate efforts for September 2013, the annualized ROE for Financiera that Financiera Confianza has made to get discounts Confianza is 8.4 percent. It is worth noting that, as at some of the input providers for its clients. a result of the merger, operating costs have increased ■■ Product adaptations, closer monitoring, and preemp- in the short-term. However, the MFI expects operating tive management are also necessary to mitigate the costs to decrease in the long run as operations are risks inherent in lending to smallholders. Through the streamlined and it can benefit from economies of scale. Case Studies—Financiera Confianza, Perú 53 access to finance for smallholder farmers problems encountered with the coffee rust, Finan- This indicates an understanding that at this client size, ciera Confianza learned that early warning accompa- most farm and household economies are integrated and nied by preemptive analysis of clients’ situations can often with several sources of income. By evaluating help the client structure a plan for repayment, even in the entire unit, Financiera Confianza addresses the the face of crop failure. This, in turn, can engender risks of cash sources and uses and establishes a loyalty by the client going forward. disbursement and payment structure around the overall ■■ Assisting rural borrowers in managing debt through unit. This evaluation methodology and resulting tool responsible lending is important. Financiera Confi- uses a production cost and revenue structure that is anza management has identified over-indebtedness staggered by month, which permits the MFI to design as a serious problem in urban Perú, particularly with a loan to accommodate erratic inflows and outflows, a credit cards. The MFI wants to move away from these characteristic of agriculture-based production units. clients and expand in rural areas, where debt levels are lower. Financiera Confianza’s decentralized, but integrated, management structure allows the MFI to respond rapidly to management issues at the local level. Good Practices Financiera Confianza has a regional field supervision Financiera Confianza’s two decades of experience and level, including a regional product manager. However, lessons learned have translated into a number of good all territorial, regional and agricultural product managers practices. travel to Lima once a month for a national-level meeting with the entire management team and review the overall Financiera Confianza’s loan evaluation methodology is portfolio’s quality and strategy. based on cash flows of the household production unit. Hiring credit officers with a technical background is useful but not necessary. Financiera Confianza considers technical generalists that are trained after being hired to be suitable, particularly given its intent to give officers a mixed portfolio of agricultural and non-agricultural clients, thereby contributing to the efficiency of the organization. Agricultural lending risks are diverse and need to be mitigated in a variety of ways. In Financiera Confianza, production risk is managed in two ways: encouragement of diversification among crops and/or other sources of income at the client level and quick preemptive addressing of known production risks; both of these have helped the MFI keep losses to a minimum. Market risks, usually price related, are mitigated by projecting significantly lower than current market prices in the cash flow analysis, particularly for crops prone to price swings. Portfolio concentration risks are also mitigated through limitations on portfolio exposure. A committed staff and management team have brought extensive value to management of the agricultural portfolio. Financiera Confianza targets a low rotation rate and pays significant attention to training, internal opportunities, and promotion paths. Consequently, many middle managers are seasoned professionals with a long history with Financiera Confianza or Nuestra Gente. This has allowed the merged Financiera Confianza staff to take a longer-term view of clients and their needs, a horizon that is essential for agricultural clients. 54 Case Studies—Financiera Confianza, Perú access to finance for smallholder farmers Case 4: Caja Huancayo, Perú Background Caja Huancayo is a municipal Caja, 100 percent owned by the municipality of Huancayo. With a concentrated presence in the central region of Perú, Caja Huancayo has been operating in the microfinance market for 25 years. It has the strongest market in Huancayo and the Junín province, with more branches than any other institution, despite growing competition from Cajas and other financial institutions entering this market in recent years. Clients interviewed for this study have described it as an institution that encourages loyalty and provides some of the most competitive interest rates. Caja Huancayo has been involved in financing agriculture in a variety of ways since 1996. The Caja finances a wide variety of agricultural activities, including livestock raising, milk production, and almost all types of crop production. Its agricultural finance strategy includes leveraging its outreach points (branch, information points, and ATM and correspondent banking networks) to further penetrate the sector, building inwards between branches. The agricultural portfolio growth This represents a sharp increase since July, when PAR rate approximates the overall institution growth rate, > 30 for the smallholder loan portfolio was 4.9 percent, while maintaining its 5 percent exposure in the portfolio. one percentage point more than the overall portfolio at risk. The sharp increase is largely attributable to As of September 2013, 3.9 percent of the Caja’s problems associated with coffee rust disease (discussed total portfolio by value was invested in smallholder in Risk Management on page 59). agricultural activities. As of July 31, 2013, 59 percent of agricultural loans disbursed valued $1,796 or less. Independent of the coffee rust problem, to address the generally high delinquency rate among loans of $718 or Currently, 12.5 percent of the smallholder loan portfolio less, Caja Huancayo is considering restricting lending to is at risk, versus 3.88 percent for the overall portfolio. individuals with a minimum number of hectares. Table 17. Caja Huancayo portfolio composition (September 30, 2013) Total Microcredit SME portfolio Other portfolio Micro, SME portfolio agricultural portfolio Number of active loan clients 155,261 59,556 10,082 87,058 5,405 Number of loans outstanding 176,942 67,675 13,105 96,162 5,535 Portfolio outstanding ($) 427,560,803 118,524,820 141,218,914 167,817,069 16,649,497 Portfolio at risk (>30 days) 3.88% 5.41% 7.63% 2.93% 12.51% Case Studies—Caja Huancayo, Perú 55 access to finance for smallholder farmers Table 18. Caja Huancayo total agricultural portfolio by loan size (July 31, 2013) Portfolio outstanding PAR>30 days No. of clients No. of accounts <718 542,728 10.9% 1,072 1,083 718-1,796 3,034,637 4.1% 2,252 2,265 1,796-3,592 3,479,542 3.6% 1,224 1,229 3,592-7,184 4,021,583 5.2% 707 713 >7,184 5,145,432 2.2% 339 348 Total 16,223,923 N/A 5,594 5,638 Table 19. Caja Huancayo credit products Product Maximum term Rates Amounts Collateral Clients Other key features Agricultural Two years for 2.5%- Any amount Unsecured Semi-commercial Irregular payments loans working capital 3.0% below $10,775 smallholders, may be allowed; loans; 10 years per and secured commercial finances working for fixed asset month above $10,775 smallholders capital and fixed loans assets Education Five years Varies $72-$12,572 Unsecured All clients N/A loans Housing 15 years N/A Up to 80% of Secured All clients N/A loans the property value Leasing Five years N/A N/A Secured starting All clients N/A at $10,775 Products and Approaches make irregular payments depending on their cash flow, although a lump sum payment of interest and principal Segments and Products and one disbursement are most common (more than Caja Huancayo has a single agricultural credit product one disbursement can be made). for all agricultural segments, regardless of size or whether it is for fixed assets or working capital. The Other products provided by Caja Huancayo include only difference is that the Caja will lend more for a housing and education loans, leasing, fixed-term fixed asset loan based on the client’s existing equity. deposits, and insurance. While they are cross-selling The maximum term is two years, with a grace period products, it seems that they could further improve by of no more than 30 days, and the interest rate varies placing more emphasis in this area. from 30 percent to 36 percent annually. Caja Huancayo takes property or land as collateral where possible, but is flexible as to the legal status of the collateral, especially Lending Methodology The approach to evaluating the credit needs of each for smaller loan amounts. Proof of ownership is agricultural client is similar among segments. Caja required as collateral when the client segment reaches Huancayo analyzes credit applications at a crop or medium-sized farmers, as are financial statements. activity level using a semi-automated tool, with some Thirty percent of the agricultural loans have secured pre-loaded production costs and harvest length collateral and the remainder are unsecured or backed information, taking cash flows into consideration. In by property with no legal title. Clients are allowed to 56 Case Studies—Caja Huancayo, Perú access to finance for smallholder farmers Table 20. Caja Huancayo savings and insurance products Product Rates Clients Other key features Savings account N/A All clients N/A Fixed-term deposit N/A All clients N/A Credit life insurance 0.02552% monthly of All clients Covers outstanding loan balance up to outstanding loan balance $38,707 Life insurance N/A All clients Covers disability and provides a lump sum and monthly payments to the family for up to one year. Three plans are available. Accidental death insurance N/A All clients Covers disability, dismemberment, and abandonment. Three plans are available. Cancer insurance N/A All clients Provides lump sum after cancer diagnostic; covers hospitalization, funeral, and phone counseling charges. Three plans are available. Debit card protection N/A All clients Covers varying amounts based on theft of insurance debit cards and possible associated expenses. General risk insurance N/A All clients Covers property damages from fire, flood, explosion, earthquake, strikes, civil unrest, malicious damage, vandalism, terrorism, natural risks, theft, civil responsibility, and extraordinary expenses. 2014, the Caja expects to fully integrate its cash flow reduction in paperwork. These factors contribute to the evaluation tool into its systems. The Caja uses a MIS competitiveness of the Caja relative to Agrobanco, the that was developed in-house and has the capacity to public agricultural development bank. While Agrobanco analyze all income sources. The tool has been further offers significantly lower interest rates, loan processing developed in the last few years to standardize the reportedly takes a month or more. Clients are aware parameters commonly seen in crop investments (costs, of these differences and prefer Caja Huancayo. Based productivity levels, prices, etc.), using primarily publicly on the information it has amassed on rural segment available data, and to include crop production costs, preferences, these clients value rapid service (since they which vary according to the level of technology applied. typically do not focus on planning), minimal paperwork, and friendly interaction with the Caja’s employees. The evaluation methodology also considers other income and expense flows around the household production unit. Caja Huancayo generally finances one crop at a time, although it will finance two loans if there is a significant mix of crops, where more than one crop makes up more than 20 percent of the financing needs. This conservative approach to assessing the farmer and the credit required usually entails lowering price and productivity estimates to anticipate a very conservative scenario, which could result in lower financing than clients may prefer. Caja Huancayo’s lending methodology typically allows the MFI to complete the loan analysis and disbursement process within two to three days. Neither financial statements nor legal guarantees are required for the smaller loan sizes, which has led to a Case Studies—Caja Huancayo, Perú 57 access to finance for smallholder farmers Product Implementation and provides recommendations to management, such as seasonally adapting the weights of the incentive system Product Design and Roll-Out for loan officers working exclusively in agriculture. Agricultural lending is usually introduced in branches which have reached the break-even point and present Agricultural loan officers are not necessarily a potential market. Hence, branches start offering the agronomists, but have university-level education and agricultural loans not earlier than 12 months after they generally have some education in agronomy, forestry, open. It is considered an additional product, but not or agro industry, or come from a farming family. part of the core business. Promising applicants (based on their curriculum vitae) must pass both technical and psychotechnical exams, as Organizational Structure and Human Resources well as reference checks and an interview. Loan officers Caja Huancayo has introduced two new positions to attend a six-day training program in Huancayo or Lima support its agricultural lending: an agronomist in the that occurs monthly. After training is complete, the risk management department to review agricultural successful applicants work with senior loan officers at loans valuing $35,920 or more; and a credit analyst, the branch to obtain field experience and build a client working under the credit manager, who oversees the base, while on probation for six months. Loan officers, agricultural lending portfolio. The former was created along with all other personnel, have access to an online because many of the Caja’s agricultural loans were more repository of trainings, some of which are mandatory than $35,920 (particularly in the centro-oriente region) for specific employee positions. and required special attention. Per Caja Huancayo’s policy, loans of more than $35,920 must go to the risk All loan officers receive incentives based on outstanding management department. Before the MFI hired an portfolio, number of clients, portfolio at risk, and other agronomist in 2012, the risk specialist would evaluate factors. The portfolio at risk data is the most critical, the loan like any other SME loan, and then would send as once a pre-determined percentage is surpassed, the credit file to an agronomist for an external opinion. no incentive is received. In 2010, Caja Huancayo The new system makes the process more efficient. introduced a change affecting the incentives of loan officers that work exclusively on agriculture to ensure The credit analyst overseeing the agricultural loan they are compensated more consistently throughout portfolio also has oversight over retail credit. The the year. Given the seasonal changes affecting the analyst regularly visits branches, analyses portfolio data, agricultural portfolio, the weights of each criterion are 58 Case Studies—Caja Huancayo, Perú access to finance for smallholder farmers variable throughout the year. Since the outstanding The Caja’s distribution network also includes 938 non- agricultural portfolio decreases during harvest season, bank correspondents through a variety of networks, greater weight is placed on portfolio at risk at this time and participation in 1,800 ATMs. of year. Loan officers with a mixed portfolio of both agricultural and non-agricultural loans do not have Marketing seasonally-adjusted incentives, but rather receive the Caja Huancayo conducts two annual marketing same incentives as credit officers managing commercial campaigns for small and large agricultural producers, as credit portfolios. part of a larger marketing campaign across all segments. Many mechanisms are used to market products at these Delivery Approaches and Channels times, including banners, posters, brochures, roaming Caja Huancayo serves its rural and agricultural clients announcement vehicles, and radio spots. Most print through branch and information offices, mobile credit materials are customized to depict an image related to officers who reach rural clients by motorcycle, its agent farming, such as the Caja’s mascot on a tractor. The network, and ATMs. The Caja has 60 branches spread out Caja also markets products through a few producer among nine departments in Perú, 33 of which manage associations, in particular coffee associations and agricultural portfolios. Although the Caja does not have cooperatives. any specific plans to expand its lending to agricultural smallholders, in the next year, it plans to open new branches to eliminate bottlenecks in branches that are Risk Management at or above capacity, in some cases near smallholders. Risk is managed in a number of ways, including the The MFI also has 31 information offices that do not evaluation methodology noted above, collateral taken— have cash services and are dependent on branches for usually land or property, but not with formal title in all credit operations. The information offices are located in cases—and credit bureau checks. Caja Huancayo also rural areas and can receive credit applications. Because manages risk by staffing its risk management department they are staffed by branch staff, they are not open daily with an agricultural specialist who reviews applications and any credit application is processed at the branch. for agricultural loans of more than $35,920. Case Studies—Caja Huancayo, Perú 59 access to finance for smallholder farmers Based on historical experience, Caja Huancayo has which it adjusts depending on the size of the loan being limited its exposure to agricultural credit risk by setting financed. limits on its participation in the total portfolio. During the first few years of agricultural lending, the percentage of While it has a single agricultural credit product, Caja the portfolio in agricultural credit grew quickly, reaching Huancayo has a robust and diverse product portfolio 15 percent of the overall portfolio by 2000. Because of available to all clients, although it is not aggressively unsatisfactory results, the Caja introduced new systems cross-selling products in the agricultural sector. Being in credit technology and risk management, such as regulated allows the corporate body the ability to allowing irregular payments and limiting the exposure promote a number of financial products along with of its agricultural loans to approximately 5 percent of strong systems and processes to support distribution of the total portfolio. However, within that 5 percent, the the agricultural product. This means that its monitoring Caja did not previously set limits on exposure to specific data and reports are detailed and timely and they count activities such as types of crops and livestock. Nor is on documented processes and policies which directly its MIS currently capable of tracking the activities pertain to the agricultural segment. financed. The fact that the Caja has not set crop-specific risk tolerance levels has left more than 50 percent of Caja Huancayo has learned a variety of lessons about its agricultural portfolio exposed to coffee rust disease, agricultural finance. which is facing most Peruvian coffee producers. This has raised awareness among the management and they ■■ The marketing and customer service departments can are in the process of upgrading their systems in order be tailored to the rural segment. The Caja massively to be able to track the developments in main activities. advertises its small and large campaigns through many traditional marketing methods. Another risk management mechanism Caja Huancayo ■■ Clientsare able to conduct transactions at multiple has in place is to require loan officers to visit agricultural producers at least 60 days and again 30 days before distribution points, although these are more likely to repayment is due. This has provided a useful early be urban than rural. warning system, as loan officers become aware of any ■■ When lending to agricultural smallholders, it is potential risks ahead of the harvest. For example, coffee important to listen to client feedback and customize rust problems were identified in April 2013 and the Caja the service approach. The Caja hires a third party to started reprogramming loans the following month. produce a quarterly client satisfaction report, based on visits to clients and branches, and a client satisfaction survey. Results can be separated by branch, showing Profitability and Sustainability the differences between urban and rural areas. ■■ According to the surveys, the main concerns of Caja Huancayo showed profitability in 2012, posting a 17.5 percent ROE, above the weighted average for agricultural producers are delays in loan evaluations Latin America, but the profitability of its agricultural and farm visits. The speed of loan processing and loan products is not known. The Caja conducts direct disbursement is also critical to rural and agricultural costing only for its product lines and does not cost clients. Based on this feedback, the Caja streamlined specific products. There is a general consensus at the its approach and processes loans in 2 to 3 days, similar MFI that the agricultural product is expensive to deliver to other MFIs operating in the same regions. but that it recovers its costs. In fact, according to the ■■ It is important to evaluate the cash flow of the Caja’s general manager, the agricultural lending product household production unit when determining the is one of its most profitable products. creditworthiness of smallholders. At this smaller client size, most farm and household economies are integrated and often have several sources of income. Lessons Learned, Good Practices, By evaluating the entire household unit, the Caja and Success Factors analyzes risks of cash sources and uses.   Caja Huancayo has generated strong brand loyalty and recognition, particularly in Perú’s central region, aided by its association with the Huancayo municipality. It has a reputation among clients for being the financial institution with the lowest interest rates in the market, 60 Case Studies—Caja Huancayo, Perú Endnotes 1 Studies have found that small farms in labor- 5 Referred to as semi-commercial smallholders in intensive countries tend to have greater productivity loose value chains, or simply semi-commercial than larger farms (Eastwood, Lipton & Newell, smallholders, in the remainder of this document. 2009). While the difference in productivity may disappear as economies become more capital- 6 For the purpose of this document, unless otherwise intensive or with plantation crops such as sugar indicated, rural clients are defined as clients in rural cane, it shows that smallholders could be essential areas who are not primarily engaged in agricultural in improving the global food supply. activities but are closely integrated into the agricultural economy that dominates rural areas. 2 The complete segmentation framework includes medium and large farmers, in addition to commercial 7 These 19 MFIs include both IFC investment clients and semi-commercial smallholders, and subsistence and non IFC clients. farmers. See IFC 2012 for complete segmentation definitions. 10 India MFIs in Agriculture: Preliminary findings in IFC internal report. January 2014. 3 In the IFC 2012 publication, “Innovative Agricultural SME Finance Models,” the distinction 11 Only seven of these are included in the table, between tight and loose value chains is made at the since data for the eighth respondent was largely commercial smallholder level. For the purposes incomplete. of this study, a simplified categorization was used with commercial farmers defined as those selling 12 Eleven MFIs specifically targeted agricultural and within tight value chains, while semi-commercial rural clients as part of their institutional mission, smallholders were defined as those operating in and four entered the market due to saturation of loose value chains. urban/peri-urban markets. In the remaining seven cases, the reasons were miscellaneous or somewhat 4 Christen and Anderson’s segmentation of unclear, making them difficult to categorize. smallholder farmers is slightly different than the one presented in IFC 2012, as well as the working 13 According to the opinion of ADOPEM definitions of these segments in this document. management. Christen and Anderson segment the market into commercial smallholders in tight value chains, 14 It is worth noting that the characteristics of the commercial smallholders in loose value chains, and labor markets in the countries where our case study non-commercial (subsistence) farmers. However, MFIs operate do not appear to be a determinant these numbers are the best estimates available on of the preferred or actual profile of loan officers the size of the respective farmer segments. managing agricultural loans. In Perú, neither Financiera Confianza (which is moving towards a ENDnotes 61 access to finance for smallholder farmers generalist loan officer profile) nor Caja Huancayo or altering them. Examples include vehicles, (which hires only specialized loan officers) consider appliances, machinery, and liquid assets (accounts the lack of qualified staff in the regions where they receivable, bonds, etc. that can be rapidly turned into operate to be a challenge in their smallholder lending cash). Movable assets in agricultural finance include programs, according to their survey responses. In inventories or stock of agricultural commodities the Dominican Republic, ADOPEM has struggled or inputs (seeds, fertilizers). Fixed assets refer to to find qualified personnel with agricultural property that cannot be moved without damaging backgrounds but, as documented in its case study, or altering it, such as land and houses. it has partnered with universities and training institutes to ensure its agricultural credit officers 23 These are often labeled “real” collateral (“garantias have specialized agricultural backgrounds, even reales” in Spanish). although they all manage diversified portfolios of agricultural and non-agricultural loans. Ultimately, 24 The field research did not document how loan the decision to use specialized or generalist loan provisioning and risk-weighting is affected by officers, appears to be driven primarily by strategic, different types of security, a factor likely to influence rather than market, reasons. lending decisions. 15 This segmentation is based on the commercial, 25 Caja Nuestra Gente merged with Financiera semi-commercial, and subsistence smallholder Confianza in May 2013. See Case Study 3 for more farmer distinction as described in Chapter I of this details. report. 26 Although not really MFIs, Agrofinanzas and 16 Note that the quote refers to “agricultural lenders” Finterra in Mexico are examples. generally, not to MFIs. 27 Offered by Caja Huancayo, it includes coverage 17 This is the approach ADOPEM is taking with for damages from fire, floods, explosions and a soon-to-be-launched pilot of a loan product earthquakes, strikes, civil unrest, malicious damages, with a seven-year loan term and four-year grace vandalism, terrorism, natural risks, and theft of period for smallholders that introduce a tree crop fixed assets, and reimburses for extraordinary in partnership with a leading manufacturing and expenses. export company. 28 Trivelli and Tarazona, 2007. 18 While the agrocrédito product is being used with all smallholder farmers, ADOPEM is 29 For ease of reference in this paper, we use the term considering developing a specific product for larger “commercial” to refer to non-agricultural activities agribusinesses. or non-agricultural loans for enterprise purposes. 19 Adams, Graham, and Von Pischke (1984). 30 Financiera Confianza’s AgroPuro product is an exception to this. However, as described elsewhere 20 Interestingly, some ADOPEM clients choose to in this report, the MFI is phasing out this product maintain monthly payments, despite the current in favor of AgroMix, a product that analyzes flexibility in setting payment terms. household cash flow. 21 This question was not explicitly formulated in 31 This statement applies to financial institutions the survey, where the diversity of loan security involved in agricultural lending and not just MFIs. requirements is similar for working capital and fixed assets loans. The individual case studies, however, 32 DCA coverage does not include interest losses. It is documented enhanced collateral requirements for unclear from the USAID website whether the DCA loans above specific thresholds. covers first loss and if so, what percentage. 22 Movable assets, also known in legal and banking 33 Demirguc and Klapper (2012). FINDEX Database, terms as movable property, are defined as assets/ World Bank. Colombia and Perú are below the property that can be moved without damaging LAC average, with 30 percent and 20 percent, 62 Endnotes access to finance for smallholder farmers respectively (adults with an account at a formal 44 It is debatable whether this level of field monitoring institution). carried out by ADOPEM loan officers is necessary. Its effectiveness seems to be supported by the low 34 Trivelli and Venero (2007) in “Recent advances delinquency rate of the smallholder loan portfolio. in agricultural finance: Supply and strategies—A For an MFI with an extensive branch network in review of literature and experience,” French rural areas, in a country the size of the Dominican Microfinance Network Rural Finance Commission, Republic, this level of field monitoring may be FARM Conference, November 2007. feasible and sustainable. However, for MFIs in larger countries, and/or with less extensive branch 35 BBVA Microfinance Foundation became a network resulting in greater distances to clients, it shareholder in November 2012. may not be feasible. 36 There is some debate among senior staff regarding 45 In this particular case of ADOPEM, the technical whether or not the balloon payment will include assistance was provided at no direct monetary cost both principal and interest, or just principal, with by a donor agency. interest payments continuing to be made monthly. 46 CEPAL, as of December 2011. 37 The exchange rate used in this case study is 42.53, according to the Dominican Central Bank as of 47 “Caja” is a common term in Perú and other Latin September 30, 2013. American countries to designate a non-bank savings and credit institution, licensed to collect deposits. 38 The Spanish translation for movable property It is often (but not always) a financial cooperative, collateral is “garantía prendaria”. See Box 2. i.e., a member-based and member-owned financial institution. 39 The pilot will include a loan product with a seven-year loan term and four-year grace period 48 The two institutions entered into an agreement for smallholders that introduce macadamia nut to merge in late 2010. The merger was officially farming. Comercializador la Loma will provide a approved by the Peruvian superintendency in April guaranteed market for the farmers’ produce and 2013, effective May 1, 2013. provide technical assistance. 49 Financiera Confianza is part of the BBVA 40 ADOPEM estimates that the out-of-pocket Microfinance network investment in software changes alone cost approximately $30,000. Additional costs included 50 Agrobanco offers lower interest rates than all other ADOPEM staff time in the redesign, and the institutions and longer loan terms. For working technical assistance provided by WWB/CODESPA. capital, Agrobanco has terms of 18 months to 24 months and Financiera Confianza up to 12 months. 41 The Dominican Republic has nine distinct and six For fixed assets Agrobanco lends up to seven transitional agricultural zones. years vs. Financiera Confianza up to four years. Other competitors vary by region: in the central 42 ADOPEM has a long tradition of investing in region, the main competitors are ProFinanzas, Mi training, going back to its origins as an NGO. In Banco, and Caja Huancayo. In Lima-Oriente, it is 2011, the bank received technical assistance for 11 Caja Piura and Financiera Edyficar. In the north months from the Frankfurt School to restructure its and south regions, it is mainly Agrobanco, although training program for all staff, with special attention Edyficar is entering these markets aggressively. given to credit officers. 51 The exchange rate used in this case study is 2.784 43 Regulations allowing banks to use agent networks (nuevos soles per dollar), according to the Peruvian were just published by the government, and Central Bank as of September 30, 2013. ADOPEM has presented a proposal to initiate branchless banking that is pending approval by the 52 Clients can have no more than two outstanding regulatory authorities. loans with any financial institution to receive a loan from Financiera Confianza. If the total level ENDnotes 63 access to finance for smallholder farmers of indebtedness is higher than $7,184 inclusive 61 According to Superintendence data for August of existing loans and the new loan, the AgroPuro 2013, Caja Huancayo had 20 branches in Junín methodology is used; if indebtedness is lower than (60 percent of its total branches), compared to $7,184, the AgroMix methodology is used. 16 branches for Financiera Confianza (9 percent) and 13 branches for Banco de Crédito del Perú (3 53 There are no financial incentives in place for loan percent). officers to encourage cross selling. With regard to payment services, clients participating in the 62 In areas where Caja Huancayo has agricultural focus group conducted for this case study said that lending operations, Financiera Confianza and state- they used Banco Nación in Lima to remit internal owned Agrobanco are direct competitors. payments to themselves in the Junin province and deposit the funds in their Financiera Confianza 63 Based on conversations with a small, non- savings account. None of the clients were aware, representative sample of clients. however, that they could deposit the funds directly into a Financiera Confianza savings account at any 64 The exchange rate used in this case study is 2.784 location. (nuevos soles per dollar), according to the Peruvian Central Bank as of September 30, 2013. 54 In practice, it appears that Financiera Confianza officers may not always analyze the cash flow of 66 Through an online portal maintained by the the entire household unit. In a credit committee Ministry of Agriculture that contains market prices meeting in Tarma attended by several members and production costs per crop, per region. of the research team during the preparation of this case study, the credit officer presenting a loan 67 Agrobanco does pose a challenge to the repayment application for $1,796 said that only the cash flow culture, however, as a result of recent loan of the agricultural activity had been analyzed. forgiveness programs (2010 and 2011). 55 The evaluation criterion includes projected cash 68 Caja Huancayo does not practice a consistent flows that can cover 1.3 times the amount of the custom of zoning credit officers’ areas of operation, loan. which has allowed for overlap within, and between branches. 56 A university system based in Monterrey, México, with branches or affiliates in Perú and other Latin 69 With existing branches in the south and the coast, American countries. the Caja plans to expand agricultural lending focused on cash crops while recognizing the unique nature 57 This is an arrangement shared among several of the coastal market which is primarily larger financial institutions. farms and export driven. Growth in agriculture will remain capped at approximately 5 percent of the 58 KasNet facilitates payments, deposits, withdrawals, total portfolio. and account balance information at agent locations. Any location can provide its services to multiple 70 Caja Huancayo does not use portfolio insurance financial institutions. mechanisms to mitigate crop-specific risks. 59 DCA guarantees are partial guarantees (covering 71 According to Mix Market. The Superintendence up to 50 percent of the loss on loans made by publishes slightly different ROE at 20.65 percent as financial institutions) provided by the U.S. Agency of December 31, 2012 and shows Caja Huancayo for International Development to stimulate lending is more profitable than all but one municipal Cajas to viable but underserved sectors. in Perú. 60 While this is below the weighted average for 72 At the time of the survey, the Caja was not able the region, given the recent merger between to provide information on the direct costs of its Financiera Confianza and Caja Nuestra Gente, the agricultural lending. annualized ROE may not be a completely accurate representation of the new institution. 64 Endnotes References Adams, Dale W., Douglas H. Graham, and J.D. Von Christen, Robert Peck, and Jamie Anderson. 2013. Pischke. 1984. Undermining Rural Development with Cheap Segmentation of Smallholder Households: Meeting the Range Credit. Washington, D.C.: Westview Press. of Financial Needs in Agricultural Families. No. 85 of Focus Note. CGAP. Bagazonzya, Henry, Zaid Safdar, and Soham Sen. http://www.cgap.org/sites/default/files/Focus-Note- 2011. “Module 7: Broadening Smallholders’ Access Segmentation-of-Smallholder-Households-April-2013. to Financial Services through ICT.” ICT in Agriculture: pdf Connecting Smallholders to Knowledge, Networks, and Institutions. The World Bank. Christen, Robert Peck and Douglas Pearce. 2005. http://www.cto.int/wp-content/themes/solid/_ Managing Risks and Designing Products for Agricultural layout/dc/k-r/ICT_in_Ag_Sourcebook_web_light.pdf Microfinance: features of an emerging model. No. 11 of Occasional Paper. CGAP. Carroll, Tom, Andrew Stern, Dan Zook, Rocio Funes, http://www.ifad.org/ruralfinance/pub/risks.pdf Angela Rastegar, and Yuting Lien. 2012. Catalyzing Smallholder Agricultural Finance. Dalberg Global Coates, Mike, Richard Kitchen, Geoffrey Kebbell, Development Advisors. Catherine Vignon, Claude Guillemain, and Robin h t t p : / / d a l b e r g. c o m / d o c u m e n t s / C a t a l y z i n g _ Hofmeister. 2011. Financing Agricultural Value Chains in Smallholder_Ag_Finance.pdf Africa: A Synthesis of Four Country Case Studies. Eschborn, Germany: GIZ. CGAP and IFAD. 2006. Emerging lessons in agricultural http://www2.gtz.de/dokumente/bib-2011/giz2011- microfinance: selected case studies. 0368en-agricultural-value-chains.pdf http://www.ifad.org/ruralfinance/pub/case_studies. pdf Demirguc-Kunt, Asli, and Leora Klapper. 2012. Measuring Financial Inclusion. The Global Findex Database. Chemonics International Inc. 2009. FS Series #5: Value No. 6025 of Policy Research Working Paper. Washington, Chain Finance—Model Scope of Work. Washington, D.C.: World Bank. D.C.: U.S. Agency for International Development. http://egateg.usaidallnet.gov/sites/default/files/ Diaz, Lillian C. and Jennifer E. Hansel. 2007. Practitioner- FS%20Series%205_Value%20Chain%20Finance_ Led Action Research: Managing Risk-Sharing Models Work MSOW.pdf with Farmers, Agribusinesses, and Financial Institutions. Presented at the International Conference on Rural Finance Research: Moving Results into Policies and Practice. Rome, Italy: SEEP Network. http://www.fao.org/ag/rurfinconference/docs/ papers_theme_2/making_risk_sharing_models.pdf References 65 access to finance for smallholder farmers Eastwood, Robert, Michael Lipton, and Andrew Newell. Khandker, Shahidur R. and Gayatri B. Koolwal. 2014. 2010. “Farm Size.” Handbook of Agricultural Economics. Does Institutional Finance Matter? Evidence Using Panel Data Burlington, VT: Academic Press. from Uganda. No. 6942 of Policy Research Working Paper. http://michaellipton.files.wordpress.com/2012/02/ Washington, D.C.: World Bank. farmsize2009.pdf Klein, Brigitte et al. 1999. “Better Practices in Ehrbeck, Tilman. 2013. “10 Priorities for Financial Agricultural Lending.” Volume 3 of Agricultural Finance Inclusion in 2013 and Beyond.” Posted on CGAP blog Revisited. Rome, Italy: FAO. January 23, 2013. http://www.cgap.org/blog/10-priorities-financial- Mahajan, Vijay and K. Vasumathi. 2010. “Combining inclusion-2013-and-beyond Extension Services with Agricultural Credit: The Experience of BASIX.” Focus 18, Brief 13 of Innovations Food and Agriculture Organization of the United in Rural and Agricultural Finance. Edited by Renate Nations. 2013. Food Price Index. Online dataset dated Kloeppinger-Todd and Manohar Sharma. Washington, June 6, 2013. D.C.: International Food Policy Research Institute. h t t p : / / w w w. f a o. o r g / w o r l d f o o d s i t u a t i o n / http://www.ifpri.org/sites/default/files/publications/ foodpricesindex/en/ focus18.pdf GIZ. 2011. Agricultural Finance: Trends, Issues and Meyer, Richard. 2012. Microcredit and Agriculture: Challenges. Eschborn, Germany: GIZ. Challenges, Successes, and Prospects. Antwerp, Belgium: http://www.ruralfinance.org/fileadmin/templates/ INCOFIN. rflc/documents/06__giz2011-0460en-agricultural- https://www.incofin.com/sites/default/files/ finance.pdf attachments/publications/Microfinance%20and%20 agriculture.pdf Hazell, Peter. 2011. Five Big Questions about Five Hundred Million Small Farms. Conference on New Directions Miller, Calvin. 2013. “Agricultural Finance.” The New for Smallholder Agriculture. Rome, Italy: International Microfinance Handbook. Edited by Joanna Ledgerwood. Fund for Agricultural Development. Washington, D.C.: World Bank. http://www.ifad.org/events/agriculture/doc/papers/ https://openknowledge.worldbank.org/ hazell.pdf bitstream/handle/10986/12272/9780821389270. pdf ?sequence=6 Hazell, Peter, J. Anderson, N. Balzer, A. Hastrup Clemmensen, U. Hess, and F. Rispoli. 2010. Potential for Quiros, Rodolfo, ed. 2010. Proceedings of the scale and sustainability in weather index insurance for agriculture conference: “Agricultural Value Chain Finance.” San and rural livelihoods. Rome, Italy: International Fund for Jose, Costa Rica. Agricultural Development and World Food Programme. http://www.fao.org/fileadmin/user_upload/ags/ http://www.ifad.org/ruralfinance/pub/weather.pdf publications/AVCF_2011e3.pdf International Finance Corporation. 2012. Innovative Salami, Adeleke, Abdul Kamara, and Zuzana Brixiova. Agricultural SME Finance Models. Global Partnership for 2010. Smallholder Agriculture in East Africa: Trends, Financial Inclusion. Constraints and Opportunities. No. 105 of Working Papers http://www1.ifc.org/wps/wcm/connect/55301b804e Series. Tunis, Tunisia: African Development Bank. bc5f379f86bf45b400a808/Innovative+Agricultural+S http://www.afdb.org/fileadmin/uploads/afdb/ ME+Finance+Models.pdf ?MOD=AJPERES Documents/Publications/WORKING%20105%20 %20PDF%20d.pdf International Finance Corporation. 2011. Scaling Up Access to Finance for Agricultural SMEs: Policy Review and Trivelli, Carolina and Alvaro Tarazona. 2007. Riesgos Recommendations. Global Partnership for Financial y portafolios agropecuarios: lecciones desde la experiencia de Inclusion. instituciones financieras de América Latina. No. 151 of http://www.gpfi.org/sites/default/files/documents/ Documento de Trabajo. Lima, Perú: Instituto de Estudios G20_Agrifinance_Report%20(FINAL%20ONLINE). Perúanos. pdf http://archivo.iep.pe/textos/DDT/ddt151.pdf 66 References access to finance for smallholder farmers Vermeulen, Sonja and Lorenzo Cotula. 2010. Making the most of agricultural investment: a survey of business models that provide opportunities for smallholders. London, Rome and Bern: IIED, FAO, IFAD, and SDC. http://www.ifad.org/pub/land/agri_investment.pdf Weber, Ron and Oliver Musshoff. 2012. “Is agricultural microcredit really more risky? Evidence from Tanzania.” Agricultural Finance Review 72 (3). h t t p : / / w w w. e m e r a l d i n s i g h t . c o m / j o u r n a l s. htm?issn=0002-1466&volume=72&issue=3&articleid =17062755&show=pdf&PHPSESSID=iaknv2nbbrqd k1ja81ft0njga7  References 67 access to finance for smallholder farmers 68 Annex – Desk Review List of Examples ■■ Contract Farming in Ghana Latin America and Caribbean ■■ Value Chain Finance Integration in Kenya ■■ Credit to Soybean Farmers through Silos in Paraguay ■■ Value Chain Finance and Technology in Kenya (2) ■■ Emerging Farm Financing in Mexico ■■ Value Chain Investments in Southern Africa ■■ Agricultural and Rural Lending in El Salvador ■■ Value Chain Integration in Malawi ■■ Microwarrant Program in Bolivia ■■ Emerging Farm Financing in Zambia ■■ Agriculture Finance Diversification in Perú ■■ Financing Producer Associations in Mozambique ■■ Agriculture Finance Diversification in Bolivia ■■ Customized Lending Methodology in Madagascar ■■ Financial Linkages for Smallholders in Nicaragua ■■ Commercial Village Integration to Value Chains in ■■ Contracts in Agricultural Value Chain Finance in Kenya Honduras ■■ Warehouse Receipts in Niger ■■ Production Chain Credit in Bolivia ■■ Agricultural Value Chain Finance in Honduras Asia ■■ Integrated Financial Instruments and Services in Nicaragua and Non-Financial Services for ■■ Financial Smallholders in India ■■ Artichoke Value Chain in Perú ■■ Correspondent Banking in India ■■ Rice and Fruit Value Chains in Perú ■■ Warehouse Receipts in India ■■ Quinoa Value Chain in Bolivia ■■ Smallholder Input Finance in India ■■ Agriculture Finance Diversification in Guatemala (2) ■■ Index-Based Weather Insurance in India ■■ Diversification into Agricultural Finance in Africa Azerbaijan ■■ Credit Facility for Group Lending in Zambia ■■ Contract Farming in Vietnam ■■ Warehouse Receipts in Tanzania ■■ Cattle Insurance in India ■■ Contract Farming in Zambia ■■ High Agricultural Investment in Kyrgyzstan Chain Finance through Joint Liability Groups ■■ Value ■■ Value Chain Integration in India in Ghana ■■ Outgrower Scheme in Tanzania Annex – Desk Review List of Examples 69 access to finance for smallholder farmers 70 2121 Pennsylvania Avenue, NW Washington, DC 20433, USA www.ifc.org