and medium enterprises (SMEs), in order to be effective to these target groups. Political pressure has forced institutions in some countries to provide rural financial services, but, with no commitment, results are poor.


• Sufficient scale and market share is essential for banks with a rural orientation.


• Client linkage to corporate governance—for example, rural and urban client shareholders or client panels—can positively influence performance and safeguard the rural mission of an institution.


• Clear client segmentation linked to products and distribution channels is essential to effectively delivering products in the rural environment.


• Direct product distribution channels—including mobile-phone banking, ATMs, and electronic point-of-sale devices—are becoming increasingly important for rural finance delivery. A modern and up-to-date IT system is crucial to these services.


• Rural banks in Africa need to focus on both sides of the balance sheet (that is, offer an appropriate mix of savings and lending products). Due to a lack of well-operating markets, they need to be largely self-financing.


• Policy instruments based on risk or cost sharing can be effective but need to be based on clear client segmentation. In cases of sufficient payment capacity, they can be used to overcome the lack of enforceable collateral or to make the credit itself more enforceable. Clients with insufficient payment capacity can only be assisted through income-support mechanisms, meaning grants not loans.


The Rabobank approach to financing agriculture


Among the most important lessons Rabo Development has learned about building sustainable agrifinance in Africa is that segmentation of farmers is essential. In general, a small group of commercial farmers is responsible for a large part of a country’s agriculture production and exports, and often these farmers are the only ones with access to financial services. A large group of subsistence farmers who lack sufficient repayment capacity for bank loans resides at the bottom of the pyramid. The group between the subsistence farmers and the commercial farmers consists of both farmers of small cash-crops (for example, coffee, cotton, or cocoa) with a low annual marketable surplus and so- called “emergent” farmers. The latter group has the potential to grow into commercial farmers but lacks both the financing and farm-management expertise. Financing small cash-crop farmers is only feasible through a supply-chain approach. These smallholders should be financed indirectly via contract farming with better-rated “off-takers” (or processors). Under such schemes, the farmer commits to supply 100 percent of a particular crop to the off-taker, and the off-taker commits to buy 100 percent of the farmer’s product but pays that


money directly to the bank, thereby allowing a direct repayment. Under these structures, the repayment risk to the individual farmers is converted into performance risk to both the farmer and the off-taker. In many cases, cooperatives can play a facilitating role by being the counterpart of the off-taker and the borrower of the loan. A cross-liability system whereby the members guarantee one another’s loans could provide extra comfort to the bank. Also, systems involving warehouse receipts can provide additional financing to this target group; they have been used effectively by the banks that Rabo Development has invested in. Emergent farmers justify an individual approach since they


have the potential to develop into commercial or professional farmers with corresponding growth of financial services. Strict criteria need to be established regarding minimum size, sufficient entrepreneurial spirit, basic understanding of business planning, and farm-management skills. With a combination of financial services and technical support, these farmers stand a fair chance of success. Emergent farmers can be financed under the existing retail


structure of a particular bank, but the local branches involved would need to hire and train agrifinance specialists who understand farming and have the ability to appreciate the particular risks associated with it (including, among others, climatic, disease, and price risks). It is essential to form alliances with other stakeholders in the value chain who also have an interest in developing and investing in the farming sector (for example, farmers’ organizations, commodity exchanges, agri-input providers, and off-takers). The main obstacles to financing agriculture are unpredictable


or erratic government behavior and interference in the agricultural sector. This is especially the case in cash crops like coffee, which are often important sources of hard currency, and in grains, of which African countries are often net importers. In several coffee- exporting countries, the coffee export is not free but rather regulated through auctions with only a limited number of private exporters licensed. In grains, prices are often regulated by the government to safeguard food security. This comes often at the expense of local farmers who are struggling to break even, and it is aggravated by relatively high transaction costs and the weak market position of African farmers.


Conclusion


The Rabobank approach is strongly focused on the value chain, as ultimately the farmer—who runs the price risk, to a large extent— will only be able to get a fair price when the whole chain operates effectively. The success of agricultural development depends on the creation of a large group of professional local farmers producing high volumes of marketable output at a consistent quality. This will have a positive effect on reducing the transaction costs throughout the whole value chain. It is also imperative that all those involved share a common vision on development and contribute in effective, constructive, and committed ways. n


See more information at www.rabobank.com. Gerard van Empel (g.j.j.m.empel@rn.rabobank.nl) is general manager of Rabo International Advisory Services and director of Rabo Development.


INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE Supported by the CGIAR


www.ifpri.org


sustainable solutions for ending hunger and poverty Supported by the CGIAR


www.worldbank.org Copyright © 2010 International Food Policy Research Institute and the World Bank. All rights reserved. Contact ifpri-copyright@cgiar.org or pubrights@worldbank.org for permission to republish.


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