Inclusive Finance: Challenges and Opportunities - Ifad

Inclusive Finance: Challenges and Opportunities The Rome-based agencies’ perspective

Enabling poor rural people to overcome poverty

Introduction Most rural households and enterprises need access to financial services in order to grow and generate income. This is especially the case for the people who work the world’s estimated 500 million small farms, and the many agribusinesses that buy from and sell to them. However, access to finance in the developing world is unevenly distributed. Promoting “inclusive finance” means intensifying the depth of outreach and providing services to marginalized groups, especially women, reaching beyond conventional microcredit to the people at the bottom of the economic pyramid. Smallholder farmers need ongoing access to financial services specific to their agricultural activities and to reach markets. But small producers are often perceived as too risky by commercial financial institutions and can fall into the category of “the missing middle,” as they are served neither by microfinance institutions nor by commercial banks. And in many places, formal financial services are not aligned with the business and investment purposes of small producers, as well as being simply too far away or too expensive. Women farmers and entrepreneurs tend to face disproportionately greater obstacles in accessing financial services, training, networks and information, in addition to barriers in the legal and policy framework. The burden of unpaid work also hampers rural women’s ability to take advantage of on- and off-farm employment and market opportunities in the agricultural sector. Rural small and medium-sized enterprises (SMEs), on which farmers rely for inputs and sales, also need diverse financial services. SMEs are often caught in the gap between consumer products provided by microfinance institutions and commercial services from banks. As a result, they cannot get the financial services and loans they need to grow and thrive. Smallholder households have a range of financial needs: • savings to manage irregular cash flow, respond to external shocks and make investments • working capital to finance their engagement in agriculture and marketing • investment capital and access to leasing and insurance services • money transfers to send and receive payments from family at reasonable cost, and to sell and buy goods • liquidity for their normal and extraordinary household expenditures • insurance to help manage the impact of risks and unexpected events. Expanding access downwards, however, must be about more than just smaller loans – the extreme poor frequently cannot access a market or invest capital in a way that allows for the repayment of a loan. And while they often benefit from social safety net programmes which typically include cash/voucher transfers, food assistance, or public works employment, such programmes sometimes lack effective exit strategies.

Pro-poor financing modalities The three Rome-based United Nations food agencies (FAO, IFAD and WFP) give particular emphasis to the implementation of innovative financial instruments that are of particular relevance to smallholder farmers: • Credit through private-sector agricultural businesses. Embedding finance in the production chain along with other goods and services (e.g. seeds, inputs, weather information, insurance) through “agricultural production finance” or “value-chain finance” arrangements is most relevant to higher-value agricultural products sold through structured, contractual relationships. Contract farming, in which credit is often in-kind (in the form of inputs), as is the repayment (in the form of produce), makes feasible large numbers of small-scale loan transactions to farmers. Contract farming can also provide access to technical and marketing assistance. Marketing cooperatives acting as market intermediaries can also play a role in providing short-term credit – in effect, a form of bridging finance – to their members.

• Collateralization of physical assets. Besides loan guarantees, the instrument of greatest relevance to smallholder farmers is the warehouse receipts system, in which a third-party warehouse operator stores the produce delivered by farmers at agreed quality standards, and issues them a receipt that they can then use as collateral to get a loan. This system eases access to finance and also helps to reduce market transaction costs through the independent enforcement of produce standards. • Collateralization of ”forward delivery” contracts. Smallholder farmers can use forward delivery contracts from reputable and well-established buyers as collateral for loans. • New information and communication technologies. Financial service providers are encouraged to have management and information systems that can handle multiple, customized credit, savings and payment products, including point-of-sale transactions and direct transfers. • Savings and insurance. Different kinds of savings accounts and various insurance products can be useful to assist smallholders as they transition from subsistence farming into the market economy.

Looking beyond production Agricultural value-chain finance does not replace conventional finance. Despite its many benefits, value-chain finance cannot also provide the range of other financial services that serve the more general needs of rural households, beyond agricultural activities. The biggest challenge is for poorer farming households, which fall outside the scope of highly structured arrangements. Their demand for financial services must be met holistically. The development of well-functioning rural financial systems able to provide sustainable access to demand-responsive financial services is critical for rural economic development. The Rome-based agencies address persisting challenges at the country level with scalable solutions and opportunities, together with other United Nations agencies and partners. The Capacity Building in Rural Finance (CABFIN) Partnership is a knowledge networking and development partnership of FAO, IFAD, World Bank, United Nations Capital Development Fund and Deutsche Gesellschaft fϋr Zusammenarbeit (GIZ). It develops and supports the Rural Finance and Investment Learning Centre (RFILC), a dynamic portal that offers rural finance information and presents on-line training in English, French and Spanish. FAO and IFAD work to support countries on Comprehensive Africa Agriculture Development Programme (CAADP) country investment plans and the African Agribusiness and Agro-industries Development Initiative and partnership with Making Finance Work For Africa. FAO and IFAD also provide technical support to WFP on the Purchase for Progress (P4P) Working Group on Access to Finance. P4P promotes local procurement of staple food with the intention of achieving a higher developmental gain by buying in a smallholder-friendly way, while building capacity at the country level in post-harvest handling or storage, access to financial services and financial literacy. The WFP/IFAD Weather Risk Management Facility is a joint initiative that supports the development of innovative weather and climate risk management tools, such as weather index insurance, that improve rural livelihoods and reduce hunger. WFP promotes financially inclusive food assistance through safety nets and social protection programmes, by providing vulnerable and poor populations with access to basic financial services on a low-cost basis through a variety of means, including agent banking and mobile money schemes. Financial Graduation is a transformative approach that aims to prepare beneficiaries for integration into markets so that their business activities (and the household benefits) last beyond the usual initial period of intensive support. The programme uses a three-step targeting approach to identify the poorest households. Consumption support is provided as cash or food. The amount, frequency and duration vary across sites. Options for viable livelihoods are

discussed with participants to individually match the right asset to their interests and skills sets. Results so far provide strong evidence that the graduation model can work, leading to increased food security, increased and more diverse incomes, and increased assets. Remittances also promote financial inclusion. In 2013, over US$450 billion will be sent by migrants abroad back to developing countries – 40 per cent of it to rural areas. Through the Financing Facility for Remittances, IFAD, in partnership with the European Commission, the Consultative Group to Assist the Poor, World Bank, United Nations Capital Development Fund, and the governments of Luxembourg and Spain, has been addressing major constraints in the remittances market. While remittances are mainly used for daily subsistence needs, a small percentage of these flows is invested in agriculture, which represents an amount equal to four times global official development assistance to this sector. However, significant facilitation is still required in order to maximize diaspora investment in agriculture. The Diaspora Investment in Agriculture initiative is addressing how the global diaspora can be encouraged to invest in sustainable agricultural projects with real potential for impacting the lives of poor rural people.

Questions for discussion • How can we provide smallholder farmers with tailor-made financial services and how can we connect them to markets? What are the persisting gaps? What are scalable solutions? • Many banks do not recognize smallholder farmers as entrepreneurs. What are the best practices for providing financial and business development services so as to help micro, small and medium-sized enterprises grow and thrive? • Given the importance of agriculture to food security, nutrition and rural development, including for post-2015 sustainable development goals, how can we catalyse universal access to financial services? How can the RBAs, together with other United Nations partners, jointly define a vision and path toward making universal access to financial services a reality? • How can the Rome-based agencies further advance the above objectives, individually and with other United Nations partners and actors such as mobile phone operators, private companies, financial service institutions and agribusinesses? Are there particular country-level opportunities? • How can cash transfer programmes and other payments supported by the RBAs be used to develop more inclusive financial systems, and to help households and businesses transition to formal accounts and other financial services?

Calvin Miller Senior Officer and Leader Agribusiness and Finance Group Food and Agriculture Organization of the United Nations Viale delle Terme di Caracalla, 00159 Rome, Italy Tel. (39)-06-570-54469 [email protected]

Michael Hamp Senior Rural Finance Advisor Policy and Technical Advisory Division International Fund for Agricultural Development Via Paolo di Dono 44 00142 Rome, Italy Tel. (39)-06-54592807 [email protected]

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• How should we best measure progress toward financial inclusion and ending hunger, alleviating poverty and achieving food security? At the global level? At the country level?

Brian Bogart Policy and Programme Advisor Policy, Programme and Innovation Division World Food Programme Via C.G.Viola 68 Parco dei Medici 00148 Rome, Italy Tel. (39)-06-65132690 [email protected]

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