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Pacific Regional Capacity Building Workshop on Improving Access to Finance for the Agriculture Sector. Nadi, 20 & 21 October, 2011
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21 October 2011

SESSION:Improving access to agricultural credit by developingan enabling secured transactions framework.

 
TOPIC OF PRESENTATION: Using innovative collaterals toimprove agricultural credit – FDB perspective.
 
PRESENTER: Deve Toganivalu, Chief Executive Officer, Fiji
 
Development Bank.
 
 
Ladies and gentlemen.
 
 
 
Thank you for the opportunity to share with you this morning, the Fiji Development Bank’s experience in using innovative collaterals to improve access to agricultural credit.
 
 
When I saw the term “innovative collaterals”, I wondered if at FDB, we had missed something as I have always thought our collateral requirements when compared to others - were innovative.
 
Then I thought: If we really want to be innovative, we should take absolutely nothing as collateral except the viability of the project based on its potential. That would certainly be innovative!
 
 
AN OVERVIEW
 
Before I begin the main part of my presentation, I’d like to give you all a very brief overview of our business so that you understand the context of how and why we do what we do.
 
 
FDB is a state-owned enterprise established in 1967. Since its inception, the Bank’ strategic focus has always been to assist Government in its development goals particularly those related to agriculture, rural development, commerce and industry.
 
 
As a development instrument of the state on the one hand, and an autonomous financial institution on the other, our business is an arranged marriage of enhancing social objectives through commercial enterprise. And, like most marriages, maintaining harmony means having to continuously strike a balance between the two. I would like to think we are to some extent, a For-Profit Social Enterprise.
 
 
The Bank is overseen by a board appointed by the Minister of Finance. The daily operations are overseen by me as the Chief Executive Officer with the assistance of an executive committee or EXCO which includes three general managers.
 
 
Over the years our policies, products and services have been designed based on the Bank’s and government’s strategic objectives as well as market demands. To help meet these objectives, government provides interest subsidies to the Bank so that it can on-lend at very low interest rates to SMEs including the agriculture sector.
 
 
We do not take savings or terms deposits, our funds are raised in the market and the bulk of our revenue is derived from interest as well as fees and charges.
 
 
As a development financial institution, our lending policies are pro-poor in that, certain products are designed to allow those with the least in terms of tangible assets and equity, to borrow funds for the purposes of starting a legitimate enterprise. Such lending, you will agree are not only risky but also have a low success rate.
 
 
Add that to the nature of agriculture as a business where you have inclement weather, pests and diseases, fluctuating prices and poor market access etc as additional considerations, you will appreciate that the level of risk absorbed by FDB is over and above that of other commercial financial entities.
 
 
At the end of September 2011, our agriculture portfolio (excluding Fisheries and Forestry) stood at 3,689 accounts valued at $37.30MM. In terms of the Bank’s accounts and total portfolio, this represents 72.2% and 11.1% of our business respectively. The
overall market share for agriculture (including Fisheries and Forestry) lending held by FDB at 30 June 2011 is 58% - up 4% from 2010.
 
 
At FDB, we have had our fair share of successes as well as…well, lessons learnt shall I say. In my line of business one micro-finance client paying off his or her account is considered a phenomenal success! It is no secret that as soon as you disburse a loan that comes with high risk, you have to prepare to pretty much write it off six months to a year down the line – that is the reality of supporting high risk projects that come with low security.
 
After years of observing, implementing and designing lending policies based on social goals at FDB; easing access to credit, particularly agricultural credit, is in my opinion, a small part of a more holistic approach that we all need to take if we are to ensure that the credit provided is utilized correctly for the purposes intended and that sustainable livelihoods are created as a result.
 
 
The main part of my presentation this afternoon will focus on three key areas:
 
1.      Collaterals accepted by FDB for Agricultural Loans;
 
2.    Business Models Created & Lessons Learnt; and
 
3.    Measuring the Impact of Agricultural Financing.
 
 
 
1. COLLATERALS ACCEPTED BY FDB
 
In the traditional banking model collaterals are taken as a
 
safeguard to cover the value of the debt should the borrower
default. These collaterals are taken in the form of mortgages, charges, bill of sale, term deposits, guarantees etc.
 
If we really want to be innovative, we should assess loan applications based purely on the potential of the project to maintain a positive cash flow and have access to a ready market as well as the requisite support – labour, cartage, good planting material and Agriculture Extension advice. FDB has done this with past projects.
 
 
To be innovative also means increasing your risk exposure when lending to the agriculture sector. To minimise this risk, financing for such projects can be assessed based on:
·        Sweat equity – evidence of work undertaken;
 
·        Evidence of a sound business plan – this is where Agriculture Extension or incubation centres can play a pivotal role in helping the farmer select profitable crop(s) and identifying/securing markets before planting;
 
·        Evidence of a 12 month cash flow projection – the lender can take into account previous months’ cash flow as an indicator if the project has already started; and
 
·        Guaranteed market access – if there is no market, the ability to repay is significantly reduced.
 
 
To cover the requirement for collaterals, consider the following:
 
·        Placing a cap on the loan amount – this could be anywhere between $500 or $5,000 per project based on acceptable risk;
        ·        Limiting the project lifespan. In Fiji, it is FDB’s experience that group-based enterprises rarely survive past two years. 
         The loan amount should be repayable within this time frame.
 
·        Provisioning an amount each year – this amount can be determined based on acceptable exposure; and
 
·        Taking third party guarantees – this is a safeguard and can come from friends, family members, Government or any acceptable third party.
 
 
For every client that we finance, we try to ensure that each project achieves the following:
 
·        Develops the resource-based sector;
 
·        Creates long term employment; and
 
·        Helps enhance a better standard of living for all. a. Social Banking Facility (SBF)
 
Between March and December 2009, we offered a micro-financing product called the Social Banking Facility. This was a provisioned facility, hence its limited period of offer. Within that product were two facilities:
 
1.      The Micro-credit Scheme (MCS), previously known as the Small Rural and Agricultural Scheme; and
 
2.    The Agri-finance Scheme (AFS).
 
 
 
The MCS was designed to spur income generating activities that would address the social needs for the most vulnerable sections of the committee. The loan value that each individual could apply for ranged from $500 to $5,000. It was open to anyone earning less than $7,500 p.a. (individual or joint).
 
The agricultural portion of the MCS was given for growing of sugar cane, fruits, vegetables, root crops etc. The total number of accounts at the close of the facility totaled 662 by number and is valued at $2.31MM.
 
 
The AFS facility on the other hand, was designed to meet all farm related costs. This facility was available to viable projects for financing solely at the discretion of the Bank. The value of loans under this facility fell between $5,001 and $10,000.
 
Under AFS, loans were given for farming and farm improvements as well as the purchase of machineries and fertilizers and other farm-related costs. A total of 416 accounts valued at $1.61MM are on our books.
 
 
For both these facilities, the equity required was set at 20% but flexible with each project considered on its merits including proven sweat equity i.e. farms with evidence of planting, were given due consideration in lieu of cash equity.
 
In terms of security, the Bank was again flexible but prudent in that it accepted Crop Lien, Mortgage, Personal Guarantees or any security that the client had to offer including Bill of Sale, Lien over Fixed Deposits and Notifications.
 
 
Two years on, how are these accounts performing? The AFS accounts have an impairment rate of 52% and the MCS 63% (by number).
 
 
b. General Agricultural Loans
 
 
Under the general agricultural lending, the Bank has an additional 2,500 accounts valued at $32.55MM (to the end of September 2011). Of these, impaired accounts make up 46.2% by number and 33.82% by value.
 
In total, the Bank’s agricultural (excluding Forestry and Fisheries) portfolio at the end of September 2011 comprised 3,689 (72.2%) accounts valued at $37.30MM (11%).
 
In terms of impaired accounts within this sector, these are 50% by number and 37.4% by value.
 
 
The Bank offers 12 different products for agricultural purposes (excluding Fisheries and Forestry sectors). These include facilities for:
 
  •  Horticulture, Grains, Pulses, Livestock, Dairy and Poultry  
  •  Agricultural Land Development  
  • Agricultural Land Purchase (for production other than sugar cane)  
  • Agricultural Land Sub-Division 
  • Construction of Farm Housing on Non-Cane Farms
  • Purchase of Farm Vehicles, Machinery, Equipment and Implements
  • Loans to Sugar Cane Farmers – All Purposes
  • Loans to Sugar Cane Farmers – New Entrants and Below Average Producers
  • Broiler Industry – Small Holder Chicken Farm Projects
  • Beef Farming
  • Coconut Farming
  • Dairy Farming  
 
The equity requirements for any of these facilities range from between 10 to 35% of the project cost. Depending on the product, the Bank will also accept sweat equity in lieu of cash equity. Similar to the Social Banking Facility, the Bank while flexible is also prudent in accepting Crop Lien, Mortgage, Charge on Lease, Personal Guarantees or any other security that the client had to offer.
 
 
This is standard Banking practice you may say, but if I told you that the class of land that we also accept Charges over is Class “J” lease for all agricultural purposes, you may well be surprised. For those of you not familiar with Fiji’s land classification system, Class “J” leases refer to leasing of native land reserved for the exclusive use of the tokatoka (family unit) land or the mataqali
(clan). I don’t think any of the commercial banks or financial institutions accept Class J leases as collateral because it isn’t as easily liquidated as other lease types.
 
 
In addition to the facilities mentioned, the Bank also offers Reserve Bank of Fiji’s Import Substitution and Export Credit Facility for farmers and exporters who need working capital to assist in either growing crops that will help reduce imports and/or grow and export. There is no equity required for this facility and farmers/exporters can borrow up to $1MM at an attractive rate of 6% per annum.
 
 
2. BUSINESS MODELS CREATED & LESSONS LEARNT
 
I will give you two practical examples of how we have used our flexible loan terms to set up business models that we thought were best suited to meet the requirements of the Bank as well as the needs of the group borrowing.
 
 
a. ACME Land Development Company Limited
 
The name of course is fictitious but the example is from a real client experience.
 
 
From 1997, a number of native land leases under the Agricultural Landlord and Tenants Act (ALTA) started to expire and as a result, hundreds of cane farmers of Indian descent moved off the farms and resettled elsewhere. The main farmers for this crop have always been families descended from the original girmityas or indentured labourers brought in from India by the British between 1879 and 1916 to work on the sugar cane farms. Approximately 20 to 25 percent of Fiji’s population relies on this industry for their livelihood.
 
As the vacated leases returned to their traditional land owning units a few of the indigenous landowners decided that they would have a go at cane farming. One such entity comprising around 20 farmers in the Western Division approached the Bank in 2003 to finance a tractor as well as several trucks and utility vehicles to help them with work on their farms and cartage of harvested cane to the mill.
 
All of the farmers were new with new leases. Individually, they were also clients of the Bank. To facilitate lending, the Bank suggested that the farmers form a company that would borrow on their behalf and that’s how ACME came about.
 
As part of the ACME, the farmers agreed to take a $10,000 loan for their own farms and later a further $2,000 each as equity share towards the purchase of farm machineries and trucks.
 
 
As security the Bank held second mortgage over one of the member’s farm (he was also an existing client); debenture over the company’s assets, guarantees from the directors as well as government; and bill of sale over the tractor and vehicles
 ACME carried out all the initial development works for the farms and was paid from the development cost allocated in the loan and as a result, the first year crop was a good one.
 
 
ACME could not continue with their management role of the farms from year two onwards because none of the members wanted to pay the development costs required for the next season’s planting. Remember, the development costs for the 1st year was met from the loan funds.
 
 
In this set up, ACME was not a grower but a farm manager. The individual farmers were the growers. As such all cane proceeds are paid directly to the Bank for the individual growers because the Bank held a lien over the crops for the individual loans. After deductions from FSC for their individual loans, the balance was refunded directly to the farmers.
 
 
What this meant was ACME received nothing from the cane proceeds so for it to survive, it started hiring the vehicles out on a contractual basis and offering cleaning services. Less than two years after it started, the company started to face problems. Internal problems between members and management led to termination of the vehicle hire contract. This problem was compounded further by mismanagement, death of two of the directors, the imprisonment of the third (on an unrelated matter) and the inability of the remaining director to run the company.
 
Repayments were sporadic and the amounts repaid were well below the amount required per month.
 
 
By early 2010, the Bank had exhausted all avenues to recover arrears and began foreclosure proceedings. At the end of the day, the value of the collaterals provided was not enough to cover the arrears.
 
 
In hindsight, the model used was good in that members all had individual titles to their leases and valid contracts with the Fiji Sugar Corporation for their cane. The problem was that the company did not have the right people managing the project and that ACME held no real authority in obtaining deductions from cane proceeds because it wasn’t the contracted grower. As far as we were concerned, the loan agreement was between the Bank and ACME and whatever arrangement ACME had with its members was between them as we expected the Company to honour the loan agreement it had with the Bank.
 
 
b. TAUSALA Dalo Project
 
In this next example, we look at a group of dalo or taro farmers in the Central Division in 2007 with established farms but needed working capital to increase production. Unlike the previous example, this group did not hold individual leases but were farming as a collective on mataqali (clan) land.
 
 
The Bank was asked by the local exporter buying the farmers’ dalo to take a look and see how we could assist the group expand their farms. Upon inspection and discussions with the group, we were satisfied that they had sweat equity and the venture showed promise because the exporter was well established and a market was available for the dalo.
 
 
The Bank agreed to finance this as a pilot project but because the farmers held no titles, a deed of trust was executed with trustees appointed by the group to manage the loan on the farmers’ behalf. This was a similar situation to the previous example but in this scenario the trustees were listed as the growers and they held the contract with the buyer.
 
 
As collateral, the Bank had the assignment over dalo proceeds as well as personal guarantees from the three trustees one of whom was the chief with established authority over the group.
 
Things went well for the first 18 months then the situation within the group started to deteriorate and the trustees failed to meet the six monthly repayment of $2,200 in June 2009. Efforts were made to save the project but by early 2010, the Bank had no option but to begin foreclosure.
 
 
So what happened? The disagreement within the group arose when several members wanted to increase production and others didn’t. Gradually, farm targets started falling behind and this affected the contract the Trustees had with the Buyer. It was discovered later
that dissatisfied members of the collective decided to sell their crops outside of the agreement they had with their Trustees. Other exporters were eager to take the dalo and whether they were aware or not of the arrangement between the Trustees and the pre-arranged Buyer is not known. At the end of the day, the security offered was not enough to cover the outstanding loan amount. These are but two examples of attempts by the Bank to fund grassroots resource-based projects outside of traditional lending guidelines using assessed project viability as surety. You could say, we were innovative.
 
 
c. General Observations
 
That said we have also financed many successful projects in the agriculture sector. These farms would either be managed by an individual or nuclear family units and not a collective of different individuals.
 
 
Ladies and gentlemen, we have been doing development financing for over 40 years. Risk management is something that I would like to think, we have a pretty good grasp on. But risk management is also a double edged sword - the greater the risk the greater the reward or as is the more likely case with us, the greater the burn! On the other hand, if we didn’t take the risk we would be failing in our responsibility as a development financing institution to provide finance at the grassroots level.
 
Yes, there are things I feel we can do better to increase our success rate within the agriculture sector. But to be able to do that, we will need to also improve the support services or structures that will enable the following:
 
1.      Improving financial literacy amongst the general population. Simple things like budgeting, financial planning and savings must be understood by those attempting to go into business.
2.    Encouraging entrepreneurship. Stringent regulatory requirements by municipal councils, rural local authorities and the State also impact businesses. Relevant laws and their regulations while designed to maintain standards must also be considerate of the capacity of SME businesses and farms to afford the costs related to upgrading their operations to do meet these requirements.
 
3.    Improving technical knowledge. Farming is a science. In Fiji, farming is a traditional occupation passed down over the generations. Those farms that thrive do so only at a semi-commercial level and for a limited time. Growth is hampered because these farmers don’t have the technical knowledge or expertise to understand market forces, finding alternative markets for their crops, off-season planting, farm management, sourcing the best planting materials, improving variety of fruits and vegetable etc. The commercial level farms you will find, are run by those who have the technical experience, marketing expertise as well as the operational and mechanical support to sustain business at that level.
 
4.    Expanding incubation centres and improving monitoring and supervision. Small businesses whether they are start ups or in the juvenile stage of growth, require constant mentoring and supervision. Farms even more so simply because the majority are smaller farms who are extremely vulnerable to market conditions.
 
5.     Ready buyers and a better export/wholesale/retail network for fresh produce. The majority are small holder farms where the principal have limited education and do not understand the vagaries of market forces.They need to know there is a confirmed buyer before they plant the first seed.
 
6.    Agricultural insurance. The loss of crops to pests, diseases and inclement weather does have a serious impact to this sector. Either or all of these three can set a farm back a few years, driving farmers even deeper into debt in order to refinance and restart their farms.
 
 
3. MEASURING THE IMPACT OF AGRICULTURAL
 
FINANCING
 
At the end of the day, the real measure of impact will be reflected in our respective country’s GDP. A look at Fiji’s GDP (current prices) for 2005 and 2010 as an example, we can see a decline. In 2005, Fiji’s GDP for the agriculture sector including Fisheries and Forestry was $608,501MM and in 2010, this dipped to $603,846MM. Conversely, FDB’s portfolio for agriculture increased from 1,964 accounts valued at $48.7MM in 2005 to 3,414 accounts valued at $157.73MM in 2010.
 
Clearly, there is a disparity in lending on our part and the resulting agricultural production noted in the annual GDP. A credit impact study has to be done to find out why there isn’t a corresponding growth between lending and production.
 
Anecdotally, given the impairment rate of 50% of our agricultural lending, it is possible that sustainability is a major factor affecting production.
 
Other measures of impact would be an increase in employment rates in the sector and a reduction in rural poverty where vast tracts of agricultural land lie.
 
 
4. CONCLUSION
 
Ladies and gentlemen, we would be kidding ourselves if we think that easing access to finance or make financing readily available for the agricultural sector through innovative collaterals alone is the solution.
 
Accepting lower value collaterals or no collateral as an innovative measure to improving access to financing is only a very small part to enabling growth in the agricultural sector. This will only work if it is done in tandem with issues I raised earlier:
 
·        Financial Literacy
 
·        Encouraging entrepreneurship
 
·        Improving technical knowledge
 
·        Incubation centres/supervision and monitoring
 
·        Ready market
 
·        Agricultural insurance
 
 
Anything outside of that would simply be just financing subsistence to semi-commercial level farming with minimal returns and no real impact.
 
If you have any questions, I will be happy to take them at the end of this session.
 
Vinaka.
 
 
 
 
 
 
 

 

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