Agricultural Lending: A How- To Guide

AGRICULTURAL LENDING:A How-To Guide

Foreign Affairs, Trade andDevelopment Canada

Affaires étrangères, Commerceet Desveloppement Canada

Dis

clai

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Agricultural Lending: A How - To Guide

FC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growthin developing countries by suppor ng private sector development, mobilizing

private capital, and providing advisory and risk mi ga on services to businesses andgovernments.

This report was commissioned by IFC through its Agricultural Finance and Post HarvestHandling Program in Vietnam, funded by the Canada Department of Foreign A airs,Trade and Development (DFATD) and IFC, which is aimed to improve sustainable ruralgrowth in Vietnam.

The conclusions and judgments contained in this report should not be a ributed to,and do not necessarily represent the views of, IFC or its Board of Directors or the WorldBank or its Execu ve Directors, or the countries they represent. IFC and the WorldBank do not guarantee the accuracy of the data in this publica on and accept no responsibility for any consequences of their use.

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Disclaimer

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his report, “Agricultural Lending: A How To Guide,” was developed as part ofIFC Agricultural Finance and Post Harvest Handling Program in Vietnam, fundedby the Canada Department of Foreign A airs, Trade and Development (DFATD)

and IFC. The overall goal of this mul year program is to improve sustainable ruralgrowth in Vietnam, leading to an increased net income of USD 36.6 million for farmersby 2019. Speci cally on agricultural nancing, the program aims to support nancialins tu ons in building capacity in order to expand nancing to the agricultural sector,to farmers and value chain players.

The report was prepared under the overall guidance of Rachel Freeman, IFC Asia Manager for Financial Ins tu ons Group Advisory Services. We acknowledge the signi cant contribu ons of Hans Dellien, IFC Regional Agri nance Specialist for EastAsia and Paci c, the main author of the report, and Patrick Starr from Connexus Corpora on, who has been commissioned by IFC to carry out the desk research, dra ing and case study analysis.

We would like to thank Kyle F Kelhofer, IFC Country Manager for Vietnam, Cambodiaand Lao PDR for his review. Thanks to peer reviewers for their invaluable technicaladvice and comments: Calvin Miller from FAO, Maria Pagura and Juan Buchenau fromthe World Bank, and Panos Varangis, Huong Mai Huynh and Hang Thi Thu Nguyen fromIFC. We would like to thank IFC agriculture project team members and the many individuals and organiza ons that contributed to the research and study through interviews before, including the farmers, traders and processors who took part in theresearch.

Our apprecia on to Deviah Machimanda Appaiah for edi ng this report, and Anh VanThi Chu for her help with the design of the report.

Vietnam 2015

Acknowledgements

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Table of Contents

TABLE OF FIGURES ...................................................................................................vii

TABLE OF TABLES .....................................................................................................viii

LIST OF ABBREVIATIONS ..........................................................................................ix

OVERVIEW ..................................................................................................................1

Introduc on....................................................................................................1

Summary of Content ......................................................................................1

Target Audience..............................................................................................2

Addi onal Informa on ...................................................................................3

INTRODUCTION TO AGRICULTURAL FINANCE .......................................................5

What is Agricultural Finance?.........................................................................5

Agricultural Finance Market Opportunity ......................................................6

Risks of Agricultural Finance and Mi ga on Strategies .................................9

Models of Agricultural Finance.....................................................................12

Factors In uencing the Introduc on of Agricultural Finance.......................15

Ins tu onal Capabili es ...............................................................................16

Checklist........................................................................................................17

THE PRODUCT DEVELOPMENT PROCESS ..............................................................19

Introduc on to the Five-Phase Model .........................................................19

Timeline for Introducing Agricultural Lending Products ..............................20

Structure of Team and Leadership................................................................20

Resources and Timing...................................................................................21

Checklist........................................................................................................21

PRODUCT DEVELOPMENT PHASE 1 - PREPARATION ...........................................23

Iden fy Ins tu onal Gaps ............................................................................23

Management Informa on Systems (MIS) Requirements.............................26

Build Internal Leadership Team....................................................................27

TA L C T T

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Prepare for Implementa on.........................................................................28

Challenges and Lessons Learned ..................................................................29

Checklist........................................................................................................29

PRODUCT DEVELOPMENT PHASE 2 - MARKET RESEARCH..................................31

Selec on of Regions with High Agricultural Poten al ..................................32

Evaluate Target Clients .................................................................................34

Compe ve Landscape Analysis ..................................................................41

Go-No Go......................................................................................................42

Strategy Development for Pilot Phase..........................................................44


Checklist........................................................................................................44

PRODUCT DEVELOPMENT PHASE 3 - PILOT DESIGN............................................47

Product Term Sheet ......................................................................................48

Agricultural Lending Methodology...............................................................50

Key Business Strategies for Agricultural Finance..........................................54

Marke ng Agricultural Lending Products.....................................................55

Performance Metrics ....................................................................................56

Key Sta Capabili es ....................................................................................56

Agricultural Lending Sta Training ...............................................................57

Checklist........................................................................................................59

PRODUCT DEVELOPMENT PHASE 4 - PILOT TESTING AND MONITORING ........61

Agricultural Lending Process ........................................................................61

Tracking Performance Metrics......................................................................64


Checklist........................................................................................................67

TA L C T T

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PRODUCT DEVELOPMENT PHASE 5 - PRODUCT LAUNCH AND ROLLOUT .........69

Strategy Development for the Rollout Phase ...............................................69

Se ng Up an Agricultural Lending Unit .......................................................72

Developing an Implementa on Plan ............................................................73

Arrears Monitoring .......................................................................................74

Summary Case Study....................................................................................75


Checklist........................................................................................................78

CONCLUSION ............................................................................................................81

APPENDIX

Appendix A - Addi onal Risks.......................................................................82

Appendix B - Hybrid and Structured Financing Models ...............................83

Appendix C - Financial and Governmental Policies A ec ng Agricultural Lending ................................................................87

Appendix D - Ins tu onal Diagnos c ...........................................................90

Appendix E - Sample Producer Segmenta on Interview Form....................96

Appendix F - Compe ve Posi on Analysis ...............................................103

Appendix G - Farmer Segmenta on Analysis .............................................104

Appendix H - Loan Appraisal Forms and Expert Score Variables ...............109

Appendix I - Sample Performance Reports ................................................120

SELECTED BIBLIOGRAPHY.....................................................................................122

TA L IG

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Table of igures

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

Figure 8

Figure 9

Figure 10

Figure 11

Figure 12

Figure 13

Figure 14

Components of Introducing Agricultural Lending...................................3

Basic Value Chain Map ...........................................................................6

Corn, Wheat, Rice and Beef, Commodi es Indexes 1980 2013 .............7

Risks along the Value Chain ....................................................................9

Integrated Risk Structure: The Farmer's Perspec ve..............................9

Appropriate Financing Models by Value Chain and Enterprise Risk Levels ...........................................................................13

Product Development Process .............................................................20

Phase 1 – Prepara on...........................................................................23

Phase 2 – Market Research ..................................................................31

Phase 3 – Pilot Design ..........................................................................48

Phase 4 – Pilot Tes ng and Monitoring ................................................61

Lending Process for Agricultural Clients ...............................................63

Phase 5 – Product Launch and Rollout .................................................69

Growth of the FI's Agricultural Lending Por olio 2010 14 ...................76

TA L TA L

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Table of Tables

Table 1

Table 2

Table 3

Table 4

Table 5

Table 6

Table 7

Table 8

Table 9

Table 10

Table 11

Table 12

Table 13

Table 14

Table 15

Table 16

Key Agricultural Risks and Mi ga on Strategies ....................................10

Sample Gap Analysis...............................................................................24

Variables to Analyze When Researching a Region's Agricultural Poten al ...............................................................32

Co ee Producer Pro les in Central Highlands........................................36

Total Assets and Last 12 Months Farm and Family Income $ ...............36

Financing Needs for Co ee Farmers in Central Highlands......................38

Farmer Risk Pro les of Central Highlands...............................................40

Es mated Por olio Size for Central Highlands .......................................40

Variables to Consider when Researching Compe tors' Products............................................................................41

Projected LO Produc vity During Pilot ...................................................43

Projected Outstanding Loans and Por olio Size of Pilot ........................43

Term Sheet Format .................................................................................48

Financing Models in the Mekong Delta..................................................71

Agricultural Risks and Mi ga on Strategies ...........................................82

Financial Policies and Their Impacts on FIs ............................................87

Government Policies and Their Impacts on FIs ......................................88

LI T A IATI

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List of Abbreviations

CC

FI

GDP

GPS

HA

HR

IFC

IT

MFI

MIS

NGO

PAR

SME

USAID

WB

Credit commi ee

Financial ins tu on

Gross domes c product

Global posi oning system

Hectares

Human resources

Interna onal Finance Corpora on

Informa on technology

Micro nance ins tu on

Management informa on systems

Non governmental organiza on

Por olio at risk

Small and medium enterprises

United States Agency for Interna onal Development

World Bank

Ove

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INTRODUCTIONgriculture is the main source of incomeand employment for the 70 percent ofthe world's poor, who live in rural areas.

Yet, only 10 percent of gross domes c produce(GDP) in low and middle income countries isgenerated by the agricultural sector1. This results in the severe mismatch between thepropor on of people employed by the agriculture sector and the propor on of GDP a ributable to agricultural produc on. In developingcountries, most actors in the agricultural sectorare small scale agricultural producers andsmall, non farm entrepreneurs involved in a variety of microenterprises with diversi ed, yetlimited income sources. A majority of thesehouseholds have li le or no access to formal

nancial ins tu ons or adequate nancialservices. Due to this lack of access, most ruralpoor and low income households rely on costlyinformal sources of nance (for example, inputsupplier credit, trader credit, or self nancing).None of these allow them to take full advantage of economic opportuni es. Financial ins tu ons FIs , such as commercial banksand micro nance ins tu ons, can ll an important nancing gap by expanding opera onsinto rural areas to serve the needs of this largesector.

Research conducted by IFC shows that FIs inemerging markets resist lending to agriculturalenterprises for two main reasons: lack of exper se and familiarity with the needs of theagricultural sector and lack of tailored productsand processes to respond to its needs2. Addi onally, a major challenge in servicingrural clients is that they are o en physically dispersed across large geographical regions,posing addi onal costs and logis cal issues.Thus, distribu on channels must be cost e ec

ve and convenient for both ins tu ons and

clients. The development of exible and easilyreplicable structures for marke ng, delivering,and monitoring nancial products is cri cal tothe sustainability of an ins tu on’s agricultural

nance expansion.

SUMMARY OF CONTENTThis toolkit introduces and explains step bystep the key elements of success for FIs to expand nancial services to farmers. The content was developed around IFC’s global experience in assis ng FIs with the development and implementa on of agricultural

nance products. The bene ts of this work aresynthesized in this guide, along with knowledge and exper se of best prac ces amongboth IFC clients and others. The guide includesadvice on each step involved and ps on howto address the complex challenges that mightarise during product development process.

The guide has seven chief components:

1. Introduc on to Agricultural Finance: Thissec on introduces agricultural nance andiden es the common risks in agriculturalproduc on that may impact client repayment capacity.

2. The Product Development Process: Thissec on introduces the product development process and how an ins tu on couldbest posi on itself for sustainable successin rural markets.

3. Product Development Phase 1 Prepara on:The rst step in the product developmentprocess involves iden fying gaps in an FI’s

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1 World Development Indicators, 2014 by World Bank.2 Scaling Up Access to Finance for Agricultural SMEs Policy

Review and Recommenda ons, IFC 2011.


processes, lending policies, loan appraisalforms, and determining op mal deliverymechanisms for launching new products inrural areas.

4. Product Development Phase 2 MarketResearch: The second step in the productdevelopment process involves understanding new clientele characteris cs, marketdynamics, es mated crop volumes produced, seasonality of incomes, crop diversi ca on strategies and nancingneeds by sector and size of farmer.

5. Product Development Phase 3 Pilot Design: The third step involves dra ing ini al features and characteris cs of newproducts, developing a business plan forthe pilot phase, de ning and se ng success metrics, and extensive training(theore cal and eld based training) forloan o cers.

6. Product Development Phase 4 Pilot Tes ng and Monitoring: The fourth stepinvolves monitoring the pilot’s opera onalperformance, quality of the risk analysis,produc vity of loan o cers, and e ec veness of marke ng strategies. Also, assessment of how it is received and used bytarget clientele. The third and fourthphases are itera ve. Depending on howthe pilot rates on the pre determined success metrics from phase 3, the productmay need to return to phase 3 to be adjusted and rolled out again.

7. Product Development Phase 5 ProductLaunch and Rollout: How to design andplan the rollout of the product, ensuringthat the FI has all the resources (humanand nancial) for a gradual release, makingthe new product available to the wholemarket.

This guide highlights case studies and successstories from around the globe to illustrate howother ins tu ons already work within the agricultural sector. Look for these case studiesin blue text boxes.

Using IFC’s interna onal experience, this guidefocuses in great detail on the development ofnew products targeted at farmers and the adjustments FIs must make to be er engagewith them and directly nance commercialfarmers. It discusses other nancing strategiessuch as value chain nance, which could beemployed to reach the agricultural sector. Thisguide brie y discusses these models and men ons resources for further informa on.

TARGET AUDIENCEThis guide seeks to inform change agents working with or within nancial ins tu ons interested in introducing new agricultural lending products for farmers. This audience includes innova on o cers at nancial ins tu ons, nancial inclusion specialists atmul lateral banks, or technical assistanceproviders. The guide’s goal is to provide a resource for development professionals and

nancial prac oners alike to understand opportuni es, risks, and processes for developing new products for agricultural lending.Senior managers in nancial ins tu ons will

nd the rst two introductory sec ons mostuseful to understand the agricultural lendinglandscape. Technical assistance providers working with nancial ins tu ons to introducenew products will nd descrip ons of each ofthe ve phases more applicable in their work.

Providing nancial services to the agriculturalsector is a complex and challenging endeavor.Financial ins tu ons need to understand theagricultural sector and the characteris cs and

nancing needs of target clients. They alsomust adjust their systems, human resources,and ins tu onal culture to be successful. Thisguide provides an integrated approach to understanding and managing the pieces andprocesses of ins tu onal change to engagewith this new sector. It is important to emphasize, that this guide requires the support oftechnical assistance providers to work with

nancial ins tu ons in building up theprocesses and capacity to sustainably introduce agricultural lending.

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This guide will not focus on some of the morecomplicated aspects of se ng up sustainable

nancing models in rural areas, such as how tocross sell nancial services to the rural sector,how to build strategic alliances with valuechain players to increase outreach, or how touse new technology to improve distribu on

channels and increase cost e ciencies of nancial transac ons in rural areas. While

these areas will be men oned periodicallythroughout the document, the focus will remain on se ng up the processes necessaryto lend directly to farmers in rural areas.

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Personnel Management

Performance Metrics

Figure 1 Components of Introducing Agricultural Lending

ADDITIONAL INFORMATIONFor addi onal informa on, please visit IFC’s website (www.ifc.org), or contact the IFCAgri nance team. IFC is willing to discuss possible advice and support for customiza onand applica on of this Agricultural Lending: A How to Guide with interested nancial ins tu ons to adapt to their respec ve requirements and opera onal context. Pleasecontact:

IFCHans Dellien, Regional Agri nance Specialist

Financial Ins tu ons Group, East Asia & Paci c

Indonesia Stock Exchange Building, Tower 2, 9th Floor

Jl. Jend. Sudirman Kav. 52 53, Jakarta 12190, Indonesia

Phone: +62 2129948068

Email: [email protected]

Huong Mai Huynh, Opera ons O cer

Financial Ins tu ons Group, East Asia & Paci c

63 Ly Thai To Str., Hoan Kiem Dist.

Hanoi, Vietnam

Phone: +84 4 38247892

Email: [email protected]

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I T D CTI T AG IC LT AL I A C

here are some unique industry risks associated with lending to the agricultural sector. However, there are

important market opportuni es wai ng for FIsthat make the ini al investment to adapt products to meet the needs of new clients inthis industry. Some key issues FIs should consider as they inves gate this space are:

• The main challenges when expanding nancial services into rural areas?

• The biggest risks in agricultural nance inthe target country or region?

• The type of farmers and ac vi es to be nanced?

• The value chain players and how to collaborate with or support them?

• The skills and human resource competencies required to lend in rural areas?

• Best prac ces to assess credit risks of farmers and agribusinesses?

• Delivery channels that are more e ec vein rural areas?

• The best strategy to o er pro table services in rural areas?

This guide looks at these issues in a structuredand systema c manner.

WHAT IS AGRICULTURAL FINANCE?Agricultural nance is a sectorial concept thatcomprises nancial services for agriculturalproduc on, processing, and marke ng. It includes short, medium, and long term loans,leasing, savings, payment services, and cropand livestock insurance. This guide focuses on

nancing agricultural businesses, primarilysmall and medium farmers, who tend to be located in rural areas. Providing services tothese types of clients spread out in rural areascan increase transac on costs. This guide talksabout how to strategically address these speci c issues. The concept of agriculturalvalue chain nance emphasizes the ver cal dimension of agricultural nance between di erent segments of agricultural valuechains3. FIs must look at agricultural nanceholis cally; as the full range of ac vi es involved in ge ng a product or service throughdi erent phases of produc on and delivery tothe nal consumer. This can help FIs keep amarket oriented view to target produc ve investments in areas that need them most. Further, approaching agricultural nance froma value chain perspec ve allows FIs to providea wider range of products to a wider range ofactors beyond farmers and producers who maybe more geographically dispersed and harderto reach.

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Introduction to Agricultural inance

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3 Scaling Up Access to Finance for Agricultural SMEs PolicyReview and Recommenda ons. IFC 2011..


To visualize what a basic value chain might looklike, see Figure 2. It shows a simple value chainof producers using inputs from suppliers, andthen selling raw goods to processors, who inturn sell the nal product to wholesalers or exporters, depending on whether the productis for domes c or interna onal markets. On thele , nancial providers (banks, micro nance ins tu ons, etc.), cross cu ng serviceproviders (transporters, warehouse operators,etc.) and sector speci c providers (trade associa ons, extension services, etc.) o er cri caltechnical support and nancing to the valuechain. The success and strength of the valuechain and of the nancing itself depend on theenabling environment (local and interna onalgovernment policies, legal environment, etc.).For example, high export taxes for a speci cproduct or cumbersome export formali escould seriously cripple the poten al of the en re value chain.

By construc ng a map for poten al value chaininvestments, such as the one in gure 2, FIs

can more easily iden fy gaps in nancing andevaluate poten al opportuni es with greaterease. These maps help investors understandand visualize where there might be a weak linkin the chain and why that weakness exists. Thisensures that the right type of funding ows tothe areas that need it most.

AGRICULTURAL FINANCE MAR-KET OPPORTUNITYTotal GDP of low and middle income countriesis es mated at $24.6 trillion, with the agricultural sector represen ng nearly $2.5 trillion.4

Further, by 2050, the world will need to feedmore than nine billion people, requiring nearly70 percent more food than we consumetoday.5

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Figure 2 – Basic Value Chain Map

Global Trading Environment

Na onal Enabling Environment

Financial Providers

Sector-Speci c Providers

Cross-Cu ng Providers

Exporters Wholesalers

Processors

Global Retailers

Input Suppliers

x Producers

Na onal Retailers

4 World Development Indicators 2014 by WB.5 Global Agriculture Towards 2050, UN Food and Agriculture

Organiza on, 2009, fao.org.


A study by McKinsey & Company says prices ofstaple crops, such as corn, wheat and rice, inaddi on to meats, such as beef, have been increasing over the past ten years.6 Prices arelikely to con nue to increase because of higherglobal demand for food and increased demandfor higher quality food by growing middleclasses in developing countries (see Figure 3).

This means larger quan es of food will needto be produced more e ciently with smallerquan es of inputs. The global trend of risingcrop prices is having a posi ve impact on ruraleconomies, genera ng higher incomes andmore opportuni es to invest. Also, the increaseof extreme weather events in the world’s important agricultural regions is forcing farmers to adapt, which can lead to disrup onsin previously stable agricultural value chains.The demand and price increases, as well aschanges in consumer demographics, will increase the need to produce more food. Farmers will need to invest in new technologiesand rural infrastructure to produce more

sustainably. Financial ins tu ons should introduce interes ng nancing products to supportthis more dynamic rural context.

The rela vely low penetra on of nancial ins tu ons into rural areas indicates a largebusiness opportunity. According to Findex data,only 8 percent of adults in rural areas in developing countries have borrowed from formal

nancial ins tu ons and only 48 percent havebank accounts.7 Further, according to WorldBank surveys, 28.7 percent of rms in all countries listed “lack of access to nance” as thebiggest obstacle to their businesses. This number rises in low and middle income countries, where agriculture is a larger part ofthe economy. For instance, in sub SaharanAfrica, 40.8 percent of rms listed “lack of

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Figure 3 – Corn, Wheat, Rice and Beef, Commodi es Indexes 1980 2013

nominal price index, 100 = January 1980

350

300

250

200

150

100

50

1980 1990 2000 2010 20130

Source: Interna onnal Monetary Fund; UN Comtrade, UN Conference on Trade and Development;World Bank; McKinsey Global Ins tute analysis

Com

Wheat

RiceBeef

6 N. Denis, D. Fiocco, J. Oppenheim. From liability to opportunity: How to build food security and nourish growth,”March 2015.

7 World Bank Global Financial Inclusion Database. 2014.


access to nance” as their biggest obstacle8.Given the large propor on of businesses in theagricultural sector in these developing markets,these numbers present an en cing market opportunity for FIs exploring entry into theagricultural sector. Access to nancial servicesis cri cal for providing funds for farm investments in produc vity, improving post harvestprac ces, smoothing household cash ow, enabling be er access to markets, and promoting be er risk management. However, access

to a comprehensive range of nancial servicesremains a signi cant challenge for farmers indeveloping countries. Some countries havestarted addressing this issue by to coordina nge orts between public and private sectors toimprove the supply of nancial services, technologies, and access to markets for smallfarmers. The box below summarizes some ofthe work led by government and private sectorin Vietnam.

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8 World Bank Enterprise Surveys. 2014.9 Grow Asia. World Economic Forum. October 2014.10 “Agriculture in Vietnam gets a boost with new public private sector project.” World Economic Forum. 2010.

Public Private Partnerships Focus on Sustainable Agriculture in Vietnam9

The Public Private Task Force on Sustainable Agriculture in Vietnam was formed in May 2010at the World Economic Forum on East Asia in Ho Chi Minh City. Co chaired by the Ministerof Agriculture and Rural Development, the task force comprises 17 global and four localcompanies, two provincial governments, a na onal research ins tute, two interna onal organiza ons, and ve NGOs. The mul stakeholder partnership focuses on ve crops(co ee, corn, soybean, tea, and fruits and vegetables) de ned as strategic priori es in Vietnam’s na onal plan, and has mobilized working groups and pilots for each. In November2011, the Government of Vietnam ra ed adop on of the World Economic Forum’s NewVision for Agriculture (NVA) framework into the country’s 10 year na onal agriculture strategy, integra ng a new dimension of environmental sustainability into Vietnam’s long term aspira ons.

"Government and business share the same goal: we both want to see strong and sustainablegrowth in Vietnam’s agriculture sector," said Cao Duc Phat, Minister of Agriculture and RuralDevelopment. "We have iden ed a number of ways in which we can work together moree ec vely towards that goal."

"Growing Asian demand for food means we must increase both produc on and quality tomeet that growth while opera ng within the constraints of climate change. If companiescombine e orts with the government and each other, we can operate more e ec vely alongthe full value chain," said Frans Muller, Member of the Management Board, METRO Groupand Co Chair, World Economic Forum on East Asia.10

The government has placed a high priority on industrializa on and moderniza on of ruralagriculture, se ng a target of 3.5 percent annual growth in the sector un l 2020. Privatesector investment is seen as cri cal to achieving that target. Par cipa ng companies includeArcher Daniels Midland (ADM), Bunge, Cargill, Dupont, METRO Group, Monsanto, Nestlé,PepsiCo, Swiss Re, Syngenta, Unilever, and Yara Interna onal.


RISKS OF AGRICULTURAL FINANCE AND MITIGATIONSTRATEGIESThe rela ve size of the agriculture industry inthe developing world, combined with projected growth es mates, makes this marketan a rac ve opportunity for FIs looking to

nance growth oriented agricultural enterprises. So why are FIs not ooding the marketwith products and services? Perhaps thebiggest barrier for FIs to overcome is the perceived high level of risk that the ins tu onwould need to take on as a result of building anew por olio in the agricultural sector. As canbe seen in gure 4 below, the risks are not justconcentrated at the producer level of the valuechain as one might expect but are prevalent atall levels. Agriculture is an inherently risky industry, and risks faced by actors in the valuechain ul mately translate into risks that FIsmust take into account when evalua ng pro tability of an investment opportunity.However, just as with any new target industry,building an understanding of key na onal players, value chains, and regula ons can go along way in helping FIs counteract and mi gaterisks. In fact, many of the risks enumerated inFigure 4 are encountered in other industries,so this guide will help interpret how some speci c risks can be be er understood and mi gated in the agricultural industry.

Of all the actors in the value chain, it is mostfrequently farmers and rural small and mediumenterprises (SMEs) that lack access to appropriate nancial products. FIs that target agricultural SMEs face a variety of challenges,such as understanding cash ows of ruralhouseholds and business cycles of small farmsand es ma ng repayment capaci es of smallfarmers (who in many cases lack formal accoun ng systems). FIs must assemble detailed business pro les of poten al farmerclients and also have a good understanding ofrisks that farmers face. Figure 5 illustrates primary categories of risks faced by rural farmers including business risks related to produc on, climate, investments, inputs, andthe market. While these are some chief risks,this list is not exhaus ve. Some addi onal risksare listed in Appendix A – Addi onal Risks. FIsmust consider all of these risks when developing an agricultural lending strategy and determining which segments will build the strongestpor olios.

Figure 4 – Risks along the Value Chain

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Producers Transporters

Produc on

Price

Organiza on

Financing

Ins tu onal

Infrastructure

Quality control

Technology

Logis cs Temporary over-supply

Processors Retailers

Infrastructure

Storage

Price

Lost produc on

Government policies

Technology

Regulatory Environment Finance, Sta ng Product quality Government policies

Input Suppliers

Quality

Availability

Infrastructure

Knowledge

Financing

Figure 5 – Integrated Risk Structure: The Farmer's Perspec ve

Farmer

• Work health risks • Capital risk • Business and tax risks

• Machinery risk • Produc on loss risk • Managerial capacity • E ects of disease or pests

• Risk of quality loss • Price risks • Excess supply risk

• Risk of poor investments

• Input price risks

• Natural resource risks • Risk of natural disasters

Climate Produc on

Market Investment

Inputs


FIs with extensive loan por olios will no cethat many risks in gure 5 also exist in other industries. However, there are subtle nuancesthat help FIs be er understand how these risksappear in the agricultural sector and how be er to mi gate them.

Managing Agricultural Risks

Working in rural areas is never an easy proposi on. Vast geographic areas and lowpopula on densi es, o en sca ered acrosshard to reach loca ons, result in higher opera onal costs for nancial ins tu ons. Organiza ons need to develop and implement

a comprehensive and integrated strategy too er sustainable nancial services in ruralareas. This strategy should include design of e ec ve risk assessment methodologies, development of strategic collabora ons withvalue chain players, and crea on of coste ec ve distribu on channels. The followingsec on shows how risk management processescan be incorporated into the basic nancingmodel. The remainder of the guide will walkreaders through the step by step process ofcrea ng a nancial product for agricultural borrowers and how speci c ac ons can address these risks before the product is o cially launched.

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Table 1 – Key Agricultural Risks and Mi ga on Strategies

Risk Mi ga on Strategies

Climate Risk: Crops are highly suscep ble to uctua ons in climate and rainfall. Lack of access

to water sources or irriga on systems and temperature varia ons considerably a ect sizeand quality of harvests. Natural disasters or climate events, such as drought or ooding, seriously impact the farmer’s ability to meet produc on demands.

Mi ga ng risks of natural disasters is di cult, butprogress has been made in the area of microinsurance, especially in weather index insurance.When insurance payouts follow a benchmarkindex, bene ts payments can be targeted to bene ciaries who su er the worst losses see MicroEnsure case study below . Another way tomi gate climate risks is to select regions with highagricultural poten al and large crop diversity. The bank can diversify its agriculturalpor olio across di erent crops in the region, reducing overall risks. Targe ng farmers with access to irriga on also reduces risks of rainfallvola lity, ensuring more stable yields.

Produc on Risk: Produc on risks result frompests and diseases that a ack crops during thegrowth cycle, as well as from losses caused bysubstandard farming prac ces or inadequate condi ons during harvest, transforma on processing , or transporta on of the produce.

Inadequate handling before and a er harvest canlead to signi cant losses. Produc on risks are directly related to technical and managerial capaci es of farmers, and to technical constraintssuch as quality of agricultural inputs seeds, fer lizers, etc. , harves ng processes, and storagesystems. The managerial capacity of a farmer signi cantly in uences her/his ability to successfully produce and market crops.

FIs need to assess each farmer’s technical andmanagerial skills by reviewing her/his produc ontechniques in detail, crop diversi ca on strategies, and access to markets. FIs should havestrong risk assessment processes in place, enabling them to select low risk farmers. Also, FIscan collaborate with technology transfer agencies, nancing farmer groups that receivetechnical and marke ng support. This holis c

nancing approach increases poten al businessfor FIs and helps stabilize the en re value chain,thereby reinforcing the producers at the base.


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Risk Mi ga on Strategies

Investment Risk: Investment risks relate to non repayment of credit provided to farmers,other producers, or other value chain actors. Thisrisk may be borne by the FI, or the value chainactor ac ng as retail nance provider for otheractors, which is referred to as “internal” valuechain nance.

Credit o cers should analyze intended use of theloan during the due diligence process to determine if the investment is wise. As men oned above, FIs must develop adequate riskassessment processes that will help them evaluate managerial capaci es of poten al clientsand the ra onale behind the proposed investments. Non repayment of credit can be greatlyreduced by linking repayment through lead actors, such as trustworthy aggregators or exporters. Such actors help ins ll and ensure accountability. Arrangements of this type arestrengthened when lead actors co signatoriescan absorb risks for example, , through equitycapital or other collateral and when con ngencyarrangements are in place, to deal with unavoidablerisks such as crop failure . Providing nancing forsmall farmers indirectly through arrangementwith larger value chain actors improves e ciencyof credit delivery and decreases risk of nonperforming loans. These types of direct and indirect nancing arrangements are discussed inmore detail later in this sec on.

Input Risk: Input risks may arise when prices ofagricultural inputs increase to a point that makesproduc on unpro table, genera ng losses tofarmers and preven ng them from repaying theirloans. Farmers also face the issue of low qualityfer lizers or counterfeit products in the market,which could have limited or even nega ve impacts on yields.

Verifying a history of strong yields and comparingproduc on costs of farmers to regional benchmarks can help FIs assess the produc on effec veness of poten al farmer clients. Further,technology transfer ins tutes and reputable inputproviders are necessary players to ensure qualityof agricultural inputs. Farmers focused on improving quality of their products are incen vized to spend slightly more money on cer ed seeds or fer lizers, when assured ofhigher yields. FIs need to assess each farmer’sagricultural prac ces and the quality of the inputsthey usually purchase before extending credit.

Market Risk: Agricultural products most suscep ble to subs tu on carry the greatest market risk, because purchasers are indi erent to thesource of products that are homogenous and easily interchangeable. It is common for farmers tohave good yields and strong management of cropcycles produc on, harvest, storage only to facedrops in prices at the me of sale due to excess supply. In saturated markets, farmers areforced to sell at low prices, some mes evenbelow cost of produc on.

Fixed contracts throughout the value chain helpmi gate market risks, especially when dependence on one market can be avoided. FIsshould look for contract farming or export agreements, especially when evalua ng nancingfor other agribusinesses within the value chain. In niche markets, such as fair trade channels,buyer rela onships can signi cantly reduce marke ng risks, even for small producer groups.Product standards and cer ca on can also reduce market risks.


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A more detailed discussion of risk and arrearsmonitoring for farmers can be found in phase5 of this guide.

The following case study is an example of a collabora on between two private sector companies seeking a market led solu on tomi ga ng one of the biggest risks in the agricultural sector: climate risk.

11 Cracking the Nut Publica on, 2015.12 This sec on borrows heavily from IFC’s “Guide for Financ

ing 12Agriculture Value Chains.” P. Varangis, H.A. Miller, D.Chalila, H. Dellien and D. Shepherd.

MicroEnsure’s Entrance into Zambia’s Rural Microinsurance Market11

In 2014, MicroEnsure – a large global microinsurance company – began serving the Zambianmarket with its FarmerShield life and weather insurance product in partnership with NWKAgriservices. NWK is an agribusiness that operates a co on out grower program that engages 100,000 smallholder farmers and has diversi ed into input distribu on and commodity storage and trading. Faced with famer loyalty and side selling problems, NWKpartnered with MicroEnsure to o er weather index and life insurance to its farmers. Thecompanies planned to build weather sta ons across Zambia to record weather events, butfaced with high construc on and opera on costs, decided to use satellite imaging to monitorregional weather. Prior to its rst season of opera on in 2013 2014, 6,610 farmers signedup for weather index insurance, covering 7,600 hectares.

This par cular weather index product was designed so that bene ts payouts were modeledon the impact of various clima c events, such as drought or oods, on co on yields. Datawas collected at a local level and bene ts were automa cally paid out if the weather eventcrossed the predetermined level of severity.

In 2014, weather events triggered $42,000 of payouts, thus demonstra ng the value of theproduct in its rst season. Further, the FarmerShield life insurance product covered 25,165farmers’ lives who paid a total of $5,536 for coverage. The net loss ra o for this productwas 48 percent, which is a posi ve outcome for a life microinsurance product. It a ractedeven further demand from farmers to cover addi onal lives in their households. As a resultof this coverage, farmers valued both the weather index and life insurance products andappreciated both direct (for example, claim payouts) and indirect (for example, integra oninto the value chain) bene ts of the insurance products. NWK no ced a posi ve impact onits business with increased deliveries and reduced side selling (pending nal conclusions ofthis pilot study and the products are expected to be sustainable and pro table for the insurers and reinsurers. From the ini al product with NWK Agriservices, MicroEnsure is diversifying its product o erings to rural Zambians, which is vital for the development ofrural Zambian nancial markets.

MODELS OF AGRICULTURAL FINANCE12

There are plenty of poten al nancing opportuni es within the agricultural sector and valuechains. However, there is no “one size ts all”approach to nancing the producers and associated value chains. While strategically placed

nancing can reduce risk across the value

chain, each segment of the chain should beconsidered according to its own merits and anappropriate approach be developed. Figure 6provides an illustra on of various models that


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Risk Level of Enterprise

Risk

Lev

el o

f Val

ue C

hain

Low High

High

Farm Direct & Agri-SME Finance - Higher reach, lower impact - Limited collabora on

Producer Organiza on & Input Supply Finance - Moderate reach and impact - Moderate collabora on

Structured Value Chain Finance - Higher impact, lower reach - Signi cant collabora on

FIs might employ based on risk levels of targetinvestments. The lower the risk involved in aninvestment, the more a rac ve it is for direct

nancing. Since risk levels are more elevated inthe agricultural sector, there are other

nancing models that can indirectly nanceproducers at the base of the value chain, without taking on the full risk of direct inves ng.

This illustra on shows that lower risk farmersin rela vely low risk value chains at the bo omle corner of the graph can be nanced withmore direct approaches. While the nancingreaches the farmer directly, this approach islimited in its impact on the single farmer directly nanced. In contrast, farmers that fallinto the higher risk categories, concentrate oncommodi es that are more risky, or live inareas that have higher risk pro les, are moresuccessfully nanced through structured valuechain nance approaches. This type of nancing can poten ally impact many farmers indirectly. The nancing itself will be concentratedon larger organiza ons that work with farmers.

FIs using a structured model of nancing outsource more func ons and responsibili esto value chain players. For example, one valuechain player may not only help preselect poten al farmers, but will also occasionallyprocess loan applica ons and collect repayments. This model requires more coordina onbetween FIs and value chain players, and ismore frequently used in value chains wherethe processor or trader is in an oligopolis c

posi on (that is, farmers are locked into sellingtheir products to one or few buyers; or strongand enforceable contract farming is in place).

There also exist a variety of hybrid nancingmodels that can be explored between the twoends of the spectrum. These allow for tradeo sbetween the degrees of coordina on or collabora on between par es, depending on wherethey fall in the risk spectrum. These hybridmodels o en involve more open and light collabora ons between FIs and value chaincompanies, where FIs use and leverage localknowledge of value chain players to gain accessto their suppliers and to pre select those farmers with characteris cs that are a rac veto the FIs. Later FIs will have a more direct rolein marke ng and farmer selec ons, as well asin the loan approval and recovery processes.As an illustra on, in Kenya, local FIs work witha large drip irriga on manufacturer to providea ordable nancing to purchase drip irriga onequipment along with technical assistance forits proper use. FIs here work with the valuechain to provide customized services to helpaccelerate produc on.

Extending nance to enterprises at di erentlevels of risk involves certain tradeo s betweenlevels of impact and outreach. This is partly dueto the reality that nance alone is o en insucient to make signi cant improvements inyields and income, especially for smaller farmers. Varying levels of complexity accompany the nancing mechanisms for riskierclients. Typically, the more complex nancingmechanisms for riskier agricultural clients address nancial needs and also their needs fortechnology and inputs, technical assistance,and market access. Direct models typically address nancial needs. Hybrid models mayaddress needs for inputs, technical assistance,and/or market access; depending on the partners and the nature of the collabora on.Structured models typically provide a full suiteof services in conjunc on with nance. Themarket research process that this toolkit recommends, will help FIs select the most appopriate lending models, according to theirvision, target clientele, and risk appe tes.

Figure 6 – Appropriate Financing Models byValue Chain and Enterprise Risk Levels


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However, structured value chain nance models can be di cult to implement, requiringsigni cant coordina on among partners withcomplementary roles and mutually bene cialincen ves. Addi onally, the outreach of structured value chain nance is o en limited to therela vely small number of farmers linked tohighly organized value chains. Nevertheless,once in place, these hybrid and structured approaches can create a systemic way to expand access to nance for producers, reduce

nancing risks, and grow the value chain as awhole.

In addi on to the external aspects of the nancing models discussed in this sec on, FIs

will need to adjust key internal areas – creditpolicies, risk management, human resources,and distribu on channels – to successfully lendto the agriculture sector. During credit assessments of farmers, loan o cers need to gatherand u lize informa on to assess technical level,managerial skills, character, reputa on, andwillingness to repay. Addi onally, FIs need specialized lending processes and tools to evaluate both household and farm level cash owto assess ability to repay, as well as to structureloan products to meet borrower needs andcash ow pa erns. Por olio monitoring andrisk management should account for seasonality and adjust to weather and other produc onrisk factors via close monitoring and ac vemanagement (a more detailed descrip on ofarrears monitoring for small farmers is discussed in the rollout sec on in phase 5). Regarding human resources, rural loan o cersshould have a background in agronomy andtheir performance incen ves should be calibrated to balance por olio growth with riskmi ga on appropriate to the agriculture sector. Distribu on channels may need to beadapted to reduce costs of reaching clients inremote areas.

This guide focuses on adjustments banks needto make to nance the agricultural sector andon the process to design and implement loanproducts for direct lending to farmers and agricultural SMEs (agri SMEs). For more

informa on on value chain nance models andtheir advantages and risks, see Appendix B –Hybrid and Structured Financing Models.

Direct Farmer FinancingDepending on risk pro les, certain farmers maybe a rac ve clients for nancing on a standalone basis. These farmers typically haverela vely diversi ed sources of income (acrosscommodi es and/or ac vi es); limited seasonalityand ability to smooth cash ow throughout theyear; irriga on or limited exposure to weatherrisks; use of good agricultural prac ces; andstrong access to markets and favorable prices.From a geographic perspec ve, these farmersalso need to be rela vely easy to reach throughbranch banking or other marke ng channels onan individual basis. Further, loan sizes ought tobe su cient to jus fy individual credit assessments and other overhead costs associatedwith direct lending.

Iden fying Farmers for Direct Financing: Farmers for whom nance is the dominant constraint usually have established wholesaleor retail channels and strong rela onships witha substan al number of suppliers. From theperspec ve of FIs evalua ng repayment risks,these small farmers should produce the bulk oftheir output for commercial sales (not subsistence). The best target commodity groups arethose compe ve farmers with good yieldsand growing demand for their products.

Agri-SME FinancingA number of agri SMEs ful ll key func ons inmany value chains as traders or aggregators toconsolidate goods and provide transport or access to other markets. Although they generally do not support farmers with inputs,technical assistance, or quality control, theyo en do provide nancing to farmers throughtrade credit or pre nancing of inputs. Increasing working capital nance for these agri SMEsmay be a good entry point for indirectly

nancing farmers.


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The poten al nancing opportuni es for certain farmers may be too small and/or short term to jus fy the costs and administra

on of direct nancing. In those cases nancingfarmers via agri SMEs in commodity valuechains does not consider the credit quali ca

ons of the farmers who ul mately receiveshort term nance, but instead relies on thecreditworthiness of agri SMEs and their abilityto manage their own por olios of outstandingloans.

It is not uncommon for successful agri SMEtraders to be medium sized farmers themselves, who procure from other smallfarmers in their vicini es to help cover operating costs of transport to markets. These typesof agri SMEs are normally good borrowers, andcan be used as conduits for credit to smallfarmers in their procurement network. A primary cau on is to assess not only their creditworthiness and management skills but alsotheir characters to ensure business prac cesare acceptable. This assessment should bewary of traders that pay low prices, charge highe ec ve rates for advances, or take large margins rela ve to their value addi on.

Iden fying Agri SMEs for Financing: Highperforming agricultural entrepreneurs can bee ec ve partners in increasing probability ofsmall farmer success and loan repayment. FIsshould look for:

• A strong documented record of pro tablecommercial agricultural opera ons in thetargeted commodity group, preferably as aproducer

• A solid track record of procuring from smallproducers (and in some cases, organizingthe needed mix of technical and input supply services)

• Strong management and organiza onalskills, to be able to put the pieces togetherfor a growing number of small farmers

• Commitment to adding value to smallfarmers in ways that increase their produc

vity, quality, and earnings

• Ability to work with a signi cant numberof small farmers (30+ small farmers).

FACTORS INFLUENCING THE INTRODUCTION OF AGRICULTURAL FINANCE13

Ins tu onal buy in from every level of the FI isimportant when introducing a new agriculturalproduct. Top management should serve asstrong “champions” suppor ng the work ofcredit managers and loan o cers. To gain buy in of senior managers, the team will needto describe business opportuni es in nancingthe agricultural sector, and poten al upside forthe FI. During the market research phase, theteam will gather cri cal informa on about theagricultural sector to bolster the business casefor nancing it. The presence of these champions will ul mately dictate whether the introduc on of agricultural nance is a success. Thechances of successfully launching and sustainably running the program is much higher withstrong leaders explaining what the opportunityis and how the new processes will be integrated into the organiza on. Conversely, ifmanagement is not united on developing apilot product, divisions within the organiza onwill form as the workforce tries to understandthe mixed messages coming from the leadership. Launching a successful agricultural lending program requires a strong, uni ed organiza on and commitment. This guidehelps champions within FIs to be er assess theagricultural market poten al of a par cular region, and prepare a business plan and strategy for the rural sector, and get buy in ofsenior management.

Just as a strong and mo vated culture insidethe FI is key to the success of an agriculturallending program, a suppor ve enabling environment outside the organiza on is alsonecessary. Private sector engagement is a goodbellwether to help determine the strength of

13 This sec on borrows heavily from IFC’s “Guide for Financing Agriculture Value Chains.” P. Varangis, H.A.Miller, D. Chalila, H. Dellien and D. Shepherd.


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the agricultural sector within a country. It ismuch more bene cial for FIs to operate in markets alongside private investors making equity investments because the risks are diminished further and ac ve partners can enhance capacity and produc vity. Withoutprivate sector investment, FIs will need to bemore selec ve when evalua ng investments inthe agricultural sector.

Agriculture is an area that receives poli cal a en on, so there may be certain governmental policies that impact its nancing. Factorsthat support agricultural nance include: policies that allow FIs to charge adequate interest rates to cover the costs of reaching dispersed popula ons; government interven

ons and subsidies; and appropriate use ofloan guarantees. FIs need to iden fy in advance any policies that could undermineagricultural nance, be aware of poten al pi alls, and prepare to address those challengesearly on. For a more detailed descrip on ofsome nancial policies and how each could either enhance or undermine agricultural lending, see appendix C.

Policies governing the agriculture sector aresubject to changes in the poli cal climate.These changes can both posi vely and nega

vely impact overall pro tability of lending tothe sector. There is a variety of policies thathave a strong in uence on the businessenabling environment for agriculture in generaland nancing (and investment) for agriculturein par cular. For example, agriculture sectorpolicies may include price interference, especially in staple crops, which can underminemarket forces and create challenges for the

nancing of certain farmers. Trade policies foragricultural commodi es and inputs (both exports and imports) may include restric ons,taxes, quotas, or price controls. Lastly, government ac vi es in infrastructure, irriga on, procurement, and insurance also impact private sector investments and nancing ofagriculture. It is helpful to gather relevant regional and/or commodity speci c informa

on for each of these policy areas when possible. FIs can adapt products and target

speci c value chains that present the most en cing opportuni es by con nuously monitoring these nancial and governmental policies. For an addi onal discussion of somegovernmental policies and how each one couldeither enhance or undermine agricultural lending, see appendix C.

INSTITUTIONAL CAPABILITIESA er establishing that there is strong demandfor agricultural loans among current and poten al clients, you must ensure that your ins tu on has the necessary capabili es andinfrastructure to introduce agricultural lendinge ec vely. Introducing agricultural loans willhave an impact at many levels of the organiza on.

• Senior Management should be open to restructuring the organiza on and aligningsta to implement agricultural lending e ec vely.

• The Credit Department should be capableof adjus ng and implemen ng adequateprocesses for agricultural lending acrossbranches. The FI should be open to adjusting roles and responsibili es of eld stato assess and manage agricultural loan applica ons and train branch managers onapproval and monitoring of agriculturalloans using the new processes.

• The Risk Department should adjust thepolicies to address the addi onal risks involved with the agricultural sector, andimplement new processes and tools tomanage and monitor agricultural por oliorisks.

• The Management and Informa on Systems Department should be capable ofmaking the necessary adjustments to theinforma on system to enable exible loanschedules and the use of grace periodswhen required to be er match farmer cash

ows. The system should be able to monitor an agricultural lending por olio and


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generate all necessary reports (monthly,seasonal, etc.) promptly.

• The Human Resources (HR) Departmentshould be open to adjus ng the posi onrequirements for loan o cers to facilitatethe selec on of sta with agricultural backgrounds, and to introducing a trainingcurriculum on risk assessments for agricultural loans. HR should be able to managea sta specializa on process by type oflending product with suppor ng performance based incen ve systems.

To guarantee success, the introduc on of agricultural lending must be consistent withand contribute to the organiza on’s mission,vision, and strategic objec ves.14

CHECKLISTBy now, your organiza on’s management teamand board should have talked through the challenges and opportuni es of introducingagricultural lending. Using your top line knowledge of the market and your ins tu on, youwill have decided whether or not you are readyto begin to look more closely at introducingagricultural lending. Now is the appropriate

me to think about how ready your ins tu onis, what are your par cular challenges, whoshould lead the process, and how to set up apilot. The following checklist will help to highlight whether you are ready to proceed withplanning for the introduc on of agriculturallending:

• Do you understand what agricultural nance is and how it might t in your ins

tu on?

• Can you explain why introducing agricultural lending could present an importantopportunity for your ins tu on?

• Do you understand the predominant risksof the rural sector, and, in par cular, theagricultural lending risks that you ins tu on will need to tackle?

• Do you have a long term vision and commitment to engage with the agricultural sector and make addi onal provisionsto manage the cyclical nature of the sectoreven when it is nega vely a ected byevents outside your control (such asweather events)?

• Have you assessed the di erent agricultural nance models that would best suityour ins tu on, and whether you can incorporate those into your current ins tu onal processes?

• Have you inves gated the nancial policiesthat could impact the agricultural sector inyour target country or region?

• Can you ar culate which government policies will impact your entrance into agricultural lending and how?

If you can answer all these ques ons, you areready to start planning for your expansion intoagricultural lending.

14 Introducing Individual Lending. Women’s World Banking.H. Dellien, O. Leland. 2006.

The

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here are some unique risks and challenges in lending to the agriculturalsector. But some mes, a li le innova

on is all that is required to take advantage ofthe tremendous market opportunity in agricultural lending. FIs new to lending to the agricultural sector will need to adapt exis ng lendingprocesses and create nancial products to respond to the characteris cs, needs, and aspira ons of this unique sector. An in depthunderstanding of the agricultural sector and itsplayers will enable FIs to innovate, thereby allowing early movers to stay ahead of thecompe on. Ins tu ons that con nue to o erthe same products, which do not address thepar cular needs of a sector or value chain, willmiss out on market opportuni es.

However, adapta on and innova on cannot beone me occurrences. Farmers are diverse andrequire many di erent products. A lack of understanding of the agricultural sector and itsplayers would considerably reduce the chancesof an FI successfully introducing nancial services in rural areas. Any gaps that exist inproduct o erings, such as those that exist inthe agricultural sector, represent opportuni esto grow the client base and bo om line pro ts.

INTRODUCTION TO THE FIVE-PHASE MODELThe process for innova ng and developing

nancial products for the agricultural sectorcan be broken down into a basic ve stepmodel. The FI should keep in mind risks associated with agricultural lending and the nancialstrategies to mi gate and manage those risks.

As illustrated in gure 7, the process beginswith the prepara on phase. Here, an ins tu

on iden es gaps in its lending processes,credit risk policies, human resource skills, management systems and distribu on channels, and iden es the adjustments requiredto engage with the agricultural sector and manage the par cular risks posed by it.

In the second phase, ins tu ons researchwhich geographical regions have large poten

al for successful agricultural nance. Once theregions are selected, FIs conduct more detailedstudies of the poten al value chains and associated farmer segments. During this phase,FIs iden fy the most a rac ve and least riskyvalue chains for nancing and which lendingmodels would be most e ec ve in reachingthose clients. At this point the team should prepare a business plan for the pilot, with targets and an implementa on budget, whichshould reach breakeven point within a reasonable period of me.

The third and fourth phases of the process areitera ve. In the third phase, an ins tu on willdesign nancial products and a lending and delivery model (the strategy) for tes ng. In thefourth phase, the ins tu on implements thepilot strategy and monitors the opera onalperformance of the pilot, the learning of thesta , and whether the product has been wellreceived by target clients. If there are problemswith the lending processes, the products, orthe outreach strategy, the pilot is redesignedand re piloted. This process is repeated un l asuccessful pilot (as de ned by predeterminedmetrics) is conducted.

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The Product DevelopmentProcess

T


In the h and nal phase of the process, theins tu on o cially launches the new product.Based on market feedback, FIs may decide torevise products and make slight changes by

conduc ng some addi onal research and goingthrough an abbreviated version of the pilo ngand launch processes again.

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Phase 1

Prepara on Phase 2

Market Research

Phase 5

Product Launch and Rollout

Phase 3

Pilot Design

Phase 4

Pilot Tes ng and Monitoring

Market Feedback

Figure 7 – Product Development Process

TIMELINE FOR INTRODUCINGAGRICULTURAL LENDING PRODUCTSThe design and implementa on of nancialproducts for the agricultural sector are con nuous, given the par cular characteris cs ofvalue chain players and farmers. Comple ngthe process will take a signi cant investmentfrom the en re ins tu on throughout theplanning, pilot, and rollout process. It is possible the ins tu on will see some return on itsinvestment before the end of the process. Especially if farmers and agricultural businessesperceive that the FI is interested in understanding their challenges and that the FI is willing toadjust its products and delivery systems to engage more e ec vely with them. This canserve as a marke ng point to a ract moreclients in rural areas.

This meline can also be much compressed depending on the current state of agriculturallending within the ins tu on. For instance, anFI may already have products similar to whatfarmers would nd most useful, in which case,re ning these exis ng products will be lesscostly and less cumbersome. On the otherhand, if the needs and preferences of farmersare dras cally di erent from those of currentclients, a new o ering might be the most

appropriate response. The en re new productdevelopment process should take, on average,between 12 to 18 months from the earlieststages of prepara on to the launch of the newproduct. This meline can be compressed orexpanded depending on how much me an ins tu on spends on pilo ng and tes ng thenew product before it is o cially launched. Depending on the FI’s experience with tes ngnew products, it is the itera ve phases of pilotprepara on and tes ng that usually take themost me.

There is no set me during the year that is bestfor FIs to introduce new agricultural nanceproducts, so an ins tu on can begin theprocess at any point. The pilot launch and nallaunch of a new product may best be medwhen the target segment is in need of cash. Forfarmers, this is typically just before the plan ngseason when they are seeking money for quality inputs.

STRUCTURE OF TEAM AND LEADERSHIPDuring the early planning stages, the seniormanagement team and other key stakeholdersmust be involved in the decision of whether ornot agricultural lending is feasible or desirable.Once the decision is made, a cross func onal


agricultural lending leadership team should becreated to design the strategic plan, managethe research process, design and pilot test theproduct and processes and manage the pilotevalua on and roll out the product across theorganiza on. A senior sta member can serveas the agricultural lending project manager,with the responsibility of driving the processand being accountable for the implementa onof the project through each of the phases.

The agricultural lending project managershould be iden ed early in the process sincethis person should have an in depth understanding of how and why all key decisions aremade. Since agricultural lending is, by its verynature, a cross ins tu onal endeavor, this person will need to coordinate with a largenumber of individuals in many di erent areasof the ins tu on. Lending process need to beupdated, new credit review guidelines created,new policies addressing the rural and agricultural risks dra ed and approved, adjustmentsto the marke ng plans implemented, changesto the selec on and training of agricultural loano cers reviewed, new loan repayment plansand grace periods introduced, and performance metrics analyzed. The agricultural lendingproject leader will need to coordinate thesevarious ac vi es throughout the ins tu onand guide the process to comple on. Guidelines on construc ng the agricultural lendingteam are included in Phase 1 of this guide.

RESOURCES AND TIMINGFIs cannot simply jump into the rst phase ofthe product development process. Before beginning Phase 1, each FI should hold a workshop with its board and senior managersto discuss the ra onale for agricultural lending.During this workshop, management should discuss the levels of market demand for thenew product, the government policies relatedto the sector, the ins tu onal environment,and ins tu onal skills and capabili es. Thispreliminary step should take no more than afew days provided su cient background informa on is available.

CHECKLISTBefore o cially beginning Phase 1, considerthe ques ons below:

• Can you explain why introducing agricultural lending is important for your ins tu

on at this point?

• Do you understand the 5 step product development process and generally whatis accomplished in each step?

• Have you met with a team of senior management to preliminarily discuss theagricultural lending market and how it tsinto the structure of your ins tu on?

• Does your team understand the melineinvolved in crea ng a new product and thelevels of e ort required to make the introduc on a success?

• Do you understand what is required of theagricultural lending project leader and thetype of person that might be successful inthis role?

If you can answer each of these ques ons, thenyou are ready to begin Phase 1 of the productdevelopment process.

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P D CT D L P T PHA 1 – P PA ATI

he rst phase of a new product development cycle begins when an ins tu

on decides to formally inves gate itsdevelopment. At this point, the FI has usuallyconducted ini al mee ngs to discuss the goalsof the product and has iden ed a projectleader or team to guide the process through tocomple on. In the prepara on phase, FIs

conduct an internal analysis of the lending andrisk processes, opera ons, and personnel toiden fy any poten al gaps that would need tobe lled. During this phase, FIs will ensure thatthe updated processes address the new risksthey will face. FIs will also put together theirleadership teams.

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Product Development Phase 1 –Preparation

T

Phase 1

Prepara on Phase 2

Market Research

Phase 5


Phase 3

Pilot Design

Phase 4


Market Feedback

Figure 8 – Phase 1 – Prepara on

IDENTIFY INSTITUTIONAL GAPSMany di erent areas must be inves gated toiden fy gaps in an ins tu on. Everything from

nances to opera ons and lending methodologies to branch structure must be evaluated todetermine if the current processes adequatelyaddress addi onal agricultural risks andwhether the ins tu on is ready to introduce anew product. This sec on will go through somehigh level ques ons that should be answeredwhen conduc ng this analysis. For a more complete diagnos c tool, see. Appendix D – Ins tu onal Diagnos c.

Senior management should be able to ar culate clearly the vision of the product, how it tsinto current product o erings, and who thedesignated leaders will be.

Vision: What is the vision for the new productin three years? Why is it important for the ins tu on?

Strategy: How does the new product t intoyour ins tu on’s overall strategy? What arethe target markets for the new product? Whatins tu onal upgrades are required? Are theresu cient funds to upgrade and support a newproduct?


Leadership: Are your leaders suppor ve of thechange? Is there clear ownership? Are leaderswilling and able to allocate the necessaryamount of me? Are the leaders aware of thepar cular risks that the agricultural sector poseto the bank? Do incen ve structures need tobe adjusted?

The FI will mobilize sta and other resources towork on the development e ort and create awork plan. This plan will help the FI to iden fygaps and make adjustments to the necessarylending processes and tools to enable it to be er engage with the agricultural sector.

Structures and Processes: Are the current riskassessment processes adequate to analyzecash and nancing needs as well as repaymentcapaci es of rural clients? Can the new productbe e ec vely provided in rural areas throughyour exis ng delivery structure? What changesmust be made in delivery processes, appraisaltools, infrastructure, and internal controls totarget the agricultural sector in an e ec ve andcau ous manner?

Competencies: What technical and organizaonal competencies are required for the

introduc on of agricultural loans? Do you havethe necessary competencies in house? Whataddi onal skills and knowledge need to bebuilt for the sta to e ec vely support this ini a ve? If external support is necessary, isthis an op on that is possible for the FI?

Culture: How would the introduc on of agricultural loans a ect exis ng behavior at thebranch level? At the head o ce level? Howwould the FI address resistance or fear ofchange in the transi on from being an FI focused in urban areas to a lender nancingthe agricultural sector? Can this be done e ec vely? Can ins tu on manage di erentproduct cultures simultaneously?

The box below highlights an example of how abank in Indonesia systema cally compared itsproducts and processes to the best prac ces inthe region. This high level gap analysis can helpan ins tu on determine the level of changenecessary when implemen ng agriculturallending.

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Phase 1 Featured Prac cal Example: Gap Analysis at an Indonesian FI.

Gap Analysis for an Indonesian Bank

In 2015, IFC worked with a large Indonesian nancial ins tu on to analyze the ins tu on’scurrent products and processes and to conduct a general gap analysis as the bank preparedto introduce agricultural products. The bank analyzed its current opera ons in the followingareas and compared them against industry best prac ces:

Table 2 – Sample Gap Analysis

Analysis Area Best Prac ce Indonesian Bank

Iden ca on of Agricultural Regionswith Poten al

Conduct market research in eachregion to iden fy its agriculturalpoten al

No market research

Target Commodi es Inves gate all commodi es andfocus on those that have thestrongest market poten al andpro tability

Focused only on palm, rubber,cocoa, orange, sh, and poultry


This preliminary gap analysis, along with the informa on provided in the ins tu onal analysis in appendix D, will give the FI a clearer picture of how ready the ins tu on is to introduce a new product, and what adjustments arerequired to enter a new market. Once the gap

analysis is completed, a detailed ac on planshould be prepared with adjustments required,due dates, and the sta responsible for its delivery. In many cases, external support mightbe necessary to help the bank design and implement the adjustments iden ed.

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Based on what they found a er conduc ng this gap analysis, the bank was able to adjustits resources and personnel to build a strong agricultural lending unit.

Analysis Area Best Prac ce Indonesian Bank

Target Clients Target low risk farmers and valuechain players based on benchmarks to be developed

Lending only to farmers in preselected crops, and traderswho could use the FI’s currentproducts monthly payments

HR Prepara on Train lending o cers in agricultural lending and agribusinesses

No specialized training curriculum for agricultural lending

Product Design Mul ple loan products withgrace periods and exible repayment schedules

Loans with only monthly paybackperiods

Underwri ng Process:Data Gathering

Detailed analysis of both farmand non farm income

Loans based on total area of cropproduc on

Underwri ng Process:Income Calcula on

Based on cash ow data collected during an interviewand cross veri ed against regional benchmarks

Based on technical card assump ons of income and expenses

Underwri ng Process:Veri ca on

Thorough data veri ca on offarm and non farm ac vi es, including technical skills, yields,and collateral

Focused on veri ca on of valueand loca on of collateral usuallycommercial real estate

Underwri ng Process:Credit Analysis

Evaluate crops, technical level,cash ow pa erns, nancingneeds, and repayment capacity

Capacity to repay a loan is assessed using crops’ data fromtechnical cards data and collateral valua on

Monitoring of CropTrends

Regular monitoring of cropprices, produc on volumes, andgrowth

Only monitor prices

Coverage Area Pilot in a strategic region andlater roll out the product toother regions based on marketpoten al

Rolled out anywhere based ondemand


MANAGEMENT INFORMATIONSYSTEMS (MIS) REQUIREMENTSManaging agricultural loans requires FIs to design or adapt so ware applica ons that willenable the ins tu on to manage clients moree ciently. MIS should, therefore, allow loan o cers to process loan applica ons swi ly,while providing objec ve informa on on therisks and repayment capaci es of clients sothat the credit team can make objec ve decisions. MIS should enable the design of adequate loan payment plans that match farmers’ seasonal cash ows. It should provide

mely informa on on por olio quality. This willenable FIs to closely monitor payment schedules and to react promptly when problems arise due to weather or price shocks.

MIS should help banks organize the lendingprocess into three modules: Client, Loan, andCash.

Client Modules

The client module should have at least threeapplica ons:

1) Client Maintenance: FI sta can register newclients and update current clients, co signers,and guarantor informa on.

2) Financial Informa on Maintenance: Loan o cers can capture and register nancial informa on from the client and farm visits (forexample, farm assets, liabili es, revenues, expenditures). This module should also enableloan o cers to update clients’ nancial informa on and register and update guarantees.

3) Financial and Risk Informa on Analysis:Loan o cers can capture and summarizeclients’ socioeconomic and nancial details,risk informa on, and guarantee reviews.

Loan Modules

This module should help FIs e ec vely managelarge volumes of loan applica ons in at leastfour applica ons.

1) Work ow Monitoring: Organize and monitor loan applica ons by work ow stage: loanrequest; farm visit and data collec on; loan

decision process; and loan processing and loandisbursement. The applica on should provideinforma on on the mings required from loanapplica on to loan disbursement.

2) Financial and Risk Summary for the CreditCommi ee: Cri cal farmer informa on in onepage to be used by the credit commi ee duringthe loan approval. This informa on includesthe balance sheet, income statement, nancialra os, and risk parameters for each farmer.Some applica ons could have an integratedscoring model and decision tree to improvestandardiza on and objec vity of loan analysisand approval. Those parameters should beclearly disclosed.

3) Loan Approval/Rejec on: A summary of allcredit commi ee decisions, numbers andamounts of loans approved by session, reasonsfor loans rejected, and sta s cs on loan decisions on a monthly and weekly basis.

4) Loan Installments design: Enables the FI toreduce its credit risk by designing exible loaninstallments that match farmer cash ows. Themain type of payments that the system shouldo er are: 1 Irregular installment amounts withirregular installment schedules; 2 Grace periods; 3 Irregular installment amounts withregular installment schedules; and 4 Regularinstallment amounts with irregular installmentschedules.

Cash Modules

This module allows banks to register all loansdisbursed and collected during a period, themain applica ons are:

1) Credit disbursement: Enables the bank todisburse loans and monitor all scheduled disbursements.

2) Payment: Collects and registers all paymentsscheduled and received by the bank.

3) Disbursement of Reschedules Loans:Processes only those loans that have beenrescheduled due to external shocks.

4) Monthly Payments and Disbursements Report: Monitors all disbursements and installment payments made in a period, and provides

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detailed monthly reports by loan o cer,branch, and region.

FIs can purchase satellite so ware applica onsto manage and monitor all of this informa on,which could then be synchronized with thecore banking systems already in place. Some ofthese client management solu ons are available for FIs to purchase as o the shelf solu ons. FI sta will then need to work on integra on and synchroniza on of the new systems with their core banking systems.

Other FIs, with fully integrated core banking solu ons, could decide to develop or adjustthose applica ons in their core banking system.Whichever solu on the FI chooses, the FIshould be sure to work with specialized expertsin agricultural lending systems. Some toolsavailable on the market include the ACDI VOCAtool men oned later in this guide, or the toolused by IFC (CLARA), among others.

BUILD INTERNAL LEADERSHIPTEAMTo delve deeply into many of these areas, theFI will need to appoint a project manager anda cross func onal leadership team to managethe ini a ve. The agricultural lending projectmanager should drive the change process andbe accountable for implemen ng the projectthrough each phase. Also, this person shouldserve as the primary point of contact with external agencies or consultants. should the FIdecide to seek extra technical advice.

The project manager should ideally have someknowledge of agricultural nance and havestrong analy cal, planning, and communica

on skills. Selec ng this person from amongexis ng sta is bene cial since the person willhave a solid knowledge of the ins tu on, its organiza onal culture, and clients. The principal responsibili es of the project manager are:

• To drive development of all aspects of theagricultural loan product, policies and procedures, systems and quality control.

• To support opera ons sta with backstopping and guidance during implementa on,especially during the pilot phase.

Depending on the FI’s management structure,this person may also manage new agriculturallending sta .

In addi on to the project manager, a coregroup of people from within the ins tu onmust oversee and manage the process of designing, developing, and implemen ng agricultural lending. The group should be composed of board members, senior managers, and key opera ons sta to ensurean integrated treatment of the challengesposed by the implementa on of this product.

This team should have the skills, capacity, andcommitment necessary to oversee the pilot,and should represent the interests of the stadirectly a ected by the changes. The leadership team should be cross func onal, typicallyincluding the heads or representa ves, ideallyfrom each of the following departments:

• Opera ons and Credit Department (especially senior level branch managers)

• Risk

• Finance

• Administra on

• Human Resources

• MIS

• Internal Audit.

Substan al me and e ort should be investedin the selec on and training of this core team.This is essen al not only to ensure welldesigned loan products and policies, but alsoto ensure that the core team is capable oftraining other sta as the new product is rolledout. Because these individuals also are responsible for guiding changes across the ins tu onrequired for delivery of agricultural loans, theywill need to be strategically selected and supported by managers.

During the implementa on phase, the projectmanager will play an important func on indriving the process and coordina ng with theleadership team to oversee adjustments required in the di erent departments across

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the organiza on. Since each of these departments will be required to revise their systemsand ac vi es with the introduc on of the newproduct, their support and ac ve involvementin the decision making process is crucial in theearly stages.

PREPARE FOR IMPLEMENTATIONThe agricultural lending project team shouldcreate a high level ac on plan when preparingto introduce agricultural lending products, especially if the agricultural sector is a new target market. This plan must cover ins tu onalcapacity building, preliminary market research,and pilot plans. To accomplish this, the projectteam should assemble all materials and informa on generated to this point and considerthe following:

• Ins tu onal goals for the agricultural lending product

• Ins tu onal changes required to meetgoals

• An cipated changes to other products andservices

• Proposed stages and detailed meline toensure success of the product introduc onprocess, including responsibili es, deadlines, and whether external support will besolicited

• Iden ca on of a specialized advisoryservice provider to support the ins tu onwith adjustments to the lending processesand training of sta

• Preliminary Pilot budget and nancial projec ons.

The project team must have a complete understanding of the organiza onal structure andhow departments coordinate work by studyinginternal strategic plans and organiza onalcharts. Par cular a en on should be paid toall departments that will o er opera onal support to those involved with agriculturallending. Everyone should have a clear understanding of the repor ng structure and supportmechanisms available for the agricultural lend

ing sta to ensure well coordinated productimplementa on.

A er deciding how the agricultural lendingsta will t into the ins tu on, the projectteam should develop the organiza onal structure for the pilot phase. The chart shouldillustrate speci c managers and loan o cers,and it should clearly delineate the repor ng hierarchy. The recommended structure shouldfacilitate delivery of high quality products andservices while encouraging e ec ve sales andcollec on e orts. Loan servicing and monitoring needs should also be examined and the opera onal pla orm reviewed to ensure theappropriate team is trained in agriculturalproducts and in place to monitor the por olioof generated loans. The new structure will betested during the pilot phase. The team willhave a chance to assess poten al new technology pla orm requirements involving investments in technologies (for example, handhelddevices or GPS units), vehicles, mobile bankingunits, or other equipment needed to reachborrowers located in rural areas. Crea nglower cost satellite o ces that are sta ed during market days could be a strategic op on.

Also, the project team must review and adjustthe goals and objec ves of the sales and underwri ng teams to ensure that they arealigned with the growth objec ves of the pilot.Agricultural loan o cers should mainly focuson expanding the agricultural por olio. However they should also process non agricultural loans in rural areas. Focusing only on agricultural loans could reduce a loan o cer’sproduc vity due to the seasonal demand foragricultural loans and could also increase theconcentra on of the ins tu on’s por oliorisks. Therefore, each loan o cer’s por olioexposure to agriculture should be limited toaround 40 percent to 50 percent. The loan o cers focusing on agriculture should have adequate experience with agriculture, allowingthem to e ec vely analyze farmer produc ontechniques, managerial skills, basic credit demand, and risks before passing on the bestapplica ons to the credit commi ee. Ensuringtechnical capacity of loan o cers will require

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the project team to develop an outline for appropriate training for each loan o cer, including specialized training in the highest priority value chains.

To complete the prepara on phase, the projectteam should present and review the pilot’s organiza onal structure and opera onal pla ormrequirements with the senior managementteam to ensure e ec veness and buy in.

CHALLENGES AND LESSONSLEARNEDOne of the biggest challenges in preparing tolaunch a pilot is to design a cost e ec vemodel to test the product without redirec ngimportant resources and funds from the instu on.

Having the right level of agricultural exper seis cri cal to driving sustainable growth of theagricultural loan por olio. Many FIs nd it extremely challenging to nd sta that possesses in depth knowledge of agriculture aswell as the lending experience required toserve clients e ec vely. FIs o en have to decide whether to hire agricultural experts andtrain them to lend or provide agricultural training to exis ng lending sta .

Past experience has shown that it is usuallyeasier and more e ec ve to train agriculturalexperts in nancial analysis and lending tofarmers and rural businesses than to train exis ng loan o cers on agricultural produc ontechniques. By training agricultural experts in

nancial analysis, FIs have increased their produc vity in rural areas while simultaneouslyproviding adequate nancial services to farmers in a sustainable manner.

Another challenge frequently faced at thisstage is the building of consensus among keyinternal stakeholders. A large number of people in the ins tu on will be directly or indirectly a ected by the introduc on of agricultural lending. So, its success will dependon their commitment and enthusiasm. Themore input people can have in de ning thechanges made, the more they will feel as

though they can own the nal result. Not allsugges ons or recommenda ons can be implemented, but the project team should follow upwith relevant sta members, so that they feelthat their voices have been heard.

CHECKLISTDuring this phase, your ins tu on’s management should use the data you already have tounderstand how the new products will t intothe ins tu on. You should also have iden eda core agricultural lending project manager andleadership team and developed a high level ac on plan that will start to implement duringPhase 2 – Market Research. At this stage, yourins tu on’s senior management needs tospend me providing clear direc on and visioninside the organiza on on how agriculturallending will be introduced.

The following checklist will help determinewhether you are ready to proceed with phase2 of the new product development process:

• Have you assessed your ins tu onal readiness to introduce agricultural lending?

• Have you iden ed a full me, competent,and knowledgeable senior manager to leadthe agricultural lending ini a ve?

• Have you established a cross cu ng teamto provide leadership throughout each ofthe phases of the process?

• Have you put together your high level ac on plan for each phase of the process,detailing how and with whose supporteach phase will be conducted?

• Have you iden ed an external technicaladvisor to guide the ins tu on with adjustments required to implement lendingprocesses and tools for agriculture andagribusinesses?

• Have you begun to build understandingand commitment to the process of agricultural lending among your sta and keystakeholders?

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Prod

uct D

evel

opm

ent P

hase

2 –

M

arke

t Res

earc

h

P D CT D L P T PHA 2 – A T A CH

he second phase of the new productdevelopment cycle begins a er an instu on has nished conduc ng its gap

analyses, preparing its leadership team, andbuilding internal support. At this point, theproject team is ready to conduct in depth research on poten al new clients and markets.

In the market research phase, the project teamgathers informa on to understand characteris cs of the new clientele, market dynamics,and es mates of crop volumes, seasonality ofincome, crop diversi ca on strategies, and

nancing needs by sector and size of farmer.

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Product Development Phase 2 –arket esearch

T

Phase 1

Prepara on Phase 2

Market Research

Phase 5


Phase 3

Pilot Design

Phase 4


Market Feedback

Figure 9 – Phase 2 – Market Research

Some important ques ons FIs usually ask whende ning agricultural expansion strategies include:

• What are the main challenges when expanding nancial services into ruralareas?

• What type of farmers and ac vi es shouldwe nance?

• Who are the key value chain players andhow can we collaborate with them?

• What would be the role and responsibilies of the di erent partners in a value

chain nance model?

• What are the best risk assessment modelsand tools for lending to small farmers?

• What are the skills and HR competenciesrequired to lend to farmers?

• What delivery channels are more e ec vein rural and agricultural areas?

• What are the most e ec ve marke ngstrategies to reach farmers?

The project team will use the informa on discovered during the market research phaseto select regions with the strongest agriculturalpoten al. They will study farmer pro les andlinks in the target value chains to design a profitable business model and develop sectorspeci c nancing products. Once the productshave been developed, their acceptance by poten al clients is important for the success ofthe business model. Addi onal market research may be needed later to con nually


re ne and improve products and adjust themto market needs.

SELECTION OF REGIONS WITHHIGH AGRICULTURAL POTENTIALThe rst step in the market research process isto determine which markets make the mostsense to research and which markets exposethe FI to the lowest risk. In this case, since theproject team is inves ga ng the developmentof new agricultural lending products, the FIshould select regions with high agricultural poten al as prime targets for the new productsto minimize risks. FIs can diversify their risks by

nancing mul ple crops throughout the yearin these regions. FIs can nance an even widerarray of projects while mi ga ng weather risksin regions with access to irriga on.

Crop insurance is emerging as an important enabler when nancing agriculture because FIscan use this tool to minimize losses in par cularly risky regions. However, in many emergingeconomies, crop insurance is not available, oris limited. Alterna vely, weather index insurance can be used to cover agricultural por oliorisks, but requires a reliable data on clima cevents, which are usually gathered by a

network of weather sta ons. Many developingeconomies lack those systems and technologies. But even without the presence of insurance, banks can s ll use di erent strategies tomi gate risks and provide nancing to the agricultural sector. Therefore, insurance is justone fact to consider in the selec on of a regionto start a pilot on agricultural lending.

The bank should iden fy and select regionswith high agricultural poten al and crop diversity. It should also look for regions with dynamic private sectors (traders, other agricultural industries/processors, and exporters),which buy crops from farmers or add value byprocessing them. Addi onally, governments,donors, and NGOs can provide valuable extension services. Regions with training ins tutes that transfer skills on best agriculturalprac ces to improve crop yields and incomeare important in reducing produc on risks.These organiza ons can help the bank iden fyand select communi es that have bene tedand adopted best prac ces.

When analyzing a region for its agricultural poten al, the project team should consider thevariables listed in table 3:

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Variables Region 1 Region 2 Region 3

Agricultural Land

Total land

Agricultural land

Agricultural land with irriga on

Popula on and GDP

Total popula on

Table 3 – Variables to Analyze When Researching a Region's Agricultural Poten al


The selec on of appropriate regions is essenal to the success of agricultural expansion

because it can greatly reduce risks. The branchselec on process evaluates the agricultural andmarket poten al of a par cular region, which

will determine its risk exposure level. Ofcourse, if the FI already has branches in themost a rac ve agricultural regions, thesewould be the best places to start evalua ngtarget clients.

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Variables Region 1 Region 2 Region 3

Rural popula on

Total GDP

Agricultural GDP

Crops Produced in Hectares HA

Basic grains

Vegetables

Fruits

Industrial crops

Livestock heads

Poultry

Egg layers

Piggeries

Ca le

Dairy produc on

Main Value Chain Present

Agricultural processors

Crop exporters

Crop Retailers


Some nal criteria to consider when selec ngbranches to pilot the new agricultural lendingproduct include:

• Opera onal self su ciency for at least twoyears

• Good performance indicators and smoothopera ons

• Strong regional demand for agriculturalloans

• Limited compe on in agricultural nance(that is, rela vely neutral tes ng ground)

• Organized branch manager with strongleadership and management skills

• Good communica ons with head o ce

• Adequate physical space at branch for addi onal sta and clients.

EVALUATE TARGET CLIENTSOnce poten al regions are selected, the second part of the market research stage is toiden fy farmers’ and value chain players’ charactersi cs. This helps the project team tosegment poten al clients and determine howmany are bankable and how many would be interested in agricultural loans. This step enables the FI to understand the demographicdetails of their new poten al clients and howbest new agricultural products could meet

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Vietnamese Banks Work to Expand Rural Lending

In 2013, IFC inves gated nancing opportuni es to farmers and agricultural enterprises.The team iden ed three regions in Vietnam (Red River Delta, Central highlands, andMekong Delta), which have signi cant poten al for agricultural produc on. A er analyzingthe principal crops, total area planted, and produc on volume, the team narrowed downthe regions, and conducted detailed value chain analyses in two regions: the Central Highlands and Mekong Delta. IFC Team visited several districts in each region and interviewedfarmers producing di erent crops and other value chain players by size (small, medium, andlarge). The team inves gated both perennial crops (tea, co ee, rubber, pepper, and cashew)as well as seasonal crops (rice, maize, and vegetables). It also studied livestock (Ca le, pigs,and poultry).

The team found that the percentage of land used for agricultural, and the diversity of crops,were key indicators of the agricultural nance poten al in the region. In the Central HighLands, the use of land for agriculture was between 15 and 38 percent. In rela on to the poten al demand for loans, there were approximately 450,000 farmers in the region, ofwhich 86 percent owned less than 2 hectares. Nonetheless 10 to 15 percent of small farmersrented addi onal land for produc on, which showed the strong demand that existed fortheir products.

With these gures, together with a preliminary analysis of the private sector, the team concluded that the value chain actors in the Dak Lak region of the Central Highlands o eredmore opportuni es to diversify the loan por olio. This would help banks be er mi gateagricultural and market risks.

Phase 2 Featured Prac cal Example: Analysis of rural agricultural markets and risk analysis in Vietnam.


their needs. With a detailed understanding ofthe average farmers’ produc on capacity, assets, and cash ows, ins tu ons can design

nancial products suited to the needs of regional farmers. A thorough picture of farmerpro les, including produc on cycles and cash

ows, will help ins tu ons de ne loanamounts, grace periods, frequency of installments, and terms suitable to farmer needs inthe di erent target regions. The project teamwill need to interview poten al clients in the

eld, which can be great preliminary trainingfor loan o cers, who will need to collect thiskind of informa on in the future to assessclient loan applica ons. For a sample farmersegmenta on interview form, see appendix E– Sample Producer Segmenta on InterviewForm. The FI should plan on using these formsto interview individual farmers in the target region. It is best to interview 9 to 12 farmers inthe region for each target crop or sector. Thesefarmers should represent a range of farm sizesand crop metrics so that the FI can get a moreholis c picture of target clients.

When evalua ng poten al clients and the results of the segmenta on interviews, theproject team should keep the following ques ons in mind:

• Who are the target clients for agriculturallending at the FI?

• Will the FI focus mostly on cross selling toexis ng clients, or seeking new clients elsewhere?

• If the FI does choose to seek new clientsfor the agricultural loan product, what willthis mean for the por olio in terms ofclient mix?

• What eligibility criteria will be used (for example., net farm income, repayment history, number of employees, growthprospects, and sector)?

Once all the data is gathered, it will be helpfulto organize it in either Microso Excel or another database applica on to analyze the informa on. In this way, the team can breakthe responses into categories and analyze

where the strongest poten al clients will fall.Since the FI is evalua ng lending directly tofarmers, two of the most cri cal indicators willbe farmer incomes and farm sizes. It will bebest to break up the data into three or four income/farm size segments and then analyzethese key factors:

• Average area cul vated

• Average income a ributable to each typeof crop/livestock

• Number of seasons per year

• Average produc on costs

• Average annual pro t

• Average assets available to post as collateral

• Average loan amount demanded and received

• Average monthly loan installments.

The FI should analyze each of these factors foran average small, medium, and large farmer inthe region for the last agricultural year, as de ned by income segment or farm size. Cropyields, volumes sold, and crop prices in the region, commercializa on channels, and market dates should be iden ed. Non farmincome, such as ren ng of property or sales ofrelated goods should also be taken into account. Finally, produc on costs should be es mated with break ups for labor, agriculturalinputs, and other costs. Based on this data, theFI can es mate yearly income, produc oncosts, and net income for di erent types ofproduc on. Es mates can be rough at thisstage since the objec ve of the exercise is tounderstand the characteris cs, nancingneeds, and credit risk associated with di erenttypes of farmers of the target region. This informa on will enable the ins tu on to determine which type of farmer o ers a lower ormore balanced risk pro le. For a detailed example of what this analysis could look like,see appendix G Farmer Segmenta on Analysis.

The following example illustrates how the project team could evaluate target clients.

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- 36 -

Target Client Evalua on for Farmers in Vietnam

As part of an agricultural lending market research e ort, IFC evaluated in Vietnam the risk levels of farmers in some promising agricultural regions to understand the produc on cycle,distribu on channels, and main challenges faced by them. The team asked farmers to de nethe criteria used to classify small, medium, and large farmers in the surrounding area, and es mate the percentage of farmers that would fall under each category. Finally, the teamasked farmers to select nine farmers to be interviewed, three farmers per each category (small,medium, and large). They asked about employment numbers and inves gated whether thefarmers planted any addi onal crops besides co ee on their farms (see table 4).

Table 4 – Co ee Producer Pro les in Central Highlands

The team found that large farmers operated on average 10 HA of land or more (owned orrented), medium size farmers operated on 2 to 9 HA, and small farmers operated on 1 HAor less. The next step in the evalua on consisted of looking at the balance sheets of eachfarmer. The team evaluated assets – including a breakdown of current assets (for example,working capital and inventory) and xed assets (for example, irriga on systems, equipmentand house) – as well as liabili es and equity. The team also constructed simple income statements to see how much each farmer made and when they received payment for theirgoods (see table 5).

Table 5 – Total Assets and Last 12 Months Farm and Family Income ($)

Large Medium Small

Crops Ha

Co ee 20 4.5 1

Pepper Intercrop with Co ee 3.5

Fruit Rambutan, Orange 5

Total 25 4.5 1

# Temporary Employees 20 12 1

LARGE MEDIUM SMALL

Co ee Size Income Size Income Size

Dec Feb/full produc on 20 HA 115,500 4.5 HA 16,000 1 HA 5,850

May 4.5 HA 14,000

Pepper

Feb 3.5 HA 65,000 2 HA 13,500

Jun 2 HA 27,000


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The di erences are important when comparing yearly income because there is a veryhealthy income mix of on farm and o farm income, par cularly for large and medium sizedfarmers. The large farmer with 20 HA of co ee and 3.5 HA of pepper generates a total netincome of $121,220. This farmer also has an o farm income of $26,300 from an agriculturalinputs store, co ee trading, and interest rates from small loans made to local farmers.

LARGE MEDIUM SMALL

Eggs 3,000 Egg layers 64,800

Fruits 500

Nov Dec 5 HA 24,000

TOTAL INCOME 204,500 135,300 6,350

TOTAL PRODUCTION COSTS 83,280 54,640 2,580

41% 40% 41%

NET FARM INCOME 121,220 80,660 3,770

Other Family Income

Agri Input Dealer Fer lizer 8,000

Trading Co ee & Rice 1,200

Electric Installa on 12,000

Rent of House 900

Interest Income Por olio 17,100

Total Other Family Income 26,300 12,900 1,200

Net Farm Income + Other Income 147,520 93,560 4,970

Percentage FarmIncome/Total Famer Income 82% 86% 76%

Family Expenses 14,670 5,884 3,210

Disposable Income/Year 132,850 87,676 1,760


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On the other side, the small farmer only has income from co ee and a secondary incomefrom fruits. His yearly net income is approximately $3,770 from both ac vi es. The smallfarmer needs to work as an agricultural worker to complement his farm income to cover allfamily expenses.

Next, the team evaluated the nancial demand of each farmer type and inves gated whataspects of a loan were a rac ve to each prospec ve client (see table 6).

Table 6 – Financing Needs for Co ee Farmers in Central Highlands

In the communi es visited, farmers es mated that 5 percent of the total farming popula onwere large farmers who had more than 10 HA of land; 25 percent were medium farmerswith 2 to 9 HA of land; and, 70 percent were small farmers with 1 HA of land or less. In thehypothe cal case that the bank would target 30 percent of the total number of large andmedium farmers in the region, the team es mated they could reach 1,300 large and 6,000medium farmers. The por olio growth poten al in 3 5 years for low risk farmers (large andmedium farmers) could reach $15.6 million and $39 million respec vely. This preliminarycalcula on shows promising business opportuni es for the bank in the region.

Variables Large Medium Small

Loan amount $15,000–30,000 $6,000–10,000 $1,500–3,000

Use Expand fer lizer business

Buy more land for co ee

Working capital for co ee

Loan term 10 months 3 years 1 Year

Disbursement 1 Disbursement 1 Disbursement 1 Disbursement

Payment Plan End of term/quarterly interests rate

Yearly Yearly/January/Monthly interest payment

Collateral Land/red book limitsborrowing

Farm Farm

Percentage of Farmersby Size

5% 25% 70%

Number of Farmers 4,334 21,670 60,677

Target 30% = 1,300 Farmers 30% = 6,500 Farmers 10% = 6,068 Farmers

Average Loan Amount $12,000 $6,000 $2,000

Market Size es mated $15.6 million $39 million $12.1 million


A er mee ng with farmers in the eld and collec ng the requisite informa on, the projectteam can divide the interviewees into risk categories. Farmer risks are associated with thefrequency and regularity of their cash owsalong with their level of technical skills and exper se with di erent crops. Broadly, farmerscan be placed into the following risk groups:

• Low risk farmers: Those with good crop diversi ca on, mul ple harvests per year,and access to irriga on, which enablesthem to generate regular monthly cash

ows. They are usually commercially oriented with sizable produc on volumesthat generate strong revenues and high repayment capaci es. They possess goodtechnical skill levels and have mul ple buyers.

• Medium risk farmers: Those with somecrop diversi ca on, mul ple harvests peryear, and can pay at least the monthly

interest on loans and the principal in lumpsums two or three mes a year. They tendto be commercially oriented with adequate crop produc on volume, whichgenerates midsize revenues. They possessaverage to good technical skill levels.

• High risk farmers: Those who have lowcrop diversi ca on, generate only seasonalincome, who cannot pay interest or principal on a monthly basis, but can only paylump sums at the end of the crop cycle.They generate small produc on volumesmostly directed to household consump onand small por ons directed to the markets.They possess low to medium technical skilllevels.

The following example illustrates how the project team could use the informa on fromthe farmer evalua on above to arrive at an appropriate risk level determina on.

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Risk Level Evalua on of Farmers in Vietnam

To determine risk levels of farmers in the evalua on above, the team studied the results ofthe evalua on and summarized the ndings in a table that clustered farmers by risk pro le.Table 7 displays farmer risk pro les in the Central Highlands. Poultry and egg producers inthe region produced good volumes, generated strong cash ows, and had monthly incomesenabling them to pay monthly installments. These producers had good technical skill levelsand secure access to markets. The co ee and pepper farmers had diversi ed produc onand mul ple incomes throughout the year. Both crops had strong demand in interna onalmarkets and prices were trending upward. These farmers applied good agricultural prac ces.Finally, the team found that rubber producers were the riskiest, par cularly because of theexcessive specializa on and lack of alterna ve crops. Addi onally, producers in the regionhad a limited number of interested buyers. Even though rubber trees can generate incomeduring eight months of the year once in full produc on, it takes seven years for rubber treesto reach full produc on capacity.


The example above shows that es ma ng thepoten al regional demand is cri cal when deciding whether or not to expand nancialservices. The team es mated the poten al demand during their mee ngs with farmergroups. During these mee ngs, farmers were

rst asked to es mate the total popula on of

the village as well as the percentage of small,medium, and large farmers living in the village.The team used this informa on, along with the

nancial needs of each type of farmer, to cometo a reasonable es ma on of market size.Table 8, shows the poten al demand for theCentral Highlands.

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Table 7 – Farmer Risk Pro les of Central Highlands

Risk Levels Ac vi es

Low Risk Poultry and egg producers or pig producers combined with co ee or pepperStrengths:Frequent cash ows, diversi ca on of risks, mul ple income streamsthroughout the year, access to markets, stronger management skillsRisks:Price vola lity, suscep ble to pests and disease

Medium Risk Co ee and pepper farmersStrengths:High demand for products, high crop values, good technical skillsRisks:Seasonal income, moderate diversi ca on, price vola lity

High Risk Rubber producersStrengths:Access to markets, strong demand, income spread over eight monthsRisks:No inter cropping op ons, long gesta on period (seven years), high investment per HA, only one source of demand

Table 8 – Es mated Por olio Size for Central Highlands

Ac vity Large Medium Small Total

Target Poultry and Egg Producers 113 565 584 1,262

Average Loan $ 75,000 30,000 7,500 n/a

Por olio Outstanding $ 8,475,000 16,950,000 4,380,000 29,805,000

Target Co ee and Pepper Producers 1,300 6,500 6,068 13,868

Average Loan $ 12,000 6,000 2,000 n/a


FIs can es mate poten al growth and assessthe por olio risk level for a region with this informa on,. FIs could then selec vely choosewhere to launch new agricultural productsbased on their risk appe tes.

COMPETITIVE LANDSCAPEANALYSISAs men oned in the introductory chapters, theteam should evaluate impacts that governmentprograms might have on the agricultural sector.Speci cally, subsidies or other programs maychallenge the nal viability of a new productaimed at the agricultural sector, so the teamshould thoroughly research these programs atthis point. Addi onally, the team should

analyze which other nancial ins tu ons arepresent in the region, which segments they target, and what type of products they o er tothe agricultural sector. When pilo ng a newagricultural lending product, you must have adetailed understanding of the lending productso ered by the compe on. This informa onhelps the FI can understand how compe veand a rac ve the new product is. Basic informa on that could be collected the compe torsis summarized in table 9 below, as well as in appendix F – Compe ve Posi on Analysis.While it may be challenging to a ain this levelof detail – since many ins tu ons are usuallyhesitant to share speci cs of their loan por olios – this informa on can be very useful whendesigning the nal product.

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Ac vity Large Medium Small Total

Por olio Outstanding $ 15,600,000 39,000,000 12,136,000 66,736,000

Target Rubber Producers 91 182 182 454

Average Loan $ 60,000 20,000 5,000 n/a

Por olio Outstanding $ 5,454,000 3,634,000 908,750 9,996,750

Total Outstanding Por olio $ 29,529,000 59,584,000 17,424,750 106,537,750

Outstanding Clients 1,504 7,247 6,834 15,584

Table 9 – Variables to Consider when Researching Compe tors' Products

Variables Bank 1 Bank 2 Bank 3

Total Bank’s Por olio

Loans for Agriculture

Segments/sectors targeted

Minimum and Maximum Loan Amount

Loan Term

Grace Period

Payment Schedule

Interest Rates

Administra on Fees

Other Fees

Time from Applica on to Disbursement


By using this data, and the results of the industry, compe on, and geographical analyses, the project team will have a goodidea of the ideal client pro le and where theproduct should be launched. This informa onwill help ensure that the FI designs adequateproducts tailored to the needs of this newclient base. It will also help the FI launch its expansion with clients that represent the lowest risk for the ins tu on. To expand successfully, the FI should consider how manyexis ng clients might be eligible for agriculturalloans. Expansion into a broader, more diverseclient base can happen once the ins tu on ismore familiar with the region.

The introduc on of agricultural lending o enmeans integra ng a new pro le of targetclients, one with di erent nancing needs andmore complex business cycles. The choice oftarget clients should be consistent with the FI’smission, vision, and strategy. Thus the teamshould carefully consider the FI’s current imagein the market and re examine the FI’s originalmission. Although the FI may be able to shipeople’s percep ons by introducing agricultural loan products, the FI is unlikely to reach acompletely di erent target audience withoutsigni cant marke ng or re branding e orts.

GO-NO GOSome ins tu ons may determine during thisphase that they are not well placed to intro

duce agricultural lending. If research reveals aght market with s compe on and li le

room for new entrants, management maywant to con nue to serve current target market segments with greater e ciency andimproved service rather than diversify producto erings to the rural sector. Or, if the FI assessment reveals capability gaps or suggests thatthe nancial or administra ve burden wouldbe too great, it may also be wise to wait.

One of the most useful ways to decide whetherto proceed is to determine how long it will takefor the agricultural lending product line tobreak even. If the market condi ons are favorable, and the FI has su cient capital availableto sustain the product line un l predicted pro tability, these could be good indica ons toproceed.

At this point, the project team will have all theinforma on required to make the pitch to senior management and explain why the bankshould enter the agricultural lending sector.The team should present a business case forthe pilot phase with a clear value proposi on,targets on por olio growth, and de ned levelsof produc vity for loan o cers. Deciding notto proceed should not be viewed as a failuresince the introduc on of any new product is amajor investment for the ins tu on. Externaland internal condi ons must be conducive foran e ec ve introduc on.

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Business Case and Projec ons for a Financial Ins tu on in Indonesia

Based on the informa on gathered during the market research and risk assessments, a teamfrom an Indonesian bank decided to focus on nancing egg, poultry, and dairy producers toto start with. Theseare more sophis cated sectors and generate daily cash ows. The teamdecided to wait before focusing on vegetables and corn, which are very dynamic sectorsbut which generate more seasonal incomes. To gain management buy in, the team presented informa on explaining the market poten al and then described the risks associated with each sector. They then stepped through the es mated por olio growth and loano cer (LO) produc vity forecasts for the pilot phase. The team assumed that the bank would start with two LOs per branch at nine pilo ng branches in total. Further, LO


- 43 -

produc vity was projected to scale up over 12 months according to the following levels:one loan disbursed per month per LO during the rst ve months of the pilot; two loansdisbursed per month per LO from months six to 12; and, three loans disbursed per monthper LO from months 13 to 18. The table below shows projected produc vity per LO at theend of the rst 12 months.

Table 10 – Projected LO Produc vity During Pilot

The team projected total agribusiness and rural loans to total just over $675,000 a er theini al 12 months, according to the schedule below.

Table 11 Projected Outstanding Loans and Por olio Size of Pilot

With this informa on, the team successfully presented their business case to senior management and received approval to begin planning the pilot. The 12 month pilot allowedthe team to thoroughly analyze product adop on and use in the eld and make adjustmentsto the product terms as necessary.

Year 1

Case Load/LO 12

Por olio Outstanding/LO $ 37,678

Loans disbursed per LO/month 1

Months Number ofBranches

Number of Account O cers

Targets

O/S Loans O/S Por olio $

1 – 5 3 6 53 237,138

6 – 9 6 12 105 425,626

10 – 12 9 18 210 678,205


STRATEGY DEVELOPMENT FORPILOT PHASEIf the project team determines that the FI iswell placed and that there is enough of a targetmarket to pursue, they can begin developingthe strategy to implement the pilot. Developing the strategy for the pilot phase can takeplace a er ge ng a clear understanding of theoverall agriculture market and the key economic actors opera ng within the FI’s target geographical area.

The pilot strategy should address certain keyfeatures of the pilot program, such as:

• Finalizing ini al branch loca ons and delivery mechanisms for tes ng the newproduct.

• Se ng objec ves and goals that are ambious, but also realis c based on the team’s

data and nancial models.

• Determining what addi onal investmentsare required to pilot the new product. Investments would involve training of staand targeted marke ng and sales campaigns.

CHALLENGES AND LESSONSLEARNEDPerhaps the biggest challenge during the market research phase is to ensure that the FIhas enough resources to reach out to targetclients in the regions with the highest agricultural poten al. Taking the me to travel tothese regions and se ng up quality interviewswith farmers and other value chain actors cantake some me and resources. The FI’s teamcould conduct one or two weeks of market research with a limited number of interviews(for example, 45 to 60 farmers and 10 to 15value chain players) to reduce research costsand resource demands. The interview formsare simple and the bank sta can conduct theinterviews themselves. However, the researchteam must be supported by local experts toiden fy farmer groups and value chain playersand schedule the interviews. Some mes, it

may be more e cient to enlist the help of outside resources, such as local marke ng

rms to help survey the target popula ons, ora donor agency, such as IFC. Many value chainstudies are conducted on various crops incountries around the world. These are publiclyavailable and are a great star ng point for anFI to begin to learn about certain agriculturalproducts. But understanding the farmers’ perspec ves on nancial needs and what theyexpect from a bank is slightly di erent andmore nuanced, and will require one on one interac ons.

FIs must take their me to inves gate newmarkets, but should be careful to avoid “analysis paralysis” from informa on overload. It isnot necessary to speak with thousands of farmers in each value chain to gain a full understanding of their needs and how a bank can address those needs. As men oned earlier, arepresenta ve sample should consist of around9 to 12 farmers per crop or sector of varyingsizes from around the target geographicalareas. It is likely that one farmer’s challengesare very similar to his immediate neighbor’schallenges. So interviewing each one is unlikelyto yield any addi onal insight and may not bean e cient use of the FI’s me and resources.Rather, pick small samples of many agriculturalsectors from around the region and infer fromthe data what the representa ve challengesare and how the ins tu on could design agricultural lending products. This process mayseem expensive or cumbersome. However, ifthe FI decides to con nue developing a newagricultural product as a result of this research,the informa on can help with loan assessments for the rst clients.

CHECKLISTDuring this phase, the project team shouldhave collected enough data to make an informed decision about whether or not toproceed with agricultural lending. The teamshould have evaluated the target market andcompe ve environment to determine whereit would make sense to launch a new agricultural product. The project team should have

- 44 -


also collected data from farmers in the targetregions to understand their nancial needs andhow the organiza on can meet those needswithout taking on excessive risk levels. By combining this data, the project team shouldhave an ideal region and a pro le of an idealtarget client that they can use to then create anew product. Finally, the project team shouldhave worked with the board and execu vemanagement to dra a business plan and ruralstrategy for the pilot phase.

The following checklist will help your team determine whether you are ready to proceedwith Phase 3 of the new product developmentprocess:

• Has your team iden ed any necessary addi onal resources to undertake the various components of the market research phase?

• Has your team completed an analysis ofthe compe ve environment and targetmarket? And has it iden ed the geographic region (or regions) that has thelargest agricultural poten al?

• Has your team inves gated the bestbranch loca ons to launch agriculturalproducts or other appropriate deliverymechanisms, such as mobile devices, aswell as associated costs?

• Has the team gathered data on farmersand producers in your target region s anddoes your team understand their nancialneeds?

• Has the team developed a business planand strategy to launch the pilot phase?

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Prod

uct D

evel

opm

ent P

hase

3 –

Pi

lot D

esig

n


- 47 -

er the project team has completedmarket research in the selected regionand gained a comprehensive under

standing of the poten al market and clientneeds, the team is ready to design the pilot.Now, the project team needs to design and implement a business model that will ensurecost e ec ve services in rural areas and a thorough screening process to select farmerswith good repayment capacity and willingnessto pay. A robust lending model to nance theagricultural sector should:

• Capture all income streams for the farm,iden fy the frequency of cash ows, ascertain the repayment capacity, and assesstechnical and managerial skill levels.

• Reduce credit risks by o ering farmers adequate loan terms and repaymentschedules matching their seasonal incomes, irregular cash ows, and build inoccasional grace periods.

• Incorporate processes to enable crossveri ca on of yields, crop incomes, andcrop produc on costs, collected by theloan o cer during farm visits.

• U lize objec ve score systems to es materisk levels of farmers and resul ng impactson the maximum loan amounts.

• Employ a systema c and consistentprocess to cross verify sales and produc

on costs collected by contac ng references (buyers and suppliers).

This lending approach requires that loan o cers have a good understanding of the agricultural sector to be e ec ve. They mustalso have the skills and knowledge to analyzeproduc on techniques and interact with farmers. The model further recommends thatFIs engage with the agricultural sector gradually and that they build strategic alliances withlocal players to manage and mi gate risks.

This third phase is the rst of two itera vesteps in the pilot process. During this phase,the project team will dra the ini al featuresand characteris cs of the new product. Theteam will develop key performance metricsand conduct extensive training (theore cal aswell as eld coaching) for loan o cers. Theteam will also support and coach the FI’s stain the eld with marke ng ac vi es, farm visitsto collect data, loan analyses, and ini al approvals.

Addi onally, during this phase, the team willneed to work with senior management to ensure su cient nancial resources to complete the pilot. A robust pilot will requirefunding to cover the costs of adjus ng or se ng up new branches, recrui ng and training new sta , and conduc ng marke ng andpromo on ac vi es.

Product Development Phase 3 –Pilot Design

A


The pilot design process will require inves ngin resources to develop the product, set up theorganiza onal structure to run the pilot, trainsta , and conduct marke ng ac vi es duringpilot implementa on. At the end of this phase,the FI should have policies describing featuresand condi ons of the agricultural lending product, a strong lending methodology, a training curriculum, and a plan to train loan o cers.The FI’s business model should gradually engage with the agricultural sector to target

low risk clients rst. It must outline key marke ng ini a ves to ensure that the targetclientele knows about the availability of thenew product.

PRODUCT TERM SHEETThe project team, a er analyses and interviews, should construct a reasonable pilotproduct. Table 12 presents a format that canbe used to develop this term sheet.

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Phase 1

Prepara on Phase 2

Market Research

Phase 5


Phase 3

Pilot Design

Phase 4


Market Feedback

Figure 10 – Phase 3 – Pilot Design

Table 12 – Term Sheet Format

Product Name Produc on/Pre Harvest Finance, Post Harvest Finance, Inventory Finance, Short Term Equipment Rentals, Leases, etc.

Descrip on A brief summary of the product, such as target borrowers, loan purpose, and general terms and condi ons of the loan.

Target Market The type of business and ac vity the product is meant to nance.

Repayment Terms

• Maximum term of the loan in months or days.• Frequency of principal and interest payments monthly, quarterly, or

at maturity .This could also allow for irregular payment plans ed to agriculturalsales.

Interest Rate and FeesNormal interest rate allowed.Other fees associated with the loan, such as commitment, applica on,or past due fees.

Loan Amount Maximum and minimum loan amounts.

Eligible Borrowers

This might include:• Minimum amount of experience in ac vity being nanced.• Veri able sales to commercial buyers.• Checking and/or deposit rela onship with the FI for a minimum

period.


Some factors in this product design may needto be revised or modi ed a er the product ispiloted for the rst me. The monitoring andevalua on phase (which will be covered inPhase 4) is therefore very important. The pilotdevelopment phase is designed to be itera veso that if the FI determines that certain features are una rac ve to the target market,they can be tweaked and perfected un l theright balance is achieved. The most cri cal aspects will be aligning repayment terms andinterest rates with customer needs. By conduc ng thorough interviews and listeningclosely to feedback from the poten al clients,the FI should be able to design a product thatmeets customers’ needs. Speci cally, the product should o er exibility to match farmers’seasonal cash ows and irregular incomesthroughout the year. At the same me, it mustconsider the ins tu on’s cost structure andlegal and regulatory context.

Customer ScreeningFinancial ins tu ons must focus on visi ngfarmers with the strongest poten al for successfully applying for loans. . The FI mustcreate a set of simple criteria to pre selectfarmers that are likely meet the criteria for receiving a loan. This will help to avoid spending me with farmers who would not qualifyand ensure an adequate return on investmentin developing agricultural lending processes.An e ec ve pre selec on system will help increase the produc vity of loan o cers. Someexamples of selec on criteria are:

• Ini al eligibility

1. At least three years of experiencefarming in the region

2. At least two years of experience in thecrop being nanced

3. Percentage of produc on sold on themarket over 60 percent

4. Ownership of land; if not, guarantormust own land

5. Farm located less than 30 Km from thebranch and accessible all year round

6. Loan amount requested between$3,000 to $50,000

7. Loan to be used for farming (workingcapital or xed assets).

• Farm Visit: If the farmer meets the ini aleligibility criteria, a loan o cer can schedule a visit to the farm. During thisvisit, the loan o cer will inspect the farmand elds to ensure the size and crop informa on provided on the applica on isaccurate. The loan o cer will also gathersocio economic data and collect the documenta on required:

1. Client’s socio economic informa on

2. Borrower’s capacity to repay

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Product Name Produc on/Pre Harvest Finance, Post Harvest Finance, Inventory Finance, Short Term Equipment Rentals, Leases, etc.

• Average balance of at least x mes the monthly interest payment.• Business within x kilometers of branch o ce.

Collateral Personal guarantees might be required from all individual borrowers.

Other Requirements

Other requirements might include:• Crop insurance from an insurer acceptable to the lender

if available .• Addi onal collateral acceptable to the agricultural lending unit.• Electronic payment transfer directly from borrower’s bank account.


3. Assets and solvency

4. Character references.

• Veri ca on of informa on collected: A erthe farm visit another sta member willcross verify the informa on collected during the farm visit:

1. Veri ca on of references: clients, suppliers, banks

2. Veri ca on of u lity bills, bank accounts, collateral, credit history.

• Loan analysis: The informa on collectedfrom the farm visit is entered into the loanappraisal template.

Phase 3 Featured Prac cal Example: IFC lending methodology.

AGRICULTURAL LENDINGMETHODOLOGY

Employing a robust lending methodology willhelp the FI properly evaluate poten al clientsand will ensure all necessary informa on iscaptured. Many FIs already have proprietarylending tools and methodologies developed fortheir current business units. However, thereare several important areas in agricultural lending that FIs should ensure are part of theirlending processes. A er reviewing the materialin this sec on, FIs should be able to determinewhether it would be more helpful to introducea new methodology, update the currentmethodology with the necessary adjustments,or use one of the systems already developed.

This sec on discusses a methodology, developed by IFC, which comprehensively analyzes farmers’ risks and incomes. Thismodel was developed by combining and re ning successful lending models previouslydesign and implemented by Procredit15, theFrankfurt School of Finance & Management16,and ACDI/VOCA.17

The model iden es all farm and non farm incomes during the dura on of the loan and

compares crop yields, incomes, and produc oncosts against regional benchmarks. The lendingmodel is supported by an expert score thatiden es the risk levels of farmers and suggests maximum loan amounts based on riskpro les and disposable incomes. Finally, to determine nancing needs and repaymentschedules, the model prepares a detailedmonth by month cash ow analysis of all farmand non farm income and expenses. The cash

ow worksheet helps determine nancingneeds by iden fying the months where themost nega ve cash ow occurs. It shows whenthe farmer can repay the loan, based on futureincomes projected in the cash ows. See appendix H for a more detailed overview of thelending forms and expert score variables.

The key elements of loan appraisal include thefollowing:

• General Client Informa on: Age, years offarming experience, years working in theregion, educa onal level, house ownership, household size, and number of working members. This informa on is also usedto es mate the socio economic scores ofthe client.

• Capacity to Repay: The analysis takes intoconsidera on three sets of data to es mate the borrower’s capacity to repay:

1. Past 12 months’ farm income (for example, hectares planted and cropsand livestock sold). This informa onhelps determine the historical crops orlivestock volumes produced by thefarmer, and if planned produc on during the dura on of the loan is reasonable. The Weighted Total Yield(second column from the right) is theaverage of two mes the minimumyield, plus the last yield, plus the maximum yield, divided by four.

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15 Introducing Rural Finance into an Urban Micro nance Ins tu on: The Example of Banco Procredit, El Salvador.Juan Buchenau and Richard L. Meyer.

16 Agricultural Loan Evalua on System (ALES). FrankfurtSchool of Finance & Management.

17 Pro t Planer Farm Cash Flow Analysis Tool, ACDI VOCA.


2. Projected farm income during the dura on of the loan for example,hectares to be planted and crops andlivestock to be sold to es mate futurecrop income, the loan appraisal formcalculates conserva ve average crop

yields and average crop prices (thesame approach used for weightedyields is used to es mate average cropprices). Also, it deducts family consump on and a percentage of croplosses.

3. Other farm income, such as livestockor dairy produc on, is also consideredwhen applicable.

• Buyers: A er es ma ng the main farm incomes, iden fy main buyers of the crops.These buyers will be contacted and used asreferences to verify the sales amounts reported.

• Farm Produc on Costs for both crops andlivestock : The produc on costs collectedshould be very detailed, and should beiden ed for each crop. This informa onwill enable loan o cers to understand thetechnical level of farmers and how knowledgeable farmers are about prices of inputs and crop yields and prices. Produc

on costs are classi ed as input costs,labor costs, service costs, and opera onalcosts.

• Technical Skill Level: A er analysis of theproduc on costs, yields, and agriculturalprac ces used by the farmer, the loan o cer can assess the technical level of thefarmer based on inputs used, agriculturalprac ces, and the accuracy and level of detail of the informa on provided. For a

detailed descrip on of the farmer’s skilllevel scores, see appendix H.

• Other Family Income and Expenses: Theincome analysis includes other non farmincome to understand the concentra onand risk exposure of the farmer. Family expenses and other debt obliga ons arealso used to complete the assessment ofthe repayment capacity of the farmer.

• Analysis of Client’s Assets and Liabili es:This sec on of the loan appraisal form focuses on farm size, asset composi on,and capital structure. Here, the loan o cers should iden fy the inputs, agricultural and livestock inventories, tools andmachinery.

• Farm Characteris cs and Poten al: In thissec on, the objec ve is to understand thefarm characteris cs and agricultural poten

al by analyzing the size of the farm, soilcharacteris cs, land plot slope, access toirriga on, and an cipated rainfall. If thefarmer has more than one plot of land,each plot should be captured separately.The condi on of the land will also be usedto es mate scores.

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Last Year Yields and Income (Crops produced and harvest in the last 12 months)

Min Max

Tomato 4.00 192,000 240,000 Corn 2.00 12,000 18,000

-

Production / Ha

52,750 7,250

--

220,000 16,000

Units

kgkg

-

DateCrops Cultivated AreaEstimated Yields

LastWeighted Total Yield

211,000 14,500

- -

Projected Farm Income next Cycle (During the loan duration)

Last Min Max

Tomato 4.00 Kg 211,000 5% 200,450 1,550 1400 1800 1,538 308,191,875 OctCorn 2.00 Kg 14,500 500 3% 13,565 2,550 2200 2700 2,413 32,725,563 Jul

- - - - -- - - - -- - - - -

TOTAL INCOME 340,917,438Rp

Total IncomeTotal

Production Sold

Cultivated Area UnitsWeighted

Total Yield DateCrops Total Prod

Family consumption

% Losses Selling Price


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SUMMARY FARM AND FAMILY INCOME AND PRODUCTION COSTS

Total Farm Income during the duration of the loanFarm IncomeIncome / Stored CropsOthers Farm IncomeTOTAL FARM INCOME

Production CostsInputsLaborsServicesOperationsTOTAL PRODUCTION COSTS

NET FARM INCOME

Other Income and Household Income / Year

Salaries & BusinessFamily ExpensesCurrent Debt PaymentDISPOSABLE INCOME FARM & FAMILY

Total

66,000,000.00Rp 44,300,000.00Rp 43,888,890.00Rp

184,823,110.00Rp

Total117,692,000.00Rp

70,920,000.00Rp 13,400,000.00Rp

5,000,000.00Rp 207,012,000.00Rp

135,352,937.50Rp

340,917,437.50Rp 1,447,500.00Rp

342,364,937.50Rp

Total

18 Pro t Planner Tool. ACDI/VOCA.

• Liabili es: This sec on looks at the indebtedness level of the farm before the loan is disbursed and how much addi onal debtthe farmer can take. The liabili es are divided into short term and long term liabili es. The original amount, loan use,current balance, installment amounts, andfrequency of payment are recorded. Installments are also included in the cash

ow analysis to es mate the farmer’s repayment capacity. Collect the last payment stub or proof of payment from thefarmer’s FI and request contact persons inthe respec ve FIs to verify the informa onprovided.

• Comparison to Regional Benchmarks: Theinforma on collected during the farm visitis then compared to regional benchmarks.This informa on can be adjusted if necessary to have consistent and reasonable assump ons to es mate net farm incomeand repayment capacity. The rst columnshows the produc on costs of the regionalbenchmark and the yellow column shows

the data collected during the farm visit. Ifthere are discrepancies, adjustments canbe made in the yellow column.18

• Cash Flow Analysis and Loan Design: Onceadjustments to data collected during thefarm visit have been made; loan o cersenter other family income and family expenses in the monthly cash ow sheet.Here, the credit commi ee can analyze indetail the monthly cash ows and nancing needs of the farmer, which is represented by the most nega ve monthlycash ow throughout the produc on cycle.By analyzing cash ows, the credit committee can also design the loan term, graceperiod, and payment structure. For example, if the most nega ve cash ow occursin month 8, then that is the amount thatthe farmer will need to nance his ac vi

es. If that farmer an cipates income from


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Select Crop Below

159-Tomatoes-Fresh-CommercialPlant Date

Timing

Area

Region

Jul-15 Min

Max

4

Independent1

20Ha

Malang

Item DescriptionValue / Unit Area

Est. Adj.Total

FertilizerSeedCrop Protection ProductField Materials

Preparation & PlantingMaintenance & WeedingHarvest

Preparation & PlantingMaintenance & WeedingHarvestTransportation

ProductionPackaging UtilitiesRent & Fees

Yield Sold KgPrice per UnitTotal Revenue

Total Expenses

Nest Profit

14,700,0002,500,0004,950,000

10,150,000-

5,600,0006,200,0003,600,000

--

1,503,000--

1,400,000-

---

5,250,000-

50,5401,600

50,1131,538

11,100,0002,600,0004,240,0009,140,000

2,680,00016,150,000

3,750,000

1,500,000

1,400,000

44,400,000

10,400,000

16,960,000

36,560,000

10,720,000

64,600,000

15,000,000

-

-

6,000,000

-

-

5,600,000

-

-

-

-

21,000,000

-

200,452

1,538

308,295,176

231,240,000

Subtotal Input Costs

Subtotal Labor Costs

Subtotal Service Costs

Subtotal Operations Costs

108,320,000

90,320,000

11,600,000

21,000,000

77,055,176


agricultural ac vi es in months 5, 9 and10, then those can be set as the three installments to repay the loan.

• Credit Commi ee and Loan Approval: Thecredit commi ee will review two documents that summarize the informa on collected. The rst document is the cash

ow analysis and the second is the creditcommi ee summary sheet (below). Thisdocument shows the farm income and expenses as well as non farm income andfamily expenses on the le side of thesheet. The disposable income, at the bo om of this table, determines the repayment capacity of the farmer. Belowthe disposable income is the balance sheetof the farm, which shows the size of the

farm, the asset alloca on, liabili es, andcapital structure of the farm. This informa

on will determine the solvency and liquidity of the farmer to absorb more debt. Onthe right, using the informa on entered inthe preceding tables, the tool calculateskey nancial ra os and analyzes thefarmer’s risk pro le. The tool also analyzesthe strength of these metrics using thescore analysis from appendix H. The scoresystem suggests a maximum loan amountbased on the risk level of the farmer andthe farmer’s disposable income. Low riskfarmers qualify for loans up to 70 percentof their disposable income, while mediumrisk farmers qualify for loans up to 30 percent of their disposable income.

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FARM INCOME Financial Ratios Level Ideal Farmer ResultFarm Income 340,917,438Rp < 60% 4.2% StrongStored Crops 1,447,500Rp > 1,5 3.00 StrongOther Farm Income -Rp < 60% 8.95% StrongTotal Income 342,364,938Rp < 60% 60.47% Weak

< 70% 41.67% StrongProduction CostsInputs 117,692,000Rp Farmer Risk Profile Score Weight Classification ResultLabors 70,920,000Rp Farm Conditions 18 18% 3.24 GoodServices & Operations 18,400,000Rp Technical Level Farmer 19 18% 3.42 AverageTotal Production Costs 207,012,000Rp Crop Diversification Ratio 6 15% 0.90 Weak

Farm's Financial Strengh 17 20% 3.40 StrongNET FARM INCOME 135,352,938Rp Farmer's Character 13 14% 1.82 GoodSalary and Business 66,000,000Rp Farmers's Socio Economic 18 15% 2.70 AverageFamily Expenses 44,300,000Rp Total Score 91 100% 15.48 68.94%Current Debt Payment 43,888,890Rp Max 132.00 Disposable Income 113,164,048Rp

FARMER RISK PROFILE PERCENTAGEBALANCE SHEET FARM Very Low Risk >80% Approve up to 70% of disposable IncomeCash & Account Receivables 80,000,000Rp Low Risk 65%- 80% Approve up to 50% of Disposable IncomeInventory - Agriculture 117,600,000Rp Medium Risk 50%-65% Review and approve up to 30% of DIInventory - Livestock 43,200,000Rp High Risk < 50% Reject

TOTAL SCORE 68.94% APPROVEDCurrent Assets 142,800,000Rp Land and Building 528,000,000Rp Disp Income / year 113,164,048Rp Cycles/yearTOTAL ASSETS FARM 911,600,000Rp Disp Income / Cycle 113,164,048Rp 1Short Term Liabilities 10,000,000Rp Long Term Liabilities 15,000,000Rp Int rate interest / year Rekomendasi

TOTAL LIABILITIES 25,000,000Rp Max Loan Proposed 56,582,024Rp -Rp 50.0%TOTAL EQUITY FARM 886,600,000Rp Load Proposed by LO 50,000,000Rp -Rp Other Family Assets 390,000,000Rp Other Family Liabilities 42,000,000Rp Use of the LoanFamily Equity 348,000,000Rp If the production fails, how could you pay back the loan?

Sell the car

Liquidity RatioCumulative repayment capacity ratioDebt ratio including the loanOperational EfficiencyLoan to Value Ratio (LTV)

RECOMMENDATION

KEY BUSINESS STRATEGIES FORAGRICULTURAL FINANCEThe implementa on of the pilot in the nextphase will require ne tuning and balancingseveral important components:

Agricultural Poten al: Serve areas with strongagricultural poten al rst. Look for crop diversi ca on, mul ple crops seasons, accessto irriga on, and access to diverse markets.

Target Businesses in Rural Areas First: Look topriori ze nancing businesses in rural areas,such as crop traders, input and serviceproviders, and crop processors.

Select Farmers with Lowest Risk: Priori zefunding for farmers with the lowest risk levels.Look for farmers with stable monthly incomes

rst, and then expand the por olio to higherrisk farmers with seasonal incomes.


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Build Strategic Partnerships: Risks can be mi gated by leveraging the knowledge of localplayers to form strategic partnerships withlarger agricultural industries, technology transfer agencies, or insurance companies.

Risk Assessment: Develop a strong and customized risk assessment process with updated loan applica on forms for agriculturalclients. Use scoring models to evaluate thestrengths of crops and livestock and analyzecash ows closely.

Product Design: Design products tailored tofarmer needs, including seasonal payments, irregular installment amounts, and grace periods.

Branch Loca on: Leverage a rural branch loca on to reduce opera onal costs. Addi onally, be sure to create working regions for eachloan o cer and use technology, such as mobiledevices, to facilitate ease of payment, whenpossible.

Diversi ca on: Make sure the FI’s por olio isreasonably diversi ed. This guide recommendsthat a maximum of 30 percent of the por olioshould be in agricultural loans.

Loan O cer Tasks: Rural loan o cers shouldmanage both agricultural loans and commercial loans. By doing this, each loan o cer’s produc vity is maximized, the seasonal demand for agricultural loans can be balancedwith demands for commercial loans at other

mes of the year, and each loan o cer’s por olio risk can be diversi ed.

MARKETING AGRICULTURALLENDING PRODUCTSOnce the product term sheet is developed andapproved by senior management, the projectteam must organize a marke ng campaign toa ract new clients. Marke ng in rural areas requires a slightly di erent approach than marke ng in urban areas. In rural areas, loano cers may nd it useful to contact farmers’associa ons by contac ng group leaders and

explaining the new services o ered by the FI tothem.

The loan o cer could also request to physicallymeet the group of farmers at an associa onmee ng. During this mee ng, the FI can useabbreviated customer segmenta on ques onnaires to iden fy the characteris cs of the region, such as the number of farmers in thatpar cular area, the main crops, the biggestchallenges throughout the produc on, andharves ng and marke ng processes. The loano cer should listen carefully and iden fy themain challenges, which could imply nancingopportuni es for the FI.

The informa on gathered at these mee ngswill help the loan o cer propose speci c loanproducts that t the needs of farmers. Mee ngs with farmer associa ons should beorganized ini ally on a weekly basis. The informa on collected should be stored in aworksheet summarizing market poten al,number of farmers, and nancing needs iden ed. A er the mee ngs, the FI can moreeasily iden fy the most interested farmers andschedule farm visits to con nue with the applica on process.

Incen vizing loan sta to proac vely organizemee ngs with farmer groups will facilitate ful llment of the marke ng plan. Loan stamust appreciate the advantage of targe ng anew demographic that it had previously nottargeted before. For example, the bank may require loan sta to meet with at least 25 farmers each month. Evidence of such meetings may come in the form of weekly marke ngreports that summarize where the mee ngswere conducted, how many farmers a ended,what the main nancing needs of the groupwere, and how many farmers were interestedin taking it further.

The procedures for marke ng to agriculturalbusinesses will depend on the size of the business. Some mes it is more e ec ve forbranch managers or middle managers to organize and meet agricultural coopera vesand enterprises to build ins tu onal


- 56 -

rela onships and to explore areas of collabora on between the FI and those players. Once the contacts have been established and the objec ves de ned, loan o cersshould start marke ng agriculture nancialproducts to the farmers linked to those companies and coopera ves.

The bank may already have a wealth of agriculture related businesses and/or their employees as depositors. Exis ng depositors arelow hanging fruit that can be harvested mostrapidly to build the agricultural por olio. Assoon as the agricultural sector is targeted andthis new por olio is opened, the bank’s interest in nancing targeted agricultural ac vi es can be communicated to exis ng depositors to make them aware of new loanproducts designed to serve agriculture.

PERFORMANCE METRICSIt is important for the project team to set clearobjec ves for the pilot so that it can measuresuccess before a full rollout. Metrics should beboth quan ta ve and qualita ve. Quan ta vemetrics could include the total number of agricultural loans disbursed, loans disbursedper rural loan o cer and per branch, averageloan size disbursed, and outstanding loans perbranch and per rural loan o cer. Addi onalmetrics could include the number of rural loano cers per branch and number of branches o ering the agricultural lending product, aswell as the impact of the product on the bo om line of the FI.

Qualita ve metrics could include sta andclient percep ons or assessments of the easeof pu ng processes in place. The actual targetsshould di er from ins tu on to ins tu on depending on the size of the FI, there is no perfect benchmark. However, regardless ofsize, the project team should have a set of keyperformance metrics approved by senior management against which they can track theirprogress during the actual pilot. Targets shouldbe set with the expecta on that learning ande ciency will improve over me. More detail

on how to track performance metrics is givenin Phase 4.

KEY STAFF CAPABILITIESThere are speci c skills that each branch manager and each new lending o cer shouldpossess when building up the agricultural lending team. These skills will help ensure thatpoten ally successful applica ons are forwarded to the credit commi ee for nal approvals.

Rural and Agricultural Lending O cersBuilding up ins tu onal capacity to e ec velylend to agricultural clients is a necessary prerequisite to launching an agricultural lending product. The decision to train agriculturallending sta or to recruit from outside the ins tu on depends on the educa onal andprofessional background of current sta and itscapacity to develop new skills through training.To make this decision, consider the pro les ofthe exis ng group of loan o cers and the locallabor market.

Agricultural lending requires an in depth understanding of rural clients, par cularlywhen de ning farmer risk pro les and evaluating their technical skill levels. On the otherhand, the basic nancial principles required toanalyze a loan are fairly standard and easier tolearn. It is easier for an agronomist to learn

nancial analysis than for a business professional or an accountant to learn agronomy andcrop produc on techniques. FIs may nd itmore cost e ec ve to hire agronomists andtrain them on nancial analysis than to trainexis ng sta on intricate agronomic principles.

To ensure agricultural loan o cers maintainadequate levels of produc vity, FIs should also

nance other economic ac vi es in rural areas.Agriculture is seasonal, and during somemonths of the year, there may be li le or nodemand for agricultural loans. Loan o cersmust have diversi ed por olios, where agricultural loans represent at least 20 percent and atmost 50 percent of their loan por olios.


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Working areas must be created for urban andagricultural loan o cers to reduce compe onamong them to get the same clients. Urbanloan o cers should focus on urban and suburban areas only, while agricultural loan o cersshould create working regions outside the cityand work those regions on a weekly basis.Within their regions, agricultural loan o cersshould market loans to traders, manufacturers,and service providers apart from farmers andproducers. Working areas must be designedearly in the process to avoid compe on andtensions among team members.

When building up agricultural lending sta ,management should look for some typical a ributes that characterize e ec ve agricultural lending o cers:

• Educa onal background in the followingareas:

o Agronomy

o Farm management

o Sales and marke ng of agricultural inputs

o Training and technology transfer tosmall farmers.

• Basic understanding of nancial, economicor accoun ng principles (some banking experience welcome, but not required).

• Familiarity with agricultural markets.

• Open to frequently traveling to the eld(60 percent 70 percent of the me).

• Able and willing to ride on a motorbike.

• Willing to work in the eld under the sun,dust, and rain.

• Excellent communica ons skills and a en on to details.

Branch Manager Responsibili esThe responsibili es of branch managers willshi substan ally with the introduc on of

agricultural lending. Branch managers will needto become more involved in the assessmentand monitoring of farmers, in analyzing their

nancial data, and assessing their technicalskills. The ability of branch managers, whoo en head credit commi ees, to undertakesound loan assessments is pivotal to the success of agricultural lending.

The new responsibili es for branch managerswould include:

• Monitoring of new products that may require addi onal analyses.

• Implemen ng new repor ng requirements: cross checking and analyzing to ensure accurate data collec on.

• Ensuring sta have the appropriate analycal capacity and tools.

• Maintaining an understanding of local agricultural markets and strategic planningfor growth and expansion.

• Building strategic alliances with value chainplayers.

• Fostering collabora ons with technologytransfer ins tutes.

• Promo ng communica on and informaon ows, both externally through market

ing and through internal communica ons.

Branches will be carefully selected for rollingout the new agricultural lending product,based on the market research in the previousphase. It will be possible to o er targeted training programs to build necessary sta skillsin these few branches. As the lending programexpands, the ins tu on can accordingly trainmore sta .

AGRICULTURAL LENDING STAFFTRAININGExis ng and incoming sta must be trained onproper agricultural lending methodologies andprocedures to ensure success of the pilot and


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launch of the new product. Loan o cers, project management, and credit commi eemembers all need to be trained on the speci csof agricultural lending. The agricultural lendingproject manager should coordinate with thehuman resources department in developingand running the training sessions. The projectleader should also coordinate the developmentof training materials. Several training curriculaon agricultural lending have already been developed by interna onal organiza ons suchas IFC; the project manager may start by seeking assistance from outside sources to leverageexis ng exper se and materials.

Successful training programs for agriculturalloan o cers include theore cal, in class (1 2weeks) and eld coaching components (up to6 weeks) with managers and experienced loano cers.

Theore cal training should cover:

• The bank’s commitment to agricultural nance and how it ts within its mission

• Crop produc on cycles and benchmarksfor target value chains

• Agricultural risk and rural lending principles

• Es mates of past and future agriculturalrevenues

• Assessments of farm assets and liabili es

• Documenta on of crop income and business expenses

• Cash ow analysis and loan structuring

• Credit assessment, analysis, and approvalcriteria

• Descrip on of the new product and how tostructure appropriate loans

• Aspects of customer service

• Marke ng strategies in rural areas

• Por olio monitoring in rural areas.

Analy cal tools and approaches used by the ins tu on should be explained, prac cedthrough exercises (for example, preparing abalance sheet and income statement for anagricultural business), and tested. Prepara onfor eld training should be done through roleplaying and processing of “mock” client applica ons.

By the end of the theore cal training, traineesshould be comfortable with calcula ng repayment capaci es and the nancial ra osused for loan decisions. A test to measure thetrainees’ comprehension is conducted to improve the training and screen out unsuitableindividuals before they move into the eld.Screening prospec ve sta avoids poten allyproblema c contacts with clients, and also limits costly me investment involved in eldtraining.

Field training involves coaching new loan o cers in conduc ng client interviews, observing indicators about the household or farmingbusiness that might in uence loan assessment,and capturing key socio economic informa onfor nancial analysis. It also involves illustra ngways to ensure cross checking and verifying accuracy of informa on.

During eld training, trainees are o en mentored by an experienced trainer or loan o cer in conjunc on with the branch manager.It is an essen al component of the training,and therefore, opera ons and human resources teams must allot adequate me andsta ng to coach of trainees.

The eld training covers such subjects as:

• Group mee ngs with farmers for researchand marke ng ac vi es

• Farm visits and data collec on

• Loan appraisal and data veri ca on

• Loan approval processes

• Communica ng decisions and next stepsto applicants.


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At the end of the training program, new loano cers should be familiar with all processes associated with lending to new agricultural customers. They should be able to source newclients, interact with them in produc ve ways,gather informa on through interviews, andmove applica ons through the approvalprocess. New loan o cers may require someprac ce to be able to iden fy produc veclients, so the training is crucial for the ul matesuccess of the agricultural por olio.

CHECKLISTThe primary goals during this phase are to ironout the nal details of the pilot program, createan outline and term sheet of the new productthat includes key parameters and marke ngplans, and train sta on agricultural lending.

The following checklist will help determine ifyou are ready to con nue to Phase 4 of thenew product development process.

• Have you de ned the key characteris cs ofthe new product, drawn up a term sheet,and got the new product approved by senior management?

• Have you discussed and determined goalsfor the pilot branches?

• Have you developed a training curriculumand support materials?

• Have you trained loan o cers involved inthe pilot on the di erent aspects of thelending technology such as informa oncollec on in the eld, loan assessment,loan approval, and arrears monitoring?

• Have you established clear performancetargets for loan o cers?

• Have you prepared a marke ng plan toreach the rst clients?

• Have you implemented and adjusted lending policies, if necessary?

Prod

uct D

evel

opm

ent P

hase

4 –

Pi

lot T

estin

g an

d M

onito

ring

P D CT D L P T PHA 4 – PIL T T TI G A D IT I G

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er the project team has completed design of the pilot product and determined what the pilot program will look

like, the team is ready to begin pilot tes ng andmonitoring results. This fourth phase is the second of the two itera ve steps in the pilotprocess. During this phase, the project teamwill begin the pilo ng process and monitor thepilot’s opera onal performance, the quality of

the risk analysis, produc vity of the loan o cers, and the e ec veness of the marke ngstrategies. Also, the team will assess how wellthe new product is received and used by thetarget clientele. Depending on how the pilotrates on the pre determined performance metrics from Phase 3, the product may need toreturn to Phase 3 to be adjusted and rolled outagain.

The pilot tes ng phase is an opportunity too er the product to a sample group of clientsto determine whether these customers need,and will use the product. The results of thisphase will help determine whether demand exists for the new product, what modi ca onsor changes to the terms and condi ons areneeded, and what features or processes needadjustment. The me required for the pilot willdepend on both internal and external contextsof each ins tu on. When condi ons are par cularly favorable the pilot may last onlyaround six months. Favorable condi ons include when a team has strong leadership orthe product is widely accepted. With less favorable condi ons, however, the project team

might need to pilot test the product and tweakthe services for a year or more before sa sfactory results are obtained.

AGRICULTURAL LENDINGPROCESSFIs beginning the pilot rollout for their newagricultural products, may nd it useful to review in detail speci c steps of the lendingprocess, from iden ca on of new clients tomonitoring and repor ng. FIs should ensurethat each loan o cer and member of thecredit commi ee works through this processto ensure that each loan is handled e cientlyand analyzed correctly. The steps outlinedbelow take 15 days in all. Depending on the ex

Product Development Phase 4 –Pilot Testing and onitoring

A

Phase 1

Prepara on Phase 2

Market Research

Phase 5


Phase 3

Pilot Design

Phase 4


Market Feedback

Figure 11 – Phase 4 – Pilot Tes ng and Monitoring


per se of each FI, this process may take longer,especially if the credit commi ee is not locatedat the branch or if it only meets periodically (forexample, once a week).

During ini al stage of iden fying new customers, the FI will explain the product tonew clients and make preliminary decisions onwhether to con nue with the rest of the analysis.

1. First client contact – screening with loano cer (Day 1).

2. Informa on session – loan o cer informsclient about agriculture product (Day 1).

3. If the loan o cer determines that theclient has a qualifying project, he/she assists the client in comple ng an agriculture loan applica on form (Day 1).

4. Loan o cer opens a client le (Day 1).

5. Loan o cer adds client to agriculturepipeline report (Day 1).

6. A er comple ng loan applica on, borrower gives documents (collateral, references) to loan o cer (Day 2).

7. Loan o cer assigns a day to meet theclient on site to get more detailed informa on to complete the loan assessment forms described in the previouschapter (Day 2).

8. Loan o cer carefully examines all documents related to collateral, payingpar cular a en on to the status of inventory land records, coordina ng withlegal sta and government as necessary(Day 3).

The client’s informa on and credit history isanalyzed in great detail in the second stage.

1. Veri ca on o cer conducts due diligenceby carrying out reference checks of suppliers, customers, and, where possible,the bank records of customer, as well aschecking market and compe tors (Day 4).

2. Veri ca on o cer meets guarantors andchecks collateral (Day 5).

3. Loan o cer and agriculture director iden fy which outstanding issues remainand decide whether to con nue with thisclient (Day 5).

4. Veri ca on o cer makes follow on sitevisit to the farm to inspect farm premises,inventory, livestock, and internal books(Day 6).

5. Loan o cer analyzes nal cash ow, income statement, and balance sheetprognosis; structures the loan accordingly;and completes analysis, write up, and naldocumenta on check (Day 7).

6. Loan o cer and lawyer s review nal documents and forwards loan memorandum to branch manager (Day 7).

7. Branch Manager reviews and provides approval for submission to agriculturecredit commi ee (Day 8).

In this third phase, the credit commi ee will either give its nal approval and disburse theloan or reject the loan.

1. Loan o cer submits loan applica on tocredit commi ee (Day 9).

2. If approved, commi ee signs o on loanapproval form; if rejected, client is provided with a list of de ciencies and canresubmit when these are addressed (Day 9).

3. Loan o cer informs client of loan decision(Day 10).

4. Loan o cer requests any addi onal documenta on required to ful ll condi

ons and for closing (Day 10).

5. Opera ons o cer arranges collateral registra on and insurance documenta onwith local and/or district government (Day 11).

6. Opera ons o cer prepares loan/collateralagreements based on credit commi ee decision (Day 12).

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7. Opera ons o cer ensures that all disbursement condi ons have been met(Day 13).

8. Loan o cer walks client through disbursalof loan proceeds at the branch (Day 13).

9. Opera ons o cer follows through on ful llment of all condi ons of loan disbursement (Day 13).

10. Rela onship manager checks all documenta on and condi ons and signs approvalform (Day 13).

11. Client and guarantor s sign documentaon (Day 14).

12. Loan o cer provides repayment scheduleto client (Day 14).

13. Teller disburses loan to client (Day 15).

While some of these steps might require morethan one day, a loan can be disbursed within afew weeks of the applica on. To summarize,the processes of lending to agricultural clientscan be broken down into three steps as seen in

gure 12.

- 63 -

Farmer completes loan applicationLoan officer analyzes all pertinent documentsInitial approval for further analysis

Due diligence of references and business relationshipsAnalysis of cash flow and collateral arrangementsVerify farm conditions through on-site visit

Review financial ratiosAnalyze farmer's risk profileReview repayment capacityReview investment planAssess guarantees

Initial Contact

Loan Analysis

Loan Approval

While the pilot test is running, the project teamcan also prepare for analysis of the pilot’s results and conduct some preliminary monitoring and evalua on. Doing this before the pilotis complete allows the team to be er prepareto either move forward with implementa onor conduct addi onal pilots. These are theareas to follow up:

• Loan o cer and client agree to monitoringschedule (As necessary)

• Monitoring visits to client Monthly

• Agriculture updates monthly report(Monthly)

• Loan o cer updates branch manager onproblem loans (As necessary)

• Other repor ng as determined by bank.

The team should conduct weekly and monthlyevalua ons of the en re pilot por olio duringthe rst six months, evaluate di erent types ofclients, and record both complaints and posi ve feedback. Preliminary monitoring andevalua on should allow the team to do the following:

• Review internal loan approval and riskmanagement systems

• Monitor levels of sta knowledge

• Evaluate customer service

• Gauge the e ec veness of marke ng andcommunica ons.

Figure 12 – Lending Process for Agricultural Clients


Reviewing all of these on an ongoing basishelps the team iden fy issues and problemsand improve the processes as the pilot progresses.

TRACKING PERFORMANCE METRICSMonitoring and evalua on should take placethroughout pilot implementa on. The goal ofthis step is to analyze the actual performanceof the pilot against the targets de ned in Phase3 and make any necessary changes before theproduct is rolled out across the organiza on. Itis much easier to make changes and test themthroughout the pilot, so it makes sense to takethe me to get the pilot right. Some key performance metrics that the team shouldtrack include:

• Size of total agricultural por olio outstanding;

• Percentage of por olio that is at risk (PAR)– the total value of loans outstanding thathave one or more installments of principalpast due for more than 30 days, or 90 days;

• Loan o cer produc vity, such as loans disbursed per o cer each month;

• Loans outstanding per loan o cer

• Total agricultural por olio as a percentageof the ins tu on’s total por olio;

• Average loan size for agricultural loanproducts;

• Cycle me – the total number of days fromini al contact to loan disbursement; and,

• Customer sa sfac on level and demandfor the agricultural loan product.

For sample performance reports that may helpthe project team track these metrics, see Appendix I – Sample Performance Reports.

Beyond collec ng quan ta ve data on thenumbers and amounts of loans outstanding,

monitoring and evalua on should also includesome of these following key qualita ve items:

• Monitor the lending process quality at allthree levels: ini al contact, loan analysis,and loan approval;

• Re assess the technical pro ciency levelsof the loan o cers par cipa ng on thepilot team;

• Analyze product acceptance by clients;

• Talk to sta or hold informal focus groupsto evaluate the level of sa sfac on withthe product;

• Check for product marke ng consistencyacross loan o cers and branches;

• Discuss any necessary product adjustments with pilot team; and,

• Design and monitor the necessary adjustments of the di erent areas

If the FI does not have an ongoing customersa sfac on program, the project team mustconduct research with individual loan clients tounderstand how they perceive the new product and to evaluate their level of sa sfac

on with the product and suggested altera ons. Qualita ve research with currentcustomers will give the team a sense of howsa s ed customers are with the product andtheir response to the marke ng ini a ves.Qualita ve research with poten al customerswill inform the team of any barriers customershave against borrowing from the FI and whymarke ng ini a ves have not compelled themto take advantage of the new product.

Upon comple on of the pilot, feedback shouldbe collated and wri en up into a pilot evalua on report that outlines the actual versus target metrics, key lessons learned, outstanding issues and recommenda ons. Thisshould be used for any further pilots, as well asfor developing the plan for rolling out the product across the ins tu on.

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CHALLENGES AND LESSONSLEARNEDA major challenge faced by FIs during thisphase is the lack of technical and analy calskills in their agricultural loan o cers. Many FIsface this problem when they begin inves gating expansion into agricultural markets. Lending to the agricultural sector has many nuances and risks associated with it, which areabsent in the commercial sector. For this reason, this guide stresses the importance ofcrea ng a robust and detailed training curriculum (including extensive eld coaching) to buildon the skills that loan o cers have already developed working with the commercial sector.By layering on the new analy cal techniquesand appraisal processes for the agricultural sector, the FI can more e ec vely developstrong agricultural lending o cers.

Another key challenge faced by many FIs at thisstage is the structuring of an e ec ve marketing strategy. This can be di cult when targeting one geographic area with poten al clientsthat are spread over a large territory. For thisreason, this guide recommends rst focusingon exis ng clients at the branches selected aspilot sites. There are likely exis ng clients whopar cipate in agricultural ac vi es, who coulduse addi onal nancing to bolster their businesses. Reaching out to these clients to adver se the new product can be an e ec veway of spreading the news about the new o ering. Addi onally, using technology, such astargeted SMS campaigns to reach exis ngclients in the pilot region, may yield addi onalclients.

Financial ins tu ons must also collect reliablequan ta ve and qualita ve data on a melybasis. Prudent agricultural lending requires thecollec on and analysis of a signi cant amountof data on clients, produc on, and prices. IFChas seen FIs encounter this challenge in numerous situa ons in its work suppor ng introduc on of agricultural lending around theglobe19. The more FIs can adapt the tools

described above (further exhibited in appendices H and I), the easier and more coste ec ve it will be to evaluate client data. Microso Excel can be an especially useful toolto increase the reliability of the process. Bybuilding in automa c calcula ons, the chancesof errors is greatly decreased. Automa on canalso increase e ciency and support fasterpor olio growth, as well as improve loan applica on assessment.

Addi onally, the uptake of the new productamong target communi es can present a challenge to some FIs. Having a new productwith exible repayment terms linked to cash

ows can be a rac ve to rural farmers. However, FIs need to ensure that target customers know the product is available andhow it can bene t them directly. Holding meetings with key farmer associa ons is a great wayto get the FI in front of target customers, butsome mes FIs need to go even further withtheir marke ng. Some mes, something as simple as incorpora ng images of the targetclientele in marke ng materials can help overcome the mistrust that some farmers haveof FIs and their presump on that FIs are not interested in serving them.

A strong customer service orienta on can alsohave a posi ve impact on customers adop ngthe product. FIs can compete e ec vely withsubsidized credit from ins tu onal players anddi eren ate their o erings among themselvesby providing rapid loan processing and disbursement, personal a en on to clients,customiza on of products, terms and servicesto match client needs, and non nancial services.

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19 Access to Finance for Smallholder Farmers. IFC. 2014.


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Phase 4 Featured Prac cal Example: Pilo ng challenges at an East Asian FI.

East Asia Bank Faces Challenges when Pilo ng Agricultural Lending

IFC worked with a bank in East Asia that was rolling out an agricultural lending pilot. Thebank piloted the product over the course of one year, using three agricultural lending o cers. These o cers were able to disburse a total of 67 loans represen ng about$450,000. The bank experienced a wide variability in disbursements of loans each month,but learned a lot about their target clients through the process. For the next year of thepilot process, the bank plans that each loan o cer will disburse an average of three to fourloans per month totaling about $11,000. A er the ini al 24 months, the ideal loan o cerwill manage a por olio of about 100 outstanding loans worth $300,000. During the last yearof the pilot, this total should climb to 160 loans worth $480,000. The bank plans to achievea non performing loan rate of less than 3 percent a er two years and less than 4 percenta er the third year. There will be two specialized agricultural loan o cers per branch forthe rollout phase.

Overall, the bank has found that the pilot implementa on process was slower than originallyplanned, preven ng the team from mee ng original targets. The pilot team encounteredthe following key challenges:

• Limited analy cal skills of loans o cers, which slowed their learning process andproduc vity

• Insu cient and unstructured marke ng ac vi es

• Lack of monitoring and follow up a er marke ng mee ngs with farmer associa ons

• Ini al low quality and accuracy of data collected, which required mul ple visits tothe clients to clean and clarify the data

• Inadequate availability of vehicles to visit farmers and clients in rural areas sloweddown marke ng ac vi es.

As a result of these challenges, the bank decided to standardize and document the processesfor pre selec on of clients to reduce loan processing mes. It also updated its recommendedpro le for hiring agricultural loans o cers, ensuring that they do have agricultural backgrounds and stronger analy cal skills. The bank is implemen ng a structured marke ngplan that will be used during the rollout phase.


CHECKLISTThe primary goals during this phase were to

nalize the processes for loan o cers andcredit commi ee members, and to launch theproduct in a select region. During this phase,the project team should also have collecteddata on the performance of the pilot andtracked it against pre determined targets.

If the pilot did not perform as well as expected,the project team should return to Phase 3 ofthe process and redesign the necessary elements and then launch the pilot again. Thefollowing checklist will help you determine ifyou are ready to con nue to the nal phase ofthe new product development process.

• Did the pilot run according to plan and wasit completed within the set deadlines?

• Did you successfully resolve all issues andproblems arising from the pilot?

• Were the results of the pilot monitored ona regular basis throughout its dura on?Were these results combined with an evalua on when the pilot was complete?

• Has a decision been made about your needto conduct another pilot? If your team decided that you needed another pilot, hasit been completed?

• Have the key lessons from the pilot beendocumented and implica ons for implementa on been iden ed, especially recognizing how the lessons might apply atdi erent branches and with di erent clientgroups?

• Was your project manager, senior management, and the board sa s ed that the pilotmet the required targets?

• Is the pilot team prepared to transfer itsknowledge to other sta not involved inthe ini al pilot s ?

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P D CT D L P T PHA 5 – P D CT LA CH A D LL T

STRATEGY DEVELOPMENT FORTHE ROLLOUT PHASEOnce the pilot is completed and product adjustments, if needed, are implemented, theteam should spend me building a comprehensive agricultural lending strategy for the rollout.A well developed strategy will help management guide and track organiza onal goals andobjec ves. With the informa on gathered upto this point, the project team should workwith management to envision where the organiza on is headed in the next three to ve

years. This vision should re ect the vision forthe en re FI and for the agricultural lendingbusiness. The strategy should put in place aroadmap for how the FI will achieve its goals.It should set short term (less than one year),medium term (one to three years), and longterm (three to ve years) objec ves. This implementa on plan should contain ac onablesteps, with a detailed schedule. Key elementsinclude target crops and client types, the channels for reaching clients, human resource andtraining needs, new products, appraisals, monitoring, and risk management systems.

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er comple ng the pilot program, andif the results show promise for futuregrowth of the agricultural lending

por olio, the project team is ready to developa strategy to roll out the product across the ins tu on. The release of the product shouldbe gradual and will require having necessaryhuman and nancial resources already in place.This phase also requires constant monitoringor market feedback throughout the life of the

new product. Each agricultural lending o cerwill interact with clients on a regular basis. Theo cer must listen to customer suggs ons onproduct improvement or new products. Thiswill allow the FI to evaluate product updatesand the program as a whole, as client needsevolve over me. Some of these interac onsmay lead the FI to return to the market research phase (Phase 2) to learn more aboutthe opportuni es that have opened up.

Product Development Phase 5 –Product Launch and ollout

A

Phase 1

Prepara on Phase 2

Market Research

Phase 5


Phase 3

Pilot Design

Phase 4


Market Feedback

Figure 13 – Phase 5 – Product Launch and Rollout


An organiza on’s strategy for the rollout shouldbe discussed, debated, and decided at theboard level to truly become part of organiza

onal make up. Subjects to be covered duringthese conversa ons should center on issues ofstrategic importance, including:

• Understanding the broader market andwhether there is the scale and opportunityto reach pro tability.

• Understanding the FI’s compe ve advantages in the marketplace and ensuring that the new product line strategybuilds on these advantages.

• Ensuring that objec ves and goals are realis c. Management should be detachedand cri cal when se ng objec ves, and set worst, expected, and best case scenarios during nancial modeling.

• Understanding how the agricultural lending product line will a ect other areasof business. Will it support these otherareas or cannibalize them?

• Establishing whether the organiza on haspersonnel capable of delivering on thisbusiness plan. If not, what is the plan to

achieve the needed level of organiza onaldevelopment?

• Establishing opera onal pla orm requirements. Does the bank’s branch networkreach su ciently into those areas of market opportunity? Which branchesshould be priori zed based on the marketresearch results? What would be the appropriate branch rollout strategy?

• Determining what addi onal investmentsare required to reach the new market. Investments involve hiring or training of exis ng sta , investment market surveys,marke ng and sales campaigns. It shouldinclude bank infrastructure and new technologies, such as hand held devicesthat could assist in reaching more remoteborrowers.

As men oned in the introduc on, agriculturallending can vary from direct lending to farmersto more structured value chain nance models.The example below illustrates the crea vitythat can go into strategy development; FIsworked with rice mills in the Mekong Delta region of Vietnam to indirectly nance ricefarmers.

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Collabora on between Banks, Rice Mills, and Rice Farmers in the Mekong Delta Region

Rice processors, in the Mekong Delta region of Vietnam, are engaged with farmers to di ering degrees. Some processors have built short term rela onships based on price opportuni es, while others provide more integral support to farmers by supplying cer edseeds and fer lizers, and then purchasing all the produc on via contract farming. FIs havemul ple advantages when working with such players. This guide encourages FIs to iden fyand select value chain players for cost e ec ve collabora on.

In the Mekong Delta the team interviewed two large processors who trade more than200,000 tons of rice per year. These are local companies, using di erent strategies to collaborate with farmers. The rst one uses contract farming and pre nances seeds andfer lizer to farmers specializing in Jasmine rice for export, while the second company produces tradi onal rice for the domes c market (see table 13).


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Table 13 – Financing Models in the Mekong Delta

The two large rice processing plants nance a signi cant number of farmers 6,000 and 500respec vely with an outstanding por olio of approximately $36 million and $250,000.Both companies are interested in collabora ng with FIs to provide addi onal nancing tofarmers. The rst company could nance 1,000 addi onal farmers with a bank’s support,while the second company could add 500 addi onal farmers. Given the di erent strategiesthese companies employ to interact with local farmers, they approach addi onal nancingopportuni es in di erent ways. The rst company is interested in preselec ng farmers. Itwill help the bank organize the groups to market the products, provide technical supervisionto farmers, and later, support the bank with reten on and collec on of loans. The otherrice processor is more interested in ge ng a loan from the bank to on lend those funds tothe farmers, assuming 100 percent of the risks. In fact, this company does not want thebank to lend directly to its farmers.

With these two strategies in mind, local FIs could approach each company and structureappropriate models to suit their needs. These two rice producers are examples of the typesof rms FIs should seek out when building agricultural lending por olios. FIs new to agricultural lending can adapt and adjust their strategies to accommodate this type of partnership.

Financing Models Large Co. #1 Large Co. #2

Does the company pre nance farmers? Yes Yes

Number of farmers pre nanced 6,000 500

Por olio outstanding $36 million $250,000

Loan term 4 months 4 months

Criteria to nance Quality of produc on, loca on, group associa on Quality of produc on

Interest in Collabora ng with FIs Yes Yes

Amount of pre nancing $5 million $230,000 to 460,000

Number of addi onal farmers 1,000 500

Loan term 4 months 4 months


Some of the key ques ons that the projectteam should keep in mind as it nalizes a rollout plan for agricultural lending across theins tu on:

• What organiza onal structure does the ins tu on want to put in place (for example, centralized unit, small units ateach branch)? Which structure is morecost e ec ve?

• Which region and branch does the ins tuon expand to next? What are the criteria

for making this selec on (for example, levelof demand, ability to assign a regional coordinator)?

• What human and nancial resources areneeded to introduce agricultural lending inaddi onal regions?

• What will the marke ng strategy be? Do alllending o cers have a clear message anddo they know how to e ec vely presentthe product to new clients?

SETTING UP AN AGRICULTURALLENDING UNITAt this point in the new product developmentcycle, the project team should evaluatewhether it is necessary to set up a separateagricultural lending unit. Incorpora ng theagricultural lending unit into the overall organiza onal structure will ensure that thechain of command is in place for decisionmaking, distribu on of authority is understoodby all working in the agriculture business line,and func onal du es are assigned and covered.

At the beginning of the rollout phase, it maymake sense to keep agricultural lending housedwith other lending units. By doing this, thepor olio will have a chance to grow and mature before the unit is separated as a standalone en ty. The growth of the por oliowill take me. So, in the early stages of the rollout, the FI could take advantage of

overlapping management processes un l returns and volume necessitate the eleva onof the unit. Senior management should decidethe thresholds for separa ng out the agricultural lending unit that must be met before therollout phase begins.

Once the decision is made to create a standalone agricultural lending unit, this teamcan help standardize implementa on andprocesses across the ins tu on, develop ins tu onal rela onships with other valuechain players in the regions to expand outreachto farmers, and help manage and mi gaterisks. This unit could also coordinate market research in new regions and collect data oncrop prices and trends by leveraging its experiences from the pilot and rollout. Types of structures can vary by ins tu on. However,the opera onal structure must be clearly de ned within the FI to enable it to supportsales, lending, and monitoring sta with agriculture speci c knowledge. To accomplishthis successfully requires support from theboard and senior management team and creditsta (as covered in Phase 1). The rst step isge ng each group to understand what is involved in agricultural nance, how it a ectsthe FI, and how to take ownership of theprocess.

The way in which agricultural lending is integrated completely into an FI’s structure depends on a number of factors. These includethe FI’s current organiza onal structure, par cularly its credit opera ons, experience inagricultural lending, the volume of agriculturallending in its por olio, and its strategy for capacity building, training, recrui ng, and retaining quality sta .

On the other hand, if agricultural lending is anew or rela vely new concept for an FI, it maynot be necessary for an FI to create a separateagricultural lending unit. Instead, the FI couldinvest in increasing sta capacity in the eld,regional o ces, and headquarters. Adequateregional technical and opera onal support as

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a link between headquarters and branch o ces is of cri cal importance but is o enoverlooked. While there should be agriculturallending champions within an FI, there are prosand cons to crea ng an agricultural lendingunit. It may be a good t for very experiencedFIs with large volumes of agricultural lending,but may not work for smaller FIs.

Any organiza onal chart revisions should alsobe accompanied by a review of the opera onalpla orm for delivering agricultural loans. Investments may need to be made in addi onal technologies, such as hand held devices, informa on technology (IT), and management informa on systems (MIS), to enhance electronic lending pla orms to reachmore distant popula ons. Increasingly, FIsaround the world are inves ng in technologythat can have a signi cant impact on their ruraland agricultural lending lines and nancialservices, including savings. FIs are expandingnetworks of automated teller machines as wellas mobile banking and “branchless banking”approaches, such as handheld devices and miniprinters, global posi oning systems (GPS), andmobile phone applica ons.

For example, an FI in the Dominican Republichas started using handheld mobile devices tocapture and analyze seasonal incomes andcash ows from farmers, e ec vely automating the collec on of data. These handheld devices have reduced data input errors, increased data processing speeds, and haveshortened the loan approval process. M Pesain Kenya is another interes ng example of howmobile payments have reached more than 50percent of the country’s rural popula on20.The collabora on between Safaricom and localbanks has enabled bank clients to transfermoney and purchase goods using their mobilephones, drama cally reducing transac onalcosts, par cularly in rural areas.

DEVELOPING AN IMPLEMENTATION PLANExpanding nancial services into new ruralareas requires an integrated approach to manage and mi gate the risks of agriculturallending. FIs must implement the di erent toolsand strategies discussed above, including: selec ng regions with high agricultural poten al, targe ng low risk farmers, developing robust and adequate loan appraisal technologies, designing adequate loan products for farmers, selec ng sta with adequate backgrounds, and developing strategic partnerships with local value chainplayers to manage risks. Calibra ng and balancing all these principles will help ensurea successful implementa on and rollout of newagricultural lending products.

Rolling out agricultural lending across theins tu on involves making the new productavailable to a much bigger market, and thus requires careful planning. Assuming that thecharacteris cs and features of the product arein line with the needs of prospec ve clients,the project team will need to develop a detailed plan that assigns responsibili es andde nes me periods for the broader rollout.The strategy should include a number of components, including:

Strategy and Budget: First and foremost, theteam will need to determine the ming and logis cs behind rolling out the product to eachand every branch of the ins tu on. Next, andin conjunc on with senior management, theproject team should clarify how agriculturallending ts into the broader ins tu onal mission. As a part of this, the team will alsoneed to set a clear budget for expansion ofprocesses across the ins tu on. This will include an ongoing marke ng plan that coversall branches and includes pro tability planningto nalize the numbers of agricultural loans

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20 56 percent of rural Kenyans are “registered ac ve mobilemoney users.” Financial Inclusion Insights. Kenya CountryPro le. 2015.


and size of the por olio that will be requiredfor agricultural lending to be pro table. Usingthe data from the pilot rollout, the team shouldalso nalize short term strategic ac ons thatneed to take place to ensure success of rollingout agricultural lending. Addi onally, a long term development strategy that includeshard targets and objec ves for the agriculturalpor olio as a whole will need to be laid out inthe implementa on plan.

Growing the Agricultural Lending Por olio:Based on the results of the pilot and the extensive research conducted during the market research phase, the team must determine how best to grow the por olio. This couldoccur by a rac ng new clients or by crossselling to exis ng clients. No ma er whichstrategy the team uses, clear targets must beset and progress tracked as the product isrolled out. Addi onally, the team will need todesign a training curriculum for the rest of theloan o cers who will be working with agricultural clients. This could occur by region or atcentralized training centers. Ideally, the product will be rolled out gradually in the regionswith highest agricultural poten al, so brancheslocated in the primary agricultural regionscould be targets for the ini al wave of training.

Marke ng and Promo on Strategy: Combiningthe FI’s marke ng experience and the resultsof the pilot, the project team should devise astrategy to promote the agricultural lendingproduct, speci cally to the target audience selected as priority earlier in the process. Theteam should speci cally use the data obtainedduring farmer interviews and focus group discussions from the market research phase.This data will help the team determine whichmessage is most compelling to the target audience and how best to reach them. Thestrategy for promo ng agricultural lendingshould form part of the FI’s overall brandingand marke ng strategy. Each region should develop its own marke ng plan targe ngfarmer associa ons, value chain players in the

region, and input and technology suppliers.Branch managers and product managersshould monitor progress of the marke ngplans in each region on a monthly basis. Themessages used should complement those usedfor other products and be consistent with theoverall corporate brand. Each component ofthe marke ng and communica ons should becomplementary and promote a compellingmessage about the FI that resonates with therural popula on.

Monitoring Growth: Based on the goals andobjec ves set forward in this strategy, the teamwill need to monitor the growth of the por olio and establish systems to ensure eachmilestone is met. Using the tracking tools described in the previous sec on and in appendix I, the project team should track por olio performance as the product is rolledout. Beyond these basic measures, the projectteam should track gross por olio size, costsand pro ts. Further, by increasing the numberof loan o cers working with the agriculturalsector, the team will need to establish criteriaand monitoring systems to ensure that necessary capacity and levels of technical knowledgeare maintained across the ins tu on.

ARREARS MONITORINGAs discussed above, lending to the agriculturalsector is risky in part because the agriculturalsector is exposed to risks such as climatechange and market demand. External shockslike typhoons, droughts, and other weather catastrophes impact the agricultural sector regularly. Market and price risks could a ectfarmers in a region or country with devasta nge ects on their incomes and repayment capacity. Even when there are no major external shocks, agricultural produc on is subject to minor varia ons in yields and harvest dates, which could delay payments ofloan installments.

FIs growing their agricultural lending por oliosneed to have special strategies to deal with

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major shocks as well as with minor natural climate varia ons that could a ect yields orharvest seasons. In the la er case with minornatural climate varia ons, FIs could preventand reduce rela onship stress and nega ve interac ons with clients by providing someextra me to farmers for repayments. Thiscould include allowing the extra me farmersrequire to harvest, process, and sell their products. Any addi onal me given to pay loaninstallments should be discussed with farmersduring the loan assessment and included in theloan design.

Some mes, even a er giving extra me to payloan installments, farmers might face delays inthe harvest and marke ng of crops. Banksshould have systems in place that closely monitor farmer payment schedules. Wheneverthere are delays in the payments, loan o cersshould visit farmers immediately, iden fy theproblem, and determine if the late payment isdue to external factors and whether the willingness to repay is strong. If this is the case,the bank could be exible and provide addi onal me. Those rescheduled loansshould be for short periods of mes, andshould have a detailed report and the approvalof a supervisor or branch manager. A er theextra period, farmers should be able to repaythe loan. If there are addi onal problems,those cases should be analyzed and processedby special loan recovery teams, and the responsible loan o cers should provide closesupport.

In case of major disrup ons due to externalshocks such as typhoons, droughts, or otherweather events that could impact larger regions and large numbers of farmers, FIsshould put together a special team to assessthe damage at the farm level. FIs should workin coordina on with government agencies toassess the damage in the region. Even with

dras c external shocks, the level of damageand impact at the farm level varies dramacally. Therefore, FIs should visit each farmerand assess the damage su ered individually, ifpossible. In many cases, damaged crops will recover later, but produce subop mal yields. Inthese cases, FIs should nego ate individuallywith farmers, providing extra me and evenaddi onal funds to those farmers heavily impacted, if they show strong willingness topay back the loan. Some farmers will be impacted only moderately, and will be able topay back the loans with only minor delays orrescheduling. The only way for FIs to assess thereal impact and to iden fy those di erences isto visit farmers one by one and nego ate withthem individually. FIs should show real interestin understanding each par cular situa on and be open to providing adequate support accordingly.

In any event, addi onal provisions must bemade every year to manage those cyclical external shocks. FIs should have a long term vision for the agricultural sector, which will inturn have a posi ve impact on farmers, andfurther build goodwill and loyalty among thecommunity.

SUMMARY CASE STUDYThe case study below illustrates one ins tu

on’s methods for rolling out agricultural loansto a sector of the popula on it was alreadyserving. This example brie y shows how the ins tu on progressed through the product development process and how it adapted itscurrent processes and opera ons to be ermeet the needs of its customers. This FI usedinnova ve channels to signi cantly increase itsbusiness and customer base. It trained sta ina specialized unit a ached to its lending department and tweaked products that already existed in its por olio.

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Phase 5 Featured Prac cal Example: Introduc on of agricultural lending at a Cambodian FI.

Cambodian Financial Ins tu on Develops Agricultural Lending21

A nancial ins tu on partnered with the World Bank’s Agriculture Finance Support Facilityto develop agricultural lending skills, design new loan products to respond to farmers withlarger nancing needs, and enhance service delivery to reach remote rural popula ons.

The FI established an agricultural lending unit at the beginning of the project within its creditdepartment. It was faced with the challenge of nding quality loan sta that understoodagriculture. The FI decided to ll key posi ons in the unit with internally recruited personnelspecialized in product development and lending, who were subsequently trained in agriculture. The ins tu on also decided to use exis ng lending sta , many of whom had already been lending to agricultural clients, but lacked agricultural exper se. To addressthis, the FI appointed two permanent trainers within the unit to train and coach lendingsta at the branch level during the product pilot stage on how to lend to agricultural clients.Another eight trainers coached sta during the rollout stage. Also, an agricultural expertwas recruited to provide sector exper se and manage the FI’s rela onship with agriculturalvalue chain partners. The new unit directed and managed the expansion of agricultural lending, taking responsibility for product design, sta training, and development and implementa on of agricultural lending guidelines, policies, and procedures.

Previously, the FI had tradi onally focused on providing microloans tofarmers. However, these micro nance loans had notbeen su cient to meet theneeds of farmers because oftheir small value, in exiblerepayment schedule, andrela vely higher interestrates. During the project, theFI developed a new cash

ow based loan product thatwas designed to meet thegrowing demand for largerloans among farmers not served by other nancial ins tu ons in Cambodia. With the launchof the new product, the average agricultural loan was approximately $6,000, compared tothe average microloan of $1,300. The new loan provides exible repayment terms in linewith farmers’ seasonal cash in ows. Interest on the new loan product is on average 0.10percent lower than microloans. The product was piloted gradually in 14 branches in various

21 Cambodia: Project Results and Lessons. World Bank Group. February 2015.

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Figure 14 – Growth of the FI's Agricultural Lending Por olio 2010 14


CHALLENGES AND LESSONSLEARNEDDeveloping new products and services thatbe er meet client needs results in increasedbusiness, but also requires addi onal capacityto manage growth e ec vely. In the case studypresented above, the FI started to serve a newmarket of farmers with larger nancing needs.Given the high demand for its new productduring the pilot phase, the FI implemented appropriate measures to ensure its sta wasable to take on new clients e ec vely. Measures included con nuous sta training inagricultural lending methodologies and opera

onal improvements to e ec vely manage increased cash volumes. To enable more rigorous and appropriate credit risk assessment oflarger agricultural loans, the FI developed a detailed risk assessment methodology andtrained its lending sta on how to use thiswhen appraising loan applica ons. Also, coaching provided to the lending sta enhanced the sta ’s ability to serve largerclients with more complex requirements bybuilding up their rela onship managementskills. The FI also tested the use of both an

agent distribu on network and mobile tellersas cost e ec ve means to expand and scale upservices to agricultural clients.

Best Prac ces and Success Factors for New EntrantsIFC conducted a recent study on nancial ins tu ons introducing agricultural lending inLa n America. The lessons that resulted fromthis study can be valuable when planning theroll out. As discussed before, introducing agricultural lending in a nancial ins tu on requires careful planning and prepara on, aswell as adapta on of systems and resources. Itgoes beyond just introducing a new product. Italso requires high level management commitment, se ng realis c targets, and being readyto adjust terms and prac ces. The factors listedbelow are required to successfully introduceagricultural lending:

• Knowledge of the Client: While importantfor any lending opera on, it is par cularlycri cal when entering the agricultural lending market.

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parts of Cambodia and the na onwide rollout is now taking place. Loans are disbursed byspecialized credit o cers trained on the new cash ow based lending methodology. As ofOctober 2014, the new loans amounted to $11.6 million (equivalent to 4 percent of the FI’stotal loan por olio).

As in similar markets, Cambodian FIs have a limited presence in rural areas since the lowpopula on density does not jus fy the cost of running a branch network. Hence, the FIneeded to nd a cost e ec ve means of reaching rural clients. To achieve this, the FI tookadvantage of Cambodia’s high mobile phone penetra on to launch a pilot mobile bankingservice with mobile tellers—the FI’s eld o ce employees who visit rural clients to facilitate

nancial transac ons. Currently, such transac ons are limited to deposits, withdrawals, newsavings accounts, and account balance con rma on. However, the bank plans to includeother services, including loan applica ons. The transac ons are completed using 3Gequipped smartphones. Clients receive an SMS con rming comple on of the transac on.


• Flexible Products: Agricultural lending isnot one size ts all. Loan tenor, disbursement, and payment terms need to beadaptable to the diverse farmer pro les.

• Cash Flow Analysis of the Household Produc on Unit: Analyzing the householdproduc on unit allows to match paymentterms to cash ows. It also provides a moreaccurate analysis of payment capaci esand true risks of lending to farmers.

• Diversi ed Risk Management Tac cs:Agricultural lending risks are diverse andneed to be mi gated in a variety of ways.Close, eld based client monitoring, por olio diversi ca on, conserva ve cash

ow analysis, and credit bureaus andcredit scoring are all tools an FI can use inrisk management. Also, the FI’s collateralrequirements should be commensuratewith loan sizes and other risk factors, suchas client repayment history, crop diversica on, and non agricultural sources of revenue.

• Specialized Loan O cers: Hiring loan o cers with a background in agriculture isconsidered cri cal. Introducing addi onal,specialized sta posi ons to support por olio quality may also be necessary.

• Design Incen ve Systems to PromoteAgricultural Lending: Establishing dis ncttargets for agricultural and commercialpor olios, and/or adjus ng the agriculturaltargets to seasonal varia ons, may help incen vize agricultural lending.

• Automa on of Data Capture and CreditAnalysis: Prudent agricultural lending requires collec on and analysis of a signicant amount of client, produc on, andprice data. Automa on can reduce errors,increase e ciency, support faster por oliogrowth, and improve loan applica on assessment.

• Customiza on of Marke ng Materials toRe ect the Target Market: Incorpora ngimages of the target clientele can helpovercome the mistrust that farmers o enhave of nancial ins tu ons and their presump on that FIs are not interested inserving them.

• High Level Buy In: Successful lending tothe agricultural sector requires products,approaches, and systems that are dis nctfrom those for microcredit. It requires di erent mindsets and investments in newtools and systems. In short, it requires astrong ins tu onal commitment and support by senior level management.

• A Strong Customer Service Orienta on:FIs must provide rapid loan processing anddisbursement, personal a en on toclients, customized products, terms andservices that match client needs, and non nancial services to compete e ec vely with subsidized credit from agricultural development banks and di eren ate o erings among themselves.

• Explore Opportuni es to Introduce or Expand Value Chain Finance: Value chain

nance could be used to serve the “missing middle” farmers – commercialfarmers in exis ng value chains – and reachlarger groups of farmers more e ciently.

• Explore Lower Cost Delivery Channels:Agent and ATM networks, mobile phonebanking, and debit cards can all be used toreduce costs of lending to rural and agricultural clients, while making it easierfor clients to access nancial services.

• Consider Introducing or Expanding Availability of Longer Term Financing forAsset Acquisi on: To meet farmers’ investment needs, FIs may wish to adjusttheir maximum loan terms and lendingmethodologies, and use of value chain

nance and other mechanisms to reducethe risks of long term nance.

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• Evaluate Opportuni es for Cross Selling:A focus on the broader nancial needs ofagricultural clients could help reduce clientvulnerability and contribute to the economic advancement of low incomeclients, while improving pro tability at theindividual client level.

CHECKLISTBefore you begin the nal rollout of agriculturallending, make sure you have accomplished thefollowing:

• Have you created a detailed expansionstrategy and rollout plan, including a detailed meline, assigned responsibili es,and budget?

• Have you created a promo ons and marke ng strategy?

• Have you agreed and documented whereagricultural lending will be rolled out andin what order?

• Has sta been trained to carry out the rollout and have new loan o cers beentrained?

• Have standardized processes been drawnup for all branches adop ng agriculturallending?

• Have you established a means to monitorand evaluate your rollout?

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Con

clus

ion

C CL I

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ntroducing agricultural lending can bea complicated process. But if the ins tu on puts in the me necessary to

adjust processes, research target markets, trainsta , and monitor the pilot and ins tu onalrollout, both the FI and the clients can bene tgreatly from the results. In summary, here aresome key points to remember as you introduceagricultural lending at your ins tu on:

• Before you begin the new product development process, you should invesgate several important overarching aspects: the macro economic and regulatory environments, ins tu onal nancialstability, senior management buy in, andclient demand for the product.

• You must understand your target client todesign products that e ec vely meet theirneeds.

• You must create a sound project team tointroduce agricultural lending.

• You should design and implement a stronglending methodology that captures seasonal cash ows, ensures that data collected is consistent with regional benchmarks, helps the FI understand the

farmer’s risks, and suggests loan decisionsaccording to an objec ve standard.

• You should seek external help for phaseswhere your ins tu on lacks the requiredcapabili es.

• Your agricultural lending team and yoursenior management must plan carefully forthe introduc on of agricultural lending.

• You should introduce agricultural lendinggradually and build strategic alliances withother players in rural areas (agribusinesses,technology transfer ins tu ons, insurancecompanies, and government agencies) tomanage and mi gate agricultural risks.

• You should conduct at least one successfulpilot before you roll out agricultural lending across your whole ins tu on.

• You should monitor and evaluate agricultural lending on an ongoing basis and dealwith problems as they arise.

Following these guidelines should help you introduce agricultural lending successfully, generate pro t for your ins tu on, mo vateyour sta , and sa sfy your clients.

Conclusion

I


The table below discusses some addi onal risks and examples of challenges that FIs could examinewhen exploring investments in the agricultural sector.

Table 14 – Agricultural Risks and Mi ga on Strategies

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Appendix A – Additional isks

Risk Mi ga on

Inventory Risk: Inventory risks include both overproduc on and underproduc on. If a farmeroverproduces during a certain harvest period perhaps in response to rising prices or as a resultof specula on that the product will be in greaterdemand he or she must have space to store theproduct for sale at a future date or nd other markets to sell the product. Under producing as aresult of poor planning or poor growing condi onscould nega vely impact sustainability of businessrela onships and every aspect of the farmer’s life,including his or her ability to repay a loan.

To mi gate this risk, FIs could require that producers formalize their sales rela onships in contractsand use those as collateral for nancing. Anotherapproach could be to use a system similar to thatdescribed above for mi ga ng climate and naturalresource risks FIs could require producers to buya package of services that includes insurance andtechnical assistance. These services could helpcover any losses; should a producer be unable torepay the loan.

Cash Risk: Perhaps the most basic risk, which thisguide will explain in more detail later, is the lack ofliquidity most farmers face during the growing season. Most agricultural products do not producestable cash ows like other commercial enterprisesor services, so farmers are some mes unable tomeet monthly loan repayment requirements thatare typically demanded by FIs. As a result, farmersare unable to take advantage of tradi onal

nancial products, even if there is an FI physicallypresent in the community.

Focusing on mi ga ng cash risks can be a very important area for FIs entering the agricultural

nance space. Handling these risks can be largelymanaged by the FIs themselves. This repaymentrisk can be lessened by inves ng in the developingor adap ng new nancial products to the uniqueneeds of the agricultural sector. For instance, tyingrepayment to cash ow pa erns for example, repayment at harvest mes can make accessing

nance much easier for rural clients and can considerably reduce credit risks for the FI.

Regulatory Risk: Given the pressure on governments to ensure adequate agricultural produc onand food security, the regulatory environmentcould pose challenges to FIs evalua ng investments in the sector. Agricultural value chainsfrequently face risks from government regula onsand programs. For instance, unfavorable government subsidies could distort market dynamics anddisincen vize private sector investment. Or excessive taxes and customs formali es couldmake expor ng too cumbersome.

When it comes to government regula ons, FIs cando li le if the government enacts policies that adversely a ect investments in agriculture. One ofthe best ways to overcome this challenge is to seekout a diverse range of investments in di erentcrops and products at all levels of the value chain.As is the case with any por olio of investments, aslong as the risk is spread out over a number of di erent value chains, the impacts of regula onchanges will be minimized.

APP DI

PRODUCER ORGANIZATION FINANCINGThe small size and dispersed loca on of smallfarmers that dominate the produc on base ofcertain commodi es make it di cult and costlyfor banks to lend directly to small farmers.Many mes, producer organiza ons are established to aggregate the needs of farmermembers and enable e cient supply of a rangeof func ons that may include input supply, advice on good farm prac ces, transport, marke ng and sales, post harvest processing,and access to nance. When strong, wellmanaged producer coopera ves or associa

ons exist, banks can lend to or through theseproducer groups, or the organiza ons can helpaggregate the credit requirements of farmermembers.

There are two varia ons on this model: the rst(Model 1) is also known as a wholesale model,based on a bank lending indirectly to smallholders through the aggregator organiza on.In this case, the en re group is the borrower,and therefore group members guarantee eachother. The second (Model 2) is also known asthe agent model, in which the group’s organiza on may administer the loans or a por on ofthe loans, but individual group members arealso directly obligated as borrowers.

The bene ts of both approaches are savings oncosts of creditworthiness assessment and loanadministra on. Success factors includestrength of management, length of history, andcommercial orienta on of the coopera vethrough which the bank will lend.

However, many such producer organiza onsare poorly managed. It is important to assessthe management skills, nancial capacity, andhistorical performance of such organiza onsboth to e ec vely u lize the nance and to

administer and manage individual loans tofarmer members through the organiza on. Thefollowing are key criteria to determine whethera producer organiza on or coopera ve willmake a strong partner for an FI.

• Strong, established market links and thecapacity to sustain them.

• Track record of assuring needed qualityand produc on levels.

• Demonstrated ability to add value throughinput supply, technical services, postharvest packaging, transport, and/ or

nancing links.

• Management capabili es to con nue toput together and expand opera ons.

• Solid legal structure enabling the aggregator to support loans.

• Solid nance and accoun ng systems andresults to make the aggregator a reliablepartner and if required, conduit for lending.

• Work with a substan al number of smallfarmers, normally at least a hundred ando en thousands, to jus fy FI’s inten on toestablish cost e ec ve partnerships.

Weaker producer organiza ons may not be appropriate for Model 1 but could be used inModel 2 to help iden fy progressive farmerborrowers. They can be strengthened to provide some complementary services, butmay not be viable as conduits for nancing orother services. Addi onally, the security of themodel can be enhanced by cash collateral

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Appendix – Hybrid and tructured inancing odels23

23 This sec on borrows heavily from IFC’s “Guide for Financing Agriculture Value Chains.” P. Varangis, H.A.Miller, D. Chalila, H. Dellien and D. Shepherd.


requirements at the organiza on level to provide some form of group guarantee, insteadof relying on tradi onal collateral or claims onharvest proceeds at the individual farmer level.

Producer organiza ons can ll many di erentresponsibili es, and whether to use Model 1 orModel 2 depends on the structure and role ofthe organiza on.

INPUT SUPPLIER FINANCINGMost commercial banks have limited branchnetworks outside major urban centers and fewbranches in rural areas. Banks can pursue agricultural nance via branchless bankingarrangements with small retailers and othercompanies (including telecoms) that have ruraldistribu on networks. Input supply companiesand other agro dealer networks (such as thosefor equipment or irriga on) are par cularlysuitable for agricultural nance, as these companies o en have strong knowledge of thegood farmers in the community. They have thecapacity to screen borrowers and serve as conduits for bank loans, par cularly in the

nancing of inputs or equipment.

In this model, banks may also lend directly tolocal agricultural input dealers but leave theprovidingsion of credit to individual farmerscompletely in the hands of the agro dealersthemselves (using agro dealers as in thewholesale model described previously).

Some agro dealers are part of a network established by input supply companies, associa ons, or other ini a ves providing technical assistance, which are playing proac ve roles in combining nance with otherservices. In these cases, the bank can tap intothe combina on of inputs and advice to provide nance to enable farmers to increaseproduc vity and earnings.

In most cases, these agro dealer arrangementsdo not involve buy back arrangements withfarmers and thus do not address access to markets. When an input supplier links with abuyer and a nancial ins tu on, such models

then move into the territory of more structured value chain nance due to the highdegree of collabora on necessary.

Banks should look for the following quali eswhen iden fying poten al input supply company partners:

• A strong track record of providing a rangeof value added inputs to small andmedium sized farmers, normally combining seeds, fer lizer, and plant protec onproducts.

• Strong rela onships of trust and respectwith local farmers, based on solid valueadd and integrity of the dealer and, if relevant, the brand of the network.

• Strong knowledge of technical aspects offarming in key commodity groups, ideallygraduates with agronomy training to helpscreen agro loans and par cipate in disbursements and collec ons.

• Pro table opera ons in which agriculturalnance can contribute incrementally to the

pro tability of the dealer through fees andincreased input sales.

• Ideally, value proposi on that includestechnical and informa on services to farmers, enabling the farmer to receive inputs, technical support and nance fromthe dealer.

• Adequate in house capacity to handle thescreening of agro loans in the season priorto plan ng/growing, when most agricultural loans need to be made.

• Loca on in an area where the nancial ins tu on intends to concentrate agricultural nance opera ons.

STRUCTURED VALUE CHAIN FINANCINGStructured value chain nance (VCF) models require the most collabora on with corporateagribusinesses, as banks rely on some form of

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APP DI

buyer contracts (wri en or verbal) to help secure its loans in these models. From thebank’s perspec ve, having a strong buyer in thechain in itself provides comfort.This helps to reduce or manage the risks of limited marketaccess and price vola lity, and thus reduce default risks, especially if the farmer has an o take agreement with a trusted counterparty.

Structured VCF models can be divided intoght and loose VCF models, with “ ghtness”

determined by the magnitude of side sellingrisks. The risk of side selling is the biggest challenge for any actor that provides inputs,input nance, or working capital to farmers ina value chain with expecta ons to generate repayment via sale proceeds from these farmers.

Loose value chains are typical of crops that aremore easily marketable and, therefore, a ractthird party buyers seeking to purchase cropsdirectly from farmers in the value chain. Whilefarmers may have contracts with value chainbuyers, they can be tempted to “side sell” tothese third party buyers. Therefore, buyers arereluctant to provide any form of guarantee orsupport to the bank for loose VCF models.

Tight value chains are integrated chains inwhich farmers face only one de facto buyer forcertain types of crops, such as highly specializedexport crops, highly perishable crops, andcrops with constric on points in the chain, usually transport costs or specialized processing (such as sugar or co on). In these ght VCs,side selling is very costly or even impossible. Asa result, buyers are o en willing to engagemore robustly with the bank in ac vi es to facilitate VCF and may even provide a guarantee or other forms of risk sharing.

As may be expected, there is also a spectrumbetween strictly loose and extremely ghtvalue chains. Because of the di erences between loose and ght, as well as the rangebetween the two ends of this spectrum, approaches needs to be customized accordingto the situa on.

Corporate farmer rela onships, crop characteris cs, and involvement of other intermediaries in the value chain must be analyzedbefore developing a speci c structured valuechain approach. The following guidance canhelp determine whether a value chain falls intoloose or ght VCF structures.

Corporate farmer rela onships in ght valuechain nance are most successful:

• When the agribusiness has built longstanding rela onships with a large numberof small farmers due to a natural monopoly. For example, in sugar cane, the weightand perishability of the commodity meansthat sugar cane producers are dependenton the sugar mill in the area.

• When the di eren ated characteris cs ofthe crop being procured by the agribusiness means that the company pays higherprices than others in the market. For example, a dried onion exporter seeks hardwhite onions that get a higher price thanother onions in the market.

• When the agribusiness has developed stable, mutually advantageous procurement and technical service arrangementswith a substan al number of small farmers.

Crop characteris cs ma er, as high valueadded commodi es are most promising for

ght VCF rela onships:

• In products such as fruits and vegetables,dairy, co ee, and co on, the agribusinesscan jus fy the needed expenditures to provide or organize input supply, technicalservices, quality control, and procurementwith a substan al number of small farmers.

• If the company has the market channels toassure farmers di eren al prices for quality or di eren ated products, these rela onships tend to be stable and providea strong pla orm for value chain nancing.

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• Perishable products—fruits, vegetables,dairy which require cold storage or rapidarrival to nal markets to retain value, o erstrong prospects for ght value chain

nancing.

Intermediary and aggregator involvement inthe value chain can a ect the degree of ghtness:

• The involvement of tradi onal traders andmiddleman can undermine the establishment of ght value chains betweenagribusinesses and small farmers.

• These traders o en charge high e ec verates for advances, take high margins, anddo not help farmers improve produc vityand earnings.

• At the same me, many small farmers havegenera ons of dependence on these tradi onal traders, who o en are embedded in the community, willing to provideadvances and emergency loans, and provide stable procurement arrangements.

• When an agribusiness enters such situaons, it must be able to o er superior

value through higher prices for quality outputs, advice on good prac ce, access toinputs, and access to lower cost nancing.

These structured models represent the highestdegree of collabora on and coordina on andrequire considerable me to structure and implement. The actual details of the roles andresponsibili es of each party must be carefullyagreed to and implemented. However, in addi on to the high cost of coordina on, thepoten al outreach here is limited to only thosefarmers that are connected to the buyers (andinput suppliers).

In some cases, such structures are the only feasible way to reach a large number of farmers. Structures, in which distribu on andrepayment are managed by the agribusinessbuyer and/or input supplier, demand maximum transparency to ensure that farmersunderstand the nancial products that they arereceiving (in terms of loan amount, interestrate, and other terms).

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APP DI

The table below lists some key nancial policy areas FIs should evaluate when considering launching a new product for the agricultural sector.

Table 15 – Financial Policies and Their Impacts on FIs

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Appendix C – inancial and Governmental Policies Affecting Agricultural Lending

Financial Policy Policies that Enhance Agricultural Finance

Policies that Undermine Agricultural Finance

Interest Rates Freedom for FIs to set reasonable interest rates. They need to charge interest rates that allow them to covertheir costs and enable pro t.

Interest rate ceilings set at levels thatdo not enable pro table agriculturalloans to farmers.

Subsidies Temporary subsidies to FIs to cover apor on of ini al costs of establishingstrong agricultural nance opera ons,with par cipa ng FIs free to chargerates that would be viable without external subsidies.

Interest rate subsidies that are cumbersome, carry an expecta on oflow repayments, and undermine thebuilding up of rigorous, commercialagricultural nance. Temporary interest rate subsidies o en lead toelimina on of lending once subsidiesend.

Guarantees Guarantees used as inducement for nancial ins tu ons to develop

agricultural nance. FIs take the majority of risk or rst loan losses toprovide incen ves to build a rigorousagricultural nance opera on and develop other risk mi ga ngpolicies/instruments.

Guarantees to cover more than 50percent of rst loan losses. This policydoes not incen vize FIs to conduct rigorous due diligence at the outset, Ito en creates lax, poor performingagricultural nance por olios.

Quotas Required lending to farmers with nointerest rate ceilings or a reasonableceiling. This can induce FIs to createsystems and capabili es for pro tableagricultural nance.

Lending requirements with interestrate ceilings. These ceilings o en induce FIs to avoid or nd othermeans to meet the requirements.

Collateral Requirements

Flexibility in acceptable collateral forrural/agricultural borrowers that re ects local land use rights and includes moveable collateral commodity inventory, equipment,

contract rights . The applica on ofcapital adequacy requirements at thepor olio level instead of the individual loan level can help.

Strict collateral requirements and minimum coverage levels imposed bycentral banks with signi cant relianceon land with tled property ownership severely limit loans tofarmers lacking clear land tles.


The table below outlines some key governmental policies a ec ng agricultural lending for whichbackground research should be collected, along with notes to assess the policies from a qualita veperspec ve.

Table 16 – Government Policies and Their Impacts on FIs

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Financial Policy Policies that Enhance Agricultural Finance


Agricultural DevelopmentBanks

Agricultural development banks withmarket oriented policies, appropriateinterest rates, diversi ed por oliosand a management structure free ofpoli cal pressure. Alterna ve roles insecond er nancial linkages and/orsupport to all FIs.

Agricultural development banks providing subsidized loans. This undermines the building up of services by other commercial ins tu ons.

Social Security Separate nancial sector and governmental social sector policies.Policies should separate support torural/agricultural households from poli cal in uence.

Credit waivers, especially those in uenced by poli cal interests. Thesewaivers severely weaken the creditculture and strongly discourage FIsfrom lending to the agriculture sector.

Government Policy Policies that Enhance Agricultural Finance


Infrastructure Government provision and nancingof roads and other infrastructure, ifdone e ec vely, can facilitate the owof value chains, par cularly in rela vely remote areas.

Ine ec ve government provision or nancing of infrastructure can hinder

the development of commercial valuechains.

Price Controls Governments should support transparent market pricing of commodi es with investment intoavailability of price informa on for keycrops. Governments should procurekey commodi es at market prices onlywhen necessary to stockpile for foodsecurity objec ves.

Government controls on commodityprices, normally geared to protect theend consumer, o en undermine earnings to farmers and agribusinesses. When governmentsenter into direct procurement of commodi es from farmers, with minimum prices established administra vely, they o en undermine theability of companies to establish directrela onships with small farmers.

Insurance Government agricultural insurancecan be useful in reducing costs ofbuilding weather sta ons and historical data, provided that any government supported insurance is:

Government agricultural insurancethat is poorly managed and exclusivecan undermine the willingness andability of private insurance providersto develop and o er services. Poorly

APP DI

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Government Policy Policies that Enhance Agricultural Finance


• Reasonably priced• Simple to administer by FIs• Quick to honor claims• Solvent• Non exclusive, database also

available to private insurancesuppliers.

designed government insurance mayalso lead to increased moral hazard.

Subsidies Guaranteeing a oor price for staplecrops can ensure that a country has areliable supply of important agricultural goods.

Subsidies are expensive to implementand keep prices ar cially low,thereby s ing interna onal compe on.

Tari s Taxes on imports or exports can protect domes c industries and cul vate demand for domes c goods.

Import and export taxes can ar ciallyimpact prices and decrease interna onal compe on.


This ins tu onal diagnos c example will help the project team assess the feasibility of introducing agricultural lending in the FI. It should be used to summarize results of the industry and compe tor assessment, market demand, and organiza onal readiness.

The project team should ll in the ins tu onal diagnos c as it goes through the relevant steps inPhases 1 and 2, adding addi onal informa on as the project proceeds. This template should beused only as a guide. It is best to include as much informa on as possible, so the project teammay need to include addi onal sec ons within this diagnos c.

INSTITUTIONAL READINESSFinancial Analysis

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Appendix D – Institutional Diagnostic24

24 Adapted from H Dellien, O. Leland. “Introducing Individual Lending.” Women’s World Banking. 2006.

Year 1 Year 2 Percentage Change Projec ons

Por olio Quality

Repayment Rate as of 30 Days

Por olio at Risk PAR as of 30 Days

Arrears Rate

Write O Ra o

Risk Coverage Ra o

E ciency

Cost Per Borrower

Personnel Produc vity

Opera ng Expense Ra o

Case Load

Average Por olio Per Loan O cer

Pro tability

Opera onal Self Su ciency

Adjusted Return on Assets

Adjusted Return on Equity

Yield

Financial Management

Funding Expense Ra o

Cost of Funds Ra o and Cost of Debt

Debt to Equity Ra o

Equity and Assets

APP DI

Opera onal E ec veness

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Year 1 Year 2 PercentageChange

Repayment Rate as of 30 Days

PAR as of 30 Days

Opera ng Expense Ra o

Opera ng Self Su ciency

Loan Loss Reserve

Number of Loans Per Loan O cer

Average Por olio Per Loan O cer

Ra o of Number of Loans to Total Sta

Number of Ac ve Loans

Cost per Loan

Average Loan Size

Client Reten on Rate

LENDING METHODOLOGIES

ProcessesProvide a brief descrip on of the type of lending methodologies used by the ins tu on,iden fying principles and the speci c approach:

1. First contact

2. Client visit

3. Loan appraisal

4. Loan approval

5. Disbursement

6. Arrears monitoring.

Ques ons:

• Has the process been standardized?

• Map out the loan process. How doesthis process compare to other bestprac ces from ins tu ons in yourcountry or region?

• What are the speci c areas for improvement?

PRODUCTS AND SERVICESList the di erent types of products and servicesin a matrix similar to the one below. Considergraphing the growth of each product over meand try to understand the ra onale for eachproduct o ering (that is, does it target a speci c market? Or does it serve a di erentneed?)


BRANCH STRUCTURE AND ACTIVITIESMap out the organiza onal structure of thebranch.

Branch Manager: What are the main func onsand responsibili es of the branch manager?How does the branch manager enforce lendingpolicies? What are the key reports the branchmanager uses to track loan o cer performances? What are the key reports the branchmanager uses to report performance to headquarters? What are the key reports totrack arrears?

Loan O cer: What are the main func ons andresponsibili es of the loan o cers? What are

the key reports used and generated by the loano cers? How do they monitor performances?How do they track disbursements and arrears?

MANAGEMENT INFORMATIONSYSTEMS (MIS)How e ciently are the loan tracking systemsworking? Are the reports generated from thesystem adequate to monitor performance?Does each layer within the organiza on havethe necessary informa on to manage theirareas? What is the minimum amount of informa on needed to manage in an op malmanner? Does the system track pre disbursement and post disbursement processes? Whois responsible for inpu ng data in the MIS?

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Characteris c Product 1 Product 2 Product 3 Product 4

Outstanding Por olio

Number of Loans Outstanding

Loan size Average, Minimum, Maximum

Loan Term Average, Minimum, Maximum

Interest Rate Nominal, Monthly

Fees

Compulsory Savings

Other Fees

Type of Guarantees

Other Requisites

APP DI

ORGANIZATIONAL EFFECTIVENESS

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Year 1 Year 2 Percentage Change

Sta Reten on Rate

Ra o of Direct to Indirect Sta

Incen ves as a Percent of Salary

Quit Rate

Termina on Rate

Layo Rate

INTERNAL AUDIT• Are policies and procedures for key

func onal ac vi es such as credit, accoun ng, and nance in place?

• Are these policies clearly communicatedand understood?

• Are these policies updated and if yes, howo en?

• What is the process used to update policies(how is feedback solicited and documented?)

• What controls does the organiza on havein place to prevent fraud? Has fraud occurred before? If yes, when and a erhow long before was it detected?

HUMAN RESOURCES (Recruitment, Training, and Incen ves):

• Commitment—to what extent do HR policies enhance the commitment of yourpeople?

• Competence—to what extent do HRMpolicies a ract, keep and/or develop

people with skills and knowledge neededby the organiza on?

• Cost e ec veness—how cost e ec ve is agiven policy in terms of wages, salaries andproduc vity?

• Congruence—what level of congruence doHR policies generate or sustain betweenmanagement and employees?

Human Resources Audit: The main purpose ofthe audit is to evaluate the e ec veness of theorganiza on’s human resource func on. Itshould show both the department’s strengthsand weaknesses and provide managementwith a clear picture of the department’s role inthe organiza on and the following:

• Understand turnover: quit rate, terminaon, layo , reten on, re rement, length of

service, absence, over me, posi on vacancy, training and development andgrievance rate.

• Understand personnel policies: salary andbene ts package, supervisory prac ces,job design, and re rement plan components.

Legal and Regulatory Environment Analysis

• What laws govern the introduc on of agricultural lending?

• Are there interest rate ceilings on lending products in this sector?

• Are there limita ons on the amount or types of collateral that can be used when lendingto rural popula ons?

• Does the government subsidize this sector or have any guaranteed purchasing systems inplace?

Compe ve Analysis

Summarize below the results of your regional analysis and your research on other banks and FIso ering agricultural lending products.

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INDUSTRY AND COMPETITOR ANALYSISMarketplace Analysis

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Ques ons Year 1 Year 2 Percent Change

Market share vs. Total market

Market share vs. Top 5 FIs

Ang. Annual Loan Payment Over Per CapitaGDP

APP DI

MARKET DEMAND AND SEGMENTATION ANALYSISMarket Demand

Summarize below the results of your research with target clients, including key learnings and speci c recommenda ons.

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MARKET DEMAND AND SEGMENTATION ANALYSISMarket Demand

Summarize below the results of your research with target clients, including key learnings and speci c recommenda ons.

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b. Which months of the year are high season and low season and which (crops/livestock) areproduced during those months

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Objec ve of the mee ng

To be er understand the characteris cs, produc on strategies and challenges faced by producersin the region. The objec ve of the mee ng today is to discuss farmer nancing needs related toproduc on, post harvest, and marke ng. This survey will enable the FI to design adequate nancialproducts for farmers based on their cash ows and risk pro les.

1. Produc on characteris cs of the region:

a. What are the main crops produced in this region?

Appendix – ample Producer egmentationInterview orm

Crops Area Produced/Heads Volume Produced

Crops High Season Months Low Season Months

2. Demographics

a. Farmer’s Name: .............................................................................................................. ....

b. Gender: ............Male ............Female

c. Region, Province, and Village: .............................................................................................

d. Type of Economic Unit: .......Family .......Partnership .......Coopera ve .......Other

APP DI

e. Land: .................Owned Owner/Land Title:..............................................................Rented

f. Total Area Farmed: .........Own land: .........Rented land: ......... (include measurement, forexample Hectares)

g. Irriga on access: .........Yes Type:......................................................................................No

h. Number of Paid Employees (Temporary): .................Employees (Permanent): ...................

i. Family working (Temporary): ..........................Family working (Permanent):.........................

j. How many farmers are in this village/district/region?

............................................................................................................................... ....................

k. How do you de ne small, medium, and large farmers in the region

Small Farmer: ................................................................................................................. ...........

............................................................................................................................... ....................

Medium Farmer: ................................................................................................................. .......

............................................................................................................................... ....................

Large Farmer: .................................................................................................................. ...........

............................................................................................................................... ....................

l. Distribu on of type of farmer by size in this region

- 97 -

Type of farmers Es mate numbers of farmers in the region % of total farmers

Small

Medium

Large

Total # Farmers

3. What are the main produc on challenges producers face in this region?

............................................................................................................................... ...........................

............................................................................................................................... ...........................

4. What are the nancing needs to improve your produc on?

............................................................................................................................... ...........................

............................................................................................................................... ...........................


5. What are the yields in this region for the main crops

6. Assets

- 98 -

Crops Minimum Yield Average Yield Maximum Yield

Descrip on Units Price per Unit Sub Total $

Agricultural Inventory Seeds, Fer lizers, Crop Stored

Livestock Animals

Fixed Assets Farm, Machinery, Infrastructure

TOTAL ASSETS

APP DI

7. Farm Income

a. Crops Seasonal Income/Agricultural Produc on Volume in the Last 12 Months (CashFlow Analysis)

b. Livestock Income Last 12 Months

c. Other Monthly Income: Ac vi es in the Last 12 Months (Specify The Calendar Months)

- 99 -

Crop HA Produc on/Units

Family Consump on

Produc onSold

Price/Unit

Income DatesSold

Marke ngChannel

Total

Type of Animal Units Sold Price/Unit Income Date Sold Marke ng Channel

Total

Ac vity Units Unit Price Total Income

FrequencyDaily, Weekly,

Monthly

Net Income /Monthly

TOTAL INCOME:


8. Produc on Costs

a. Crop Produc on Costs/Crops During the Year

b. Animal Produc on Cost/Monthly Expenses

- 100 -

Type of Inputs Units Unit Cost Total Cost Date

Seedlings/Plants

Soil Prepara on

Plan ng

Fer lizer

Pest Control

Labor

Plan ng

Weeding/Pruning

Harves ng

Transporta on/Package

Others

Total

Type of Inputs Units Unit Costs Total Costs Monthly Costs/ or Date if Seasonal

Animals / DOC

Feeding

Minerals

Health Control

Employees

Electricity

Water

Others

Total

APP DI

9. Access To Financial Services

a. Which are the best known nancial ins tu ons in the region?

b. Previous experience with other banks, FI, or others / last 5 years

- 101 -

c. Family Expenses

Family Expenses Monthly Seasonal

Food

Educa on

Transport

Electricity/Gas

Water

Mobile Phone

Clothing

Health

Recrea on/Family events

Help Family Members

Fes vals

Others

TOTAL

Name of Ins tu on What They Are Known For:

Name of Lender Amount Requested Use of the Loan Loan

TermInterest

Rate Guarantees


c. Sa sfac on level with nancial services/most recent loan:

Name of the Ins tu on .......................................................................................................

What did you like the most from this ins tu on? ...............................................................

Overall are you sa s ed with the services received? .........Yes .........No

What other nancial services do you use? .........Savings .........Currency Exchange ......... Checking Acct ......... Remi ances .........Payment U lity Services .........Other: ............................................................

10. Financial Demand

a. What is your vision for the next 3 5 years regarding business expansion?

............................................................................................................................... ...........................

............................................................................................................................... ...........................

b. Financial Needs

- 102 -

Use of Loan Amount Requested

LoanTerm

Installment Frequency (Monthly, Bi Monthly,

Quarterly, Semester, Yearly)

InstallmentAmounts

Ideal Datesfor

Payments

c. Available Sources of Guarantee

..........Mortgage ..........House Furniture ..........Guarantors ..........Business Assets

..........Vehicles ..........Animals ..........Jewelry ..........Other:................

d. Please men oned the best way to market the products in your region?

Marke ng Op ons Yes/No

Mee ng with Farmer’s Associa ons

Direct Visits to the Farm

Mee ng with Community Leaders

Mee ng with Local Collectors

Radio/Program/Time

Mobile Phone/SMS

TV/Program/Time

Wri en Press

THANKS FOR YOUR TIME

APP DI

When inves ga ng your compe ons’ agricultural lending products, take note of the “Seven Ps”:

- 103 -

Appendix – Competitive Position Analysis

Product Compe tor 1 Compe tor 2 Compe tor 3

Product

Minimum Amount

Maximum Amount

Repayment Period

Repayment Flexibility

Collateral Requirements

Grace Period

Speci c Quali ca on Criteria

Other Requirements

Price

Interest Rate

Loan Appraisal/Processing Fees

Penalty Charges

Other Fees

Promo on

Marke ng/Informa on Dissemina on

Adver sing

Place

Branch Loca on

Slogan/Branding

Corporate Image

Product Image

Sta Quality

People

Personnel Involved in Process

Process

Loan Applica on Documenta on/Requirements

Loan Processing Time

Physical Environment

Branch Condi on

Layout


Cassava Farmers in Cambodia

Characteris cs of the Communes Interviewed

- 104 -

Appendix G – armer egmentation Analysis

Pailin Trang O’Rumdoul

Main Crops Cassava, Corn, Soybean

Cassava, Corn, Soybean, and Rice

Cassava, Corn, Soybean

HA Produced 800 HA 5,000 HA 350 HA

HA of Cassava 85% 75% 85%

# of Farmers 300 1,865 100


# of Farmers 300 1,865 100

Farmer type

Small: < 3 HA 20% 5% 60%

Medium: 4 – 7 HA 40% 70% 35%

Large: > 7 HA 40% 25% 5%

Types of Farmers

Main Challenges of Produc on


Access to water Access to waterAccess to water, when is dry it becomes dryer compared to otherregions

Access to credit Access to credit

Low technical level of farmers Poor quality of seedlingsused by farmers Low technical level

Deep water is high in calcium Use of tractor is expensive

APP DI

- 105 -

Compara ve Advantages of the Region

Cassava Farmers

Assets/Cassava Producers – Figures $


Good quality of soils Fer le soil, less use of fer lizers Highland, less pest problems

Good yields for cassava Close to Thai border, strongdemand and good prices

Cassava is pest resistant

General Informa on LARGE MEDIUM SMALL

Farm size > 7 HA 4 – 7 HA < 3 HA

Village Kamreng Soun Pou Leck Kandal

Area Owned 13 HA 5 HA 3 HA

Area Rented 10 Ha 0 HA 0 HA

Temporary Employees 40 12 8

Full Time Employees 3 0 0

LARGE MEDIUM SMALL

2. ASSETS

CURRENT ASSETS

Agricultural Inventory

Working Capital 7,000 10 kt 313

Livestock

Cows

Chicken

Sub Total Current Assets 7,000 313

FIXED ASSETS

Spraying machines 4 400 1 94


- 106 -

LARGE MEDIUM SMALL

Tractor 1 12,000

Car 1 6,500

Motorbike 2 3,200 1 2,100 1 1,200

Trucks 1 20,000 1 15,625

Farm land 10 Ha 120,000 5 Ha 35,266 3 Ha 16,875

House 1 35,000 1 22,500 1 2,500

Residen al plot 1600 3,125

SubTotal Fixed Assets 190,600 81,991 23,794

TOTAL ASSETS 197,600 81,991 24,106

LIABILITIES 3,000 2,500 313

EQUITY 194,600 23,794

Last 12 Months/Cassava Farm and Family Income USD

LARGE MEDIUM SMALL

3. Farm Income

3.1. Crops / selling date

Cassava Dec Jan 20 Ha 24,375 3.5 ha 6,250 3 Ha 5,625

Corn / Jul Dec 2,571 1.5 ha 2,188

Soybean

3.2 Livestock / Selling date

cow/carabao rental

Total Farm Income 26,946 8,438 5,625

LARGE MEDIUM SMALL

4. Produc on Costs

Total Produc on Costs 12,126 2,663 2,188

APP DI

- 107 -

Yearly Cash Flows/Cassava Producer

LARGE MEDIUM SMALL

NET INCOME FARM 14,820 5,775 3,438

Family Members 3 4 5

Other Yearly Income

Salaries / spouses

Motobike Taxi 1,519

Trucking

Other Yearly Income 0 0 1,519

Net Farm Income + Other Income 14,820 5,775 4,957

% Farm Income / Total familyIncome 100% 100% 69%

Family Expenses 3,600 1,320 1,500

Disposable Income / Year 11,220 4,455 3,457

Yearly Cash flow Cassava Producer / Figures in USD

20,000

15,000

10,000

5,000

(5,000)

(10,000)

-Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec

Cassava

Com

Non Farm Income

Production Costs

Family Expenses


Final Risk Analysis Large Cassava Producer

Risk Pro le: Med

• Has low crop diversi ca on and seasonal incomes

• Good agricultural prac ces and good yields

• Region has good climate and cassava is pest resistant, reducing risks

• Strong demand from Thailand and good prices

• Demand also to process dry cassava.

Financial Demand Cassava Farmers in the Three Communes

- 108 -

Variables Large > 7 HA Medium: 4 7 HA Small: < 3 HA

Loan Amount 15,000 5,000 1,500

Use Build rooms for rent Diversify to Longan 1 HA Working Capital

Loan Term 3 years 3 years 1 years

Payment Plan 1 payment / year Yearly payment Yearly payment

Collateral Farm Farm Farm

Percentage of Farmersby Size 40% 40% 20%

Number of Farmers 591 1,461 213

Target 30% = 177 Farmers 30% = 438 Farmers 30% = 64 Farmers

Average Loan Amount $15,000 $5,000 $1,500

Por olio $2.65 million $2.19 million $ 96,000

APP DI

The detailed forms contained in this sec on comprise IFC’s agricultural lending tool and methodology discussed in Phase 3 of this guide.

LOAN APPLICATION FORM

- 109 -

Appendix H – Loan Appraisal orms and xpert core ariables

Application No.Date Membership No.

A. APPLICANT INFORMATION 1. First Name 2. Last Name3. ID Number 4 .Gender5. Birthdate 6. Age7. Experience in the business 8. Time operating current farm 9. Civil Status10. House ownership11. Number of family members 12. No.Dependents13. Education level14. Phone No

Home Phone Handphone15. Home Address16. Location (village, sub-district, district)17. Type of Farm/Business18. Farm / Business Address19. List main sources of income

B. COSIGNER INFORMATION1. Name2. Address if different3. ID No.4. Birthdate 5. Age - Year6. Pekerjaan7. Nama Usaha8. Alamat Usaha9. No. Handphone 10. Net Income /month11. Position 12. Years in the Co Year

C. GUARANTOR INFORMATION 1. Name2. Address if different3. ID No.4. Birthdate 5. Age - Year6. Activity7. Name of Employer8. Work Address9. No. Handphone 10. Net monthly income11.Position 12. Years in the Co. Year

DateTime

Credit Officer Applicant Signature

Land Area / No of LivestockActivities


FARM INCOME AND PRODUCTION COSTS

- 110 -

Farm Income (Last Year) A. Last Year Yields and Income (Crops produced and harvest in the last 12 months)

Min Max

Projected Farm IncomeB. Projected Farm Income next Cycle (During the loan duration)

Last Min Max

TOTAL INCOME

C. Income / Stored Crops (during the duration of the loan)

Last Min Max

TOTAL INCOME

TOTAL INCOME/CYCLE

Volume Sold

Production / Ha

Units

Total IncomeTotal

Production Sold

Cultivated Area Units Weighted Total Yield

Crops

DateCrops

UnitsSelling Price

Weighted Total Yield Total Income Date

Total Prod Family consumption % Losses

Selling Price

DateCrops Cultivated AreaEstimated Yields

LastWeighted Total Yield

DISTRIBUTION CHANNELMain Buyers

TOTAL

Main Risks of the Farm

How you manage and mitigate those risks

Duration of Credit% of sales on CreditIncome / CycleVolume Sold / Cycle

CROP PRODUCTION COSTS

Crop 1 Crop 3Cultivated Area Cultivated Area

Units Total Costs Unit Rp / Unit Units Rp / Unit Total CostsSeed / Seedlings

Fertilizers

Pesticides

Other Inputs/Material

Sub Total TOTAL AGRI INPUTS

DateCrop 2Cultivated Area

AGRI INPUTS

Total CostsRp / Unit

LABOR COSTS


Units Total Costs Unit Rp / Unit Units Rp / Unit Total CostsLand Preparation

Crops Mantainance

Harvest/Post Harvest

Sub Total TOTAL LABOR COSTS

DateCultivated AreaRp / Unit Total Costs

LABORSCrop 2

APP DI

- 111 -

SERVICES


Units Total Costs Unit Rp / Unit Units Rp / Unit Total Costs

Sub TotalTOTAL SERVICES COSTS

OPERATIONS


Units Total Costs Unit Rp / Unit Units Rp / Unit Total Costs

Sub TotalTOTAL OPERATIONS COSTS

TOTAL PRODUCTION COSTSCrop 1 Crop 3Cultivated Area Cultivated Area

Production Costs / Crop

TOTAL PRODUCTION COSTS

TECHNICAL LEVEL FARMER

SUMMARY FARM AND FAMILY INCOME AND PRODUCTION COSTS

Total Farm Income during the duration of the loanFarm IncomeIncome / Stored CropsOthers Farm IncomeTOTAL FARM INCOME

Production CostsInputsLaborsServicesOperationsTOTAL PRODUCTION COSTS

NET FARM INCOME

Other Income and Household Income / Year

Salaries & BusinessFamily ExpensesCurrent Debt Payment

DISPOSABLE INCOME FARM & FAMILY Diversification of Household Income

Total

Total

Years of Experience (years)Any crops being produced for 1st time?Use of Certified SeedApply Phosphate FertilizarAmount of Nitrogen appliedWhen do you apply pesticidesCrops Conditions

Total

ACTIVITIES

Component

Crop 2Cultivated Area

Farmer Data (Survey)

OPERATIONAL ACTIVITIESCrop 2



SERVICESCrop 2

OTHER INCOME AND FARM EXPENSESFAMILY EXPENSESMembers living in the House 5 Number of Member that work 2 Family expensesFoodRentEducationElectricity, gas, waterTransportHealth and recreationClothingMobile phone/Internet/cigarretFamily events / Social Savings / Debt payment MonthsTotal / Month

Other Off farm Family IncomeOther Stable IncomeType of BusinessInventoryGross IncomeMarginNet Off Farm Income

TOTAL FAMILY INCOME / Monthly ( Salary + business) Months

Total FAMILY INCOME / Yearly (Salary + business)

Calculations / Observations

Amount Loan requested by Client Interest / Year Loan Term

(month)

Use of the Loan Installment Freq/Year

Provide details of loan use Install Amount

If the production fails, how could you pay back the loan?

Date / MonthMonthly (Rp) Seasonal (Rp)

Conservative Estimate Details Other Income

Family Expenses per Year


- 112 -

INVESTMENTS, FIXED ASSETS, AND LANDA. BALANCE SHEET AND ASSETS

CURRENT ASSETSAmount

Cash SavingsChecking AccountsOthers

TOTAL ASSETS

ACCOUNT RECEIVABLESMain Clients Acc. Receivables Term Balance

daysdaysdays

TOTAL ACCOUNT RECEIVABLES

Age Acc. Receivables

Institution

B. FARM INVENTORIESAgriculture Quantity / Unit Unit Cost Value

Crop Stored /Livestock Prod Quantity / Unit Unit Cost Value

Other Inventory (Seeds, pesticides, Fertilizers, etc) Quantity / Unit Unit Cost Value

TOTAL AGRICULTURE INVENTORY Livestock Quantity / Unit Unit Cost Value

TOTAL LIVESTOCK INVENTORY

TOTAL INVENTORIES

Farmer Data

Income Diversification Ratio of the FamilyFarmer DataIncome Diversification Ratio of the Family

Family Income DiversificationCash flow Frequency Installment frequency

FARMERS CHARACTER ASSESSMENT

Cooperation in providing informationAccuracy of information providedDoes the producer keeps detailed records of performance Farm General ApperancePersonal References

APP DI

- 113 -

C. LOAN ASSESSMENT: FARMFARM FIXED ASSETS Farm Fixed Assets (Equipment, tools and cars)

Description Quantity / Unit Unit Cost Value

TOTAL FIXED ASSETS FARM

FARM LAND SITE 1 SITE 2 SITE 3 SITE 4CropDevelopment stageArea Cultivated (Ha) Land OwnershipRent ( Rp /year) Value of Owned Land/ Ha Payment DateSITE CONDITION% of area IrrigatedType of SoilTopography slope (%)Climate (# of dry season) MonthValue of Land (Rp) Total Cultivated Area (Ha) Owned Land Value of Owned Land Rent Land Total Rent Paid / Year

OTHER FIXED ASSEST (Off Farm or secondary business activities )

Description Units Unit Cost Value

Amount

LIABILITIES AND SUMMARY ASSESSMENT

CROPS LOAN ASSESSMENTLIABILITIESFARM LIABILITIES

Original Amount

UseMonthly

InstallmentFrequency Balance Term Contact person Phone #

SEASONAL INSTALLMENTS Date

TOTAL LIABILITIES/MONTH

Institution

< 12 Month

> 12 Month


- 114 -

FINANCIAL RATIOSVARIABLE FARMER

Liquidity Ratio

Total Current farm Assets / Total Current Farm LiabilitiesCumulative repayment capacity ratio

(Disposible income + Loan) / (Loan + Interest expenses )Debt ratio including the loan

Total Debt including Loan / Total Assets FarmOperational Efficiency

Operating Expenses / Revenue RatioLoan to Value (LtV)

Loan Amount / Value of Security

TOTAL HOUSEHOLD LIABILITIESOriginal Amount

UseMonthly

InstallmentFrequency Balance Term Contact person Phone #

Month

TOTAL MONTHLY DEBT PAYMENT # Payments in the Loan Cycle TOTAL DEBT PAYMENTS DURATION OF LOAN

IDENTIFY THE COLLATERALS USED IN THE LOANS LISTED ABOVE

TOTAL HOUSEHOLD LIABILITIES

Institution

Institution Original Amount Collateral Used

SUMMARY BALANCE SHEET FARMFinancial Information Farm

Date

1 Cash & Account Receivable 12 Current Liability 2 Cash 13 Short term credit < 12 months 3 Banks 14 4 Account Receivables 15 5 Inventory 16 6 Agriculture 17 7 Livestock 18 Long Term Liabilities > 12 Months

19 8 Fixed Assets 20 9 Farm Fixed Assets 21

10 Farm Land 22 Total Liabilities 23 Equity

11 Total Assets 24 Total Liabilities + Equity

Informasi Keuangan Rumah Tangga

25 Total Assets Family 27 Family Equity 26 Total Liabilities Family 28 Equity Family + Farm

APP DI

- 115 -

CREDIT COMMITTEE SUMMARY SHEETClient's Name Years of ExpActivity Loan Amount Requested

FARM INCOME Financial Ratios Level Ideal Farmer ResultFarm Income Stored Crops Other Farm Income Total Income

Production CostsInputs Farmer Risk Profile Score Weight Classification ResultLabors Farm Conditions Services & Operations Technical Level Farmer Total Production Costs Crop Diversification Ratio

Farm's Financial Strengh NET FARM INCOME Farmer's Character Salary and Business Farmers's Socio Economic Family Expenses Total Score Current Debt Payment Max Disposable Income

FARMER RISK PROFILE PERCENTAGEBALANCE SHEET FARM Very Low RiskCash & Account Receivables Low RiskInventory - Agriculture Medium RiskInventory - Livestock High Risk

TOTAL SCORE APPROVECurrent Assets Land and Building Disp Income / year Cycles/yearTOTAL ASSETS FARM Disp Income / Cycle Short Term Liabilities Long Term Liabilities Int rate interest / year Rekomendasi

TOTAL LIABILITIES Max Loan Proposed TOTAL EQUITY FARM Load Proposed by LO Other Family Assets Other Family Liabilities Use of the LoanFamily Equity If the production fails, how could you pay back the loan?

Credit Committee ResolutionAmount Approved SecuritiesLoan Term Collateral Value Installment Frequency Type of collateralInstallment Amount Securities

Branch Manager Credit Officer

Liquidity RatioCumulative repayment capacity ratioDebt ratio including the loanOperational EfficiencyLoan to Value Ratio (LTV)

RECOMMENDATION

FINANCIAL RATIOS AND SCORE

Crop 1 Crop 2 Crops 3Cultivated Area ha Cultivated Area ha Cultivated Area ha

ITEM Total

production costs

Production Costs/ Ha

ITEM Total

production costs


ITEM Total

production costs


Fertilizers Fertilizers Fertilizers Seed / Seedlings Seed / Seedlings Seed / Seedlings

Pesticides Pesticides Pesticides

Other Inputs/Material Other Inputs/Material Other Inputs/Material

Inputs Costs Inputs Costs Inputs Costs

Land Preparation Land Preparation Land Preparation Crops Mantainance Crops Mantainance Crops Mantainance Harvest Harvest Harvest

Labors Costs Labors Costs Labors Costs

Soil preparation Soil preparation Soil preparation Other Services Other Services Other Services

Services Costs Services Costs Services Costs

Rental Land Rental Land Rental Land

Operational Costs Operational Costs Operational Costs

Total Production Sold Price per unit Total Income Total Income Total IncomeTotal Costs Total Costs Total Costs Net Farm Income Net Farm Income Net Farm Income

FARM INCOME AND PRODUCTION COSTS

SUMMARY FARM DATA


- 116 -

SCORE CARD

III. Crop Diversification Ratio1 Family Income Diversification Ratio2 Cash Flows Frequency Ratio 3 Installment Frequency

IV. Farm's Financial Strengh1 Liquidity Ratio2 Cumulative repayment capacity ratio3 Debt ratio including the loan4 Operational Efficiency5 Loan to value (LtV)

V. Farmers' Character 1 Cooperation in providing information 2 Accuracy of information provided 3 Does the producers keeps detailed records of performan 4 Farm General Appereance 5 Personal References

VI. Farmers's Socio Economic1 Gender2 Age3 Civil Status4 # of Household Members5 # of Members contribute Financially6 Education level7 Ownership of House

Score Weight Classification Result1 Farm Conditions 2 Technical Level Farmer3 Crop Diversification Ratio4 Farm's Financial Strengh5 Farmers' Character 6 Farmers's Socio Economic

Risk Level farmerLoan Amount Reccomended

I. Farm Conditions Data Farmer Score Max

1 Total Area Cultivated2 Land Owenrship 3 % of area Irrigated4 Type of Soil 5 Topography slope (%)6 Climate (# of dry season)

II. Technical Level Farmer

1 Years of Experience (years)2 Any crops being produced for 1st time?3 Use of Certified Seed4 Apply Phosphate Fertilizar5 Amount of N applied6 When do you apply pesticides7 Crops Conditions

OTHER HOUSEHOLD EXPENSESExpenses Monthly Yearly

Family expensesCurrent Debt Payment

Total

OTHER HOUSEHOLD INCOMEIncome Monthly Yearly

APP DI

- 117 -

SCORE CRITERIA

No Item Criteria Score

1. Sheet Clients & Data

1 Gender Male 1

Female 4

2 Age

< 24 Years 1

< 32 Years 2

< 40 Years 3

< 50 Years 4

3 Civil Status

Single 1

Married 4

Divorced 2

Widow 2

4 Number of family members

< 2 Persons 4

<= 5 Persons 5

<= 6 Persons 3

<= 8 Persons 1

5 Jumlah Anggota Keluarga yang bekerja

1 Person 1

2 Person 2

3 Person 3

4 Person 4

6 Educa on level

None 1

Primary 1

Secondary 2

High School/Technical 3

University/College 4

7 House Ownership Owned 4

Rent 1

8 Tujuan Pembiayaan Working Capital

Investment

2_Sheet Inv, Fix Ass and Land

1 Cul vated Land

< 1 Ha 1

1 3 Ha 2

3 10 Ha 3

> 10 Ha 4


- 118 -

3. Sheet Crop Income & Costs

1 Years of Experience years

< 1 year 1

1 3 years 2

3 6 years 3

> 6 years 4

2 Any crops being produced for 1st me? Yes 1

None 4

3 Use of Cer ed Seed

Never 1

Some mes 2

Always 4

4 Apply Phosphate Fer lizar

Never 1

Some mes 2

Always 4

5 Amount of N applied

Minimum 1

Adequate for average yield 2

Adequate for good yield 4

6 When do you apply pes cides

Never 1

Only if there's infesta on 2

Preven on 4


2 Land Ownership Owned 4

Rent 1

3 % of area Irrigated

No irriga on 1

< 50% 2

50 75% 3

> 75% 4

4 Type of Soil

Stony/Sandy 1

Clay hard 2

Clay so 3

Loam 4

5 Topography slope %

Flat 4

Slope < 10% 3

Slope < 20% 2

Slope > 20% 1

6 Climate # of dry season

Dry season < 2 months 4

Dry season 3 4 months 2

Dry season > 4 months 1

APP DI

- 119 -


7 Crops Condi ons

Poor 1

Moderate 2

Good 4

Good 3

Excellent 4 4. Liab & Summary

1 Liquidity Ra o

< 1 1

1 1,5 3

> 1,5 4

2 Repayment capacity ra o

< 1,3 1

1,3 1,5 3

> 1,5 4

3 Debt Ra o including the loan

> 60% 1

30 60% 3

< 30% 4

4 Opera onal E ciency

> 60% 1

55 60% 3

< 55% 4

5 Loan to value

> 70% 1

50 70% 3

< 50% 4

5. Liab & Summary

1 Liquidity Ra o

< 1 1

1 1,5 3

> 1,5 4

2 Repayment capacity ra o

< 1,3 1

1,3 1,5 3

> 1,5 4

3 Debt Ra o including the loan

> 60% 1

30 60% 3

< 30% 4

4 Opera onal E ciency

> 60% 1

55 60% 3

< 55% 4

5 Loan to value

> 70% 1

50 70% 3

< 50% 4


- 120 -

NUMBER OF LOANS DISBURSED

Appendix I – ample Performance eports

BranchName of

Loan O cer

Number of LoansDisbursed Actual vs.

Target

Percentagefrom Total Dis

bursement

Number of LoansDisbursed per Loan

O cer

Target Actual Target Actual

LOAN AMOUNTS DISBURSED

GROWTH PERCENTAGE

BranchName of

Loan O cer

Amounts ofLoans Disbursed

Actualvs.

Target

Percentagefrom Total

Disbursement

AverageLoan Size

Amounts ofLoans Disbursedper Loan O cer


BranchName of

Loan O cer

Loans Disbursed Month 1

Loans Disbursed Month 2

Percent Change Loans Disbursedper Loan O cer

Number $ Number $ Number $ Number $

APP DI

- 121 -

PORTFOLIO OUTSTANDING

OUTSTANDING PORTFOLIO IN ARREARS AND AT RISK

LOAN OFFICER PERFORMANCE IN CREDIT COMMITTEE (CC)

Branch Name of Loan O cer

Por olio Outstanding PercentageDi erence

Number of Loans Disbursed per Loan O cer


Nameof LoanO cer

Principle Outstanding

1 15Days

16 30Days

61 90Days

91 180Days

180+Days Total

ArrearsArrears

%No. $ No. $ No. $ No. $ No. $

Branch Loan O cer

No. of Loans Submi ed to CC

No. of Loans Approved

Total $ Requested forAll Loans By

Total $ Approved

by CCClient Loan O cer


- 122 -

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onal Finance Corpora on.

Contact:

Hans DellienFinancial Institutions Group, East Asia & PacificIndonesia Stock Exchange Building, Tower 2, 9th Floor, Jl. Jend. Sudirman Kav. 52-53Jakarta 12190, IndonesiaPhone: +62-2129948068

Website: www.ifc.org

Huong Mai HuynhFinancial Institutions Group, East Asia & Pacific63 Ly Thai To Str.Hoan Kiem Dist.Hanoi, VietnamPhone: +84-4-38247892

Agricultural Lending: A How- To Guide

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Transcript of Agricultural Lending: A How- To Guide