Session iii ii nixon bugo - agra

AGRA & Partners: Facilitation of the Impact Investing Fund for African Agriculture

(IIFFAA)

Nixon Bugo

EMRC Agribusiness Forum, Kampala, Uganda 3 – 6 October 2010

December 22nd, 2009

PwC

Agenda

2

Impact Investing Fund for African Agriculture3

Next steps and Conclusions4

Challenges and opportunities in agriculture in Africa1

AGRA’s Innovative Finance Initiatives

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PricewaterhouseCoopers Slide 3

The challenge in agricultural lending

In Sub-Saharan Africa, agriculture accounts for 70% of the labor force, over 25% of

GDP but only a few percentage points of commercial bank loans and investments.

Agriculture continues to be given low priority for investment despite the food security

challenge and the potential for economic growth;

Many regions in different countries, so called breadbasket areas, dispose of consistent

rainfall and plenty of arable land and therefore have a huge development potential;

Several governments have launched multiple initiatives to address the lack of financing

to the agricultural sector with limited results for small-scale farmers;

Banks have not lent sufficiently to agriculture due to three main reasons:

o Banks have a high risk perception of the agricultural sector;

o Banks do not see agriculture as a strategic sector to engage in;

o Banks do not have sufficient outreach for efficient lending.

Challenges and opportunities in agriculture

PricewaterhouseCoopers

Capital constraints facing African agriculture

Slide 4

Source: CIA - world-factbook, Central bank of Congo, Central bank of Nigeria, Central bank

of Kenya, Central bank of South Africa; BCEAO – Annual Report 2008

Contribution of agriculture to total GDP and outstanding loans to agriculture

as % of total loans



Current situation of the African agricultural sector

…but has huge opportunitiesAgricultural sector faces challenges…

Slide 5

Rise in food demand

Declining global food stocks

Growing opportunities for

Food

Feed

Energy

Agriculture is key for economic

growth and employment in Africa

However low agricultural productivity

0.5 t/ha compared to global average of

5 t/ha

A declining trend over the last 30 years

Africa has increased expenditure on

food exports to $30 billion annually

43 African countries considered as low-

income and food-deficient



Unlocking this potential requires a productive, efficient and

competitive agricultural sector

Hurdles for accessing financeHow to achieve this

Slide 6

Efficient access to finance for the entire

agricultural value chain;

Support banks to increase capacity for

lending to agriculture;

Support farmers to increase

productivity and market access.

High transaction costs for banks;

Capacity constraints for banks to enter

the sector;

Perceived high risk of lending;

Historically high default rates due to

moral hazard;

“Government money mentality”

Lack of focus (overview ) on the entire

agricultural value chain.


Agenda

The Alliance for a Green Revolution in Africa2


Next steps4

Challenges and opportunities in agriculture in Africa1 3-6

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Risk sharing agreement (50/50) with Centenary Rural Development Bank (CERUDEB) in Uganda;

CERUDEB lent $1 million to farmers. Now lending $4 million based on the original $500,000 guarantee;

Five years after the guarantee, the total default and draw down on the guarantee is only $10,400.

Loan guarantee facility of $5 million by AGRA and IFAD to Equity Bank of Kenya, 2008;

Leveraged $50 million in loans to agriculture;

Interest rates lowered from 18% to 10% to smallholder farmers;

Around 100 specialized staff recruited by the bank;

At end of 2009, 1 Billion Kenya Shillings ($13 million) lent, representing 23.6% of targeted loan portfolio;

Small-scale farmers lent 715 million KS ($9.5 million), 73.9% of total borrowing;

By June 2010 the Portfolio stood at more than $20 Million

Large-scale farmers have borrowed 187 million KS ($2.5 million) representing 19.3%;

Agribusinesses have borrowed 64 million KS ($1 million) or 6.7% of total borrowing;

Loans to 27,248 small scale farmers, 568 large scale farmers and 220 agribusinesses.

.

AGRA’s Experience: Innovative Finance

Slide 8

Uganda: Centenary Rural Development Bank

Kenya: Equity Bank

The Alliance for a Green Revolution in Africa


AGRA provided $1.1 million loan guarantee facility to National Microfinance Bank in Tanzania;

The Financial Sector Deepening Trust has provided a further guarantee facility of $1 million;

$10 million of loans now being provided to smallholder farmers and Agro dealers;

Lending rate lowered from 28% to 15%;

Reduced demand for high collaterals from farmers by the bank;

The bank has not reported any actual losses or requests for a draw down on the facility;

NMB estimates to recover at least 50% of the expired overdrafts;

To date, about 6,200 agrodealers have been trained and certified and eligible to access credit under this program.

Examples of AGRA’s Experience in Innovative Finance

Tanzania: National Microfinance Bank


Slide 9


AGRA’s Experience: Innovative Finance

A $10 million loan guarantee provided to lend $100 million in loans through Standard bank;

The program aims to assist 750,000 farmers in those countries in Tanzania, Ghana, Uganda and Mozambique;

Standard bank provides interest rates of +3% for small holder farmers and up to +5% for agri-businesses;

The Uganda loan facility was launched in December 2009;

As of March 1, 2010, Ushs 1.2 billion (US$630,000) has been lent;

Different types of loans totaling $4.34 million, are currently in evaluation stage;

In Ghana, Standard Bank has already extended $2 million to smallholder farmers in the Millennium Village

project in Ghana;

A pipeline totaling $17 million in possible new lending to farmers has been identified; $ 8 Million loans have been

approved for disbursements.

Mozambique and Tanzania have just commenced their loan operations.

Tanzania, Ghana, Uganda and Mozambique: Standard Bank


Slide 10


Agenda

2


Next steps4

Challenges and opportunities in agriculture in Africa1


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AGRA’s success story in leveraging commercial banks

Unlock access to finance for the entire agricultural value chain;

Sustainable leverage potential –10 times/systemic change;

Build capacity of banks to serve the agricultural sector;

Lower default rates than perceived by banks;

Technical assistance to Banks;

Risk adjusted interest rates.

Key evolution


Slide 12


Fund set up project

Unlock access to finance at scale for agriculture (at least USD$4 billion);

Syndicated risk sharing pooled facility to foster competition between banks and lower interest rates for farmers and agribusinesses;

Lower the risks faced by commercial banks;

Decrease transaction costs of bank lending to agriculture;

Develop a technical assistance strategy to allow efficient agricultural lending;

Build social impact mechanisms to measure effectiveness of lending to agriculture.

Vision: create the conditions for long-term and sustainable bankability of small-scale farmers

Objectives

Project structuring


Uniqueness in the design approach

Slide 14

Market driven approach taken by the Fund

Open architecture and collaborative platform for investors, governments,

banks and technical assistance providers

Strong innovation potential

High harmonization potential

Capacity to create a systemic change through the commitment of key

actors along the chain

Social development of small-scale farmers

Development of the agricultural value chain

New value potential for intermediaries and banks

Food security for the region/country

Project structuring


Consultation

Workshop

with African

commercial

banks,

NGO’s &

investors

Slide 15

Consultation & InterviewsFund development process

A unique process involving various actors in the development

of the Impact Investing Fund

1 2

In-depth

meetings

with

selected

players

Desktop

research

Development

of

the Fund

3 4

IFC

EIB

USAID DEG

BMGF AfDB

MIGA

IFAD

35 organisations/funds interviewed as to

role as investors in such funds;

15 commercial banks interviewed;

Several investors showed a strong

interest to participate;

Several African banks showed interest

as lender banks.

Project structuring


Strong focus on commercial bank perspective

Attractive guarantee coverage for the bank;

Insurance package for farmers;

Technical assistance support for banks, farmers, small businesses etc.;

Risk coverage reduction over time allowing the banks to take ownership;

Reduction of own funds requirements through guarantees;

Opportunities for business development;

Potential incentive payments for low claims experience;

Preferential allocation of more guarantees in the event of low claim rates or

strong social impact performance;

Provision of data and expertise to ease market entry;

Opportunity to display corporate socially responsibility.

Incentives for banks

Project structuring


Emerging Issues

Tailoring of fund structure, share classes and governance to investor needs;

Allowing full flexibility necessary;

Very few initiatives stimulating commercial lending to small scale-farmers at scale;

No harmonised model or market practice available for risk sharing mechanisms;

No one-size-fits-all model for risk sharing existing (first loss/last loss/ shared loss);

A simple guarantee is not sufficient for intermediation and technical assistance

across the value chain;

To allow efficient delivery of finance Need multiple de-risking solutions.

Assessment of current practices

Project structuring


The Impact Investing Fund for African Agriculture:

A 5 components de-risking solution package

Impact

Investment Fund

Structure

Investors African

commercial

banks

Agricultural

loan

beneficiaries

Guarantee

vehicle (SIF)

Technical

Assistance

Catalyst

(Fiduciary

Account)

Risk Sharing

and Insurance

Bankincentives

1

5

3

4

Full value chain

Technical Assistance

Full value chain

Impact Measurement

Loanportfolio

Loanportfolio

Financial First

Investors

Impact First

Investors

2

The concept


IIFFAA

Description of the components

Risk Sharing Facility (covered by the Fund)

Insurance Component (covered by TA)

Technical Assistance Facility (covered by TA)

Bank Incentive Mechanism

Impact Measurement Metrics

Impact investing Fund for African Agriculture

• Serves as performance measurement and reward tool for

commercial banks

• Provides social impact feedback to Impact First Investors.

• Drives capacity building along the agricultural and

financial value chain.

• Deploys incentives to banks to strategically move into

agricultural lending

• Deploys risk sharing and insurance instruments that

minimize the financial risk of lending to agriculture.

1

2

3

4

• Adds or helps in the development of index based crop

and weather insurance.

5

Slide 19

Impact

Investment Fund

Structure

Investors African

commercial

banks

Agricultural

loan

beneficiaries

Guarantee

vehicle (SIF)

Technical

Assistance

Catalyst

(Fiduciary

Account)

Risk Sharing

and Insurance

Bankincentives

1

5

3

4

Full value chain

Technical Assistance

Full value chain

Impact Measurement

Loanportfolio

Loanportfolio

Financial First

Investors

Impact First

Investors

2

The concept

(covered by Fund and TA)

(covered by Fund and TA)

Overall the TA account is estimated at

25% of all Fund assets


General investment target of the IIFFAA

Slide 20

Investment rules

Investors Commercial

BanksFarmers

Philanthropic

Investors

Donors / IFIs

Commercial

Institutional Investors

Luxembourg

Scheme

Risk Sharing

Vehicle

Bank A

Bank B

Bank ZRisk Sharing

Agreement

Credit agreement

Interest: x%

Credit Portfolio

- Interest (x-y)

- Default rate

- Coverage rate

on credit portfolio

Liquid asset

basket

e.g. MMI

Portfolio

performanceOffering

Documents

Investment

vs.

Return

distribution

Social Impact

Matrix

Continental

sub-fund

Regional

sub-fund

National

sub-fund


General investment target of the Impact Investing Fund for African

Agriculture

ProductsLoan beneficiaries

Slide 21

Food crops

Cash crops

Livestock

Fisheries

Etc.

Small-scale farmers

Medium- large-scale farmers

Agribusinesses, Agro-dealers and

Processors

Core objectives:

1. Sustainable social development for Sub-Saharan Africa’s agriculture and

population;

2. Financial return for investors.

Investment rules


General investment target of the Impact Investing Fund for African

Agriculture

Eligible loan beneficiaryEligible Portfolio

Slide 22

Small-scale famers

Basic entrepreneurial interest;

Production of agreed products;

Pre-agreement of a target market or off-

taker;

Subscription to the technical assistance

provision and monitoring.

Agribusinesses

Provision of an entrepreneurial business

plan;

Subscription to the technical assistance

provision and monitoring.

50-70% Small-scale farmers

30-50% Agribusinesses

Ensure value chain coverage Limitation of default

Investment rules


Technical Assistance allocation

Slide 23

Technical Assistance allocation

Loan beneficiariesBanks

Motivation and acceptance to undergo

capacity strengthening;

Provision of social impact reporting;

Assist farmers with TA in the range of

15% of loan or US$ 100-200 p.a

Max budget for agribusiness: 5% of loan;

For agribusiness: own investment >

Fund TA investment.

Budgets allocated after a need analysis;

Budget depending on strategic

commitment and performance;

Amount considered in guarantee pricing;

Max budgets allocated proportional to

guarantee;

Bank TA investment > Fund TA

investment.

• Default reduction;

• Sustainability;

• Bank commitment.

• Default reduction;

• Sustainability;

• Beneficiary commitment.


Country sub-funds….To ensure targeted investments and

development for the specific countries / regions

Investors CommercialBanks

Farmers

Philanthropic Investors

Donors / IFIs

Commercial Institutional

Investors or HNWI

Bank A

Bank B

Bank ZRisk Sharing

Agreement

Credit agreement

Interest: x%

Credit Portfolio

- Interest (x-y)

- Default rate

- Line of risk

on credit portfolio

- Coverage rate

on credit portfolio

Technical assistance and

Social Impact Matrix

Impact InvestingFund

Regional

Sub-Fund

National

Sub-Fund

Sub-fund: Nigeria

Governments

Slide 24

Sub-Funds

Continental

Sub-Fund


Sub-Fund investment policy

Slide 25

Regional Sub-FundContinental Sub-Fund

Core countries in scope: Uganda,

Tanzania, Kenya, Ghana, Mozambique,

Nigeria, Zambia, Malawi, Ethiopia,

Rwanda, Cameroon, Mali, Senegal,

Burkina Faso, Niger;

In the long term equal representation of

core countries;

In case national sub-funds exist for core

countries, the exposure of the

continental fund to such countries will be

decreased.

• Investor protection;

• Risk diversification;

• Development of small scale

farmers.

• Development all across

Africa

Sub-Funds

3 Regions: West, East, Central;

In the long term equal representation of

countries in regions;

In case national sub-funds exist for

countries in a region, the exposure of

the continental fund to such countries

will be decreased.


The Risk Sharing Facility

Slide 26

Tailored risk sharing solutions

• The facility will cover a percentage of a lending portfolio of a bank to agricultural loan beneficiaries

• The guarantees will take the form of letter of comfort and claims will only be made when there are

actual losses realized on the portfolio.

• The risk sharing facility will consider: the volume of lending; the part of the value chain that the

bank is lending to; the term of lending; The type of bank, experience and capacity for agricultural

lending and; the commercial conditions such interest rates, guarantee and collateral requirements.

• First loss arrangements for banks that want to lend to the smallholder agricultural sector, or a clear

long term commitment to the sector by the employment of dedicated staff or other investments.

• Only shared loss arrangements for lending to agro-dealers, seed companies, fertilizer companies,

equipment leasing, agro- processors and millers etc, or to medium scale commercial farmers.

• The risk sharing facility will be accessed by the banks at a fee. The guarantee fee will be set at a

level based on the financial economics of the fund

Objectives: increase bank lending to agriculture and creating financial

return for investors

The 5 components


The Insurance Component

Slide 27

Insurance

• Identify existing insurable risks and existing solutions for coverage, such as crop and weather risks;

• Assist in the development of insurance solutions such as weather index insurance, yield insurance

etc. in countries where such insurance products are not available;

• Cooperate with local and international insurance providers willing to extend their offerings to assist

in the development of appropriate local insurance products

• Link insurance products such as life insurance to the loan provided by banks to loan beneficiaries.

Objectives:

• Add another de-risking factor and develop micro-insurance;

• Cooperation with local and global insurance players to develop adequate

insurance products;

• Use existing innovative market solutions.

The 5 components


The Technical Assistance Facility

(pre-lending)

Communication CentreKnowledge & Innovation Centre

Slide 28

Use multimedia channels to propagate

and inform on agricultural financing in

order to expand the acceptance and

understanding among farmers and

banks;

Provide educational training to banks

and intermediaries on agricultural

finance;

Organize conferences and networking to

build a community for sharing

information and best practices.

Analyse key factors in default rates;

Analyse the financing needs and

specificities of the different agriculture

value chains;

Introduce technological and financial

innovation to reduce the cost for banks

and farmers;

Provide Financial engineering support to

bank for proposing packaged solutions;

Provide a Social Impact reference

framework and analyze associated data;

Provide training courses to banks and

intermediaries.

The 5 components


The Technical Assistance Facility

(on an ongoing basis)

Agricultural value chainBanks

Slide 29

Provide support on increasing

productivity through optimal use of seed,

soil, irrigation, herbicide & pesticide;

Support farmers on ways of developing

access storage facilities & markets;

Provide farmers financial education and

planning to propagate a culture of

banking;

Support farmers with their initial

relationship to the banks.

Support banks in building capacity to

serve the agricultural sector;

Advise banks on developing tailored

products such as term financing

facilities for the agricultural sector;

Support banks in expanding their

outreach to the farmers and agricultural

sector to ensure wide distribution;

Objective: creating a catalyst for change with the TA Fund

The 5 components


Bank Incentive Mechanisms

Slide 30

Incentives

• Appropriate incentive mechanisms to move banks to a strategic commitment to agricultural lending

• Bank Incentive Mechanisms would include:

Reduction of own funds requirements through the provision of eligible guarantees;

Potential incentive payments for low claims experience;

Provision of data and expertise to ease market entry;

• Avoid moral hazards;

• Reward economic and social performance such as low default rates, higher lending to small scale

farmers, etc.

Objective: set incentives for long term financial viability and strategic moves

into agricultural lending

The 5 components


Impact investing metrics/bank rating

Slide 31

Methodology and impactImpact investing metrics/bank rating

Client

activity

(economic)

40 points

Bank

activity

60 points

Scoring based on:

Bank activity (% of agri and smallholder

loans as to total loans, In-house training

and promotion..); and

Client (farmers, agri businesses) activity

(growth in revenue/ income, change in

number of employees…).

Certification and labelling by independent

third party;

Banks receiving a certification would receive

incentives (such as lower guarantee fees…)

from the fund to encourage greater lending

to the agricultural sector.

Objective: Reward bank performance and report social performance to

investors

The 5 components



Slide 32

Client activityBank activity

- Number of Scheme loans advanced as a %

of all loans advanced in the same time period

- Amount advanced through the scheme as a

% of total lending in the period

- In-house training and promotion

- % growth in agricultural loans advanced

outside AGRA scheme less growth in total

commercial loan portfolio

The 5 components

- Revenue split by agricultural sub-sector

- Growth in revenue income

- Change in profit margin over the reporting period

- Change in number of employees

- Type of employees

- Change in number of female borrowers

- Change in yield (arable farming only)

- Growth in proprietor asset base (smallholders)

- Access to healthcare services (smallholders)

- Proportion of children in school

- Provision of subsidised services by employer

(assets, access to education and healthcare)

Environmental impact

- Environmental degradation

- Change in ground water levels on an annual basis

- Waste water being discharged to water bodies

- New or improved access to energy



Slide 33

Process

The 5 components

FUND MANAGER

Board of DirectorsExternal Social Impact

Advisors

Technical

Assistance

Committee

Investment

Committee

Financial

OperationsReporting

On the ground

operations

Investor

Mgt.

Asset

Mgt.

Guarantee

Mgt.

Risk

Mgt.

Bank

dealsTA Mgt.

• The rating will be generated by collecting portfolio level social impact indicator data by bank

• Dedicated external Social Impact Advisors will generate bank ratings to ensure independence and fairness and make use of ratings to attract additional investment to the scheme.


Governance of the Impact Investing Fund

Slide 34

Functions of the Fund bodiesStructure of the Fund governance

FUND

MANAGER

Board of

Directors Advisory Committee

Technical

Assistance

Committee

Risk Sharing

Committee

Financial Operations

ReportingOn the ground

operations

Bank

deals

TA

MngmtInvestor

Mngmt

Asset

Mngmt

Guarant

Mngmt

Risk

Mngmt

Board of Directors:

Composition: key investors to the fund , representatives of country

sub-funds, promoters and independent directors

5 year term, Ultimate power and liability

Advisory Committee:

Composition: promoters, main investors, independent members

Decisions on conflicts of interest

Decisions on changes to investment policy

Risk Sharing Committee:

Composition: Fund Manager, promoters, independent members

Ex-post approval of all bank deals, performance monitoring of RSA

Technical Assistance Committee:

Composition: Fund Manager, promoter, main TA investors and

independent members

Ex-post approval of all major TA contracts and tool implementations

Performance monitoring of TA

Governance


THANK YOU

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CONTACTS

Nixon Bugo

Innovative Finance

AGRA

Tel: +254 733 12 18 96

[email protected]

Session iii ii nixon bugo - agra

Economy & Finance

donors ifis

ease market

potential

general investment

risk sharing

bank zrisk

bank incentive

impact investing