Agricultural finance in Kosovo: Potential and challenges
December 10, 2014 Pristina, Kosovo
Role of agriculture in the region 2
2006 — 2013
Bubble size: agro-GDP per capita
Albania
25%
Share of agriculture in GDP
23% 20%
18% 15%
Macedonia
Kosovo
13% 10% 8%
Montenegro
Serbia
Bosnia & Herz.
5% 30%
40%
50% Share of rural population
Source: World Development Indicators (http://data.worldbank.org/indicator), Kosovo Agency of Statistics
60%
The agri-lending market is very concentrated 3
14%
11%
9%
Banks
6%
74%
5% 49%
Source: 2012 Annual Reports, survey of financial institutions, own estimations
6%
MFIs
26%
…and agriculture represents only a fraction of the FIs total portfolio 4
Banks
Source: 2012 Annual Reports, survey of financial institutions, own estimations
MFIs
…while demand for finance is strong 5
6x more EUR 80M
Current supply
Defensive / conservative position by the banks 6
IF NOT NOW, WHEN? — Taking the opportunity
Defensive / conservative position by the banks 7
— You fear also what you don’t know!
Kosovo’s agriculture has a significant growth potential 8
Farmland
Labor
Market
Climate
Challenges can be solved when understanding specifics of the sector 9
Seasonality
Price volatility
Lack of collateral
A holistic approach is needed 10
Enabling environment
Agricultural sector
Financial literacy Agricultural knowledge and skills
Contract enforcement Land ownership rights Data availability Advisory services
Financial sector
Long-term commitment Right business model
Contradicting messages from the market players 11
A great sector to move in!
Why really doing it?
GROUP WORK
13
Coffee break 15 min
Study results: problems related to agricultural clients 14
Disagree
Inadequate documentation Loans considered too expensive Poor mitigation of high risks Inadequate access to payment‌ Insufficient collateral Impossibility to eliminate risks Insufficient financial capacity Insufficient credit history Restrictions on collateral
Loan amount too small Banks Source: survey of seven banks and seven MFIs
MFIs
MFIs+ Banks
Agree
Study results: problems related to financial institutions 15
Disagree
Source: survey of seven banks and seven MFIs
Agree
Study results: importance of various areas to develop agri-lending 16
Not important
Development of new products Training of front-office staff Risk management Procedures and policies Credit scoring Human resources management IT system Corporate governance Internal audit
Banks
Source: survey of seven banks and seven MFIs
MFIs
MFIs+ Banks
Very important
Key challenges lenders need to master 17
Efficiency challenge
Risk challenge
Market challenge
Agricultural finance
How to make it work?
December 10, 2014 Pristina, Kosovo
Contents 19
I. Introduction II. Market Challenge III.Risk Challenge IV.Efficiency Challenge
Knowledge, tools, passion‌ 20
Agrilending Dairy Farm
22
Agri-lending has never been a “low hanging fruit” for lenders but…
with proper tools and knowledge, one can get “up there”
23
Financing agriculture: Reinventing the wheel…
Friedrich Wilhelm Raiffeisen March 30, 1818 – March 11, 1888
Franz Hermann Schulze-Delitzsch August 29, 1808 – April 29,1883
…or constructing a new one?
24
25
Contents 26
I. Introduction II. Market Challenge III.Risk Challenge IV.Efficiency Challenge
Alexander Osterwalder: The Business Model Canvas
YOUTUBE URL: http://goo.gl/ZV3CJ (3:32 min)
Key Partnerships
Key Activities
Customer Segments
Value Propositions
28
Customer Relationships
Key Resources Channels
Cost Structure
Revenue Streams
Based on the farm size ‌
29
Distribution of agricultural land in different farm size groups (percent of total) Over 10 ha 8.01-10 ha 6.01-8 ha 5.01-6 ha
4.01-5 ha 3.01-4 ha 2.01-3 ha 1.51-2 ha 1.01-1.5 ha 0.51-1 ha 0.01-0.5 ha -
5.0
Source: Agricultural Household Survey 2008
10.0
15.0
20.0
25.0
30.0
‌customers can be segmented in the following way (over 10 ha)
30
1%
Corporate Farmers Emergent Farmers
Small Scale (Pre-emergent) Farmers
Subsistence Farmers (Peasants)
(3-10 ha)
8%
(1.5-3) ha
19%
(0-1.5) ha
72%
Bankable
Non Bankable
31
$350,000 ANNUAL INCOME
$1,200,000 WORTH OF LAND
Value Propositions
32
What are the financial needs of the farmers?
Working Capital (Cost Driven)
Fixed Assets (Profit Driven)
Value Propositions & Channels & Customer Relationships
33
Relationship Approach Agri-retail Approach
Private Banking
Branch Network
ATM Network
34
Social Security Payment
Value Propositions & Channels & Customer Relationships
35
Value Chain Approach
Private Banking
Branch Network
ATM Network
Mobile Banking
Post Offices
Petrol Stations
Business Models in Value Chain Financing : Model 1
36
Business Models in Value Chain Financing : Model 2
37
38
39
Value Propositions & Channels & Customer Relationships
40
Key Resources
41
Agronomist Bankers
Local Staff
Practical & Effective IT
Key Activities
Visiting Villages
42
Agricultural Trade Fairs Local Festivals
Social Responsibility Activities Easier Loans For Special Events
Agricultural Unions
Key Partnerships
43
Agricultural Cooperatives
Universities
Input Suppliers Farmers’ Chambers
Cost Structure
44
Value Driven for corporate farmers
Cost Driven for small scale
Revenue Streams
45
Cash Flow Management Revenues
Operational Fees
Key Partnerships
•Agri-unions •Agri-coop. •Universities •Farmer chambers
Key Activities
•Village visits •Trade fairs •Local Festivals
Key Resources
Value Propositions
•Project loans •Cash flow management •Card programs •VCF
Customer Customer Segments Relationships
•Relationship •Agri-retail •VCF
•Branch •ATM •Mobile •Post office •Gas Stations
•Agronomist Bankers •Smooth Process •Agrilending Scoring
Channels Cost Structure
Revenue Streams •Value Driven for corporate farmers •Cost Driven for small scale farmers
•Pricing the risk •Pricing operational costs in small scale farmers •Corporate farmers – cash flow
47
Questions & Answers 5 min
Contents 48
I. Introduction II. Market Challenge III.Risk Challenge IV.Efficiency Challenge
Defining the risks
Credit Risk (Default Risk)
49
Operational Risk
Credit cycle
50
Measuring - Application - Onsite visit - Credit appraisal
Credit Cycle
Managing - Monitoring - Problem loan management
Mitigating - Loan decision - Loan structuring
Measuring: target market
51
Measuring: on-site visits
53
No Agrilending System Over lending
Not enough lending ‘A bit of a gamble’
Measuring: competition
54
55
Case Study
Balance sheet 56
Assets Working assets
Liabilities
Fixed assets
EQUITY
Technological card 57
Operation
Time
Resources
Cost of services
Cost of technological operation
TOTAL COST
Benchmarking 58
Agriculture
Key factors • • •
Regional characteristics Historical temperatures Farm specifics
High
Yield (tons /1 ha) Medium
Low
7
5
4
55
20
4
45
20
4
Profit and loss statement 59
Technological cards
Total costs
P & L (annual)
• • • • • • • • •
Revenue Costs of goods sold Markup Gross profit Other expenses Business profit Family income Family expenses Net profit
Cash flow 60
Investment period
Sales period
months 1
+ –
2
3
4
5
6
7
8
9
10
Loan Issue
Loan repayment Surplus
Cash balance Shortage of funds
Loan repayment
Key coefficients 61
Balance sheet
Loan รท Equity
<100%
Profit and loss statement
(Loan + %) รท Net profit (annual)
<70%
Cash-flow
Installment รท Cash at the end of period
<50%
Connections between statements Type of activity: Cultivation of Wheat, Tractor lease ASSETS
62 Balance Oct-11
1. Cash
50
2. Savings
200
3. Receivables
0
4. Fuel
250
5. Seeds
200
Total current assets
700
6. Equipment
1,200
7. Tractor
2,500
8. Land
7,000
LIABILITIES
Oct-11
9. Payables
0
10. Loan
0
11. Other
0
Total borrowed funds
0
Total fixed assets
10,700
Equity
11,400
Total assets
11,400
Total liabilities
11,400
Technological card: Wheat Technological operation / used material
Month
Area (ha):
10
Consumption kg or liter / ha
Price for kg / liter
Cost of Cost of Total cost for mechanized technological the whole services per ha operation / ha area
1 Plowing (fuel)
October
25.00
1.00
25.00
250.00
2 Seeds
November
200.00
0.40
80.00
800.00
3 Sow (fuel)
November
12.00
1.00
12.00
120.00
4 Harvesting
August
25.00
250.00
142.00
1,420.00
25.00
Loan =720?
Connections between statements Technological card: Wheat Technological operation / used material
Month
Area (ha):
63
10
Consumption kg or liter / ha
Price for kg / liter
Cost of Cost of Total cost for mechanized technological the whole services per ha operation / ha area
1 Plowing (fuel)
October
25.00
1.00
25.00
250.00
2 Seeds
November
200.00
0.40
80.00
800.00
3 Sow (fuel)
November
12.00
1.00
12.00
120.00
4 Harvesting
August
25.00
250.00
142.00
1,420.00
25.00
Profit and Loss Statement Items
Total per year
Revenue from wheat
7,500*
Revenue from service
600
Total Revenue
8,100
Product Costs
1,420
Gross profit
6,680
Family income
1,200
Family expenses
1,200
Net profit
6,680
Loan amount + Interest Loan installment/Net Profit
?
Technological card: Wheat Technological operation / used material
Month
Area (ha):
Consumption kg or liter / ha
Price for kg / liter
Cost of mechanized services per ha
10
Cost of technological operation / ha
Total cost for the whole area
64
1 Plowing (fuel)
October
25.00
1.00
25.00
250.00
2 Seeds
November
200.00
0.40
80.00
800.00
3 Sow (fuel)
November
12.00
1.00
12.00
120.00
4 Harvesting
August
25.00
250.00
142.00
1,420.00
25.00
Connections between statements
Cash Flow Period Months Cash balance at the begining of period
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
0
+1
+2
+3
+4
+5
+6
+7
+8
+9
+10
+11
250
400
-170
-170
-170
-170
-20
130
130
130
130
-120
Cash from sales
7 500
Cash from services
150
150
Fuel costs
-120
Seeds costs
-600
150
150
Harvesting costs
-250
Cash flow from operations
150
-570
Family income
100
100
100
100
Family expenses
100
100
100
Cash balance at the end of period
400
-170
-170
Loan issue Loan repayment
150
150
-250
7 500
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-170
-170
-20
130
130
130
130
-120
7 380
?
Cash flow from financing
Technological card: Wheat Technological operation / used material
Month
Area (ha):
Consumption kg or liter / ha
Price for kg / liter
Cost of mechanized services per ha
10
Cost of technological operation / ha
Total cost for the whole area
65
1 Plowing (fuel)
October
25.00
1.00
25.00
250.00
2 Seeds
November
200.00
0.40
80.00
800.00
3 Sow (fuel)
November
12.00
1.00
12.00
120.00
4 Harvesting
August
25.00
250.00
142.00
1,420.00
25.00
Connections between statements
Cash Flow Period Months Cash balance at the begining of period
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
0
+1
+2
+3
+4
+5
+6
+7
+8
+9
+10
+11
250
400
190
170
150
130
260
390
370
350
330
60
Cash from sales Cash from services
7 500 150
150
Fuel costs
-120
Seeds costs
-600
150
150
Harvesting costs Cash flow from operations
-250 150
Loan issue
-570
150
-250
7 500
360
Loan repayment Cash flow from financing
150
-20
-20
-20
-20
-20
-20
-20
-20
-20
-213
0
360
-20
-20
-20
-20
-20
-20
-20
-20
-20
-213
Family income
100
100
100
100
100
100
100
100
100
100
100
100
Family expenses
100
100
100
100
100
100
100
100
100
100
100
100
Cash balance at the end of period
400
190
170
150
130
260
390
370
350
330
60
7 347
Balance ASSETS
Oct-11
1. Cash
50
2. Savings
200
Conclusions of the Case Study
3. Receivables
0
4. Fuel
250
5. Seeds
200
Total current assets
700
6. Equipment
1,200
7. Tractor
2,500
8. Land
7,000
LIABILITIES
Oct-11
66 0
9. Payables 10. Loan
0
11. Other
0
Total borrowed funds
0
Total fixed assets
10,700
Equity
11,400
Total assets
11,400
Total liabilities
11,400
Profit and Loss Statement Items
Coefficients
Total per year
Revenue from wheat
7,500*
Revenue from service
600
Total Revenue
8,100
Product Costs
1,420
Gross profit
6,680
Family income
1,200
Family expenses
1,200
Net profit
6,680
Loan amount + Interest
413
Balance sheet
Loan รท Equity
3,15%
Profit and loss statement
(Loan + %) รท Net profit (annual)
6%
Cash-flow
Installment รท Cash at the end of period
4,9%
Mitigating: loan structuring
Content of the Loan Structure
67
Suitable Payment Periods
68
Mitigating: loan structuring
69
January
February
March
April
Potatoes Broccoli Tea
Oranges Lemon Olives (Oil)
Bananas Greenhouse Rose Greenhouse Carnation
Carrot Sugar Beet Olives
June
July
August
Strawberry Plums (Early)
Greenhouse Tomatoes Greenhouse Melon Greenhouse Aubergine
Potatoes (Early) Wheat (Early) Almonds
Watermelon (Early) Melon (Early) Cucumber (Early)
September
October
November
December
Wheat (Dry) Table Grapes (Early) Cherries
Tomatoes Apricot Parsley
Sunflower Pepper Cotton
Pears Rice Kiwi
May
Mitigating: loan structuring
70
February
October
Olives (Oil)
Apricot
2 payments in one year
Mitigating: pricing
71
Inappropriate needsâ&#x20AC;Ś
72
73
Mitigating: flood, drought, frostâ&#x20AC;Ś Only 17% of the Turkish Farmers have agricultural insurance
74
INSURANCE
LOAN
Managing: monitoring
75
Managing: communication
76
Managing: problem loan management 77
78
Operational risks: open communication 79
Operational risks: dedicated personnel 80
Dedicated Agricultural Loan officers
Operational risks: centralized data processing 81
Fully Authorized Agricultural Portfolio Manager
internal fraud
external fraud
Operational risks: collusion 82
Not Real Sales
Operational risks: collusion 83
$ Indirect Loans
$
84
Questions & Answers 5 min
85
Coffee break 15 min
Contents 86
I. Introduction II. Market Challenge III.Risk Challenge IV.Efficiency Challenge
Learning from the leadersâ&#x20AC;Ś 87
â&#x20AC;Śhow to increase efficiency
Key efficiency influencers 88
Distance issue
Scale issue
Farmer profile issue
Business analysis issue
Coping with the distance issue 89
Building an Efficient Distribution Network 90
Turkey: “Water drop offices” 91
Uzbekistan: “Credit Mobile” 92
Savings Banks Foundation for International Cooperation (SBFIC)
Kenya: M-PESA 93
How does M-PESA work? 94
How does M-PESA make a difference? 95
Coping with the farmer profile issue 96
Keep it simple 97
Educate the market 98
Coping with the scale issue 99
Growing agrilending into Rural Finance 100
Agrilending
Consumer finance
Rural finance
Agribusiness finance
Microlending
“Universal” Loan Officers 101
Farm card programme 102
Working Capital Loan
Social Security Payment
Coping with the business analysis issue 103
Improving the efficiency and quality of credit decisions through Credit Scoring 104
Scoring: Are new clients riskier than repeat clients?
Bad rate
105
10.0% 9.0% 8.0% 7.0% 6.0% 5.0%
8.5%
7.3%
New client
New clients paying better than repeat clients in this bank
Repeat client
Ratio of loan amount to client equity:
New client: Repeat client:
44% 81%
Too aggressive with repeat clients
Scoring: Are older clients more risky than average? 106
10.0%
8.4%
Bad rate
8.0% 6.0%
4.5%
4.0%
2.7%
2.0% 0.0%
18-29
Younger clients pay worse
30-59 Age of client
60+
Older clients pay better
Scoring: Effect of collateral on risk
Bad rate
107
Collateral > loan amount
6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 50%
75%
100% 125% 150% 175% 200% 225% 250%
Collateral value to loan amount Taking lots of collateral not helping to control delinquency
Scoring: Key requirements for credit 108
Sufficient number of bad loans
Minimum 500 Preferably 1000+
Staff who can monitor the system Client and loan data in electronic format for past 2 years
Low-tech, low-cost solutions (like Excel) can work
Credit Factory 109
Sales • Data collection • Initial screening • Disbursement
Loan officer
Underwriting • Analytical crosschecking • Loan validation • Loan approval
Monitoring & Collection • Monitoring • Collection • Work with delinquent client
Underwriter
Call-center specialist
Training • Recruiting • On-going performance monitoring • Skills improvement
Trainer
Credit Factory 110
Productivity increase
35%
Operational costs decreased
18%
PAR decreased (from 3.5%)
1.8%
Client loyalty
95%
111
Questions & Answers 5 min
GROUP WORK
Master the challenges and build the successful agrilending operation!
113