Rural Finance in C?te d?Ivoire
After seven years working as a stock analyst and financial-sector specialist, I joined TechnoServe in Côte d’Ivoire in September 2009 as a short-term volunteer consultant and later as an independent contractor, both positions in support of the Cocoa Livelihoods Program (CLP). Funded by the Bill & Melinda Gates Foundation and a consortium of private cocoa value-chain companies, CLP aims to double the incomes of 200,000 cocoa farming households in West Africa. The work is being led by the World Cocoa Foundation, with TechnoServe as a partner, and the expectation is that by providing small-scale farmers with improved agricultural techniques, business skills, farm inputs, access to financial services and improved marketing opportunities, they will be better equipped to improve their earning potential. TechnoServe brought me in to develop a system to provide farm inputs on credit to small cocoa farmers.
Cocoa production represents a whopping 15 percent of Côte d’Ivoire’s GDP, and it is estimated that as much as a quarter of the population depends on cocoa for survival.(1) Despite Côte d’Ivoire’s status as the world’s largest supplier of cocoa (40 percent of global supply), the productivity of an average plantation is merely half of the world’s average yield. A key contributor to this poor performance is that more than 50 percent of Ivorian cocoa farmers lack access to critical farm inputs such as pesticides and fertilizer, largely because 89 percent of the farmers have zero access to credit.
Two major finance channels that I explored – microfinance and commercial banks – proved to be disappointing. The Ivorian microfinance sector is, bluntly put, on the brink of collapse. There are over 200 MFI outfits in the country (2), but the industry is highly concentrated, with the top player controlling 90 percent of the market and facing losses that could lead to its demise.(3) As for commercial banks, I learned that without an external guarantor, Ivorian banks will not lend to small-scale farmers.(4) I thought farmer cooperatives, given their scale and organized structure, should be more attractive borrowers than individual farmers. But the reality is that only a dozen of the roughly 2,000 cooperatives in the Ivorian cocoa sector are large enough to qualify for bank loans.(5)
What, then, could we do to reach the small-scale farmers we intended to work with in CLP? The model that we ultimately developed is a supply-chain financing system in collaboration with the farmer cooperatives, an input supply company and the cocoa exporters. The input supplier provides farm inputs on credit to the farmer cooperatives and is repaid during the harvest months. The supplier’s willingness to extend credit is entirely based on the partnership with the exporter, which guarantees that there will be a market for the production and thus a channel to monitor credit repayment. At the end of the day, every partner wins: the input company profits from increased sales, the exporter receives an improved supply of cocoa and the farmers increase their income through improved productivity.
Some of the major challenges to agricultural finance and how we addressed them:
- Commodity price risk. Price volatility poses the biggest risk to small-scale farmers. Until hedging instruments become more widely available, the private sector can act as a facilitator to manage this risk. In our supply-chain financing model, the cocoa exporters play an important role as a guaranteed cash-flow generator for loan repayment. Furthermore, these multinational institutions have the capacity to cost effectively hedge price risk on the world market. This relationship allows for the use of simple forward purchase contracts with farmer cooperatives, which provides a risk-mitigating tool that can be passed on to small-scale farmers.
- Rural infrastructure challenges. Even when inputs are available on credit, there must be a system to ensure that these inputs will in fact arrive at the plantations. The input supply company’s distribution expertise ensures that farm inputs will be delivered on time to the farmer cooperative, which then acts as a middleman for onward delivery to the plantations. The cooperative structure allows small groups of farmers from the same area to coordinate transportation options in bulk for added savings.
- Farmer education. By partnering with farmer cooperatives, we can take advantage of their “member intel” as a mechanism to screen for potential borrowers. Default risk generally comes from two categories: credit risk and production risk. Every farmer in our input credit program participates in a comprehensive training curriculum. This curriculum includes agricultural techniques and basic business and financial training. To further reduce default risk, the input supplier’s field agents act as a point of contact with the farmers to provide incremental training, monitor input application and reiterate the farmer’s financial obligation to repay at harvest.
When traditional credits cannot be obtained in a cost-effective manner, partnerships in the value chain can be an attractive alternative. But trade credit is primarily a marketing tool and not a profit center. As such, it cannot be relied upon as a sustainable liquidity provider, much less a large-scale poverty reduction tool. My experience tells me that financial services geared toward the poorest farmers must be implemented alongside non-financial services (i.e., training and logistical support). Those who fit the borrower profile must understand the pros and cons of credit. And for the small-scale cocoa farmers in Côte d’Ivoire, access to inputs on credit will further strain their financial resources unless they are equipped to achieve improved production. I completed my contract with TechnoServe in January, and the field team is piloting the input credit program as we speak. It is not a perfect model, but it is a foundation that will be refined with immediate results and provide a baseline for more sophisticated financial products to come.
(1) The figures in this paragraph come from STCT’s 2002 baseline study of cocoa farming in West Africa
(2) Association Interprofessionelle des Systèmes Financiers Décentralisés de la Côte d’Ivoire (AISFD-CI)
(3) Commission Nationale pour la Microfinance 2006 report
(4) Interviews with Ecobank and Banque Atlantique Côte d’Ivoire
(5) SOCODEVI, the CLP partner responsible for training farmer cooperatives