Agricultural Finance Revisited No. 7 AGRICULTURAL FINANCE REVISITED FINANCING AGRICULTURAL TERM INVESTMENTS FRANK HOLLINGER January 2004
Food and Agriculture Organization of the United Nations (FAO) Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) NO. 7
	Table of Contents

All rights reserved. Reproduction and dissemination of material in this information product for educational or other non-commercial purposes are authorized without any prior written permission from the copyright holders provided the source is fully acknowledged. Reproduction of material in this information product for resale or other commercial purposes is prohibited without written permission of the copyright holders. Applications for such permission should be addressed to the Chief, Publishing Management Service, Information Division, FAO, Viale delle Terme di Caracalla, 00100 Rome, Italy or by e-mail to [email protected]

© FAO 2004

TABLE OF CONTENTS

Preface

Acknowledgements

Abbreviations

Introduction

PART A: AGRICULTURAL TERM INVESTMENTS

1. Main Issues and Challenges

1.1 Risks of Financing Agricultural Term Investments

1.1.1 Common Risks Faced by Investors and Financiers
1.1.2 Risks Specific to Term Financiers
1.1.3 Capacity of Investors and FIs to Manage and Cope with Risk

1.2 Costs of Providing Term Finance
1.3 Determinants of the Feasibility of Term Finance

PART B: AGRICULTURAL TERM FINANCE IN PRACTICE

2. Brief Overview of the Case Studies

2.1 Features of the Institutions
2.2 Motives for Engaging in Agricultural Term Finance
2.3 Performance of the Portfolios

3. Issues in Developing a Term Finance Portfolio

3.1 Designing Products and Developing a Financing Technology
3.2 Importance of a Gradual Approach
3.3 Identifying Suitable Regions
3.4 Catalytic Role of Ancillary Investments and Support Services
3.5 Adopting a Relationship Banking Approach
3.6 Offering a Range of Financial Products
3.7 Strengths and Weaknesses of Types of Term Finance Providers
3.8 Funding a Term Asset Portfolio

4. Term Loans and the Elements of a Successful Lending Technology

4.1 Selecting Borrowers
4.2 Using Collateral and Collateral Substitutes
4.3 Appraising Repayment Capacity
4.4 Structuring Loan Disbursement and Repayment Schedules
4.5 Pricing Term Loans
4.6 Monitoring Loans and Supervising Borrowers
4.7 Dealing with Loan Default

5. Leasing: An Alternative Instrument for Farm Equipment

5.1 Basic Principle of Leasing
5.2 Main Types of Leasing
5.3 Advantages and Disadvantages of Different Types of Leases
5.4 Main Advantage of Financial Leasing Compared with Lending
5.5 Providers of Leasing Services
5.6 Leasing Experience in Developing Countries

5.6.1 Financial Lease in Practice: the Case-Study Institutions

5.7 Problems Encountered in the Application of Leasing
5.8 Measures to Increase the Sustainability and Outreach of Leasing

6. Other Instruments for Financing Term Investments

6.1 Equity Finance and Venture Capital
6.2 Financing Investments Through Nucleus Estate Smallholder Schemes
6.3 Joint Ventures - An Alternative to Individual Term Investments?

PART C: CROSS-CUTTING ISSUES AND CONSTRAINTS

7. Addressing Constraints on Secured Lending

7.1 Elements of Secured Lending

7.1.1 Constraints on the Creation of Security Interests
7.1.2 Constraints on the Perfection of Security Interests
7.1.3 Constraints on the Enforcement of Claims
7.1.4 Areas for Reform of the Legal and Institutional Framework

7.2 Guarantee Funds as a Risk-Sharing Mechanism

7.2.1 Principles
7.2.2 Empirical Evidence
7.2.3 The Way Forward: Better Practices in the Design of Guarantee Funds

7.3 Credit Bureaus

8. Managing Systemic Risk

8.1 Policy Options
8.2 Innovations in Agricultural Insurance

9. Reducing Asset/Liability Management Risk

9.1 Supporting the Introduction of Term Finance
9.2 Funding Long-Term Loans
9.3 Funding Small, Successful Term Finance Providers

PART D: CONCLUSION

10. Findings and Recommendations

10.1 Main Findings

10.1.1 Risk of term finance in relation to investment purpose and client
10.1.2 Determinants of the cost of providing term finance
10.1.3 A specific financing technology: the key to managing risk and costs
10.1.4 Term finance as part of a long-term bank/client relationship
10.1.5 Strengths and weaknesses of different term finance products
10.1.6 Impact of size on the ability to engage in term finance
10.1.7 Role of non-financial institutions
10.1.8 Importance of donor support to FIs in the introduction of term finance
10.1.9 Complementary measures to support the scaling up of term finance

10.2 Recommendations for Financial Institutions

10.2.1 General Principles for Developing a Term Finance Portfolio
10.2.2 Specific Recommendations for Designing Financial Products and Technologies

10.3 Options for Government and Donor Support

10.3.1 Direct Support to Financial Institutions
10.3.2 Measures for Creating an Enabling Environment and Enhancing Effective Demand

GLOSSARY

REFERENCES