Access to finance remains a challenge for farmers all over the world. Finding solutions to this problem is not easy, but several stakeholders in banking and finance across the Caribbean and Pacific, presented various solutions to this very complex issue during the Caribbean-Pacific Agri-Food Forum currently being held in Barbados.
Agri-businesses are deemed too risky to finance and oftentimes farmers, especially in the Caribbean are accused of not keeping proper records of their business transactions in order to present a good case to banks for loans. But there is hope.
Available options for agri-financing
Afzal Khan is the Principal Partner of Prosperity Consultants Inc. and one of the presenters at the forum. In an interview after his presentations, he acknowledged that funding from the commercial banks remain a challenge; but noted that there are creative measures to deal with this challenge. A mechanism known as “factoring” is a solution. This involves the farmer selling their products to establishments that give the famer an invoice to be paid in 30 days. The famer than uses this invoice as support to receive financing from companies that grant loans through the factoring method. The famer can use the invoice to get funding or improve their bankability to access 80% upfront of the production cost of that invoice and collect the balance of 20% from the hotel. Interest rate to the farmer for the money loaned would be at about 4%.
Mr. Khan also focused on two main types of funding in his presentation: Pre and Post-Harvest Financing Mechanisms.
“Pre-Harvesting financing is about the famer trying to obtain inputs to purchase seeds, weedicides, herbicides… as well as the labour that will go into the nurturing of the crops up to harvesting. Post Harvesting financing speaks to once the crop is harvested, how do you get it into the market place as well as attempting to manage your receivables,” Khan said in an interview after his presentation.
Objectives of pre-harvest financing
The objectives of pre-harvest financing are:
- Increased production
- Improved yields
- Encourage structured marketing arrangements
- Build trust
- Improve farmer income
- Encourage Economic Growth
There are several types of pre-harvest financing, Mr. Khan pointed out. These include: self-financing. In this instance, the process is not formal, there is no need for collateral. The farmer owns the output and there is no need for any special expertise. The other type is cooperative bank financing which requires a formal process, but no fixed asset below a certain amount as collateral. The farmer enters into a marketing contract, owns the output but needs special expertise to access this fund. Commercial banking is a little more restrictive as the collateral is fixed, though the other aspects such as a marketing contract and the farmer owning the input are the same as the cooperative bank financing. The other types include value chain financing, government sponsored, value addition, cooperatives and tradable receipt financing. The last one is very interesting as it involves financing based on future production being used as collateral. There is no need for a marketing contract; the farmer owns the output of his farm and there is need for special expertise.
The types of post-harvest financing is similar to that of pre-harvesting, with the exception of three main types: informal selling, invoice receipt financing and warehouse receipt financing. With the latter, there is need for a storage expertise and the produce is used as collateral. With informal selling, the invoice for goods received is used as collateral and there is no need for storage expert. The farmer, unlike warehouse receipt financing, does not own the produce. Informal selling is less cumbersome—it requires no collateral or storage expertise. All these are creative methods of financing agri-business initiatives, creating easier access to finance than just approaching commercial financial institutions.
As one representative of IICA said at the Agri-finance forum: “Banks are into lending money, not nurturing businesses.”
It is thus incumbent on farmers and stakeholders in agriculture to find creative means of financing their business.
Blogpost by Andre Huie, Social Reporter for the Caribbean-Pacific Agri-Food Forum 2015.