Study Tour: Mozambique
Access Bank of Madagascar (ABM) visited Opportunity Bank of Mozambique (BOM) to learn from its experiences in agriculture value chain finance and low cost delivery mechanisms.
On September 26-28, 2012, the Agriculture Finance Support Facility (AgriFin) facilitated a learning visit between AccèsBanque Madagascar (ABM) and Banco Oportunidade Moçambique (BOM). The team from ABM included Friederike Moellers (Credit Manager), Janick Razafintsalama (Head of Agriculture Lending), and Hery Rakotovao (Head of Microfinance). The ABM team visited BOM in Mozambique to learn from its business experiences in the following areas: (1) how to find prospective clients and identify potential activities to finance within a value chain; (2) how to initiate partnerships with actors in a value chain, including buyers, producer associations, processors, agro dealers, etc.; and (3) how to develop value chain-specific products and services.
The visit entailed a series of technical presentations and discussions focused on BOM’s agriculture finance strategy and its experiences in developing delivery mechanisms in rural areas.
The discussions were led by John Magnay, Senior Agriculture Advisor for Opportunity International in Africa. In Chimoio, the team visited agricultural clients, value chain actors, and mobile van operators. The team also visited a container branch near Maputo.
II. BOM’s Agriculture Finance Model
BOM’s Agriculture Finance Model is a part of Opportunity International’s rural and agriculture finance strategy. Opportunity International recognizes that the risk in agriculture finance is associated with a number of factors, including loan repayment, high transaction and monitoring costs, production risks relating to weather and disease, and volatile output markets. BOM pays particular attention to the history of the rural finance market and the state of the agriculture sector in the country. The model recognizes the challenge created by past donor and government initiatives in agriculture finance, whereby funds were advanced into rural areas with little or no expectation of repayment, fostering a perception that farmers who gain access to finance and inputs do not need to repay their loans. The situation makes it necessary for financial institutions to change the mindset of farmers and other actors involved in agriculture lending before embarking on a lending program.
Understanding the state of the agriculture sector and examining the business potential of different commodities is also an essential part of BOM’s agriculture finance model. Obtaining accurate information on the broader sector and monitoring the production and market flow of selected commodities is crucial to BOM establishing a sustainable agriculture finance business. Financial products offered in the field of agriculture are designed factoring in the production cycle and the market movement of the specific crop within a given geographic area.
Value Chain Financing for Smallholders
A key aspect of BOM’s approach to agriculture finance is its focus on serving commercially viable smallholders that have tight linkages with extension service providers for training and organized markets through buyers and processors. This approach reduces transaction costs, improves the quality of loans, and helps to ensure repayment. BOM takes a proactive role in finding such actors and developing business models suited for a variety of value chains. BOM’s agriculture finance unit is staffed with personnel who have strong expertise in the agricultural sector who are capable of identifying opportunities in value chains and developing effective partnerships with clients who have sound business plans. With this approach, BOM currently serves farmers in the maize, soya, and horticulture value chains. Within these value chains, financing is provided for production in the form of inputs, and trading for aggregating commodities. All loans to farmers are provided using group lending methodology. These farmers are directly linked with a second party buyer and/or a service provider. This approach has enabled BOM to successfully reduce transaction costs, provide access to prospective clients, and manage credit risks.
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In the case of the maize value chain, BOM works with two types of clients. The first type is facilitating financing and payments to contracted growers who supply raw materials for beer production. These farmers are organized to ensure joint liability for delivering final output. They sign a contract on a specific quantity, quality, and price with the buying company. Based on the assessment of individual clients and their relationship with the buyer, BOM prepares a customized input loan package for each client. The loans are disbursed to farmers at a central location in the field with support from the buying company. Throughout the production cycle, the buying company provides farmers with advisory services by deploying qualified agricultural technicians. At the time of loan maturity, which in most cases is the time the buyer purchases the output, BOM will collect repayments through the buyer. Upon payment to farmers, the buyer deducts the loan amount and transfers it to the clients’ account with BOM. This transaction takes place at a central buying center and the farmers receive cash ￼payments upon delivery. BOM uses a mobile bank to deliver payments and collect savings.
BOM also finances farmer unions supplying maize to the World Food Program under future price contracts. In this case, BOM provides loans to the farmers which they use to cover the costs of aggregating production, enabling them to meet the required scale for the market. Without immediate cash, however, union members do not have the possibility or the trust to deposit their production with the union and get paid after the sale. So BOM supports such unions in price structure analysis and elaboration of business plans, and provides the funds for crop aggregation from members through short term loans repaid by the World Food Program through BOM.
For the soya value chain, BOM works with a farmer union called SIWAMA, which has over one thousand members. BOM provides SIWAMA financing for mechanization of soya seed multiplication and purchase of soya as feed for the domestic poultry industry. In this value chain BOM works with Technoserve, a leading provider of production and business advisory support focused on expanding domestic soya production. A combination of good technical advice, a guaranteed output market, and appropriate financing has made SIWAMA one of the best performing clients of BOM.
Unlike the other value chains, BOM does not work through a service provider when financing the horticulture value chain. This is because horticultural clients are located in an agricultural zone with a reliable water supply and market linkages with major urban centers. Instead, BOM works with individual farmers who have proven records of production, providing them with input package loans to be repaid over a period of seven months. The only exception to this approach is fresh chili production. In this case, BOM finances farmers contracted by a leading fresh vegetable exporter. BOM works with an export company to organize farmer groups. The transaction system for such loans is similar to the traditional value chain structured loans.