USAID's Lending to the Agriculture Sector Toolkit
AgriFin (January 2013) | The toolkit was developed by USAID in conjunction with implementing partners Chemonics International and ShoreBank International. For additional information on the toolkit contact Lawrence Camp, Division Chief for Private Enterprise within the Economic Growth, Education, and Environment Division (E3), USAID, at firstname.lastname@example.org.
The Lending to the Agriculture Sector Toolkit is a suite of resources designed to support financial institutions (FIs) in: (i) making a determination whether or not to get into or ramp up agricultural sector lending; (ii) and if so, to rapidly set-up an agricultural lending unit. It was originally designed by the U.S. Agency for International Development (USAID) to increase access to agriculture finance in the sub-Saharan Africa where access to agriculture finance is a particular challenge1, but has universal applicability. The underlying premise is that FIs will not get into areas of specialized lending areas unless and until they believe that they can do so profitably and sustainably.The toolkit therefore aims reduce risks and transaction costs by promoting “a standardization of lending processes and a move toward international best practices for agricultural lending.” It includes a comprehensive collection of product sheets, policies, templates, tools, manuals, and guidelines for FIs on how to increase agricultural lending in a sustainable manner.
The toolkit consists of three main sections: research and planning, credit product development, and implementation. The research and planning section emphasizes the importance of market segmentation research for FIs to identify financing opportunities along specific value chains and to develop financial products that are demand-driven. After concluding market-mapping research, FIs should begin the process of designing a strong corporate strategy, which may include developing an in-house expertise within the financial institution. “For a bank to be successful in agricultural finance, the strategy for the sector should become a core piece of the organization’s overall business strategy” since value chain financing is crosscutting in nature and will affect all departments. Buy-in from senior management and the staff is therefore critical to ensure ownership of the process from the beginning.
The section on credit product development includes general principles on how to develop products targeting value chain actors. New product development should include the business case for each type of proposed financial product, identification of risk factors associated with agricultural products and approval criteria, description of policy requirements or policy changes that will be necessary to implement the products, projection of product profitability and product development cost, and identification of management responsibility.
The implementation section sets out detailed guidelines on four aspects: agricultural loan policy manual, agricultural loan procedures manual, underwriting analysis for agricultural loans, and loan servicing. To build a strong and profitable agricultural loan portfolio, financial institutions must adequately recognize the borrowing needs of their clients while at the same time addressing the banks’ need to control risk. This section provides useful guidance on how to develop “clear, but flexible and dynamic loan term requirements that are regularly reviewed and adjusted based on feedback from an active loan rating system and problem loan management process.”
The toolkit is accompanied by 40 different templates relevant to each of the sections, such as agricultural lending guidelines, client screening form, crop templates, product sheets, and a portfolio review tool among many others. The lending toolkit is a work in progress. In order to take into account lessons learned, the toolkit is being updated each time it is implemented. The toolkit is meant to be used as a reference guide for mid-level staff of FIs currently or prospectively involved in the agricultural sector. Some of the target audience includes client relationship staff, loan officers, risk management staff, and producer associations and cooperatives. “Ultimately, the toolkit should be easily read, adapted, and applied by bankers targeting agricultural enterprises across several levels of the value chain, including small scale producers, processors, and distributors, and service companies and SMEs supporting them.”
1. Agriculture contributes 34 percent of gross domestic product and employs 64 percent of the labor force, but represents only 5.8% of total credit across a sample of ten sub-Saharan African countries.