Crédit Mutuel du Sénégal: Project Results & Lessons
AgriFin (June 2015) | The following note summarizes key results and lessons from AgriFin's project with Crédit Mutuel du Sénégal (CMS), aimed at strengthening the agricultural finance portfolio of CMS.
The Crédit Mutuel du Sénégal (CMS) is a two-tier network composed of 90 credit unions, serving approximately 700,000 members and more than 120,000 borrowers through its 210 points of sale. The network targets farmers, micro and small enterprises, small traders, wage earners, and pensioners. The objective of the AgriFin Project was to increase CMS lending to the agricultural sector while maintaining the excellent repayment performance of the entire loan portfolio. To achieve this, the project focused on the following: (1) strengthening the agricultural finance strategy; (2) improving the lending processes and methodology, including the creation of a special unit in charge of agricultural credit and MIS adjustments; (3) introducing new agricultural loan products and an agro-credit scoring system; and (4) providing capacity building for staff involved in agricultural lending.
The purpose of this note is to highlight initial results achieved by CMS and outline some of the main lessons emerging from the project. Although contexts will differ, these lessons may be useful for other financial institutions interested in expanding their agricultural portfolios.
Established the Center for Agricultural Finance (Centre de financement agricole –CFA) to lead the agricultural finance growth of CMS. CFA was created within the Business Development Department and is closely linked with the Risk Management Unit. The Center consists of an internal sub-unit responsible for the development and management of the agricultural credit portfolio and an external sub-unit focusing on expanding business opportunities for agricultural financing and engaging with major stakeholders and markets including state agencies, farmer organizations and their partners. The external sub-unit also implements risk monitoring activities. Other responsibilities of CFA include managing the existing and future loan products and updating and maintaining the ALES credit scoring tool. CFA frequently conducts regular field visits to clients during the production season to assess the technical, commercial and qualitative progress of farmers and other clients. The Center provides monthly progress reports to the Risk Management Unit describing the level of risks faced and challenges.
Developed four new loan products for agricultural clients. Before the AgriFin project, CMS did not offer loan products tailored to agricultural clients’ investment and seasonal needs. To address this, CMS designed four new loan products:
- Seasonal crop production loan to finance the purchase of agricultural inputs including seeds, fertilizers, and pesticides;
- Value chain loan to finance farmers who work under supply contracts with a buyer;
- Medium-term loan for agricultural equipment to help clients acquire farm equipment for use on their farmers and/or rental to other farmers;
- Inventory credit in the form of short term working capital loans to producers and collectors after harvest, allowing them to store their commodity at a warehouse and receive a loan against the market value of the stored commodity.
In addition to changing its product set, CMS modified its lending approaches. The network moved from its traditional collateral-centered lending approach to a cash-flow-based lending approach, it adopted a more standardized appraisal systems in response to the associated risks, and aligned the loan repayment modalities with cash flows of the farmer.
Instituted an agricultural credit scoring system enabling more efficient client assessment. A major breakthrough for CMS was the introduction of a new loan appraisal system based on an integrated scoring method called Agricultural Loan Evaluation System (ALES). This system allows agricultural loan officers to assess loan applications of farmers efficiently and to quickly determine the credit risk of farmers based on gross margins. ALES relies on a database that includes production costs and outputs of major crops for each distinct agro-climatic production zone. As a result, updating the database on a regular basis is essential to maintain the score’s accuracy. The system calculates average input and output data per crop and region, and rejects applications with a score that lies outside a safety margin determined by the “risk appetite” of the financial institution. ALES helped CMS’ loan officers improve their understanding of agricultural production and processing. It enabled CMS to expand the number of loan applications that it processed, reduced the subjective elements embedded in an appraisal process, eliminated cases of over-indebtedness and low productivity, and over time reduced the non-performing portfolio. CMS also developed separate evaluation tools for animal production (meat and milk) and for poultry production.
Provided in depth technical training to CMS management and operational staff on agricultural lending. The AgriFin project helped CMS institutionalize agricultural finance training and ensured that the skills gained during the project remained with the institution well beyond the end of the project. A substantial amount of agricultural finance training materials and manuals were developed and have been integrated into the core staff training program.
Building capacity in agricultural finance sometimes requires major institutional and organizational changes. CMS decided to upgrade its capacity in agricultural finance by setting-up a dedicated center for agricultural finance, the CFA. CMS was cautious, however, not to create a parallel decision-making system that would generate confusion and institutional risk. For that reason, the CFA was not created as an independent unit, but is part of the Business Development Department and acts as an in-house provider of technical assistance to the whole CMS network rather than being a decision-making unit. This enables the network to develop the necessary expertise in agriculture finance without overhauling the decision-making processes.
Automated credit scoring tools helped CMS reduce costs associated with client appraisal and grow agricultural portfolio. The new credit scoring tool adopted by CMS, which was also presented at an AgriFin webinar, allows agricultural loan officers with limited knowledge of agriculture to assess loan applications of farmers efficiently and to quickly determine the credit risk of farmers based on gross margins. The system made the assessment of applications more objective and increased the overall productivity of loan officers. In order to maintain the accuracy and relevance of the ALES tool, CMS will regularly update the underlying data on which the tools is built.
Product innovation based on detailed feasibility studies helps financial institutions avoid mistakes that others have made in the past. During the AgriFin project, CMS conducted a detailed feasibility study on inventory credit in Senegal. CMS was particularly interested to learn about the specific institutional, market, and behavioral constraints which have inhibited the performance of inventory credit in the past. Two important lessons emerged from this study that influenced how CMS approached inventory credit. First, the bank learned that in order to successfully promote the product, it would need to rely on local facilitators who would promote and explain the product to farmers, otherwise, farmers would hesitate taking up the new product which they do not understand clearly. Past experience also revealed that the net profits for the depositor would be relatively small in view of the operational costs and interest accrued over the standard six months deposit.
The feasibility study led CMS to pursue the matter more strategically by using prudent ratios for financial exposure for the local credit unions, and where possible promoting the product in the context of value chain finance arrangements, where farmers engage in direct contracts with industrial off-takers or millers. Apart from this, inventory credit was promoted for small credit unions in rural markets, where buyers tended to form cartels to reduce purchase prices much below than in comparable markets, and where storage and transport facilities were available. The expectations in terms of loan volumes were modest, while repayment rates under a well-managed scheme appeared to be very good. In the design and testing phase, high emphasis was placed on producing solid risk management approaches at all levels and stages, collaborating with existing and experienced farmer organizations, and on a solid operational manual for stock management.
Figure: CMS’ Value Chain Approach
Introducing value chain finance (VCF) successfully required CMS to start with relatively well-known and well-organized value chains. To finance a value chain, a financial institution needs to have a good understanding of the entire chain, including value chain actors, operations, market conditions, and price evolution. A good understanding of the above factors makes it possible to better assess the profitability of the value chain and its resilience. CMS made a strategic decision to focus its initial VCF activities in the rice and maize value chains given that they were relatively better-known to them and also fairly well-organized. In addition, CMS was able to leverage the existing relationships with buyers in these two value chains which helped promote the VCF product more efficiently. A key aspect of the value chain finance were tri-partite agreements whereby the payment of produce went directly from buyers into the borrower’s bank account held with CMS. This enabled CMS to easily collect loan repayments by deducting them directly from the borrower’s account.
 ALES stands for Agricultural Loan Evaluation System; it is a credit scoring tool developed by the Frankfurt School of Finance and Management.
 For a webinar presentation of ALEs, visit AgriFin’s website at: https://www.agrifinfacility.org/event/webinar-credit-scoring-agriculture-lending
 See details and samples under http://agrifinfacility.org/event/webinar-credit-scoring-agriculture-lending
 Annual interest rates were mostly 12%.