Risk management

Risk management is very important to financial service providers. When they issue loans, there is a risk of borrower default. When they collect deposits and on-lend them to other clients, they put peoples' savings at risk. Anyone who conducts cash transactions or makes investments risks the loss of those funds. So all financial intermediaries face risks that they must manage efficiently and effectively to be successful. Failure to do so results in financial losses and then donors, investors, lenders, borrowers and savers lose confidence and funds begin to dry up.

The establishment of collateral in relation to a loan transaction means that the lender is assured of recovering, if necessary by court action, the material value of the loan. This means that the outreach of financial services is often influenced by the collateral that borrowers can offer, particularly in rural areas where agricultural production risks are perceived as high. Conventional collateral includes the mortgage of land or pledging of moveable assets. It also includes third-party guarantees or endorsements. Poor people have few assets to pledge and land titles are often uncertain. This has led to the use of collateral substitutes such as group guarantees and solidarity funds.

Library Resources

resource title type year resource
From Known Unknowns to Black Swans : How to Manage Risk in Latin America and the Caribbean Report 2018

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After a growth recovery, with an expansion of 1.1 percent in 2017, the region has encountered some bumps in the road. The Latin America and the Caribbean (LAC) region is expected to grow at a modest rate of 0.6 percent in 2018 and 1.6 percent in 2019. This slowdown in the region’s recovery is mainly explained by the crisis that started in Argentina in April, the growth slowdown in Brazil, and the continuing economic, social, and humanitarian collapse in Venezuela. Furthermore, net capital inflows to the region have fallen dramatically since early 2018, bringing once again to the fore the risks faced by LAC. In addition, natural disasters such as earthquakes and hurricanes have brought devastation to the region with disturbing frequency. The core of the report analyzes the foundations of risk, develops a theoretical framework to price risk instruments, and reviews how LAC has managed risk in practice. The overall message of the report is that there are different types of risk: (i) those that follow standard probabilistic distributions that can be easily insured by the market; and (ii) those that exhibit fat-tails (i.e., non-negligible probabilities of extreme events) that are much harder to ensure by the market (like earthquakes). Finally, there are “black swans” that, by definition, are unpredictable events that cannot be insured and force countries to rely exclusively on ex-post aid and/or broad preventive measures. In other words, the fatter are the tails of a distribution, the less market insurance is available, and the more countries will have to rely on ex-post aid. Yet progress in managing risk continues to be made (the Catastrophe Bond for earthquakes in the Pacific Alliance, recently sponsored by the World Bank, being an outstanding example). This would have been unthinkable some time ago. New knowledge and insurance schemes, all supported by institutions such as the World Bank, will undoubtedly make LAC a safer region to live and prosper.

2017 CSAF State of the Sector 2017

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With global population projected to reach more than nine billion by 2050, demand for food expected to double over the same period, and increasingly volatile climate conditions, there are both daunting needs and compelling opportunities to increase productivity and strengthen resilience among the world’s 450 million smallholder farmers. One of the most effective and efficient channels to reach these farmers is the small- and medium-sized enterprise (SME): the cooperatives, associations, traders, processors, and exporters that act as critical intermediaries within increasingly complex global food and agricultural supply chains. By connecting smallholder farmers to markets and providing employment to rural populations, these businesses have the potential to generate inclusive and sustainable economic growth for households, communities, and entire countries that are dependent on agriculture. 

CSAF is pleased to share this third annual “State of the Sector” report, which highlights recent growth trends and notes the risks associated with agricultural finance. We also provide data-driven insights and recommendations on how investors, donors, and others can address the evolving, and still largely unmet, needs of smallholder farmers and the businesses that connect them to markets.

Innovative Risk Management Strategies in Rural and Agriculture Finance Report 2017 English (en)

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This study reviews recent trends in rural finance and investment in the agricultural sector within the Asian region. It aims to offer a critical perspective on some of the main constraints to achieving more inclusive rural financial systems and to propose areas of public and private intervention that could advance this objective, based on evidence compiled from important innovations led by local rural actors in various countries within the region. The study also makes a joint analysis of recent trends in both agricultural markets and rural financial markets, in order to highlight important links between them that can assist in the design of multisectoral public policies that are more effective in promoting inclusive and stable rural financial systems. Given the historical separation between professional networks devoted to analysing financial markets, and, those analysing agricultural markets, important linkages between the current policy literatures related to the two networks have not been explored well.

Innovative Risk Management Strategies in Rural and Agriculture Finance  -  English (en)

Author Emilio Hernández
Publisher Food and Agriculture Organization of the United Nations
Rome, Italy
Number of Pages 146 pp.
Primary Language English (en)
Region / Country Global, Asia, Central Asia, Eastern Asia, South-eastern Asia, Southern Asia, Western Asia
Keywords Risk Management, Rural Finance, Agricultural Finance
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2016 Joint Report On Multilateral Development Banks' Climate Finance 2017

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The Joint Report on Multilateral Development Banks’ Climate Finance is a collaborative effort to make MDB climate finance figures in developing countries and emerging economies public on an annual basis, together with a clear explanation of the joint methodologies for tracking this climate finance. In this report, the term “MDB climate finance” refers to the amounts committed by MDBs to finance climate change mitigation and adaptation activities in development projects. Tracking of MDB climate finance is based on harmonised principles and jointly agreed methodologies, which are detailed in Annexes B and C. Total MDB climate finance includes commitments from the MDBs’ own account, and from external resources channelled through and managed by the banks.

Publisher African Development Bank (AfDB); the Asian Development Bank (ADB); the European Bank for Reconstruction and Development (EBRD); the European Investment Bank (EIB); the Inter-American Development Bank Group (IDBG) and the World Bank Group (WBG)
Number of Pages 44 pp.
Primary Language English (en)
Region / Country Global
Keywords climate finance, Climate adaptation finance, climate mitigation finance, climate co-finance
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Estrategias innovadoras de gestión de riesgos en mercados financieros rurales y agropecuarios Document 2016 English (en)

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El presente estudio aporta un marco analítico que describe las principales barreras a la inversión y financiación agropecuaria, las cuales se pueden agregar en la gestión de riesgos financieros, de producción, mercadeo, climáticos e institucionales, y en modelos de negocio que reduzcan costos de transacción para brindar de manera viable productos mejor adaptados a las necesidades de una diversidad de clientes rurales. A su vez, se presenta cómo las tendencias en los mercados agropecuarios han influenciado en la región latinoamericana el sistema financiero rural en general, y el sistema financiero agropecuario en particular, sugiriendo un auge en modelos de negocio y gestión de riesgos por parte de los actores económicos rurales para facilitar el financiamiento y la inversión en el sector, siendo estos actores heterogéneos y, en gran medida, externos al sistema financiero formal. El análisis de estas tendencias se complementa con estudios a nivel micro, en los cuales se explora en mayor detalle cómo estos modelos de negocio permiten viabilizar la provisión de servicios financieros rurales (crédito, ahorro, seguros y pagos) y facilitan las inversiones en el sector agropecuario. Se presenta alguna evidencia de que estos modelos han favorecido a una población rural tradicionalmente difícil de atender, como son los pequeños productores involucrados en la agricultura familiar y los hogares rurales pobres, así como los agronegocios en donde estos participan. Los resultados ofrecen algunas lecciones importantes para el diseño de políticas públicas que faciliten el desarrollo de mercados financieros rurales más inclusivos. Los casos de estudio provienen de Colombia, Bolivia, México y Chile

Estrategias innovadoras de gestión de riesgos en mercados financieros rurales y agropecuario  -  English (en)

Beyond Credit: Risk Management as a Strategy for Economic Growth Article 2016 English (en)

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Well-functioning financial markets are essential for the growth of firms, including commercial farms. But maybe not in the way you might think.

Much of the discussion about barriers to enterprise growth has traditionally focused on access to credit since the early days of the microfinance sector. This line of thinking makes the assumption that the main reason smallholder farms in developing markets aren’t producing more is because they lack the capital needed to invest in more inputs or products. Indeed, a growing body of evidence on microcredit suggests that the question of the impact of access to credit on small businesses is not cut and dry: Some studies find positive effects on profits and the number of new ventures created (for example, see Banerjee et al. 2015 and Attanasio 2014), while others find more modest effects on business outcomes (see Banerjee, Karlan, and Zinman 2015).

To read the article, click here.

Beyond Credit: Risk Management as a Strategy for Economic Growth  -  English (en)

Innover pour des mécanismes inclusifs de financement agricole et d'atténuation des risques Case Study 2016 French (fr)

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ADA et la FAO publient une étude de cas sur un modèle innovant du financement rural au Maroc 

Le secteur agricole au Maroc est un de principaux moteurs de croissance de l’économie du pays, ainsi qu’un de principaux facteurs de réduction de pauvreté.

Malgré l’essor économique exponentiel observé ces dernières années, les zones rurales comptent encore un grand nombre de Marocains vivant dans l’extrême pauvreté, s’élevant à 14.4%, contre 4.8% en zone urbaine. Le développement du secteur agricole dans ces zones est d’autant plus primordial pour faciliter l’inclusion de ces populations dans la vie active.

Bien que les institutions marocaines reconnaissent l’importance de l’expansion du secteur, celui-ci rencontre encore de nombreux défis de financement. En effet, la réglementation très stricte, ainsi que les risques liés à la production agricole rendent finalement la démarche peu attractive pour les investisseurs. Pour contrer cette problématique, la banque majeure du pays, Crédit Agricole du Maroc (CAM), a développé un modèle très innovant (Tamwil El Fellah) pour permettre l’accès à ses services aux familles de petits exploitants, en surmontant certains des obstacles que de nombreuses banques considèrent comme considérables.

Le modèle mis en place, se caractérise notamment par l’offre de financements sur mesure aux clients représentants les différentes chaînes de valeur, ainsi qu’un mécanisme de gestion de risques adapté au segment de clientèle spécifique.  

L’étude de cas, Innover pour des mécanismes inclusifs de financement agricole et d'atténuation des risques, publiée ensemble par la FAO et ADA, retrace en détail l'expérience unique de downscaling de Crédit Agricole du Maroc (CAM).  L’analyse y présentée vise à mettre en évidence des principes à appliquer par de différents acteurs pour faciliter des services financiers ruraux et agricoles dans le monde.

Bonne lecture.

Innover pour des mécanismes inclusifs de financement agricole et d'atténuation des risques  -  French (fr)

Gestión de información de riesgos agropecuarios y sistémicos (GirAs) Case Study 2015

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El documento describe el sistema de Gestión de la Información de Riesgos Agropecuarios y Sistémicos (GIRAS) mismo que es una herramienta informática (desarrollada por la Fundación Sembrar Sartawi S-SAR) orientada a generar  datos sobre riesgos agropecuarios y sistémicos a los cuales están expuestos  sus prestatarios  por la naturaleza de sus actividades agrícolas. Los resultados  que  el sistema genera permiten analizar y estimar oportunamente tanto la probabilidad de ocurrencia de un evento y como el nivel de riesgos de forma oportuna en tres ámbitos que afectan la capacidad de pago y productiva de un potencial prestatario: vulnerabilidad del cultivo, vulnerabilidad socioeconómica y amenazas (climatológicas). 

Author Young, Robin, Alborta, Pablo, Monje, Guillermo, Quirós, Rodolfo, Palancares, Laura /Fondo Multilateral de inversiones FOMIN
Publisher FOMIN
Number of Pages 22
Primary Language Spanish (es)
Region / Country Global
Bolivia
Keywords Agricultural Risk
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Revue des initiatives existantes en matière de gestion des risques agricoles au Niger Report 2015 French (fr)

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Les petits paysans des pays en développement sont quotidiennement confrontés à toute une série de risques, parmi lesquels une météorologie capricieuse et des cours en dents de scie. La plupart d’entre eux n’ont pas accès aux instruments de gestion des risques dont disposent les agriculteurs des pays développés.

Ces dernières années, la forte exposition du monde agricole aux risques associés et aux phénomènes climatiques extrêmes s’est imposée parmi les principales préoccupations, tant dans les pays industrialisés qu’au sein des nations en développement.

Aussi, à l’issue des discussions du G8 et du G20 portant sur la sécurité alimentaire et la croissance de l’agriculture, il a été décidé la mise en place de la Plateforme pour la gestion des risques agricole (PARM). La plateforme PARM a été mise en place en décembre 2013, pour une durée de quatre ans, et bénéficie du soutien de l’Agence française de développement (AFD), de la Commission européenne, du Gouvernement italien, du Nouveau Partenariat pour le développement de l’Afrique (NEPAD) et du FIDA.

La plateforme PARM a pour objet de déterminer, d’évaluer et de mesurer les risques agricoles dans les pays partenaires et de mettre au point des stratégies pour y faire face, qui pourront ensuite être intégrées aux politiques et aux plans d’investissement des pays partenaires. Elle fournit un appui technique aux gouvernements pour la gestion des risques agricoles.

Dans chaque pays, le processus PARM vise ainsi à relire à travers le prisme de la gestion des risques agricoles (GRA) les stratégies de développement agricoles et rurales de manière à intégrer dans celles-ci ce concept spécifique dans toutes ses dimensions. Plus généralement, l’objectif est d’intégrer la GRA dans le Programme détaillé de développement de l’agriculture africaine (PDDAA) du NEPAD.

Au Niger, le processus PARM s’inscrit en synergie avec une démarche initiée sur des financements de la Banque Mondiale. Le processus s’est déroulé comme suit : 

  • Evaluation des risques du secteur agricole (janvier 2013 / Banque Mondiale) ; 
  • Préparation d’un draft de « Plan d’Action pour la Gestion des Risques Agricoles (PAGRA) 2014-2023 », par le HC3N avec l’appui de la Banque Mondiale ; 
  • Organisation d’un atelier national sur la gestion intégrée des risques agricoles en juin 2014 ; 
  • Elaboration de la version définitive du PAGRA en décembre 2014 ; 
  • Opérationnalisation partielle du PAGRA à travers un projet d’une centaine de millions de dollars (financement : Banque Mondiale), pour lequel une série d’études ont été initiées sur financement PRODEX et coordonnées au niveau du HC3N.

A la suite d’une mission conjointe PARM-NEPAD, en décembre 2014, il a été convenu avec les représentants de l’HC3N qu’il serait utile de renforcer le PAGRA dans trois domaines : 

  1. La microfinance et l’accès au crédit, 
  2. Le fonctionnement des marchés nationaux et régionaux et l’accès aux marchés, 
  3. Les systèmes d’information.

En se focalisant sur les petits producteurs (qui, en général, ne bénéficient pas directement des investissements ou des mesures d’accompagnement dans les grands projets d’infrastructures), l’approfondissement de ces trois axes constituera une contribution potentielle du PARM au Plan d’investissement national 2016-2020 du Niger.

L’étude « PARM Niger » s’inscrit dans cette perspective. Cependant, en raison de la combinaison de plusieurs difficultés rencontrées dans la mise en œuvre de l’étude, l’inventaire général des initiatives prises au Niger en faveur de la réduction des risques agricoles, d’une part, et l’analyse de l’accès des petits producteurs à l’information, d’autre part, n’ont pu être réalisés jusqu’à présent. De ce fait, le présent rapport traite deux thématiques : l’accès des petits producteurs aux services financiers et l’accès des petits producteurs aux marchés nationaux et régionaux. Celui-ci est disponible sur le site du RECA Niger, avec les publications de l’atelier PARM de décembre 2015.

Lien vers le site  -  French (fr)

Author Iram
Number of Pages 61
Primary Language French (fr)
Region / Country Global, Africa, Western Africa
Niger
Keywords Gestion Des Risques, Risques agricoles, Accès aux services financiers, Accès au marché
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Platform for Agricultural Risk Management (PARM) Reference Material 2015 English (en)

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The Platform will enhance the sharing of knowledge in the domain agricultural risk management, keeping practitioners informed on the work done by their peers in different countries and disseminating news and updates on agricultural risk management-related activities and events. PARM is a partnership between the European Commission (EC), the French Development Agency (AFD), the Italian Development Cooperation (DGCS), the International Fund for Agricultural Development (IFAD), NEPAD and other development partners. 

For more information, click on the link below.

Platform for Agricultural Risk Management (PARM)  -  English (en)

Risk and Finance in the Coffee Sector: How to Improve Risk Management and Access to Finance in the Coffee Sector ? Paper 2015

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The study is the outcome of a collaborative work between the World Bank’s Agricultural Risk Management Team and the International Coffee Organization (ICO). Aimed at raising awareness of risks and their impacts on the different actors and at the different stages of the coffee sector’s value chain, the report presents a variety of programs and mechanisms for managing risks, with a focus on innovations to improve access to finance.

This report explores the role that producer associations, governments, non-profit organizations, the private sector, and other intermediaries can play in making risk management and financing tools more accessible and more workable for smallholder coffee growers. It examines the global coffee sector and outlines: 1) major risks and constraints facing the sector; 2) potential opportunities for improving the management of certain risks; and 3) programs launched in various regions aimed at improving access to finance.

Through the use of detailed case studies taken from a number of coffee-producing countries, this report seeks to demonstrate: how risks can arise that adversely impact on the coffee sector and those working within the sector; how risks can be better managed so that the sector is able to improve its resilience; how financing constraints can be overcome through a variety of innovative approaches; and how there are potential opportunities to both improve risk and access to finance in a coordinated manner. The rationale for utilizing case studies is to enable best practices to be shared more widely.

 

Publisher World Bank Group
Washington, DC., USA
Number of Pages 132 pp.
Volume / Issue# DISCUSSION PAPER 02
Primary Language English (en)
Region / Country Global
Keywords Risk Management, Access To Finance, coffee sector, case study, Supply Chain
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Warehouse Receipt System Reform Initiatives In Africa Presentation 2015

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Lessons and experiences from The World Bank Group

Author D. Ivanovic, J. S.Geours
Publisher The World Bank
Washington DC
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
Keywords Warehouse Receipts, Warehouse Receipt Finance, Risk Management
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Guarantee funds - a response to agricultural credit risk Paper 2015

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This case study discusses the role that the FOGAL, a Latin America guarantee fund, plays in risk management specific to agricultural and rural finance. FOGAL was launched by SOS Faim in the 1990s and has offices in three Andean countries: Ecuador, Bolivia, and Peru. The fund aims to provide innovative, efficient, financial solutions tailored to the needs of small rural producers through their organizations, rural financial institutions, and other development actors. The study suggests that setting up a guarantee fund is a way of managing and sharing risks between the different stakeholders as well as facilitating greater involvement of financial institutions in the rural sphere. It states that FOGAL has become well established in Andean rural and agricultural spheres, both by developing its own network and through synergies implemented with key partners. 

Author Freddy Destrait and Marc Mees
Publisher SOS Faim Belgium
Brussels, Belgium
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global, South America
Ecuador, Bolivia, Peru
Keywords Risk Management, Agricultural Finance
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Study on appropriate warehousing and collateral management systems in sub-Saharan Africa Document 2015

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“Study on appropriate warehousing and collateral management systems in sub-Saharan Africa” comes in three volumes: i) key finding; ii) technical country reports and iii) Review of applicable laws. The core subject of this report is how warehouse receipt financing enables the post-harvest part of the value chain to function more efficiently as it is a potentially useful tool for helping farmers access to funding. 

Platform for Agricultural Risk Management (PARM) Website 2015 English (en)

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The Platform will enhance the sharing of knowledge in the domain agricultural risk management, keeping practitioners informed on the work done by their peers in different countries and disseminating news and updates on agricultural risk management-related activities and events. PARM is a partnership between the European Commission (EC), the French Development Agency (AFD), the Italian Development Cooperation (DGCS), the International Fund for Agricultural Development (IFAD), NEPAD and other development partners. 

PARM website  -  English (en)

Flexible Financial Products in Microfinance to Address Risk Paper 2014

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Microfinance has spread with the aim of easing access to financial services for poor people in developing countries because, like everyone, they need the means to smooth their consumption, build their assets, run their business, and manage risk. Microfinance institutions (MFIs) have developed a wide variety of financial products that are adapted to the needs of poor people, but generally not for the purpose of helping them to deal with uninsured risk.

This paper was prepared for FERDI workshop on Flexible financial Products in Microfinance to Address Risk June 12-14, 2013.

Author de Janvry, A., Sadoulet, E., Coulibaly, A., Abordonado, A.
Publisher Ferdi
France
Number of Pages 53 pp.
Primary Language English (en)
Region / Country Global
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Framework for Warehouse Receipt Financing in Pakistan Report 2014 English (en)

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The objective of the study was to review the existing system of commodity warehousing in Pakistan, the international best practices, legal framework in warehousing and feasibility for development of storage, marketing and post harvest financing system. The study report prescribed policy and regulatory environment supporting the development of Warehouse Receipt system in Pakistan.

Framework for Warehouse Receipt Financing in Pakistan  -  English (en)

Author State Bank of Pakistan
Publisher State Bank of Pakistan
Pakistan
Number of Pages 22 pp.
Primary Language English (en)
Region / Country Global
Pakistan
Keywords Risk Management; warehouse receipt, Agricultural Financing
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How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment Paper 2013

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This paper shows how access to an innovative retail risk management instrument influences “real” production decisions. The study focuses on small agricultural firms in a semi-arid region of India, a setting in which rainfall variability during the monsoon is the primary determinant of production and income risk. The paper uses a randomized controlled trial approach to study how an innovative risk management instrument for hedging rainfall risk affects production decisions among a sample of Indian agricultural firms.  The analysis finds that the provision of insurance induces farmers to shift production toward higher-return, but higher-risk cash crops, particularly among more-educated farmers. The results support the view that financial innovation may help mitigate the real effects of uninsured production risk.

Author Cole, S.; Giné, X.; Vickery, J.
Publisher The World Bank
Washington, DC; USA
Number of Pages 55 pp.
Primary Language English (en)
Region / Country Global
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Agricultural sector risk assessment in Niger : moving from crisis response to long-term risk management Report 2013 English (en)

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Niger is a country that is perpetually living with risk. Dealing with this requires more emphasis on long-term structural solutions, rather than short-term quick fixes in order to improve the resilience of the agricultural sector. The document shows that a comprehensive agricultural risk management strategy requires substantive and sustained financial investments to move from short-term crises responses to those of long-term risk management.

Report  -  English (en)

Author The World Bank
Publisher The World Bank
Washington, DC; USA
Number of Pages 68 pp.
Primary Language English (en)
Region / Country Global
Niger
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Agricultural Decisions after Relaxing Credit and Risk Constraints Paper 2012 English (en)

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The investment decisions of small␣scale farmers in developing countries are conditioned by their financial environment. Binding credit market constraints and incomplete insurance can reduce investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The salient constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing in a farmer’s own receipt of insurance payouts, and with the receipt of payouts by others in the farmer’s social network. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, and with imperfect trust that promised payouts will be delivered.

Paper  -  English (en)

Author Dean Karlan, Robert Darko Osei, Isaac Osei-Akoto, and Christopher Udr
Publisher National Bureau of Economic Research
Cambridge, MA
Number of Pages 50 pp.
Volume / Issue# NBER Working Paper No. 18463
Primary Language English (en)
Region / Country Global
Related Resources
Weather Index-Based Insurance in Agricultural Development: A Technical Guide Training Guide 2012

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IFAD and WFP have been working together on weather index-based insurance (WII) since 2008. This upcoming technical guide translates the findings and experience to date into practical decision-making steps for IFAD and WFP country programme management staff and other donors interested in promoting this risk mitigation tool.

 It looks at each phase of the process:

 1.  Assessing whether WII is the right method of intervention and is feasible

 2.  Developing a pilot

 3.  Possible future areas that IFAD, WFP and other donors can support through scaling up.

The guide includes background information, explanations and resource recommendations to help inform decision-making.

Rural poor people in developing countries are vulnerable to a range of risks and constraints that impede their socio-economic development. Weather risk, in particular, is pervasive in agriculture. This technical guide discusses WII, a class of insurance products that can allow weather-related risk to be insured in developing countries where traditional agricultural insurance may not always be feasible.

The guide shows how insurance operates best where it forms part of an integrated approach to risk management, where constraints such as lack of access to finance, improved seed, inputs and markets can be addressed. As such, it is important to understand that WII does not have universal application. Its applicability needs to be considered in context, through case-by-case evaluation.

Author IFAD & WFP
Publisher IFAD and WFP
Number of Pages 63 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Risk Management Instruments for Food Price Volatility and Weather Risk in Latin America and the Caribbean Paper 2012

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This report examines some of the implications of price risk and volatility, and weather risks in the LAC region that are important threats to already vulnerable populations. It considers the advantages and limitations of a set of financial instruments for managing these risks; and identifies potential mechanisms for addressing concerns about the socio-economic consequences of price and weather volatility. In reviewing the innovations that are being tested in the LAC region and around the world, what is striking is that they appear to be disparate and largely piecemeal solutions to the problems of price and natural disaster risk management—they are not integrated. A more efficient and holistic solution should draw upon the recent efforts of coordination among countries within regions. The importance of risk aggregation and pooling combined with the comparative advantage of International Financial Institutions to access capital and work in a regional context, suggests a strategy to develop a fully multicountry approach to risk management. This strategy calls for establishing a Regional Asset Management Platform (RAMP) that integrates central stakeholders and develops pricing and measurement tools for extreme weather risk management and price volatility in a more efficient fashion. Global drivers of price volatility for major commodities can be managed using international futures exchange markets to some extent. However, regional climate anomalies will also mean that individual countries can suffer price volatility that represents a basis risks when using international futures markets. Thus, combining risk transfer products for regional climate anomalies with the use of careful hedging strategies for global volatility may offer better risk management strategies for either lower than expected prices that adversely affect producers or higher than expected prices that adversely affect consumers.

Author Anne G. Murphy, Jason Hartell, Victor Cárdenas Jerry R. Skees
Publisher Inter-American Development Bank
Number of Pages 110 pp.
Volume / Issue# No. IDB-DP-220
Primary Language English (en)
Region / Country Global
Related Resources
Study on risk management in rural and agricultural finance in the Near East and North Africa (NENA) Region Paper 2011 English (en)

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This study was undertaken in early 2010 to better understand and describe the current risk management practices, and their related issues, among the agricultural and rural finance organizations in the Near East and North Africa (NENA) Region. It highlights many of the results achieved and challenges faced by those organizations providing financial services to the agricultural sector and presents case studies to describe the various settings and current practices that led to these results.

FAO Paper  -  English (en)

Author M. R. Mustafa, M. Al-Sayed Ali;M. Awaideh; C. Miller
Publisher Food and Agriculture Organization of the United Nations (FAO)
Rome, Italy
Number of Pages 109 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa
Related Resources
Gestion des risques agricoles par les petits producteurs - Focus sur l'assurance récolte indicielle et le warrantage Case Study 2011 French (fr)

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Ce document propose, dans une première partie, une revue de la littérature sur les risques agricoles, présentant des éléments théoriques sur ces risques, les stratégies de gestion du risque et les outils correspondant à ces stratégies. Une seconde partie comporte les conclusions de neuf études de cas menées en Ethiopie, au Kenya, en Inde, au Malawi et en Tanzanie.

Lien vers la publication en ligne  -  French (fr)

Author Anne CHETAILLE, Aurore DUFFAU, Bastien OGGERI, Damien LAGANDRE, Guillaume HORREARD, Ilan ROZENKOPF
Publisher Agence Française de Développement
France
Number of Pages 86
Volume / Issue# 113
Primary Language French (fr)
Region / Country Global, Africa, Eastern and Central Africa, Southern Africa, Asia, Southern Asia
Tanzania, Ethiopia, Malawi, Kenya, India
Keywords Agricultural Development, Development Rural, Agricultural Risk, agricultural risk management, Agricultural Insurance, Climatic Change, Warrantage
Related Resources
Innovation in Disaster Risk Financing for Developing Countries: Public and Private Contributions Report 2011

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Innovation in disaster risk financing and insurance is occurring at all scopes: risk transfer for governments and sovereign entities, private non-life catastrophe insurance markets for homeowners, agricultural insurance for farmers and herders, and disaster microinsurance for low-income populations. Furthermore, innovation is happening on a variety of fronts in the field of disaster risk financing and insurance – product development, disaster risk assessment and sharing, and delivery channels to name a few – that interact to produce new solutions. These innovations, through public-private partnerships, can foster the development of risk market infrastructure in developing countries, which are essential to ensure the emergence of cost-effective disaster risk financing and insurance solutions from sovereign entities to households.

This report aims to advance the dialogue on creative, forward-looking solutions for developing countries by presenting recent innovations on disaster risk financing and insurance developed by the private markets as well as the international donor community, from the macro (government) level down to the micro (household) level. It discusses how these innovations can be adapted and implemented in developing countries to better protect efficiently those countries against the financial consequences of natural disasters.

Author The World Bank
Number of Pages 77 pp.
Primary Language English (en)
Region / Country Global
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The Potential for Scale and Sustainability in Weather Index Insurance Report 2010

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The World Food Programme (WFP) and the International Fund for Agricultural Development (IFAD) set out to answer this question learning from projects implemented by other organizations and from the Weather Risk Management Facility (WRMF), a joint WFP and IFAD initiative funded by the Gates Foundation.

The results are presented in a recent research paper titled ‘The Potential for Scale and Sustainability in Weather Index Insurance’. This report concludes that weather index-based insurance (or insurance which pays out when weather variables such as rainfall reach certain predetermined levels) is an effective, market-mediated solution to promote agricultural development and to help protect the poorest against weather hazards.

At the same time, this type of ex-ante (or before the event) risk management approach can reduce the need for costly emergency operations.  For example, rather than providing assistance after a drought when a farmer is unable feed her family or cover the cost of operating her farm, a payment from a weatherindex insurance policy can help this farmer meet urgent household needs without selling important productive assets – like land – or defaulting on loans used to buy seeds and fertilizer. As a result, this family is better able to recover productivity and does not need costly emergency assistance.

Key principles

In chronically food insecure areas where recurrent droughts and floods are being exacerbated by climate change, this kind of approach to managing weather risk offers a viable way to build the resilience of communities while fostering and protecting sustainable improvements in livelihoods.

In order to realize these kinds of benefits, a number of key principles for developing sustainable and large scale weather risk management programs were identified in the study.  These include:

•                Create a proposition of real value to the insured, and offer insurance part of a wider package of services;

•                Build the capacity and ownership of implementation stakeholders;

•                Increase client awareness of index insurance products;

•                Graft onto existing, efficient delivery channels, engaging the private sector from the beginning;

•                Access international risk-transfer markets;

•                Improve the infrastructure and quality of weather data;

•                Promote enabling legal and regulatory frameworks; and

•                Monitor and evaluate products to promote continuous improvement.

Author IFAD & WFP
Publisher IFAD & WFP
Number of Pages 152 pp.
Primary Language English (en)
Region / Country Global
Related Resources
The use of warehouse receipt finance in agriculture in transition countries Paper 2009

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This study discusses possibilities for warehouse receipt finance in the agribusiness sectors in Eastern Europe and Central Asia (ECA). Warehouse receipt financing is a proven instrument for allowing farmers, traders, processors and exporters to obtain finance secured by goods deposited in a warehouse. The warehouse operator issues a receipt for the stored goods, which can be used as a form of portable collateral to request a loan from a financial institution. Warehouse receipt financing is especially interesting for rural small and medium enterprises, which are often unable to secure their borrowing requirements owing to lack of sufficient conventional loan collateral.

Warehouse receipt finance has a long tradition in many Western countries and in parts of the developing world, but in most ECA countries it has only been introduced since the collapse of the Soviet system. So far, results have been mixed and there remains considerable scope for enhancing warehouse receipt financing. Despite several donor-supported initiatives to introduce a legal framework and other elements of a warehouse receipt system, and practical applications of collateralized commodity financing by international and domestic banks in various ECA countries, little consolidated and up-to-date information is available on experiences, current status in different countries and lessons learned. This study contributes to closing the gap. Part 1 provides an overview of the different types and applications of warehouse receipt finance and discusses key issues and the core elements of a warehouse receipt financing system. Part 2 reviews experiences and the current status of warehouse receipt financing in a number of ECA countries and sets out possible areas for further support.

Author Frank Höllinger, Lamon Rutten and Krassimir Kiriakov
Publisher FAO; EBRD; WB
Number of Pages 62 pp.
Primary Language English (en)
Region / Country Global
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Serbia takes initial steps to establish a Grain Warehouse Receipts (GWR) system Report 2009 English (en)

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AUDIO

In June 2009, the Warehouse Receipts Law of the Republic of Serbia was approved. Grain Warehouse Receipts (GWR) systems allow local grain farmers and agribusiness entrepreneurs to access short-term credit from banks by depositing grain in certified warehouses and using it as collateral. With more short-term credit available, farmers do not need to sell their crop immediately after harvest, when prices are typically at their lowest, to buy inputs for the next year. To ensure the successful implementation of the system, the Government of Serbia has required a focused technical assistance programme to elaborate policy directions for the development of the system and to train key stakeholders.

The FAO Investment Centre has been involved in providing technical assistance in the area of GWR for more than a decade under FAO’s cooperation programme with the European Bank for Reconstruction and Development (EBRD), which helps to establish such systems in transition countries by financing technical assistance and by providing credit lines to local banks that use the systems.

As a first step to implement the new law in Serbia, the FAO Investment Centre agreed with the Serbian Ministry of Agriculture to support a study tour to Bulgaria for key Serbian stakeholders. Bulgaria is one of the countries in the region that has successfully implemented a GWR system.

The tour, involving Serbian warehouse inspectors and government representatives in Bulgaria, took place from 28 September to 2 October 2009. Its purpose was to present to the participants the experience of the Bulgarian system with a special focus on the activities of the National Grain Service of Bulgaria which is the licensing and inspection body. The participants were introduced to all components of the system and the management process – licensing, inspection, indemnity fund, and operational bookkeeping of the licensed warehouses.

Highlights of the tour included visiting the headquarters of the Bulgaria National Grain Service and licensed public warehouses in the Bulgarian cities of Vratza, Popovo and Varna.

More information on this knowledge exchange experience is provided in the following audio interviews:

  1. Krasimir Kiriakov, President of VOCA Consult, Bulgaria, FAO consultant and expert on warehouse receipt systems (mp3: 2min31sec)
  2. Milan Djakov, the Director of the Indemnity Fund, Serbia (mp3: 2min36sec)
Audio Link  -  English (en)

Author Kiriakov, K.; Djakov, M.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Primary Language English (en)
Region / Country Global
Serbia
Related Resources
Review of Warehouse Receipt System and Inventory Credit Initiatives in Eastern & Southern Africa Report 2009

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The report is the result of a review of warehouse receipting, inventory credit and similar initiatives in six countries of Eastern and Southern Africa, including Zambia, Malawi, Madagascar, Tanzania, Kenya and Uganda, the objective of which is to share lessons with practitioners, policy makers and funding agencies. Warehouse receipting is normally part of a package of innovations designed to modernise, and enhance the efficiency of, agricultural marketing systems. It can play a very important role in the development of agriculture, by permitting farmers to hold food back to the lean season, allowing them to access markets on more equitable terms, and enhancing the efficiency of the entire commodity chain. Donors are supporting warehouse receipt initiatives of one kind or another in all six countries.

The report starts with a review of international experience and follows with a discussion of collateral management and other warehousing systems that have developed spontaneously in Africa. The remainder of the report mainly focuses on new departures going beyond these activities. Each country’s experience is discussed in turn under three major categories: 1. public warehousing, 2. private warehousing, and 3. farmer-focused approaches.

Author Jonathan Coulter
Publisher UNCTAD
Number of Pages 111 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Asset and Liability Management for Deposit-Taking Microfinance Institutions Technical Note 2009

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Even the most mature microfinance institutions (MFIs) need to pay attention to their balance sheet to manage financial risks. Risk management helps determine the appropriate balance between risk and reward. As MFIs diversify their funding sources, sound asset and liability management (ALM) is critical to help MFIs asses and manage financial risk.

By examining the structure of the balance sheet, MFIs can identify, measure, and manage financial risks—risks arising from the mismatch of asset and liability currencies (foreign exchange risk), maturities (liquidity risk), and repricing (interest rate risk). Once these risks have been identified and measured MFI managers can decide what level of risk is acceptable and set limits to maintain asset and liability mismatch at an appropriate level given the organization’s risk appetite and growth and profitability targets.

This Focus Note gives an overview of these risks and pays special attention to how they apply to deposit-taking institutions.

Author Karla Brom
Publisher CGAP
Number of Pages 36 pp.
Primary Language English (en)
Region / Country Global
Related Resources
The Microfinance Rating Outlook Report 2008 Report 2008 French (fr)

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This report aims at providing an overview of the state of the microfinance institutions rating market as at the end of 2007 and is based on data collected directly from the rating agencies. 2007 saw demand within the microfinance rating market grow by 19.5% and 539 ratings were performed bringing the global grand total to 2,280.

The previous 2006 report identified several market trends. These included the increasing levels of private investment in the microfinance industry and the need for MFIs to attract these resources in order to sustain their growth. Indeed, it can be safely assumed that these trends were confirmed in 2007 as highlighted by the 35% growth in international investments in MFIs. Aspects such as the Basel II Accords and the pressure from MFI stakeholders for more transparency and better governance within the microfinance sector have further contributed to the overall growth of the market.

The report points out that mainstream credit rating agencies are increasing their market share in the field year after year. This situation has remained constant despite the fact that specialized microfinance rating agencies have responded dynamically to the changing microfinance market by expanding geographically, consolidating their activities, and diversifying their products.

One such product diversification includes the development of the social performance evaluation, also called a social rating which is reported for the first time. This growing interest of private investors (both socially oriented and for-profit commercial) is certainly financially profitable for the microfinance field and its sustainability.

However, the microfinance players should not lose sight of their social mission and the poorer should

not be excluded from the borrowing facilities because of a higher risk of default and social ratings help MFIs to maintain their social mission.

A further challenge to the rating market that was identified in the 2006 Outlook report was the closing of the Rating Fund and whether demand would decrease as a result. Seen as the Fund was still running in certain regions in 2007, it is still too early to analyze the effect on demand but what has become apparent is the fact that the Rating Fund contributed to the growth of the rating market without creating an artificial market.

ADA Website  -  French (fr)

Author KPMG Luxembourg; ADA
Publisher ADA
Number of Pages 44 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Risk Management in Microfinance: Emerging Challenges in Indian Context Paper 2007

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In India, the exponential growth of Self Help Group Bank linkage program has brought in challenges, which expose the banks to varying levels of risks. Even though the lending to SHGs is outside the purview of the individual credit risk rating framework right now and only portfolio approach is adopted, the banks have to be ready with a roadmap for managing both the credit risk and the operational risk in Micro finance so that they will be comfortable to comply with the forthcoming Basel II norms.

The present study is a descriptive one and focusing more on qualitative aspects. Focus group discussions were held with the stakeholders to elicit their views on emerging risks at the SHG and NGO level, which led to short listing of ten major risk factors. A 5-point scale was constructed and used after pre-testing to find out the perception of the branch managers on those 10 risk factors. The data was collected from 68 Branch managers of commercial banks involved in SHG lending in 5 districts. Categorization of risk was done using the mean and the standard deviation for each risk factor.

Out of the ten risk factors, branch managers perceived 6 risk factors as high risk category, viz Reduction in grants to NGOs for group promotion, Maintenance of group accounts by a few and not in a transparent way, Frequent switch over of NGO field staff, Loan size not commensurate with the capacity of SHG members, Increasing possibility for loan default with increase in loan size and SHGs shouldering too much government program responsibilities beyond their capacities.

The present study recommends risk mitigation / management measures, suggests credit risk rating tools for SHG loans and also offers suggestions for policy changes. The major suggestions made are as hereunder:

  • The banks shall consider the credit risk rating tools suggested in this study as given in the annexure I and II as a base and shall develop their own SHG credit risk rating tools to suit their context. The calibration on the risk rating scale can be linked with credit decision making especially with reference to loan amount, tenure and pricing of the loan. The risk based pricing will encourage the SHGs to keep up the credit discipline and enforce the repayment ethics.
  • NABARD shall form Micro Credit Information Bureaus at the district level as a pilot and make available the credit histories of the SHGs to the banks over online.
  • NABARD shall organize more capacity building programs for NGOs and CBOs on basic risk management strategies in Micro finance.
  • Government should change the mode from rapid growth to consolidation phase so as to ensure a growth with stability and improve the quality of the groups.
  • NGOs shall form Federation of SHGs (CBOs) and train them to take up the responsibility from the NGOs for monitoring of SHGs.

The study findings & some of the suggestion made in the study have been incorporated by the author into the training module of the SHG training for Branch Managers and the author has conducted three training programs for Branch Managers on 13th Jan 2006, 21st Feb 2006 and 11th Nov 2006 at Madurai. The Branch managers have found that the risk mitigation / management inputs imparted through the training were very useful to them and have become confident to face the challenges in enlarging the microfinance outreach.

Author Jeyaseelan, N.
Number of Pages 41 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Managing Credit Risk in Rural Financial Institutions in Latin America Paper 2007

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Executive summary: Rural areas lack banking services due, in large part, to perceptions of high risks and high costs of delivering financial services. In Latin America, it is estimated that less than five percent of rural households have access to formal credit. Even though agriculture is declining in economic importance and non-farm activities are becoming more important over time, agriculture remains the main livelihood activity for many. Agriculture, however, is inherently more risky than other sectors due to its vulnerability to climatic shocks, commodity price volatility, and trade restrictions. In the current context of ongoing globalization and the quest to reduce rural poverty, agriculture will have to maintain and improve its competitiveness. Ready access to agricultural finance is one of the main ways of improving agricultural competitiveness. Therefore, it follows that lending technologies and, in particular, rural credit management techniques must improve.

This report examines a sample of forty-two financial institutions in Latin America that have agricultural portfolios, and identifies their principal perceived risks, how they assess and manage credit risk, and how effective they are in the process as measured by key financial performance indicators (such as asset quality, portfolio growth, and profit margins). We find that these institutions are relying on four techniques to manage risks:

  1. Expert-based, information-intensive credit technologies wherein repayment incentives for clients and performance incentives for staff play important roles, and information acts as a virtual substitute for real guarantees are being used to reduce risk.
  2. A number of diversification strategies (geographic, sectoral, commodity) are being used to cope with risk.
  3. Portfolio exposure limits (requirements that agricultural credit be less than 40 percent of total lending) are being used to reduce risk.
  4. Excessive provisioning is being used to absorb and internalize risks.

The largest challenge for expanding credit in rural areas is that few institutions are transferring credit risk to third parties. In developed countries, massive expansions of credit have been due in large part to the introduction and wide diffusion of risk transfer techniques (such as insurance, securitization, derivatives, swaps, etc) and the wider acceptance of different types of collateral (inventories, accounts receivables, warehouse receipts, etc.). In the sample surveyed, the most common risk transfer instrument available and used (albeit only by 25 percent of the respondents) is publicly financed guarantee funds, which have historically been plagued with problems such as high costs, limited additionality, and moral hazard. In order to introduce some of the other risk transfer instruments more commonly found in developed financial markets, investments will be needed to reform and strengthen the insurance industry, capital markets, credit bureaus, commercial codes, secured transaction frameworks, and information disclosure rules.

The implications of using these credit risk management techniques are many. First, credit evaluation technologies are very expensive and tend to increase operating costs and, as a result, the interest rates charged by financial institutions. Second, some minimal economies of scale and scope are necessary. Statistical evidence supports the contention that the larger rural finance institutions in the sample can more easily diversify risks, offer a wider range of products, obtain better efficiency ratios and charge lower lending interest rates. Clearly, agricultural lending cannot be the primary type of lending unless more robust risk transfer techniques become more commonplace. Third, the credit technology used in agricultural microfinance is an adaptation of urban microfinance technology and has limits for more commercially oriented and specialized agricultural borrowers. New technologies will have to be developed or adopted.

At present, a common set of credit evaluation principles seem to be widely applied:

  • Employ well-prepared staff that has some background in agronomy.
  • Use staff performance incentives to promote a sense of responsibility and to reward results.
  • Gather and use copious amounts of information on character, managerial ability, reputation for repayment, and financial viability to identify “good borrowers.”
  • Rely principally on cash flow and sensitivity analysis to determine repayment capacity.
  • Give preference to households with diversified streams of income and that are somewhat insulated from weather risks (larger homesteads, fragmented plots in different microclimates, and those that use of irrigation).
  • Use repayment incentives to avoid strategic defaults.
  • Monitor clients closely.

In conclusion, most institutions surveyed saw market opportunities in rural areas, and the most successful institutions were expanding their agricultural portfolios and generating profits. However, much can still be done to improve credit risk management by improving the feasibility of transferring risk to third parties.

The report makes several recommendations for donors and governments. The preferred or best option is to provide support to rural institutions that meet minimum scale requirements that would permit easy diversification of credit risk, and help them to expand and innovate. In countries where these types of rural financial institutions are absent, the second best option would be to assist those institutions that have a clear strategic commitment to the rural sector as well as competent management to upgrade their technologies, diversify, and introduce risk transfer instruments. The third best option would be to promote mergers and acquisitions among smaller institutions so they can reach a larger scale. The fourth best option would be to promote value chain financing, since many of the credit risks are attenuated by participation in a chain.

(Extract taken from original document.)

Author Sergio Navajas, Alvaro Tarazona Soria, Carolina Trivelli, Mark Wenner
Publisher Inter-American Development Bank
Number of Pages 36 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Tool for Developing a Financial Risk Management Policy Toolkit 2006 English (en)

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This toolkit shows MFIs how to design policies to manage financial risks. It shows how risks can be anticipated and mitigated, and if possible prevented. It also suggests how best to assign responsibility for monitoring risk and taking action. The toolkit goes beyond guidance and advice, providing a detailed policy template in Section 4, as well as a set of practical appendices that include several useful spreadsheets. The template and many of the appendices can be tailored to an individual MFI’s needs, which together offer:

  • Checklists of issues to consider and steps to take when designing and implementing a financial risk management policy.
  • Topic-specific sections on how to track risks, report risks, make key financial calculations and negotiate bank loans.
  • Working spreadsheets that include labeled charts with active cells and spreadsheet functions

This toolkit is only a starting point in designing a comprehensive policy. For example, it does not provide in depth information on cash management operations, which warrant an independent treatment due to the detailed nature of the associated control issues. Instead, the toolkit provides broad guidance on the topic and raises awareness of cash management issues. Emphasis is placed on liquidity management, since the risk of illiquidity is considered the largest threat to the viability of any financial institution.

WWB have developed this toolkit because surprisingly few microfinance institutions (MFIs) have a formal financial policy, and industry resources on financial risk management are scarce. For fast-growing financial institutions, the establishment of standards and policies to manage cash and liquidity across large branch networks is crucial for viability in the short run, not to mention the long run. The toolkit is complemented by an interactive CD training tool that provides additional insights and capacity-building, using an MFI case scenario and the Excel spreadsheets can be downloaded separately.

The toolkit can be purchased on CD or as a downloadable pdf file. It is available in combination with the interactive training course for $75 or as a standalone item.

Ordering Information  -  English (en)

Author Schneider-Moretto, L.
Publisher Women's World Banking
Number of Pages 83 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Rural Finance Innovations: Topics and Case Studies Paper 2005

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This study of innovations in agricultural finance seeks to educate policy makers, task managers, and practitioners by highlighting four key areas where innovation could lead to greater access to agricultural finance:

  • warehouse receipts and collateral securitization measures;
  • risk management products;
  • supply chain finance; and
  • technology.

The paper explores these themes by giving examples from around the world where these strategies are being applied. Because many of these case studies are in the nascent stages, a full analysis of their “success” cannot be made at this point in time. The paper attempts to address the outcomes to date, and where the case studies are sufficiently advanced, give an indication of their results.

The paper describes the issues surrounding the themes and how innovative techniques can be used to overcome traditional barriers to providing financial services to agriculture by reducing either the risks associated with lending, the costs, or both. The diverse group of case studies and thematic discussions also underscore some key lessons regarding the role of government in its quest to lower costs and risk in the rural finance space.

The case studies include the following:

  • Drumnet – supply chain financing and technical assistance in Kenya
  • Clark Cotton – supply chain financing in Zambia
  • BASIX – weather insurance and mobile computers for portfolio management in India
  • SudAgroServ – supply chain financing with farmer ownership in Tajikistan
  • Indian Tobacco Company – Mobile marketing in India
  • Fondos – Risk pooling and reinsurance in Mexico
  • CRDB Ltd. – Price risk and collateral management in Tanzania
  • Cedula de Produto Rural – farm bonds to provide liquid collateral in Brazil
  • Nacional Financiera – reverse factoring to create linkages between small suppliers and big buyers

This paper makes considerable use of tables to summarise and make the information easy to assimilate. The appendices, for example, have a useful overview of physical and financial price risk management instruments and enabling technologies. The blend of theory and practical examples is also extremely useful to those who are less familiar with any of the four key themes that the paper addresses.

Author World Bank
Publisher The World Bank
Number of Pages 83 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Shifting Technical Assistance Needs for Commercial MFIs: A Focus on Risk Management Tools Paper 2005

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This paper notes that in recent years, microfinance institutions (MFIs) have been shifting away from their reliance on donor financing and transitioning to commercial funding sources such as client deposits and loans from commercial banks and private investors. With such funding come more stringent repayment schedules and higher costs-of-funds, exposing an MFI to additional risks such as liquidity risk, interest rate risk and often exchange risk. The paper suggests that given the NGO and development roots of most MFIs, they are often unfamiliar with these risks and the techniques to manage them. It argues, however, that MFIs can utilise expertise and tools from formal financial institutions that are constantly developing and updating their risk management techniques.

Banyan Global has developed a risk management framework that involves identifying, measuring, limiting and monitoring risks. These risks include financial risks associated with matching interest and exchange rate exposure as well as liquidity and operational risks. The framework involves active asset liability management, liquidity management and internal audit. It also incorporates stress testing as a tool to manage these risks.

The paper states that regulators, raters, and increasingly donors and MFIs themselves are requiring that MFIs pay greater attention to the financial risks that they take. The purpose of this paper is to share the major findings of Banyan Global’s risk management research with the microfinance community, to explain how liquidity, interest rate and exchange rate risk can impact an MFI’s business, and to introduce practical tools and techniques which MFIs can use to measure, limit and monitor these risks. The paper notes that the techniques presented are not comprehensive but rather designed to advance the discussions surrounding microfinance risk management.

Author Powers, J
Number of Pages 15 pp.
Primary Language English (en)
Region / Country Global
Related Resources
The Role of Factoring for Financing Small and Medium Enterprises Paper 2005 English (en)

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Factoring is explicitly linked to the value of a supplier’s accounts receivable and receivables are sold, rather than collateralized, and factored receivables are not part of the estate of a bankrupt firm. Therefore, factoring may allow a high-risk supplier to transfer its credit risk to higher quality buyers. Empirical tests find that factoring is larger in countries with greater economic development and growth and developed credit information bureaus. “Reverse factoring” may mitigate the problem of borrowers’ informational opacity if only receivables from high-quality buyers are factored. We illustrate the case of the Nafin reverse factoring program in Mexico.

Document  -  English (en)

Author Leora Klapper
Primary Language English (en)
Region / Country Global
Related Resources
Surviving Disasters and Supporting Recovery: A Guidebook for Microfinance Institutions Guideline 2005

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This guidebook begins by noting that global experience demonstrates that Microfinance Institutions (MFIs) can profitably serve poor and vulnerable populations, enabling them to reach large numbers of clients. It points out that the majority of MFIs, however, remain challenged to develop the institutional capacity, client-responsive products, and business models to offer services sustainably. As clients’ repayment capacity declines, an MFI’s portfolio quality and liquidity situation position are put at risk. In the event of a a natural disaster, both the MFI and its clients become vulnerable.

The guidebook notes that experiences of several MFIs in disaster-prone areas, however, have demonstrated that access to microfinance services can support disaster preparedness and risk reduction by decreasing client vulnerability. When clients have access to needed financial services during crisis situations, the impact of the disaster may considerably lessen.

Provision of financial service during a disaster is only possible if an MFI is prepared. An unprepared MFI may not only fail to protect its clients, but puts its own survival at risk. Since the incidence of natural disaster is on the rise globally, many institutions have identified the need to prepare for this possibility for their own and their clients’ well being.

This guide seeks to assist MFIs in defining an institutional strategy for disaster preparedness. It lays out the steps for assessing the potential risk of disaster, the clients’ needs and the institutional capacity to respond. The report is based upon assessments and from this, offers a variety of recommendations for internal preparedness as well as examples of financial products that could mitigate the impact of disaster on clients. This guide also provides references to tools and guidelines which institutions may use in rolling out the strategies on which they decide.

As such, the guide is structured around the various phases for planning and implementing a disaster management plan:

  • Assessment of risks
  • Institutional preparedness
  • Client preparedness
  • Emergency response phase
  • Recovery phase

The end of the guide includes a useful summary checklist. In addition, the guide itself is interspersed with various “activity” sections, particularly within the assessment and preparedness stages.

Author 2005
Publisher The World Bank
Number of Pages 51 pp.
Primary Language English (en)
Region / Country Global
Related Resources
The Role of Financial Institutions Brief 2005

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This note begins by setting out that financial institutions are in the business of lending money and providing financial services. They can provide a range of credit services, including short- and long-term loans for business and personal use. This range allows them to serve rural, agricultural and agribusiness clients. Financial intermediaries can mobilise deposits – deposit and transfer services need to be available to allow low-income, rural, poor people to maintain liquid, monetary savings. It is noted that agricultural enterprise development, or rural development more broadly, will be well served by a financial sector that provides a wide range of services to the agricultural sector in rural areas.

It is also highlighted that at the same time, however, a number of constraints limit the provision of services by financial institutions to the agricultural sector and rural areas. These include:

  • Higher transaction costs
  • Seasonality of agriculture
  • Loan collateral issues
  • Asymmetry of information
  • Legacy of failed state-subsidised directed credit programmes for agriculture
  • Covariant risk

This note reviews the risks and problems financial institutions face in trying to provide rural and agricultural financial services, highlights new approaches and mechanisms to mitigate credit risk and improve the profitability of rural lending. This issue also discusses the potential for historically urban-focussed microfinance institutions to provide services in rural areas, including to farmer areas.

Author Miller, M
Publisher USAID
Number of Pages 6 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Ghana: Inventory Credit for Small-Scale Farmers Case Study 2004

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This brief profile starts by summarising the main benefits of the warehouse receipt system, which are providing a source of collateral to facilitate access to credit (hence its alternative name of inventory credit) and moderating seasonal price variability, plus the side benefits of improving standards of weights and measures, increasing awareness of quality and developing grading systems. It goes on to note that in those countries that do not have trusted warehouse operators and where the regulatory and supervisory capacity is weak, the use of the methodology is limited. Where it has been successful it has generally excluded small scale farmers.

The profile goes on to introduce the Ghana inventory credit project as an example of a scheme which deliberately set out to assist small scale farmers to take advantage of seasonal price swings in the maize market to improve their incomes. It was started in 1989. Farmers form groups of 20 – 50 members to store their produce in a warehouse operated by TechnoServe, a private company. The farmers are given a receipt stating the quantity and quality of the goods deposited, which enables them to get a loan to disburse to the group members. Each farmer’s account is tracked individually by the group, although the grain is the collective property of the group once it is warehoused and they are jointly responsible for its subsequent treatment, storage and sale.

By the late 1990s the scheme was assisting over 100 farmer groups with loans in excess of $170,000. Repayment rates were close to 100%. This encouraged the Agricultural Development Bank of Ghana to introduce large scale commercial inventory credit schemes which has dramatically reduced inter-seasonal price fluctuations in the country. This has consequently reduced the value of the system as inventory credit is only profitable when the increase in the value of the stored goods exceeds the cost of storage and borrowed funds. To survive the service provider will need to increase warehouse volumes, reduce costs, or consider diversifying into other products.

This note suggests that warehouse receipt systems may be viewed more as a means of increasing the efficiency of markets that as an end in itself.

Author World Bank
Publisher The World Bank
Number of Pages 2 pp.
Primary Language English (en)
Region / Country Global
Ghana
Related Resources
Foreign exchange risk management in microfinance Article 2004

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Many microfinance institutions (MFIs) fund a portion of their portfolio by accessing loans or lines of credit in hard currency. In doing so, MFIs incur foreign exchange risk, which is defined as the possibility of a loss or a gain from varying exchange rates between currencies. If not properly managed, foreign exchange risk can result in losses. Taking on exposure to foreign exchange risk makes an MFI vulnerable to factors that are beyond its control. In addition to the risk in changing rates, incurring foreign exchange risk also includes the danger that it might become impossible to carry out currency transactions because of government interventions or a market disruption. The objective of this paper is:

  1. to provide MFIs with ways to evaluate and manage foreign exchange risk to minimize exposure and avoid losses, and
  2. to highlight the role that lenders and donors can play in reducing the exposure of MFIs to foreign exchange risk.

The authors explain the meaning of currency depreciation, devaluation and appreciation and provide evidence to show how currencies change in practice and how this can impact on an MFI. After describing how developed countries manage foreign exchange risk, the paper goes on to provide some case studies of how WWB members have managed these risks.

Their first example is of a loan structure used by the Ford Foundation with MFIs such as the Kenya Women Finance Trust which is essentially a local currency loan payable in US dollars with a reserve mechanism designed to provide protection to the lender against depreciation of the local currency vis-à-vis the US dollar over the life of the loan. WWB’s Colombian and Dominican affiliates use a system in which the proceeds from a dollar-denominated loan are deposited in a bank in US dollars, while the bank in turn issues a loan to the MFI in local currency, taking the US dollar deposit as collateral.

Other methods described are forward contracts - the MFI borrows in hard currency and separately enters into a forward contract, frequently with a third party, to lock in the future rate at which it will buy the hard currency to repay the lender; and swaps - in which an MFI with a liability in foreign currency can in effect exchange it for a local currency obligation. All the methods are well explained and illustrated with diagrams.

The final section of the paper deals with how international lenders can play a role in helping MFIs to mitigate their foreign exchange risks by providing loans in local currencies. Obviously an international lender must first devise a mechanism to mitigate its own foreign exchange risk. Oikocredit, for example has set up a Local Currency Risk Fund (LCRF). In conclusion WWB recommend that MFIs perform sensitivity analysis on their projections by exploring the impact of potential movements in exchange rates on their profitability and financial condition. Such an exercise can provide valuable insight into an MFI’s ability to withstand currency volatility and be useful in setting foreign exchange risk policies that are tailored to each institution’s situation and financial structure.

Author Women's World Banking
Publisher Women's World Banking
Number of Pages 28 pp.
Primary Language English (en)
Region / Country Global
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Warehouse Receipts Programme / Agricultural Commodity Financing Programme Study Guide 2004

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The term Warehouse Receipts Programme embodies the Agribusiness Team’s overall financing activity against agricultural commodities, whether or not such credits are secured by a pledge of warehouse receipts (WHR). WHR allow agricultural producers and processors to obtain working capital by using agricultural products stored in licensed warehouses as collateral. In countries where legal and regulatory provisions applicable to WHR are satisfactory to the Bank, such financings may include a degree of domestic operating risk. In all other situations, when WHR legislation is either non-existent or inadequate, the underlying rationale has usually been to promote this instrument and to strive to move legal transition forward through policy dialogue and technical assistance. Acknowledging this shift in the scope of the programme, the Agribusiness Team renamed the WHRP the Agricultural Commodity Financing Programme (ACFP) when updating the Board of the EBRD in January 2004.

Two important aspects of the Bank’s sponsored ACFP are discussed in this special study and give rise to important recommendations:

  • WHR are designed to provide a level of comfort from a credit standpoint since the creditor/holder of such a document should be able to secure, release and liquidate the financed goods on demand, thereby avoiding any court procedures. Such out of court enforcement procedures are, however, possibly open to legal challenge. Although this is an unlikely situation, it has not yet been tested and expert local legal advice should help to mitigate this risk.
  • Indemnity funds are intended to cover non-insurable fraud risk. Unfortunately, these have proven difficult to set up and, since no claim has yet been made against the few existing indemnity funds, this is also an untested area.
Author Forestier, PH.; Bryde, P.; Fani, I. ; Papandreou, N.;
Publisher EBRD
Number of Pages 60 pp.
Primary Language English (en)
Region / Country Global
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Guarantee Funds for Small Enterprises Document 2004

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This detailed guide sets itself the goal of describing the uses, methods, and pitfalls of guarantee funds, and does so in a clear and easy-to-understand way, excellently arranged for use in institutions supporting small or micro enterprises. A credit guarantee is a financial product that a small entrepreneur can use as a partial substitute for collateral. It is a promise by a guarantor to pay all or part of a loan if the borrower defaults. Guarantee funds may be created by groups of entrepreneurs forming mutual guarantee associations or by government departments or development agencies. Such funds are of particular help to microenterprises without a proven track record: bankworthy, but without the necessary collateral or positive credit reputation.

The manual is aimed at people who have to manage guarantee funds and contains the following chapters:

  1. Introduction
  2. The role of credit guarantees
  3. Guarantee fund models, e.g. funded v unfunded schemes, individual guarantees v portfolio guarantees, enterprise oriented v institution oriented, ex-ante v ex-post guarantees, mutual guarantee associations
  4. Eligibility criteria for enterprise schemes and institution schemes
  5. Risk sharing; taking and liquidating collateral
  6. Setting the size of the guarantee fund
  7. Operating procedures and processes
  8. Relation management and marketing, including the risk of moral hazard
  9. Organisation, management and staffing
  10. Pricing and financial sustainability
  11. Accounting and financial reporting
  12. Performance monitoring

The manual concludes with two appendices which offer examples of common clauses in different types of guarantee contract. Each chapter concludes with a suggested workshop exercise aimed at helping institution staff conceptualise and develop their understanding of the guarantee fund in their own institution.

This booklet is extremely practical and deals with its subject in a clear, concise, user-friendly style. It presents a balanced view and stresses that guarantee funds are not uniformly useful or even uniformly available. The result is a manual that is informative and educational without being heavy. The ILO International Training Centre in Turin offer training courses to complement this manual.

Author Deelen, L.; Molenaar, K.
Publisher ILO
Number of Pages 142 pp.
Primary Language English (en)
Region / Country Global
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Collateral, Collateral Law and Collateral Substitutes Report 2004

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The report notes that in financial sector development, the possession of collateral largely determines whether certain categories of economic agents obtain access to the financial market and whether financial contracts are efficiently concluded, i.e., with least losses. It also highlights that collateral issues are relevant in targeted promotion strategies, like small enterprise and private sector promotion, respecting poverty alleviation.

The report defines collateral as an asset pledged by a borrower to a lender until a loan is paid back. If the borrower defaults, then the lender has the right to seize the collateral and sell it to pay off the loan. The purpose of this report is to tie together ongoing conceptual and field work on collateral law and substitution, to identify the outstanding issues, especially those relevant for policy-making and institutional learning and to formulate recommendations for donor agencies interested in the financial sector in developing countries and transition economies. The ultimate goal of this report is to influence policies, the regulatory framework and institutional behaviour with a view to innovative and effective collateral substitution. This would contribute to removing what is considered to be an important obstacle in the access of the poor to financial services.

The report is organised in 5 sections: the first part explores the extent and nature of the collateral constraint. The second section seeks to throw light on what is meant by collateral, collateral law and collateral substitutes and their respective functions. The third section reviews the available empirical evidence on the effects of the legal and regulatory framework and on the performance of substitutes. The fourth part summarizes findings. The report concludes with policy issues and points for discussion. Recommendations are given at the end of the report for central banks, representative organisations of SMEs and microenterprises, banks and governments (ministries of justice, finance and economy).

A useful glossary from Black’s Law Dictionary is also provided.

Author Balkenhol, B and Schütte
Publisher Employment Sector, International Labour Office, Geneva
Primary Language English (en)
Region / Country Global
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Risk Management Challenges in Rural Financial Markets: Blending Risk Management Innovations with Rural Finance Paper 2003

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This document was one of the leading documents for the seminar called Paving the Way Forward for Rural Finance, organized by the USAID, BASIS-CRSP and WOCCU. On this paper the author emphasizes the difficulties of risk management and risk coping in the rural areas of developing countries. The paper mentions how banking and insurance are used to manage and cope with risk; it also highlights problems that are presented in the case of the traditional crop insurance.

The paper reviews the innovations in global financial markets that provide opportunities for the rural finance institutions to manage correlated risk and expand their ability to reach rural households. The two major innovations explained on the paper are:

  • The use of global futures markets by intermediaries who can offer a form of price insurance; and
  • The use of index insurance contracts to shift natural disaster risk into global markets.

The paper presents different country case examples and how they use the index insurance. These cases are:

  • Mexico: use of water index insurance for mutual insurance, reinsurance and to facilitate water markets.
  • Mongolia: use livestock mortality rates as index insurance to cover deaths of large numbers of animals.
  • Uganda: rural bank use of weather index insurance for bank customers.
  • India: a case of microfinance insurance (BASIX)
  • Kenya: the potential for using coffee futures markets for price risk management
Author Skees, Jerry;
Publisher USAID; DFID; WOCCU; BASIS
Number of Pages 32 pp.
Primary Language English (en)
Region / Country Global
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Risk Management: Information Technology Case Study 2002

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Directed credit programs are common phenomenon in most developing countries. They continue to be implemented despite their inefficiencies and their ineffectiveness in reaching the target beneficiaries. Like any other developing countries, the Philippines has for many years been implementing subsidized rural directed credit programs to provide the rural poor access to credit. It was only recently that it has moved away from the implementation of subsidized credit to the adoption and implementation of market based credit policies to provide access to credit. Considering the expediency of direct credit provision, the adoption of market-based credit policy reforms in the rural sector has always been an impossible task. Policymakers who are only in power for a short period of time always prefer to implement subsidized directed credit programs as a form of assistance to the rural poor. This paper tells the story of how the Philippines was able to pursue and implement market-based credit policies and rationalize the implementation of subsidized directed credit programs, using the assistance of the Credit Policy Improvement Project (CPIP), a donor-funded technical assistance project. Section I gives a brief description of the Philippines policy environment prior to the reforms. Section II and III describes the CPIP, its components, how it was implemented and the key results of project implementation. Section IV gives a brief account of the challenges faced by the project and the policy reforms that are currently being implemented while the last section presents lessons learned from the project that are useful for the donor community.

Author Ma. Piedad S. Geron
Publisher USAID
Number of Pages 13 pp.
Primary Language English (en)
Region / Country Global
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Farmer and Farmers’ Associations in Developing Countries and their use of Modern Financial Instruments Paper 2002

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This paper begins by noting that since the beginning of the 1990s, with the liberalisation of commodity trading and pricing in developing countries and countries with economies in transition, the burden of risks has been shifted from Governments to farmers. In most of these countries, farmers, previously largely insulated from the day-to-day vagaries of the world market, now bear most of the brunt of volatile and unpredictable prices. The paper also suggests that when farmers receive prices that are unstable and uncertain, they run price risks from the moment they decide to plant a crop, and every time that they buy and apply inputs such as fertilisers or pesticides, or use paid labour. Furthermore, farmers’ associations too may run price risks: if they advance their members credits which are to be reimbursed through future deliveries of crops, they run the risk that, at the moment that the crop is sold, prices have fallen to levels too low to enable loan reimbursement.

Following this, the paper argues that whilst risk management markets are not a panacea for farmers’ problems – they do not exist and are never likely to exist for all commodities, and can only give temporary reprieve from a secular fall of prices – they could, nevertheless, greatly help developing country farmers to improve their lives. In addition, the paper points out that transfer of price risk is not the only facility that financial mechanisms and techniques can offer to farmers. Financial techniques can also be used to reduce farmers’ counterparty risk – to shift the risk of lending from the farmer (a credit risk) to the crop (a performance risk).

This paper looks at the practical applications of “new” financial techniques for enabling farmers to manage price risk and facilitating their access to credit. The first chapter provides an overview of farmers’ attitude towards risk, and the possible role of farmers’ associations in helping farmers cope with price risk and in facilitating agricultural financing. The next chapter describes various applications of financial techniques for price risk management and agricultural finance. The final chapter focuses on possibilities for farmers’ associations to enhance their use of these techniques, including through the use of modern communication and information technologies.

Author UNCTAD Secretariat
Publisher United Nations Conference on Trade and Development
Number of Pages 36 pp.
Primary Language English (en)
Region / Country Global
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Financing of warehouse receipts - Legal review Report 2002 English (en)

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This publication is part of report series published under the FAO Investment Centre/European Bank for Reconstruction and Development Cooperation Programme. The series presents sector reviews and studies undertaken in Central and Eastern Europe that cover development issues and innovative areas to increase investment in agriculture in the region. Warehouse receipts are used to facilitate the financing of primary agriculture, agricultural trade and food processing. Like other countries of the region, agricultural enterprises in Lithuania are facing difficulties in raising working capital. In this context, EBRD decided to promote the development of a grain warehouse receipt programme in Lithuania, as part of its support to the utilization of warehouse receipts as collateral for financing throughout the region. This publication focuses on the legal issues that need to be addressed in order to set up a functioning warehouse receipts system in Lithuania. The report is a reference for governments interested in setting up similar systems throughout the region.

Report  -  English (en)

Author FAO & EBRD
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 64 pp.
Primary Language English (en)
Region / Country Global
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Microfinance and securing credit for family farms Paper 2002

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This is the second theme synthesis paper from the international workshop held in Dakar in January 2002. It considers the issue of how, due to the lack of proper instruments to secure credit for rural areas, financial institutions (FI) have no incentive to expand their agricultural credit portfolio. Apart from considering the tools and instruments that can be used to reduce the exposure of a financial institution to risk, the paper also examines the borrowers' perspective. For family farms the real issue is securing income.

So the paper first reviews the factors that lead to credit insecurity, including factors that depend on the environment of the FI and its clientele, and those that depend on the choices made by the FI. Faced with a generally unfavourable environment, FI have a tendency to limit the share of agriculture in their credit portfolios and they concentrate their operations in areas where secure commodity chains enable them to limit their exposure to risk. In terms of the risk management policies of FIs, the paper goes on to appraise the various instruments that can be used such as mortgage of property, guarantors, pledges, agricultural warrants (pledges on stored crops or crops still in the field), delegated payment, security deposits, and various guarantee fund mechanisms.

Finally the paper reviews the question of protecting farmers' incomes. One of the main causes of default on loans lies in family accidents, illness and death. Thus health and life insurance can provide valuable protection. To manage other types of risk – weather related or economic – most family farms devise diversification strategies and involve social networks. From this perspective, agricultural services reform, particularly improving technical and economic advisory services, may contribute to securing the incomes of family farms and thus to avoiding default. The difficulties of providing adequate cover for natural disasters and market risks are touched on briefly.

Author Lesaffre, D.; Pesche, D.
Number of Pages 15 pp.
Primary Language English (en)
Region / Country Global
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The role of warehouse receipt systems in enhanced commodity marketing and rural livelihoods in Africa Paper 2002

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Most African countries have, since the 1980s, liberalised agriculture without experiencing food crisis, as feared by sceptics, but the outcome of reforms has been rather disappointing and agricultural markets remain underdeveloped and inefficient. One means to improve agricultural marketing, which is the focus of this paper, is to develop regulated warehouse receipt (WR) systems. The system will curtail cheating on weights and measures; ease access to finance at all levels in the marketing chain; moderate seasonal price variability and promote instruments to mitigate price risks. It will also reduce the need for the Government to intervene in agricul- tural markets, and reduce the cost of such interventions if needed.

The major problem in establishing WR systems in Africa is disabling elements in the policy environment. Drawing on experience from projects implemented in Africa during the last decade1, the authors outline how this challenge can be addressed, the most crucial being to build strong stakeholder support behind the initiative.

Author J. Coulter and G. Onumah
Publisher Elsevier
Number of Pages 19 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa, Western Africa
Keywords Warehouse Receipt Finance, Risk Management, Warehouse Receipts
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Financing of warehouse receipts - Legal review: Lithuania Report 2002

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This survey was commissioned by the European Bank for Reconstruction and Development (EBRD) and carried out by the Investment Centre Division of the Food and Agriculture Organization of the United Nations (FAO), under the co-operation agreement between the two institutions.

The programme had two main objectives :

  • transfer the experience and knowledge of Central European countries in the area of grain warehouse receipts; and
  • analyse the existing legislative framework in Lithuania with a view to identifying areas for improvement in order to utilise warehouse receipts in agricultural lending.

General recommendations for the implementation of the system of common-use warehouses and warehousing receipts in Lithuania, it is necessary to adhere to the following structural organization model:

  • Creation of a proper legislative environment
  • Co-ordination of interests among growers, agricultural processors and traders.
  • Proper insurance of the financial institutions (commercial banks) providing short-term loans against bankruptcy of warehouses.
  • The formation of a guarantee fund and insurance of common-use warehouses and goods in store.
  • The establishment of a state supervisory and control system.
Author FAO; EBRD
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 64 pp.
Primary Language English (en)
Region / Country Global
Lithuania
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A Risk Management Framework for Microfinance Institutions Book 2000

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This book presents a framework for internal risk management systems and processes in microfinance institutions. The content is aimed at senior managers and directors of these institutions. The initial chapters provide an overview of comprehensive risk management as an approach and discuss the significant risks and challenges facing microfinance institutions today. They explain the MFIs should not discourage risk taking but encourage prudent risk taking.

The key components of an effective risk management framework are identified and explained. These include:

  • identifying, assessing and prioritising risks
  • developing strategies to measure risk
  • designing operational policies and procedures to mitigate risk
  • implementing procedures and assigning responsibilities
  • evaluating results and revising procedures as necessary

The key concepts are illustrated with practical examples drawn from microfinance institutions around the world.

Author MicroFinance Network; Shorebank Advisory Services
Publisher GTZ
Number of Pages 70 pp.
Primary Language English (en)
Region / Country Global
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Examination of the Effectiveness and Usefulness for Commodity-Dependent Countries of New Tools in Commodity Markets: Risk Management and Collateralized Finance Paper 1998

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The paper begins by noting that in 1995, commodities accounted for 64 percent of the exports of Latin America and the Caribbean, 74 percent of the exports of Africa, and 39% of the exports of the countries of Central and Eastern Europe. Asia is the only region where most countries have successfully diversified away from commodities (whose share in total exports is 23 percent), but even here, the authors note, that some groups of countries remain highly commodity dependent.

As such, adverse prices, or adverse trading conditions, can have a major impact on most commodity-dependent countries. The authors argue, that modern market-based financial instruments, such as futures, options, swaps and various forms of collaterised finance, may not be the ideal solution to the problems caused by market instability, but no better alternatives are currently available.

The paper contends that modern market-based commodity trading instruments, such as price risk management tools and various sophisticated financing techniques, are not panaceas; in particular, they will not help much in stabilising world commodity markets – they just help entities to cope better with unstable markets. However, they can serve more modest goals, such as securing budgets, improving cash flow management, improving access to credit or reducing credit costs.

The paper aims to examine the usefulness and effectiveness of these instruments for mitigating risks and reducing transaction costs for important groups of actors – enterprises (irrespective of whether they are privately or publicly owned), farmers and Governments. The practical issues with which these often small actors are confronted when they wish to use these instruments are also examined in the paper.

The paper begins by discussing the usefulness and effectiveness of modern financial instruments for enterprises before looking at the importance of price risk management and access to affordable credit for farmers. It then considers government policy and price risk exposure.

Author United Nations Conference on Trade and Development
Publisher UNCTAD
Number of Pages 18 pp.
Primary Language English (en)
Region / Country Global
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Collateral in Rural Loans Paper 1996

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This paper was prepared by the Rural Finance Group of FAO in collaboration with ALIDE, following studies of the role and importance of collateral in agricultural and rural loans in ten Latin American countries. It was noted that collateral is vital for the growth of formal credit markets, particularly for smallholder farmers.

Different types of conventional collateral, e.g., third party guarantee, mortgage, pledged assets, guarantee funds, are examined in terms of their legal and economic characteristics. The scope for non-conventional collateral is also explored, e.g., solidarity groups, blocked savings, endorsement, loan graduation, interlinked transactions. The report is aimed at the staff of development finance institutions.

Author ALIDE; FAO
Publisher ALIDE; FAO
Number of Pages 48 pp.
Primary Language English (en)
Region / Country Global
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Inventory Credit Book 1995

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This publication addresses a problem which has emerged in recent years in countries which have liberalised their agricultural marketing systems. Government marketing organisations usually had ready access to finance to purchase and store crops. After liberalisation private traders have been expected to take over these marketing functions but they lack the finance to do so. This has placed the burden of storage, particularly of food crops, on farmers who not always equipped to store efficiently. One consequence has been high levels of seasonal price instability.

Inventory credit is one way of overcoming financing constraints. It involves placing stocks of products in a bonded warehouse and obtaining finance by pledging the stocks as security. The system can be used by traders, processors or farmers as a means of obtaining credit, provided warehouses and reliable warehouse operators are available and appropriate legislation is in place to facilitate trade in warehouse receipts.

This FAO publication includes a number of case studies from the Philippines, India, Mali and Ghana. It explains how inventory credit can be implemented and who can benefit from it. It also examines the risks involved and how to manage them. The main conclusion which emerges is that inventory credit should not be targeted at particular users but should be offered without subsidy to those who are able to use it profitably. Similarly, the exercise should be profitable to lender and borrower alike and lending decisions should be made by banks without any kind of external pressure.

Author Coulter, J.; Shepherd, A.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 107 pp.
Primary Language English (en)
Region / Country Global
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Safeguarding deposits: learning from experience Book 1995

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The book notes that encouraging rural people to deposit funds fulfils two major functions. Firstly, it fosters investment. Secondly, it builds linkage between the immediate institution and the depositor. The book suggests that this linkage, which has aspects of responsibility and belonging, has been shown to be particularly effective as the basis for successful financial intermediation. However, it highlights that these beneficial aspects only apply when the deposits are secure. It also notes that the position of savers in banking crises in developing countries is vulnerable compared to the situation in industrialised economies.

This publication is concerned with money deposited for the joint purposes of earning a return and security. Despite differences in the motivations of savers, one expectation is common to all – safety of deposits.

The book aims to address some of the issues involved in ensuring that the savings deposits of the public are secure. It highlights the key role played by an appropriate regulatory environment, by depositor education and, above all, by sound management of financial intermediaries. In addition it outlines the points for and against risk management mechanisms such as deposit insurance and also outlines rehabilitation measures which can be taken following a bank crisis.

Chapter 1 discusses the role of savings in economic development and the different types of institutions taking deposits in lesser developed countries (LDCs) are introduced. Chapter 2 looks at the increasing instability of the financial market, which presents as increasing threat to the safety of savings. The following three chapters provide information on banking crises in various environments and on the methods used to safeguard savings in different circumstances. More specifically, Chapter 3 deals with crises and relevant facts in three European countries (Finland, Italy and Hungary), and assesses the lessons for LDCs. Chapter 4 presents two cases from the semi-formal cooperative sector, one from Malaysia and one from Kenya. In Chapter 5, the strengths and weaknesses of the informal sector are approached from the point of view of the depositor. The aim of Chapters 5, 6 and 7 is to draw the key lessons from the existing evidence for banking in the LDC environment. They deal with the key policies in preventing instability in financial institutions, with the principle elements of the safety net and with methods to protect the safety of savings when financial institutions become insolvent.

Amongst others, the book is aimed at the management and staff of banks, especially those operating in the rural areas of developing countries. It is also targeted at policy makers and others who are concerned with measures to ensure the well-being of rural populations as regards their access to secure deposit facilities.

Author FAO
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 181 pp.
Primary Language English (en)
Region / Country Global
Related Resources
Warehouse receipt financing in Pakistan Paper English (en)

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This paper on warehouse receipt (WHR) financing in Pakistan, published by Karandaaz Pakistan with financial support from the United Kingdom’s Department for International Development and the Bill and Melinda Gates Foundation, is an assessment of the current status of WHR financing in Pakistan, realized through in-depth interviews with current and potential users, as well as suppliers and regulators of the scheme. An analysis of the price trends of major agricultural commodities over the last five years reveals that WHR financing could be a viable source of credit for wheat, rice, cotton and maize farmers in Pakistan. Yet, the study finds that the development of WHR financing in Pakistan is still in its infancy. Although concrete measures have been taken towards the implementation of WHR financing, there are several gaps in the regulatory, institutional and infrastructural frameworks that are required for the effective operation of the model in Pakistan. The study draws recommendations in order for WHR financing to take for an upsurge in the country.

View Resource  -  English (en)

Author Karandaaz Pakistan
Publisher Karandaaz Pakistan
Number of Pages 37 pp.
Primary Language English (en)
Region / Country Global, Asia, Southern Asia
Pakistan
Keywords Warehouse Receipts, Warehouse Receipt Finance, Risk Management
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Finance for Smallholders - Opportunities for risk management by linking financial institutions and producer organisations English (en) English (en) English (en)

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The purpose of the study is to map practices from the 14 case studies and learn from good and innovative practices. The aim is to improve the approach of NpM/APF and the members of both networks in their efforts to facilitate access to finance for smallholders.

The specific objectives of the study are:

  1. To get better insight into how to provide appropriate financial products and services to smallholder farmers and their produce organisations;
  2. To investigate current practices and methodologies to address the known problems andconstraints of the small producers and POs related to accessing funds;
  3. To map how linkage between these (potential) clients, microfinance institutions (MFIs) andbanks can be strengthened;
  4. To compile lessons learned for policy guidelines and implications for the role of the Dutchsupport organisations in facilitating these linkages for appropriate access to finance;  
  5. To give recommendations on how can best practices and guidelines can be incorporated into organisations that are members of NpM, APF and e-MFP.
Finance for Smallholders - full report  -  English (en)

Finance for Smallholders - summary report  -  English (en)

Finance for Smallholders - case studies report  -  English (en)

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