The New Agricultural Input Sales System November, 2014

Agenda

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1. Structural problems of the previous input sales system

2. Piloted input sales system design features

3. Past pilot performances

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1. Structural problems of the previous input sales system

Why input finance?

• The economics of fertilizer use in Ethiopia demonstrates a clear value proposition for usage across most crops and regions – however, fertilizer usage has increased only marginally over the years

• These low adoption rates and use can be, in part, explained by limited access to input credit

• ATA has therefore focused significant effort in the past few months on improving Ethiopia’s input credit system

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What was wrong with the previous input distribution financing system?

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Key problems with existing input credit delivery in rural sector

1. Regional credit guarantee: Regional governments provide 100% credit guarantee to the Commercial Bank of Ethiopia, limiting loan collection incentives and leading to high default rate plus budgetary stress on regions

2. Cooperatives as financial institutions: Cooperatives function as financial institutions at the retail level but do not have the capacity, the systems, or the appropriate incentives to efficiently undertake

3. Diffuse loan collection: Multiple sets of loan collection interactions (primary cooperatives collecting from farmers, cooperatives unions collecting from primary cooperatives, etc.) meaning ultimate responsibility for collections is diffused

4. Loan repayments retained by cooperatives: Loan repayments frequently retained by cooperatives as working capital, resulting in delay/failure of repayments reaching financing institutions and significant pressures on regional budgets due to guarantees

Result: Limited credit access for rural households and pressure on regional budgets

Over the past two years, MoA and the ATA have been working closely to diagnose problems in the previous input sales system among with other development partners

Source: IFPRI, 2012; stakeholder interviews 6

Payment for default

Credit

Cash

Input flow

Credit guarantee

Cash/credit flow Product flow

International supplier

Agricultural Input Supply Enterprise

(AISE)

Coop Union & Federations (Selected by

AISE)

Commercial Bank of Ethiopia (CBE)

(Loans for Cooperative Unions)

Regional Agricultural Bureaus

Primary Cooperatives

Smallholder farmers

Cooperative Unions

Commercial farms

CBE issues loans to cooperative unions via a regional representative; funds are sent straight to AISE

If coop unions default, regional

government covers the balance

Regional government credit is no longer

passed on to farmers, but some primary coops offer loans to members from their own funds

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2. Piloted input sales system design features

A new input credit system that was tested during the 2013 planting season addresses many of the problems with the old system

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Design features of the new input credit system

• Substitutes regional governments’ guarantees with market-based risk sharing mechanisms – credit guarantee fund (partial), risk insurance, etc.

• Relieves the cooperatives from the credit disbursing and collection responsibility.

Instead, the cooperatives will focus on their core business of input retailing and output marketing.

• Establishes cooperatives as the parties responsible for demand estimation of inputs and therefore gives them ultimate responsibility for any unsold input.

• Channels input credit through microfinance institutes (MFIs) or other appropriately placed financial institutions that have extended reach in rural areas and have low rates of non-performing loans (NPL) to provide input credit and loan collection.

• Minimizes the use of cash by introducing a voucher system and automation of transactions to prevent leakages and use of funds for unintended purposes by farmers and other parties.

Using financial institution (particularly MFIs) to provide credit and collect cash for input sales will limit exposure of Regional Governments

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Funding institutions (CBE)

Financial institutions (microfinance institutions)

Primary coops

Regional government credit guarantees (as per current system)

Coop unions Farmers

Vouchers for cash & credit

Farmer presents voucher for input provision

Inputs provided to farmers

Voucher redeemed for credit against loans; cash & credit based sales margin paid immediately

Loan repayment

Payment for seed and chemicals

Agricultural input producers, international suppliers, and importers

Agricultural inputs (improved seed, fertilizers and chemicals)

Loan repayment

Voucher aggregation

Payment for union fertilizer purchase

Cash voucher payment (less

margin to cooperatives)

Voucher Cash flow Input flow Loan repayment

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3. Past pilot performances I (2013 pilot and learning)

In 2013, ACSI/CBO/OCSSCO have reached ~25K wheat SHFs, and OMO has reached ~480K SHFs across all crops which focused only on credit sales

11 1. Much of this year’s credit was disbursed in cash; next year, ATA will work to ensure more vouchers are used.

Disburse input credit using manual vouchers in all 16 woredas and electronic vouchers (through partnership with Kifiya) in 5 woredas

All 16 Wheat Productivity Initiative (WPI) woredas in Amhara

Amhara Credit and Saving Institution

(ACSI)

2,558 wheat farmers (70% female)

ETB 5.3 million

Operational plan Proposed coverage Farmers reached Implementing financial institutions Credit disbursed

Disburse input credit using manual transaction platform through cooperatives

2 woredas in Oromia covered by the WPI

Cooperative Bank of Oromia

(CBO)

1,048 wheat farmers

ETB 5.3 million

Disburse input credit using manual vouchers, as part of normal group loan operations, but leveraging the voucher system designed by ATA

All 14 WPI woredas in Oromia

Oromia Credit and Saving

Share Company (OCSSCO)

21,862 wheat farmers (36% female)

ETB 75.2 million

OMO was not part of the wheat pilot but started disbursing credit using a voucher system

Broadly in SNNP OMO Microfinance

Institution (OMO)

480,300 unclassified farmers (13% female)

ETB 649.6 million

Total wheat farmers

Other unclassified farmers

25,468

480,300

~ETB 85.8 million

ETB 649.6 million

The 2013 implementation efforts for input credit demonstrated many benefits from the new system

12 Source: MoA and ATA rapid assessment MLE of the implemented input credit system in Amhara and Oromia

Benefits

MFIs disbursing credit

• System is increasing farmers savings

• Group collateral lowers the repayment risk

• System is creating financial footprints for farmers

• MFIs have the network to reach most farmers

Providing credit to smallholder farmers

• Farmers receiving credit used more inputs than the previous year

• Some farmers were able to purchase the full package of inputs (combining credit with their available cash)

Willingness and commitment of stakeholders

• Overall, most stakeholders see the value in this system and want to continue using it for next year

• The vouchers prevented loan diversion (farmer using credit for things other than inputs)

• Where vouchers were used appropriately, they prevented cash from being misallocated by the cooperatives

Voucher

Aspects of system

Problems identified from 2013 input sales system implementation

13 Source: MoA and ATA rapid assessment MLE of the implemented input credit system in Amhara and Oromia

Problems Problem descriptions Implications

Late start • Trainings done late • Delays in MFI headquarters transferring funds to

branches

• Lack of alignment between stakeholders • Input loans was not available until planting

begun

Lack of awareness

• Trainings not given to all stakeholders • Some trainings did not include finance component • Brochures were not distributed to farmers

• Many stakeholders / officials misunderstood the system and their role

• Farmers were not aware that credit was available

Lack of alignment

• Lack of cooperation among stakeholders • Trainings given to different stakeholders separately

(sometimes with different information)

• Some cooperatives and officials refused to accept vouchers

• Primary and unions demanded full payments for vouchers, not just margin

Finance issues

• Reconciliation was delayed by MFIs to pay cooperatives margin

• Lack of a plan between CBE, MFIs, and cooperatives on how union loans to CBE would be repaid

• The credit estimated was less than what the farmers demanded

• Additional interest accruing on cooperative loans

• Confusion on whether MFIs were repaying union loans on behalf of unions

• Farmers collectively got less credit than demanded

Problems with inputs

• Lack of available, high-quality improved seeds • Farmers forced to purchase caked fertilizer • Late availability of inputs (especially seeds)

• Farmers were unable to purchase improved seed

• Some farmers ended up with low quality fertilizer and improved seeds

Creating in-depth awareness creation and signing an MoU among stakeholders implementing the system were the main recommendations for 2014 planting season

14 Source: MoA and ATA rapid assessment MLE of the implemented input credit system in Amhara and Oromia

Other

• Printing vouchers centrally • More consistent follow-up at all levels • Cooperatives not distributing caked fertilizer, and farmers having the right to refuse caked

fertilizer • Cooperatives required to accept vouchers and only demand margin for payment

Supply of credit

• Improving demand projection • Ensuring sufficient supply of credit • Funds to be made available to branches before planting starts through allowing MFIs to handle

cash sales in addition to credit sales using paper based vouchers

• Start training earlier and develop a more extensive awareness creation activities / training materials

• Train all stakeholders within a woreda together including cooperatives, MFI branch employees, kebele/woreda/zonal/regional agriculture and cooperative promotion officials and auditing of the trainings all the training to stakeholders

• More farmer training and distribution of financial awareness brochures

Awareness creation

Financial agreements

• MoUs signed between CBE, MFIs and all relevant stakeholders on how the new system will work in terms of roles and responsibilities in paying off cooperatives’ input loans

• MFIs responsible for any interest accumulated on cooperative loans after cooperatives submit vouchers to MFIs

Description

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3. Past pilot performances II (2014 pilot performance)

Coming out of the 2013 pilot the input credit system was slightly redesigned – MFIs are now mandated to issue vouchers for both cash and credit input sales

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Microfinance Institution (MFI)

Cooperative / Union

Smallholder farmer (SHF)

• Handles all cash • Issues vouchers to SHFs on

behalf of cooperatives • Earns interest on

credit loans to SHFs • Pays margins to

cooperatives • Collects payment from SHFs

• Receives service fee for cash collection

• Pays CBE loan on behalf of cooperatives

• Only receives margin on the volume of inputs provided

• Margin to primary cooperatives increases to enhance liquidity

• Margin received upon verification of vouchers submitted by SHF

• Must obtain vouchers from MFI to purchase inputs from cooperative, even for cash sales (farmers cannot pay cash to cooperatives in exchange for inputs)

• Obtain cash vouchers from MFI by paying full value in cash

• Obtain credit vouchers from MFI as a loan, if deemed credit-worthy

Three working groups were also introduced in different levels to improve decision, problem-solving and implementation follow-up efforts

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Strategic working groups

Regional level working group

Members – RBOA, ACSI, RCPA, BoFeD and RFS heads Responsibilities – • Overall follow ups and provide strategic directions

Members – RBOA, ACSI, RCPA, BoFeD and RFS team members

Responsibilities – • produce operational directive • Train agents and branch staffs • Develop crop and land specific input application

recommendations • Train fertilizer recommendation calculations to

development groups • Create awareness of modifications to farmers, coops,

unions, woreda, and kebele staffs

Zonal working groups

Members – RBOA, ACSI, RCPA of Zonal and woreda levels Responsibilities – • Follow up the implementation at their zonal and woreda

levels

This working group has been

a bridge in aligning

stakeholders and problem-

solving

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In 2014, Voucher Sales System used centrally printed manual coupons (triplicate copies) – plan to automate this system in 2015 planting season

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Coop union consolidates vouchers

from PCs and passes on to MFI; coop

union maintains its record in a register

PC passes a voucher copy on to Coop Union together with a cover letter stating the serial number and amount of inputs sold

After farmer applies for a loan, MFI

appraises the farmer’s credit worthiness

and issues a voucher (giving two copies of

the voucher) and loan passbook

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1

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Primary cooperative (PC) sells

inputs to farmers in exchange for

the two copy voucher voucher*

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* Farmer keeps one voucher copy, gives one voucher copy to primary cooperative

MFI sends cash in

amount of commission

for inputs sold by

union and PC

Union sends cash

in amount of

commission for

inputs sold by PC

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In 2014, ACSI have applied the new input sales system (both cash and credit basis) in five woredas reaching 150K farmers

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Pilot area and justification

Number of farmers reached through the system

• Unlike last year pilot where both the old and new agricultural input sales system was implemented on parallel; this year only the new input sales system was piloted in the selected woredas to have a better control over the implementation effort. Thus, five woredas were in two Zones have been selected for piloting the new agricultural input sales system. (Amhara woredas – Basoliben, Debre Elyas, GoZamin, Mecha, South Achefer)

Total number of farmers reached 150,000

Number of credit clients 36,000

Credit disbursed (In ETB) 52 million

Number of cash clients 114,000

Cash collected through the cash and credit sales so far (In ETB)

220 million

Farmers in the pilot areas had increased use of inputs and access to finance

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Preliminary results

• Increased access to input credit: through ACSI’s satellite branches established mainly in the pilot woredas enabled farmers to access finance including input credit and savings products

• Increased application of inputs: farmers under the pilot areas were able to use inputs according to the recommend application rate. In addition, the system also contributed positively to the increased number of farmers that uses improved inputs which increased the demand for inputs by 40%.

• Increased awareness: all stakeholders understood the system – this is mainly through the training materials distributed and trainings provided to concerned stakeholders.

• Increased standardization of the pilot: ATA procured and distributed vouchers (triplicate copies) to standardize the vouchers across regions, to maintain the quality of the vouchers, ease of use, and control number of vouchers disbursed.

• Increased alignment: all stakeholders i.e., ACSI, Amhara BoA, BoFED and RCPA, CBE, MoA and ATA were aligned through an MoU agreement that the stakeholders signed. In the MoU stakeholders responsibilities and protocols were clearly outlined.

• Increased follow-up: There was a close follow up on the pilot woredas through the working groups at different levels. The working groups mainly concentrated on reporting and resolving problems, and setting strategic directions.

Source: Field visit result to 2 woredas in Amhara with delegates from Oromia, SNNP and Tigray regions, August 2014

For 2015 pilot, the aim is to increase the pilot coverage and also automate the input sales system for a real-time reconciliation process

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Main areas for improvements

Plan for 2015

1. Delayed reconciliation process: as BoFeD was not included in the start of the process a delay was encountered in the reconciliation process.

2. Shortage on supply of inputs: due to the new system the demand for input has increased by 40% resulting in a shortage of supply of inputs 1. Scale up: the Amhara regional state have decided to

scale up the new agricultural input sales system to 50% (area coverage of the region) and also to implement this system in selected woredas for the coming irrigation and Belg season

2. Awareness creation activities: Start training earlier and develop a more extensive awareness creation activities / training materials (to include also an extensive financial literacy campaign to the whole rural areas)

3. Automate the system: to avoid delayed reconciliation process work is underway to automate the system.

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