Three instruments that facilitate family farmers’ access to

reimbursable financing through IFAD projects implemented

in the Southern Cone (Argentina, Paraguay, Uruguay)

Document prepared by the Regional Coordination Unit

of the IFAD Mercosur CLAEH Programme

January 2017

IFAD Mercosur CLAEH Programme

Edi�cio MercosurLuis Piera 1992, piso 2Montevideo, UruguayTel./Fax: (598) 2413 6411 / 2413 6381info@�damercosur.org

www.fidamercosur.org

IFAD MERCOSUR CLAEH PROGRAMMEIFAD MERCOSUR CLAEH PROGRAMME

Table of Contents

Introduction ..............................................................3

Presenting the three instruments ...............................5

1. Capitalisation Funds for Organisations (CFOs) (Argentina) ..........................................................5

2. Savings Deposit Certificates (SDCs) (Paraguay) ...........................................................7

3. Rural Microcredit (Uruguay) .............................................................10

Reflections ................................................................13

Documents consulted ...............................................14

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Introduction

The Nordeste and Minas Gerais Family Farming Secretaries’ Forum scheduled its second annual session in 2106 for 14-16 July, in Teresina-Piauí, Brazil. The working agenda’s core issue focused on financing family farming.

The present document was prepared by the Regional Coordination Unit of the IFAD Mercosur CLAEH Programme, to be pre-sented and shared during this session.

Bearing in mind the positive experiences arising from the different instruments used to facilitate family farmers’ access to reimbursable funds through IFAD projects implemented in the Southern Cone, as well as the fact that they have evolved into public policy instruments at various levels, the Forum’s Executive Secretary and the IFAD Mercosur CLAEH Programme agreed to present these experiences with the expectation that they will become a useful resource for regional Family Farming Secretaries when analysing alternatives to complement those of the National Programme for Strengthening Family Farming.

Financing the family farming sector is a problem that is common to all countries in this region, and in each country different instruments have been tested since the first decade of the new millennium in an attempt to give family farmers better opportunities to access credit, thus complementing non-reimbursable resources that normally come

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from rural development projects as well as productive, organisational or commercial technical assistance services obtained through them (which are generally implemented with external financing) or through relevant State institutions.

The Brazilian National Programme for Strengthening Family Farming (PRONAF) is very well structured thanks to the varied instruments that it provides and applies specifically in accordance with the needs, capacities and opportunities of the different family farmers’ typologies, and within their territorial context. It is managed in such a way as to maintain a balance between specific targeting and its general framework as a national public policy instrument that is aligned with those of each province. PRONAF is widely recognised internationally for its development and results, as well as for the fact that it responds to the diverse needs of the family farming sector and facilitates access to credit for organisations, producers and youth to finance their working capital and investments.

PRONAF credit is granted at low interest rates and, for certain beneficiaries, requiring only partial repayment of the capital lent (all backed by a growing level of non- reimbursable State investment to make the system work).

PRONAF started in 2002-2003 with a budget of 2.3 trillion reales, and in 2014-2015 it allocated 23.9 trillion reales through 1.9 billion in credit operations (an average of R$ 12 000 per beneficiary). Its budget for 2015-2016 is 28.9 trillion reales, which is equivalent to 4 000 dollars per family farmer obtaining credit.

Default rates made public by the Banco do Brasil in March 2015 were 2 per cent, af-ter having renegotiated the payment pro-file for 1 trillion reales (3.5 per cent of the portfolio).

Despite the amount of resources allocated to this instrument, and the significant

number of beneficiaries that have access to credit through banks or savings and credit cooperatives throughout the country, there are still some sectors of family farmers who cannot access any of the financing opportunities provided by PRONAF, particularly in the Nordeste and Minas Gerais regions. This explains the Family Farming Secretaries’ interest in placing the “financing family farming” issue on the agenda for the July 2016 Forum.

Successful IFAD-related experiences in these countries that have been emphasised by the IFAD Mercosur CLAEH Programme apply the following instruments:

1. Capital Funds for Organisations(CFOs) using revolving funds tofinance operating capital for or-ganisations’ productive projects(Argentina).

2. Savings Deposit Certificates (SDCs) serving as collateral for operatingcapital credit given by banks orother financial institutions withinthe context of productive projects(Paraguay).

3. Rural Microcredit to respond torural families’ productive and non-productive credit needs (Uruguay).

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The CFO financial line was initially developed based on a diagnosis of rural areas with high concentrations of family farmers who were almost completely ignored by financial institutions. There were few institutions located near areas where family farmers operate, and they had little interest in responding to family farmers’ working capital needs for many reasons (high transaction costs for small operations, high climate and commercial risks, lack of or limited real collateral, lack of reliable credit background, etc.)

This instrument provides non-reimbursable capital to small-scale producers’ organisa-tions, thus establishing a revolving fund. This capital is administered by the organisa-tion itself, which lends money to its mem-bers. Members must then repay the entire amount plus an interest rate that covers the cost of maintaining the system and the fund’s real value. Payments are sometimes in cash and other times in kind. Many organisations choose an in-kind credit system to maintain the fund value, since it targets the value of the financed goods.

Loans given to organisation members must fulfil the working capital needs of the organisation’s productive or commercial project, and finance the individual activities that members will carry out to contribute to the project’s development. The credit is also intended to help improve the organisation’s competitive position within its value chain.

The methodology includes four stages:

1. Diagnosis of the organisation for the development of CFOs

2. Practical guide to elaborate the CFOs’ regulations

3. Management Manual and CFO re-cords

4. Instructions to evaluate the CFOs

The diagnosis of the organisation evalu-ates: a) programme requirements that or-ganisations must meet in order to access

Presenting the three instruments

1. Capital Funds for Organisations (CFOs). Argentina

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funds; b) the adequacy of the revolving fund in terms of meeting the financing ne-eds of the organisation’s project; and c) the organisation’s capacity to manage the re-volving fund.

The elaboration of the CFOs’ regulations is required to be participative and open, involving all members of the organisation in the guide’s analysis, and ensuring that the whole group understands and agrees on the following: a) the managing body (establishment of a credit committee); b) the goals and beneficiaries of the revolving fund established with the CFOs; c) the credit application and granting process; and d) dealing with default.

An organisation that accesses a CFO and begins to operate a revolving fund is responsible to the Unit for Rural Change (UCAR), which manages the different rural development projects implemented by Argentina’s Ministry of Agro-industry with foreign loans.

Organisations are supported throughout the four stages required for the approval of the CFO and the establishment of the revolving fund, by technicians connected to the UCAR who work in different provinces and by UCAR technicians themselves who are part of the Rural Financing Team. They regularly visit and train organisations holding a CFO, and organise annual meetings in which all organisations using this instrument take part, to promote the exchange of knowledge.

This instrument allows credit to be granted in accordance with local circumstances, it does not require real collateral, it promo-tes social control, it channels associated members’ activities towards the collective goal of cost reduction, and it strengthens associative links (e.g., when buying inputs collectively) and/or added value (e.g., by selling collectively and/or processing in the organisation’s facilities for future sale).

By April 2016, after five years of operating this instrument, the UCAR had supported

77 CFOs, representing an amount of ARS 18 million (approximately 1.4 million do-llars, which means 18 000 dollars per CFO) and 69 organisations (89 per cent) submit-ted their reports every four months.

The main activities financed are: livestock (51 per cent), horticulture (26 per cent), apiculture (10 per cent) and agriculture (5 per cent).

The follow-up reports of the 69 CFOs show that: a) 57 per cent have managed to maintain or increase their nominal value over time; b) 50 per cent lend in kind, not in cash; c) 57 per cent have revolved once or more; and d) 14 per cent have a default rate of greater than 10 per cent.

The CFOs’ limitations include: i) the risk of erosion and eventual loss of the funds; ii) credit funds can only fund working capital and very small investments; and iii) credit is limited by the amount of funds given to the organisation.

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The use of SDCs as collateral to access the formal financial system’s loans (banks, savings and credit cooperatives, financial organisations) was initially designed based on the diagnosis of the presence of various types of financial institutions in rural areas of the country where family farmers are concentrated, despite which difficulties in accessing credit were observed within the sector, as well as high interest rates due to collateral problems and commercial and cli-mate risks.

This instrument aims to provide non- reimbursable capital to small-producers’ or-ganisations, to constitute a fund (SDC) in the form of a fixed-term deposit endorsed to the financial institution (for at least two years) as collateral for a loan that meets the needs of the organisation and its members in implementing a business plan.

Normally loans are greater than deposits, in order to establish financial leverage. Organisations must repay 100 per cent of the loan with their own resources, plus the corresponding interest rate.

To determine the CDA amount given to each organisation, the Project Coordina-tion Unit of the IFAD-financed Paraguay Rural Project (PPR) developed a working method that includes:

— Defining a baseline (including both quantitative and qualitative infor-mation relating to the organisa-tion), which is carried out by a tech-nician related to the project.

— A participative rural diagnosis that identifies the circumstances of the organisation and its members, and their need for strengthening and training to develop a collective business plan.

— Designing and implementing a strengthening plan that responds to the needs identified in the diagno-sis, and achieving the formulation of a business plan.

— A business plan formulation with a precise definition of the financial resources needed (to calculate the amount of the SDC) to provide the working capital required to accom-plish the business plan’s activities.

— Elaborating adequate loan regula-tions (if resources will be given to members) clearly defining mecha-nisms and conditions under which funds will be handled, repayment management, portfolio recovery in case of default, forecasting default rates and calculating inter-

2. Savings Deposit Certificates (SDCs). Paraguay

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nal management costs to establish the interest that is required to avoid the organisation’s decapitalisation and the consequent use of the SDC to make up the difference between what is loaned and what is repaid.

— Seeking legally binding agreements between the Project Coordination Unit and the different types of fi-nancial institutions, making credit available that is secured by the SDC (negotiating the financial leverage ratio and reference interest rate).

This instrument allows the organisation to acquire credit for direct use or to be loaned to its members. Depending on the loan pe-riod, it is possible to finance assets as well as working capital.

It was tested beginning in 2007, and between 2010 and 2014 it reached its highest rate of usage, supporting 243 organisations with business plans and involving more than 6  000 beneficiaries. The total amount of SDCs reached 1.78 million dollars (more than 7 000 dollars per organisation). By the end of this period, SDCs totalled 1.61 million dollars. In other words, nearly 10 per cent of the available SDCs had been used to repay loans and 90 per cent of the original value of the SDCs was available, thus fulfilling their collateral and financial leverage functions.

The financial leverage of the SDCs that be-gan at a ratio of nearly 1.0:1.0 (meaning each dollar deposited generated one dollar lent by the financial institution) had increased to 1.0:1.3. Thus, the 1.61 million dollars available made it possible to support 2.09 million dollars in credit. This improvement in the financial leveraging ratios of SDC credit is related to the good behaviour of the organisations as clients of the financial institutions.

Interest rates payed for the loans guaran-teed by SDCs range between 15 per cent and 20 per cent annually (depending on the type of organisation and their business

plans’ characteristics), compared with the current market interest rates for operations without a SDC, which are about 35 per cent (in national currency).

Twenty-six per cent of the organisations did not grant loans to their members and used the credit to cover their own needs in imple-menting their business plans. In cases where loans were granted to members, repayment was in cash (59 per cent), in kind (18 per cent) or a combination of both (23 per cent).

After the Project ended in September 2013, and when the two obligatory years had passed during which the SDCs could only be used as collateral to access financial ins-titutions’ credit, resources deposited under the organisations’ names became freely avai-lable to them. A sample (with no statistical value) of 60 organisations revealed that 70 per cent continued to use this instrument in the same way it had been designed. The remaining 30 per cent devoted resources to buy assets, to repay loans or as credit funds for the organisation itself.

Technical assistance (including financial, productive and commercial aspects), which was provided at no cost for organisations and family farmers within the Paraguay Ru-ral Project framework, was a key element for the correct use of this instrument.

In addition to technical assistance, training must be strengthened for organisation members as well as for the financial institutions’ representatives who oversee the credit portfolios secured by SDCs that are granted to family farmers, to promote the necessary understanding of its parts when dealing with the changing scenarios normally faced by agricultural and agro-industrial business plans.

SDC-supported credit granted to organisa-tions was an important portion of the total financial aid required to implement busi-ness plans; thus, they proved to be com-plementary to other funding sources that organisations and their members needed for their capitalisation.

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3. Rural Microcredit. Uruguay

The Rural Microcredit Programme was ini-tially designed based on a diagnosis of the almost inexistent attention provided by financial institutions to rural areas where family farmers are concentrated, and the varied problems this population had in ac-cessing credit from financial and non-finan-cial institutions located in the main cities and villages (similar to the factors described above in the case of Paraguay).

This instrument aims to satisfy the short-term credit needs of a dispersed rural population living in villages of less than 5 000 inhabitants who have no access to formal credit, by creating local organisa-tions that define the use of funds received based on mutual trust, knowledge and social control.

It is implemented and operated by the Gene-ral Directorate for Rural Development (DGDR) of the Ministry of Livestock, Agriculture and Fishery (MGAP) in coordination with FUNDA-SOL, a non-governmental organisation that grants credit to micro- and small enterprises.

Credit offered by the programme is indivi-dual and can have three different purposes: a) productive; b) to cover families’ basic needs and consumption needs; and c) to improve housing. Interest rates are payed monthly and the repayment schedules are adapted to each type of operation.

Credit requests, the provision of credit and the repayment of loans, are locally managed. Clients do not need to travel to the nearest center where credit is managed.

The DGDR chooses the areas where the instrument will be made available to community members, explaining what it consists of and what responsibilities they will need to assume as a community if they decide to implement it.

To implement the programme in a certain area, MGAP requires that the community create a local credit committee (CCL) made up of a group of neighbours who are cho-sen by the community and who work on a volunteer basis. These people are the instrument’s base, and they are responsible for providing social collateral to community members who request credit.

The CCL defines the circumstances under which credit should or should not be given to the applicant, based on their knowledge of the person, his/her behaviour within the community, his/her fulfilment of obliga-tions and his/her repayment capacity. This analysis will be considered along with the information gathered in the form and the interview carried out by a FUNDASOL mi-crocredit analyst.

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Microcredit analysts are responsible for gathering and technically assessing all appli-cations, mobilising the CCL, providing and presenting all the information gathered in each applicant’s interview to the CCL, giving advice to CCL members to help them decide which loans to grant or not to grant, doing the follow-up of financed activities, and managing the collection of loan repayments. Each analyst works with several CCLs.

Public resources subsidise the analysts’ costs and other operating costs associated with the CCLs’ work, as well as FUNDASOL’s administrative services. Therefore, credit is granted to rural beneficiaries at annual interest rates that are similar to the ones payed by urban populations for short-term microcredit (6 to 12 months) with monthly payments on the capital, plus interest.

There is an incentive system for clients who thoroughly comply with their payments; these clients can access higher amounts of credit and lower interest rates, which ulti-mately reduces the final instalment. When requesting new operations, the client can obtain 50% more credit on his/her second operation, 100% more capital than the first time on their third one, and up to 150% more capital compared with their initial loan for their fourth and subsequent requests.

This programme started in 2004 and, by April 2016, 32 500 loans had been granted with a total amount of UYU 460 million (15 million dollars). At the same date, there were active 3 643 loans , totalling UYU 49 million (approximately 1.6 million dollars), of which 92 per cent were up to date and 3 per cent were overdue by 30 days or less. In other words, the default rate by more than 30 days equals 5 per cent of the port-folio. A total of 12 116 people accessed the loans during the development of the pro-gramme, and 62 per cent were given credit between 2 and 14 times (2 000 were given credit five or more times).

To achieve the coverage and performance of the portfolio, 130 CCLs were formed (involving 650 volunteers) and 15 analysts worked for them.

A total of 95 per cent of CCLs are classified as level 1, considering four performance indicators:

— Recovery rate: more than 85 per cent of granted loans

— Overdue loans: less than 10 per cent overdue by 4 months

— Loans at risk: less than 4 per cent overdue by 4 to 8 months

— Unrecoverable loans: less than 2 per cent overdue by 8 months or more

Most beneficiaries had never accessed credit before, nor are they potential users of the financial system since they do not meet the banks’ requirements or because of where they live, far from populated cen-tres where there is unregulated financing, which makes accessing credit too expensive for their family economies.

Populations that have made the most out of this instrument are those in which regular assemblies were held by the users, and where the community is informed of how the instrument is working and what the problems are. This led the communities themselves to find mechanisms that enable correcting imperfections and guarantee the sustainability of the instrument. The gathering of neighbours around the CCLs and the assemblies of users have resulted in the formation of rural development societies and civil associations.

In contrast with other microcredit programs in Latin America, Africa and Asia, the mi-crocredit analyst does not make the deci-sion to grant or deny a loan; the CCL does this. This places the central decision in the hands of the community, and the commu-nity takes into account a series of other considerations, mainly social and personal ones, in addition to economic factors. The results are reflected in the high quality of the portfolio.

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Financing the family farming sector is a problem that is common to all countries in this region, and in each of them different instruments have been tested since the first decade of the new millennium in an attempt to give family farmers better opportunities to access credit, thus complementing non-reimbursable resources that normally come from rural development projects as well as productive, organisational or commer-cial technical assistance services obtained through them (which are generally imple-mented with external financing) or through relevant government institutions.

Difficulties in dealing with working capital needs have different causes: high transac-tion costs for small operations, high com-mercial and climate risks, limited or non-existent real collateral, and a lack of reliable credit background, among others.

The three instruments presented in this document have been implemented in different contexts in their respective countries: Argentina, Paraguay and Uruguay. They have all proven to be valid options for improving family farmers’ access to reimbursable financing (banking and non-banking) by offering them an opportunity to develop projects with lower input costs, better individual primary production and collective processing, improved marketing strategies through their organisations, improved

quality of life (in terms of housing, for instance), and improved participation in value chains, achieving better economic results at the farm level.

In all cases, the preparation of borrowers has been crucial (through individual and group training) before and during the management of the financial instrument, as well as technical assistance to formulate regulations of use and management of loans, and public investment (in this case through IFAD-financed projects) to get the instruments operating on the ground and to cover some of the system’s costs, especially during the first stages of their implementation.

In two of the three cases (Argentina and Uruguay), the validity of the instruments initially tested within the framework of projects financed by IFAD has transcended them and they continue to function with other sources of public resources.

The most important aspect of the continuous development of the instruments is clearly their sustainability. Therefore, IFAD is working with involved Ministries to increase both their portfolios’ quality and their services’ efficiency. In this way, it is expected that these experiences will be scaled up to access a growing rural productive population.

Reflections

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Gómez, J.; G. Martirena; V. Ponce de León; C. Ríos (2013). «Una herramienta financie-ra para el desarrollo rural inclusivo: la expe-riencia del Programa Microcrédito Rural de la DGDR/MGAP», Anuario OPYPA.

PPR-MAG-FIDA (2014). «Apéndice 5. Fi-nanzas rurales», Documento de diseño del Proyecto Paraguay Rural. Asunción: PR/MAG/FIDA.

Proyecto Paraguay Rural (2014). Sistemati-zación de la integración financiera de fami-lias rurales al sistema financiero institucio-nal. Asunción: PR/MAG/FIDA.

Documents consulted

UCAR, Finanzas Rurales (2014). La expe-riencia de la UCAR en la promoción e im-plementación de fondos rotatorios. Buenos Aires: Finanzas Rurales, UCAR.

UCAR, Finanzas Rurales (2016). Informe cuatrimestral de evolución de FOCO enero-abril 2016. Buenos Aires: Finanzas Rurales, UCAR.

Editorial DesignIFAD Mercosur CLAEH ProgrammeKnowledge Management Component

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Three instruments that facilitate family farmers’ access to

reimbursable financial through IFAD projects implemented

in the Southern Cone (Argentina, Paraguay, Uruguay)

Document prepared by the Regional Coordination Unit

of the IFAD Mercosur CLAEH Programme.

January 2017

IFAD Mercosur CLAEH Programme

Edi�cio MercosurLuis Piera 1992, piso 2Montevideo, UruguayTel./Fax: (598) 2413 6411 / 2413 6381info@�damercosur.org

www.fidamercosur.org

IFAD MERCOSUR CLAEH PROGRAMMEIFAD MERCOSUR CLAEH PROGRAMME