FINANCIAL SECTOR ASSESSMENT PROGRAM – DEVELOPMENT MODULE MALI AGRICULTURAL FINANCE TECHNICAL NOTE DECEMBER 2015 This Technical Note was prepared in the context of a World Bank Financial Sector Assessment Program mission in Mali during March 2015 led by Mehnaz Safavian, World Bank, and overseen by Finance & Markets Global Practice, World Bank. The note contains technical analysis and detailed information underpinning the FSAP assessment’s findings and recommendations. Further information on the FSAP program can be found at www.worldbank.org/fsap. THE WORLD BANK GROUP FINANCE & MARKETS GLOBAL PRACTICE Contents I. Context .......................................................................................................................... 1 II. Suppliers of Agricultural Finance ................................................................................. 3 III. Public Support to Agricultural Finance ........................................................................ 8 IV. Demand-side Constraints .............................................................................................. 9 V. Supply-side Constraints .............................................................................................. 10 VI. Recommendations ....................................................................................................... 12 TABLES Table 1: Sectorial Breakdown of Private Sector Credit………………………………..…..1 Table 2: GDP Growth rates (%) by sector and Total in Mali, 1995-2012………………....2 Table 3: Local and International Banks’ Contribution to Cotton Marketing…………...….4 Table 4: Breakdown of BNDA’s Shareholdings………………………………………..….5 Table 5: BNDA Agricultural Loan Products for Producers……..…………………………6 Table 6: MFI Credit to Small Producers, 2013……………………………………….……7 Table 7: Evolution of banking rate, 2005-2012………………………………………..….11 Table 8: Distribution of bank branches in Mali, by region………………………………..11 Table 9: Priority Matrix for Agricultural Finance Recommendations………………....….16 i I. Context1 Despite its importance to the economy, agricultural production receives a small portion of the overall private sector credit. Contributing 40 percent to GDP and employing approximately 65 percent of the active population, agricultural production only receives 5.49 percent of overall private sector credit, largely for financing the cotton sector. This number decreased significantly from 2011 and 2012 when the level of credit to agriculture reached 11.69% and 10.94% respectively as indicated in Table 1 below. Table 1: Sectorial Breakdown of Private Sector Credit (%) Activity 2010 2011 2012 2013 2014 Agriculture, forestry, 5.70 11.69 10.94 6.54 5.49 fisheries Extractive industries 0.07 0.10 3.79 4.74 3.35 Manufacturing 6.96 7.98 9.58 11.05 12.66 Electricity, gas, water 8.42 10.02 6.43 9.61 11.93 Buildings, public works 5.28 4.44 4.96 3.78 4.94 Trade (large, small), 37.10 43.30 44.62 45.21 40.85 restaurants, hotels Transportation, warehouses, 10.24 7.12 5.63 9.32 10.13 communications Insurance, property, 13.73 9.77 8.23 5.70 6.89 business services Diverse services 12.42 5.58 5.83 4.05 3.77 Source: BCEAO, 2014. The performance of the Malian economy is largely dependent on the performance of the agricultural sector. The overall good growth in the Malian economy over the last several years is attributed to the agricultural GDP growth. Since 1995, the economy grew at about 5 percent per year until 2010, but a global recession, the military coup and terrorist activity caused a noticeable slowdown in GDP to about 1.2 percent in 2011-2012. The economic growth has resumed at a slow pace since 2013 and is currently estimated around 4.5 percent for 2014/2015. 1 In the scope of this technical note, agricultural finance is defined as financial services used for agricultural production activities (i.e., farming) and production-related activities (i.e., input supply, wholesaling, processing, marketing and trade). Rural finance refers to financial services used in rural areas by all income groups and for all activities, both agriculture and non-agriculture. 1 Table 2: GDP Growth rates (%) by sector and Total in Mali, 1995-2012 1995-2001 2001-2006 2006-2010 2011-2012 Agriculture 3.3 4.3 8.2 2.2 Industry 10 4.2 0.1 10.4 Services 4.5 5.9 5.7 -3.9 GDP 6.3 5 4.9 1.2 Source: WDI 2012 and INSTAT, 2011. Agricultural growth continues to be susceptible to high volatility and variability due inadequate risk management and safety net systems. Economic activity was adversely affected by low rainfall in 2011 and 2013 before returning to normalcy in 2014. Adverse weather conditions along with severe political instability and insecurity environment in 2012 and 2013 caused major disruptions and fluctuations in domestic output. Subsistence farming is the dominant production model in Mali. As of the last agricultural census in 2004, there were approximately 800,000 farms in Mali of which 8.9 million people derived their subsistence. The majority of farms are small, with 68 percent of farmers with less than 5 hectares of land and 86 percent with less than 10 hectares. With the exception of rice, most of the cultivated area (72 percent) is dedicated to cereal production, primarily for self- consumption. The agricultural sector is dominated by the production of cotton as a cash crop and rice, which is the dominant food crop. Outside of rice and cotton, production systems are mostly low intensive, based on traditional low input / low output cultivation techniques. Mali’s processing and industrial capacity is underdeveloped, well below industrial base of Senegal and Cote d’Ivoire. There are 500 industries in Mali compared to 4,000 in Senegal and 6,000 in Cote d’Ivoire. Although the government has set forth policies to diversify its agricultural sector, and to emphasize more on value addition/processing, to date the bulk of public expenditures have gone primarily increasing production in rice sector. As a result processing is insufficiently developed with limited value-addition along the supply chains. Very few private sector players have emerged with the capacity to provide integrated packages composed of inputs, financing and advisory services to contracted farmers. Agricultural development in general and agricultural finance in particular is hampered by a lack of quality data on the sector. Although improving, reliable statistical information is still lacking in Mali. There are often inconsistencies in agricultural data presented in the various reports available in the country. Although data on the main food crops and cotton are readily available, quality information on the high potential value chains, like mango and meat and dairy value chains, is less frequently provided. The lack of quality agricultural statistics makes public planning and analysis difficult and deters private sector investment. 2 II. Suppliers of Agricultural Finance The main suppliers of agricultural credit are commercial banks and microfinance institutions. Banks typically finance larger agro-industries, input suppliers and agro-processing companies, like the CMDT. With the exception of BNDA, they rarely finance producer cooperatives and/or farmers directly. On the other hand, MFIs finance cooperatives and individual farmers. Indeed, bank and MFI credit flowing to producers is highly contingent on the institutional and managerial capacity of producer organizations in the country, which seems to be very weak by most measures. Banks are cautious in lending directly to producer organizations, as many have difficulty reimbursing loans on time. For example, in 2013 BNDA’s default rate on loans made directly to producer cooperatives was 20 percent as compared zero percent on the loan made to CMDT to finance its contracted producer cooperatives. The cotton sector is well organized and well-financed by the banking sector. Cotton is an important sector to the Malian economy, accounting for 20 percent of export earnings and providing a livelihood for 25 percent of the population. CMDT, the only cotton company, has negotiated a pooled financing mechanism with the banks to fund cotton production and trade. It is a straight forward process – banks lend directly to CMDT2 who on-lends to their contracted farmers with in-kind loans of inputs and supplies to the producer organizations. After harvest and sale of the cotton, CMDT reimburses their loan to the banks. CMDT uses the trade loan to buy cotton from the contracted farmers. The volumes of pooled financing is highly dependent on the performance of the previous year and the market and pricing conditions for the current season. BNDA is the lead bank (largest local financier) for the pooled financing of cotton production whereas BDM is the lead local bank and largest contributor for cotton trade finance. Volumes for CMDT cotton marketing for the 2014 season, broken down by local bank and international bank contributions, is provided in Table 3. Similar detailed data on the pooled financing for cotton production over the same period were unavailable. 2 The loan is made to the CMDT Groupement d’Interets Economique (GIE) which is share ownership with GoM, CMDT, CMDT’s subsidiaries and the National Producers Syndicate. 3 Table 3: Local and International Banks’ Contribution to Cotton Marketing in Mali, 2014 % Credit % Credit Principal Principal Banques Locales EUR FCFA Local Total Banques de Développement du Mali, S.A. (BDM SA) 46,289,065 30,363,636,363 58.4 30.4 Banque Nationale de Développement Agricole, S.A. (BNDA) 15,868,557 10,409,090,909 20.0 10.4 Banque Internationale pour le Mali S.A. (BIM) 4,781,356 3,136,363,636 6.0 3.1 ECOBANK Mali S.A. 4,296,290 2,818,181,818 5.4 2.8 Banco Da Uniao 2,217,440 1,454,545,455 2.8 1.5 Banque Internationale pour le Commerce et l'Industrie au Mali S.A. (BICIM) 2,217,440 1,454,545,455 2.8 1.5 Banque Malienne de Solidarité S.A. (BMS) 2,217,440 1,454,545,455 2.8 1.5 Banque Sahélo-saharienne pour l'Investissement et le Commerce (BSIC) 1,385,900 909,090,909 1.7 0.9 Total Banques Locales 79,273,488 52,000,000,000 100.0 52.0 % Credit % Credit Principal Principal Banques Offshore EUR FCFA Local Total HSBC France 17,250,000 11,315,258,250 23.6 11.3 British Arab Commercial Bank 9,250,000 6,067,602,250 12.6 6.1 BNP Paribas (Suisse) S.A. 9,250,000 6,067,602,250 12.6 6.1 FIMBank plc 9,250,000 6,067,602,250 12.6 6.1 Ghana International Bank plc 6,000,000 3,935,742,000 8.2 3.9 BHF-Bank Aktiengesellschaft 6,000,000 3,935,742,000 8.2 3.9 BMCE Bank International plc 6,000,000 3,935,742,000 8.2 3.9 BMCE Bank International S.A.U. Madrid 5,175,528 3,394,923,820 7.1 3.4 SOCIETE GENERALE 5,000,000 3,279,785,000 6.8 3.3 Total Banques Offshore 73,175,528 47,999,999,820 100 48.0 Total Crédit Principal 152,449,017 100,000,000 Source: IFC, Global Warehouse Finance Program 2015. Only few commercial banks are active in financing agriculture outside of the cotton sector. BNDA, and BMS to a much lesser extent, provide the bulk of funding to the agriculture sector outside of the cotton sector. They are the only banks that provide direct financing to the producer cooperatives. When it comes to financing small and medium farmers and agri-entrepreneurs, new players are starting to come into the market as competition in the Bamako market intensifies, like BOA, Ecobank, and Banque Atlantique among others. This is a welcomed development that will help to increase the offer to this underserved market segment. 4 Although the BNDA is well-recognized as being the leader in agricultural finance it does not have any special legal or regulatory status with the GoM or the regional central bank, the BCEAO3. BNDA was originally established as a joint stock corporation “development bank” by a special law in 1981. Its original mandate was to provide technical and financial assistance for the implementation of any viable project that promotes rural development in Mali. Today, still espousing the same mandate, BNDA operates as commercial bank as its ‘development bank’ status was removed by the BCEAO in the early 2000s. As a result, BNDA has increased its presence in the urban areas, but not at the expense of its rural lending portfolio. The current shareholding of BNDA reflects the bank’s commercial orientation with a reduced government ownership and an increase in private ownership as follows: Table 4: Breakdown of BNDA’s Shareholdings Shareholders Shareholding (%) Government of Mali 36.48 Banque Populaire Caisse d’Epargne (BPCE) 9.72 Credit Cooperatif 9.70 Agence Francaise de Developpement (AFD) 22.67 DEG 21.43 Source: BNDA Annual Report 2014 A large portion of BNDA’s portfolio is made up of loans to the rural and agricultural sector; however, more recently this is done by providing finance to farmers indirectly through large buyers and traders. BNDA continues to be the premier financier of the rural and agricultural sector, with 49 percent of its total portfolio financing agriculture in 2014. This is an increase of 14 percentage points since 2010 when only 35 percent of the portfolio was for agriculture. The challenges in Mali’s cotton sector in the mid to late 2000s led to a profound change in BNDA’s operations and business model, shifting from a direct provision of finance to smallholders towards an indirect financing system through “Compagnie Malienne pour le developpement des textiles” (CMDT). BNDA has a well-established and executed diversification strategy which includes financing other agricultural sectors outside of cotton, targeting SME farmers and processors while expanding services to urban clients. In addition to its financing of small holder producers through CMDT, BNDA has developed a range of products for SME farm production and animal rearing. Based on its successful development and scale up of its SME lending business, BNDA has expanded its rural lending to target the specific needs of SME producers. It launched its rural SME lending with an intensive assessment of the agricultural SME segment. With a technical assistance grant from the World Bank, it began retrofitting its client assessment and lending procedures and test piloting new products for the new market. This strategy of targeting SME producers resulted in increased 3 BCEAO – Banque Centrale des Etats Africains de l’Ouest – Central Bank 5 volumes and profitably of its rural operations as compared to earlier years when they were dependent on cotton financing. The range of BNDA’s loan products for agriculture are presented in Table 5. Table 5: BNDA Agricultural Loan Products for SME Producers Short Term Loans (Maximum 2 years – Minimum 2,000,000 FCFA) Agricultural inputs areas CMDT zone 10% per annum Agricultural inputs other areas 11% per annum Advances / Harvest 12% per annum Grain storage Marketing 12% per annum Stocks Advance on paddy 10% per annum Animal Fattening 12% per annum Short-term credit consumption 12% per annum Medium Term Loans (1-5 years) First equipment and re-equipment 11% per annum Motorized equipment 12% per annum Blacksmiths and other craftspeople 12% per annum Other equipment 12% per annum Medium-term consumer credits 12% per annum Long-term loans 11% per annum Producer Associations/Collectives Production of material equipment 11% per annum Transport equipment 12% per annum Construction buildings 11% per annum Hydraulic equipment 11% per annum Source: BNDA Annual Report and Price List, 2014. In addition to these products, BNDA is part of a new government tractor finance scheme, which was recently announced in September 2015. Through this scheme the GoM is providing 1,000 tractors to farmers who have at least 20+ hectares of land and can make the 20 percent down payment. The GoM will provide a 50 percent subsidy and the remaining 30 percent will be covered by a loan from the bank at a fixed rate of 8.75 percent. In addition, BNDA requires farmers to be literate and well trained in farming, have a minimum farm size of 30-50 hectares, and to be producing at a surplus and selling in local markets. MFIs are still an important player in financing agriculture, especially for small farmers. In spite of the difficulties facing the sector, the 11 MFIs listed below, which make up 80 percent of the microfinance market, have a major presence in rural areas. Of their total loans outstanding, 53 percent goes to finance smallholder agricultural production (Table 6). MFIs agricultural finance product offering is more diverse than commercial banks. As a result some MFIs offer equipment loans, inventory credit and leasing products in addition to short-term production and marketing loans. The two largest MFIs, Kafo Jiginew and Nyèsigiso, play an important role in financing cotton and rice farmers. 6 Table 6: MFI Credit to Small Producers, 2013 Encours de Encours de % % Nombre crédit agricole N° Données crédits (en crédit crédit d'usagers (en milliers de SFD milliers de FCFA) rural agricole FCFA) Mutualistes Union Kafo jiginew 338,210 24,755,400 55% 50.0% 12,377,700 Union Nyèsigiso 170,147 10,784,900 30.0% 3,235,470 Union CAECE 13,269 5,003,000 30.0% 1,500,900 Associations de Crédits solidaires Soro yiriwaso 50,438 3,021,800 90% 85.5% 2,583,639 RMCR 53,118 2,713,000 100% 65.0% 1,763,450 Associations de CVECA CVECA Pays Dogon 22,104 522,700 100% 100.0% 522,700 CVECA ON 51,446 1,622,000 100% 100.0% 1,622,000 CVECA Kita/Bafoulabé 31,451 1,608,400 100% 100.0% 1,608,400 PASECA Kayes 49,153 1,760,600 100% 100.0% 1,760,600 CVECA de 26,509 475,668 San/Djenné et OSK 100% 100.0% 475,668 SENIWE NANVIN 8,606 102,857 100% 100.0% 102,857 Total de l'encours secteur 938,539 66,219,314 Usagers et encours des SFD considérés 814,451 52,370,325 52.6% 27,553,384 % des usagers et de l'encours des SFD 86.8% 79.1% Source: BCEAO and CCS/SFD, 2013. The MFI crisis in Mali is impacting leading MFIs’ ability to grow and expand in rural areas. In spite of the strong performance, all of the 11 MFIs listed above expressed concerned about the MFI crisis and the negative impact it was having on growth. MFIs, faced with a general mistrust of the sector, are finding it more difficult to attain new clients and refinancing from commercial banks. And donor support for capacity development and funding have reduced considerably, with most of new funding going to clean up and client resolution actions. 7 III. Public Support to Agricultural Finance The GoM provides financial assistance to the agricultural sector, mainly through indirect channels to support agricultural policies on specific commodities. As part of the country’s agricultural development and modernization plan, the GoM has instituted several programs to support farmers, mainly with input subsidies and price supports to the rice and cotton sectors. More recently, the GoM has expanded its support to wheat and maize farmers as well as targeted support to assist emerging farmers. The description and status of some of the main public programs are provided as follows:  Rice Initiative: In response to the global food crisis of 2008, GoM launched the Rice Initiative. The aim of the initiative was to increase rice production locally by 50 percent in the first year by enhancing and intensifying rice production areas. The initiative still ongoing today involves heavy government expenditures for subsidized inputs and seeds, subsidized equipment for production and processing, expansion of extension support, and government involvement in some output marketing. Through the rice initiative farmers obtain improved seeds and fertilizers of up to 50 percent of their costs. To date, the GoM states that rice production as grown by 12 percent per annum since the program began in 2008. Given the results of the initiative the GoM has developed similar input subsidy programs for maize and wheat.  National Fund for Agricultural Modernization and Development: To support the development of Mali’s agricultural sector, especially in transitioning to a modernized, value addition sector, the GoM, recently established the National Fund for Agricultural Modernization and Development. This Fund, sanctioned under Mali’s Law of Orientation for Agriculture, consists of three components and funding windows: o Agricultural Development – 60 percent o Loan Guarantees – 30 percent o Catastrophic Risk Management – 10 percent The first component targets farmers and agribusiness entrepreneurs with project finance. The second component is earmarked for guarantees for agricultural borrowers. The last component is to fund activities that minimize the impact of the agricultural calamities and protect the lives of the rural poor. The Ministry of Rural Development manages the Fund and is responsible for establishing annual plans and budgets for each window. The Ministry of Finance assures the financial management and accounting of the Fund. The development of the Fund is contingent on resource mobilization which has been slow to date. The budget for 2014 was USD 4 million, which was contributed by the GoM. Discussions are ongoing with donors to mobilize significant resources for the Fund, but no commitments have been made to date. 8  Tractor Subsidy Program: In September 2015, the GoM announced a new tractor subsidy program for emerging farmers with 20+ hectares of land. The program designed with the buy-in of some local banks provides farmers with a 50 percent subsidy on the purchase of a new tractor. The farmer has to show proof of farm size in excess of 20 hectares and be able to make a down payment of 20 percent of the cost of the tractor. Participating banks provide financing for the remaining amount, or 30 percent, at a fixed rate of 8.75 percent. Loans are guaranteed by the newly established Private Sector Guarantee Fund. The GoM has committed to subsidizing 1,000 new tractors under this scheme. Participating banks include: BMS (Lead Bank), BIM, BNDA, KafoJiginew, and Nyèsigiso. In addition to the requirements established by the government, participating banks are allowed to apply additional borrower criteria. IV. Demand-side Constraints The development of the agriculture sector continues to be constrained by long standing, well- known challenges which weaken the supply and demand for agricultural financial services. These include, but are not limited to: poor infrastructure, highly dispersed clientele, low value addition, poor production and post-harvest management, weak and unorganized marketing systems, inadequate agricultural training and education services, and an absence of effective risk management systems to address vulnerabilities. “High-priority/low-value” cotton sector is overshadowing “high-priority/high value” sectors, such as livestock, fish, rice, mango, and sesame among others. Agricultural policies and support programs have not favored a well-diversified and commercially-oriented agricultural sector. Massive support, mainly for input subsidies, has gone to increase production in cotton and rice. In contrast, marketing and trade systems of most other value chains are underfunded and are poorly organized. This situation deters banks from investing in other sectors beyond cotton. The World Bank’s Agricultural Competitiveness and Diversification Project (PCDA) has demonstrated the untapped potential in the diversification of agricultural value chains outside cotton. By promoting alternative competitive value chains, Mali could overcome the concentration and risks associated with the cotton sector and diversify its exports, most importantly through regional markets by i) improving the supply for export, ii) promoting industrial processing to focus on regionally tradable and exportable goods, and iii) increasing access to appropriate funding to commercial farming and export-related industries. Major value chains outside of cotton remain unorganized and lack professionalism. With the exception of cotton, agricultural value chains are not well-structured and organized. Inter- professional associations when they exist have difficulty coordinating chain stakeholders. This situation is most likely due to a weak capacity and professionalism at all levels – producers, traders, and processors and exporters. Most stakeholders along the supply chain, lack business strategy and management skills required to develop their farming/agribusiness enterprises. 9 Agricultural entrepreneurs have difficulty presenting bankable projects in agriculture. Many banks face substantial difficulties in getting bankable projects formulated based on identified market’s needs. In financial terms, a bankable project would usually refer to a project that banks are willing to finance since there will be a financial return on the investment. Often project promoters lack the capacity to put together complete and sound business proposals required by banks’ loan departments. The low supply of bankable projects in Mali could also partly be linked to the number of qualified firms to assist entrepreneurs in the formulation of these projects. Agricultural development is also constrained due to the lack of quality information on production systems, markets and prices. It is difficult to obtain reliable statistics on the agricultural sector in Mali. There has not been an agricultural census since 2004 and the data that does exist is missing key information on the segmentation of the rural population across farm size, crops produced, assets held, etc. Similarly, information is lacking on processing and trade segments of the chain, including producer cooperatives. Daily price and market information on key agricultural commodities is nearly absent, hampering investment and trade in the sector. Unresolved land tenure rights on agricultural lands impedes investment and development of the sector. Mali’s land tenure system is complex. It consists of modern laws and customary rights. In this system, the state owns the land and determines who to sell or attribute the land whereas the chiefs and traditional leaders manage and use the land. In this system, a private real estate market for agricultural land is absent. Private investors are required to negotiate with local leaders and government over large tracks of land. As in many countries, concerns of the push for larger scale agriculture or land grabbing from international investors have stalled land tenure debate over concerns of smallholder displacement. V. Supply-side Constraints Limited bank branch availability in Mali continues to constrain access to finance in rural areas. According to the Global Findex survey 2011 in Mali, adults living in rural areas are more than half as likely to be banked as those living in cities, 7 percent compared to 18 percent respectively. Bank branches distribution is low in Mali, most likely due to the high dispersion and low density of the Malian population outside of the urban centers. 10 Table 7: Evolution of banking rate, 2005-2012 2005 2006 2007 2008 2009 2010 2011 2012 Banking rate, with banks 2,86 3,62 3,81 4,64 3,31 4,46 5,33 5,27 Banking rate, enlarged 4 9,24 10,54 11,36 12,85 10,37 11,83 12,97 12,33 Access to financial services5 9,24 10,54 11,36 12,85 10,37 12,96 16,03 17,20 Source: BCEAO, 2013. Table 8: Distribution of bank branches in Mali, by region Region Population Number of Distribution Branches per branches of Branch 100,000 (%) inhabitants Bamako 1,245,317 24 30 1.93 Koulikoro 1,778,469 4 5 0.22 Kayes 1,551,131 12 15 0.77 Sikasso 1,900,000 17 21 0.89 Segou 1,788561 10 13 0.56 Mopti 1, 565,580 5 6 0.32 Tombouctou 661,169 3 4 0.45 Gao 547,807 4 5 0.73 Kidal 87,938 1 1 1.14 Total 11,125,972 80 100 0.72 Source: PDSF, 2007. Low capacity of banks to serve agricultural clientele. In Mali, banks have not specialized in agricultural lending and therefore often lack the capacity to analyze risks related to agriculture, especially for larger-scale farming and agribusiness projects. The result is that banks heavily rely on lending to only the safest clients in which they can domicile sales for loan repayment, a practice generally applied to all sectors. With the exception of BNDA and BMS, most financial institutions do not possess agricultural financing units, or specialized staff to cater to this segment. In fact, there seems to be a general perception in the banking community that agriculture is BNDA’s domain. However this perception may be changing as competition is intensifying, forcing other banks to look for new market segments, including agriculture. Agricultural value chain investments are constrained by limited access to long-term funding. Availability of large agricultural loans for investment are limited because banks do not have 4 The expanded banking rate integrates data from other levels of account structures, including the Post Office, the Treasury, and MFIs. 5 The rate of access to financial services integrates data from all levels of account structures, including mobile money firms from 2010. 11 adequate long term deposits or other funding liabilities to finance the larger term loan portfolios. For many years now, the shortage of term liabilities has continued to pose a constraint on medium and long term lending, which larger farms and enterprises in agricultural value chains typically need. As a result several government and donor programs focused on value chain development (PCDA, USAID Cereal and Livestock Value Chains, EU projects) have not been able to leverage the significant public investments made, thus constraining the overall economic impacts anticipated. Although input financing to farmers is working in the cotton and rice sectors, there is a significant funding gap for equipment financing. There seems to be a large unmet demand amongst small producers for equipment financing. APECAM has said that financing gap could be around 2-3 milliards FCFA. However, banks are hesitant to finance producer cooperatives directly given their historically poor repayment history. Agricultural finance products offered by banks consist of mainly short-term production and trade credit products for both small and large borrowers. In general banks offer only short term loans, less than a year, for production and trade of agricultural commodities and inputs, including small equipment. In addition, bank use a collateral management system with warehouse operators in Bamako to lend against stored inventories and domicile revenue to ensure repayment. They also lend against account receivables. As of 2013 year-end, approximately 12 percent of banking sector’s aggregated portfolio was in discounted receivables. However, longer term loans for investment are uncommon as banks do not have long-term resources to fund these products. And equipment leasing is not an option as banks, by law are not allowed to offer leasing products. Only one leasing company exists and 90 percent of its leases go to large transportation vehicles. Agricultural machinery is rarely leased through this company. Appropriate risk management tools are underdeveloped in Mali. As common in many developing countries, Mali has not been able to develop adequate risk management tools for agriculture. However, with the recently adopted regional law on micro insurance, a small pilot on micro-agricultural insurance has been started in the country. In 2014, Assurance Allianz, through an experienced micro insurance facilitator, Planet Guarantee, has insured 20,000 small producers in the maize sector. Based on the good results, Allianz has decided to extend this product to 50,000 in 2015. VI. Recommendations In order to support Mali’s long-run poverty reduction and growth goals, it is critical to develop an agricultural financing and risk management system that emphasizes agricultural modernization as a pathway to economic transformation for the country. As noted in the Country Partnership Framework (CPF) the GoM and the World Bank have prioritized improving the productive capacity and market integration of farmers as well as the structuring of key value chains. Diversifying into other sectors beyond cotton, especially meat, dairy and horticulture, will enhance 12 its capacity to revive agricultural growth. It is within this context and in taking into account the constraints laid out above, the recommendations on agricultural finance are set forth. Enhancing financial institutional capacity – bank and MFI levels - will be critical to advancing the development of the Malian agricultural economy. The GoM’s focus on improving farmer productivity and market integration as well as the continued support to the processing and value-addition sectors will require significant investments in institutional capacity development of the banking and microfinance sectors. A long-term focus is required for a paradigm shift to occur – moving from state, publicly funded agricultural sector to one that is fostered by a vibrant and viable commercial agribanking sector. A comprehensive capacity development approach is recommended, one that focus on building the banking skills to assess and manage risk of agricultural clients (farmers, cooperatives, agro-processers, warehouse operators, traders), develop targeted products/services, especially those that enhance productivity and facilitate the flow of goods through the value chain (term loans, leasing, payment services, warehousing finance) and enhancing internal procedures/processes that supports development of a commercially-oriented agribanking line of business. Attention should be paid to differences in the capacity development requirements of commercial banks and those of microfinance institutions. In some cases, needs will be similar, but in most cases they will vary substantially. For example, banks typically have the comparative advantage in serving SME agri actors (emerging farmers, traders, cooperatives, processors) whereas MFIs are more adept and well placed to offer products to individual smallholders. However, new financing models (VCF) and ICT technology has made serving smallholders a more viable options for banks. Banks require sophisticated professional training to enhance their capacity to finance more complex medium and large-scale farm, value chain and agribusiness projects. With a strong focus on value addition/processing and agro-industry development, banks will be required to build their capacity in project finance for the agricultural sector. Enhancing capacity in value chain financing in which banks can leverage the relationships with the chain to reduce risk and costs in services delivery, especially to smallholder farmers who on a standalone basis are unviable for the bank to serve. In India, HDFC, the second largest commercial bank, has had great success in partnering with milk collectors and dairy companies and cooperatives to offer a broad range of credit, insurance and payment services. Through this partnership and those in other value chains, HDFC has increased its agribanking business while reducing NPLs to less than two percent per annum, lowest across all of the business lines in the bank. This approach is featured on the World Bank’s Agricultural Finance Support Facility website at: http://www.agrifinfacility.org/agricultural-finance-learning-videos Utilizing innovation grants, credit lines, and partial guarantees, can have an important impact on increasing finance to the agricultural sector. Building a modernized farming and food system will require significant investment from the private sector. Dedicated and well- structured credit lines and guarantees to bank can help to jump start this investment, especially 13 when they are accompanied by technical assistance, in this case on agricultural banking. Consideration should be given to integrating credit lines, guarantees and innovation grants for banks and MFI in agricultural development projects. The technical assistance is particular important when a new areas of lending is undertaken, like financing emerging farmers, value chain financing, warehouse receipt and agro-industrial projects. The WBG has recently provided value chain finance training to a number of commercial banks in Vietnam who have access to targeted credit lines for rice and coffee value chain transformation project. Integrating credit lines and TA into future WBG work streams would be of highest priority: value chains and agri-based clusters development; agro-industry growth poles; ongoing West African Agricultural Productivity Program (WAAP) for investment in advanced production technologies, such as drip irrigation, improved seeds. Analytical work would be required to evaluate the feasibility of developing and implementing such instruments within the banks and MFIs in Mali. Addressing the demand/supply gap in asset financing (e.g., equipment, storage, irrigation and water harvesting systems, tractors, etc.) is critical to develop a supportive regulatory and business environment for leasing products in Mali. The leasing sector is Mali is underdeveloped, offering very limited range of products beyond the leasing of cars and trucks. To increase investment and productivity in the farming and agribusiness sector, leasing of agricultural equipment, storage, processing facilities is critical. It is important to work with the private sector and donors to remove all legal and regulatory barriers to develop and reinforce market conditions in leasing. This includes but is not limited to: 1).reviewing and defining and appropriate tax regime for leasing; 2). accelerating the computerization of the moveable collateral registry; 3). reviewing the right and obligation of all parties to a lease agreement, and repossession of leased goods; 4). exploring with banks interest for offering equipment leasing products; and 5). providing support and training to banks to establish new leasing products targeting high potential agricultural zones. Strengthening mobile connectivity and ICT solutions will have an important impact on the cost and delivery of finance to the rural economy. As demonstrated in many SSA countries, especially in Kenya, mobile money is having an important impact on savings behaviors and productivity enhancing investments of farmers. Increasingly banks rely on mobile connectivity to deliver cash transfer and payment services to their clients. In addition, many governments are turning to mobile technologies to secure the transmission of direct grants and safety nets to poor farmers. Mobile money channels and enhanced biometric technologies are helping to reduce leakage and fraud in complex and high cost fertilizer subsidy programs. This could be an immediate action area to be untaken in the delivery of the fertilizer subsidy and other assistance and safety net programs of the GoM. Improving resilience and risk management of farmers requires developing a comprehensive set of risk mitigation and coping mechanisms in addition to micro-insurance products to farmers. Support to the development of risk mitigation strategies, such as improving access to irrigation and water harvesting structures, drought resistant varieties as well as improving farmers’ agronomic and conservation practices, has shown to significantly improve resilience to weather and pest shocks. In addition, supporting the development of weather index insurance and other 14 parametric products that specifically address the well know challenges of micro/farmer-level insurance product provision, is particularly important in the Malian context. In addition, analytical work could be undertaken to evaluate the feasibility of using index insurance at the district, regional or national levels as means for ensuring social protection in the case of natural disasters. Likewise exploring the feasibility of utilizing index insurance products meso-level private stakeholders (e.g., input suppliers, banks, and processors) who lend either cash or product to a wide group of farmers and thus are exposed to production risks their farmers face. Given the geographic coverage of their clients, these actors by default reduce the covariance risk and net basis risks. Lastly, it is also important to evaluate the feasibility of developing instruments that mitigate weather related risks at the macro level, such as contingency finance instruments in which governments face much smaller commitment fees, instead of high-cost premium payments of more conventional insurance products. Targeted technical support to enhance the capacity of emerging farmers and agribusinesses is required to strengthen and increase the effective demand for agricultural finance. This in the long run will be critical to ensuring the long-run viability of banks and MFIs who serve these client segments. A binding constraint to developing robust agricultural banking systems is the lack of effective demand. Continued support to farmer education, especially in the areas of utilizing advanced technologies (improved seed, drip irrigation systems, water harvesting and conservation), farm business management, especially for emerging small and medium commercial farmers and agribusinesses. Access to quality higher-level technical assistance for the emerging farmer and agribusiness will be particularly important for the country to achieve its value chain and agro-industrial development objectives. To develop a long-term and comprehensive agricultural finance strategy, a multi- stakeholder task force is needed. A dedicated taskforce made up of representatives from Ministry of Finance, Ministry of Agriculture, private sector (banks, MFIs, producer and agribusinesses) and donor community to map out a comprehensive strategy for developing a robust and viable agricultural financing system, which includes both developing commercially viable agri-banking sector and public assistance mechanisms. The strategy needs to take into consideration the new ways in which agricultural development is being approached, including the identification and evaluation of the large scale public investments that could have the most impact on agricultural finance demand from the private sector. An agricultural finance demand-side study, with a particular focus on the state of producer cooperatives would help banks, MFIs and others better understand the financing needs of the sector. In complement to the planned agricultural census to be carried out in 2015, a deeper analysis into the make-up and institutional health of producer cooperatives would be of great benefit to the banking and MFI sectors. This information could inform new strategies and product development to better and more inclusively serve small producers and integrating them into markets. Additional analytical work may also be warranted linked to the WBG agricultural initiatives to evaluate state of institutional capacity of commercial banks and MFIs to develop and implement new products and services for farming and agribusiness sectors. This work should be 15 complemented by an evaluation of the 3-5 key value chains that the GoM and its development partners want to support to evaluate the overall performance of the value chain, to identify capacity and financing gaps of chain actors, in particular lead firms, and to study the feasibility of using credit lines and partial guarantees among other mechanisms (innovation grants, TA, technical studies to enhance the overall value chain system. Table 9: Priority Matrix for Agricultural Finance Recommendations Priority Action required Recommendation (High, Moderate, Low) (Short, Medium, Long) Enhancing bank and MFI capacity High Short Credit lines, guarantees High Short to Medium Improving enabling and business environment for leasing product development High Short Improving resilience of farmers Moderate Medium to Long term Target support to enhance farmer and agribusiness capacity Moderate Medium term Analytical work on demand (market assessment) and High Short supply side (institutional capacity assessment) Mobile/ICT technologies to Moderate Short ensure delivery of safety net payments Establish agricultural financing task force Moderate Short 16