Background
Agriculture is critical to the economies of Pacific-island countries as well as the livelihoods of their people. The agriculture sector in the Pacific is estimated to engage approximately 65% of the population, mostly in subsistence farming and fisheries, and is the primary source of income for many more. However, despite the key role that it plays, agribusiness in the Pacific has struggled to develop. There are many reasons for this, including remoteness, unclear property rights, natural disasters, lack of infrastructure, changes in international demand trends, lack of access to power and water, and a focus on tourism. Markets are small and access to larger regional markets is limited. Lack of access to finance also plays a major role in limiting the growth of agribusiness in the Pacific. Without the ability to access finance to improve operations, buy inputs and machinery and grow their businesses, those engaged in farming and fisheries struggle to achieve the quantity and quality of produce required by aggregators or processors.
Agribusinesses in the Pacific rarely have the credit history and sophistication to easily borrow to grow their businesses. In recent years, changes to the legal and regulatory environment have allowed farmers to use their vehicles, crops, and other moveable assets as collateral for borrowing. New products have also been introduced, creating a tri-partite arrangement between farmers, aggregators, and financial institutions to make it easier to draw a larger number of agribusinesses into more formal production. There are several examples across the Pacific through which farmers are able to reduce the barriers to growth. This article explores some key examples in Fiji, Samoa, and Papua New Guinea (PNG).
This article also tells the story of how financial institutions in the Pacific region are learning and progressing with the development of new products. The Pacific Private Sector Development Initiative (PSDI), a joint venture between ADB and the Australian and New Zealand Governments, has helped introduce new legal frameworks and provided in country technical support to institutions to increase access to finance for the agriculture and micro, small and medium enterprise (MSME) sectors. Although some of this work has been continuing for several years, in some markets it is still at an early stage, with challenges and local problem solving continuing, as demonstrated below.
Introduction
Lack of access to finance is a perennial issue raised by small businesses and the rural sectors in developing markets. Their voices are often amplified by the contention that Pacific economies are driven by the micro, small and medium enterprise (MSME) sector. In the Pacific, the challenge of expanding access to finance most often falls to the banking and finance sector, in particular the development banks which are typically the most active rural lenders in the region. Many farmers are not easy to reach, let alone lend to. In PNG for instance, the vast size of the country is a logistical challenge and there are 800 different languages spoken. One crop buyer spoken to for this article advised that most of her farmers are located high in the mountains and have a three day walk to reach a main road. How can such farmers access finance?
In this article we look at three case studies. Epeli, Mand and Vailolo are all small holder farmers in remote locations in Pacific countries. They are strangers to one another, but they all share one thing in common, they have grown their farming businesses with the help of loans from an agriculture value chain finance (AVCF) facility. We explore their stories in this chapter through case studies in Fiji, PNG and Samoa, demonstrating how the challenges of financing the agribusiness sector can be overcome. The examples also show that it is not just the borrowers who are learning from the process. Banks and finance companies themselves are constantly learning and adapting to the challenges of lending in the agriculture sector. Some of it is trial and error. For both sides, making small loans begins with small steps.
Mand is a vanilla farmer in the mountains of the Madang province in PNG. Vanilla is a high value but slow yielding crop. Finding a market is often a problem but she is now assisted by a mobile buyer, Kamapim Trading Limited. Her interactions with them give her a “financial identity”, which is not just evidence of her name and address, but also evidence that she is a grower with a history of regular business transactions. Today, based on this relationship Mand has a cash card from Nationwide Microbank (trading as MiBank) and can access small loans through this account.
Epeli is a ginger farmer from Naitisiri in Fiji. He has almost doubled his crop income over the last 4 years, changing both his crop mix and area, assisted by finance from Fiji Development Bank (FDB) under an AVCF model.
Vailolo is a copra farmer in Samoa. He has a supply agreement to provide his buyer, Serendi Coco Limited, with regular truckloads of copra or dried coconut. He has qualified for a loan for a new truck and now operates as an aggregator, collecting from his neighbours to deliver their joint inventory to Serendi.
Agriculture Value Chain Finance
Many people say that there is strength in numbers. That also applies to agriculture. A high number of farmers producing consistently marketable crops enables the growth of infrastructure around it. Scale is needed to build warehouses, create processing facilities and develop broader markets. There is no shortage of farmers in the Pacific region, the industry is the primary income source for 86% of the population in PNG, 90% in Fiji and 90% in Samoa. But, like most countries in the Pacific, they all import significant amounts of foodstuffs, much of which they could produce locally. Many also have strong export demand for crops, including with respect to ginger, vanilla and copra. Some of the challenges to increasing farm output are obvious, including remoteness, labour constraints and lack of mechanisation. Many farmers still rely on basic hand tools and manual labour. For most there is also a lack of access to capital.
Banks and finance companies also want size and scale when they can achieve it, for efficiency of resources. Serving the financial needs of farmers one by one is time consuming and relatively expensive so wherever possible the banks look for automation options and bulk models.
Banks and finance companies are in the business of managing their money carefully, investing in good quality loans to earn an interest margin so they can provide a return to their shareholders and pay interest to deposit holders. They act within a heavily regulated sector, each country having a central bank, which provides oversight and requires regular reports on asset quality as part of its monitoring role and often additional statutory requirements to protect clients. Banks and finance companies must comply with these requirements and accordingly favour lending on asset categories which are considered to be safer, such as mortgages on property or corporate lending which is supported by detailed financial statements.
Prior to extending loans, financial institutions look for several things to increase their confidence in lending to a particular borrower. They like to have borrowers that (i) can provide identity documentation and have a stable address, (ii) have collateral, (iii) have financial statements so they can show the client has the ability to repay their loan, and (iv) have some character reference so that they know the client will honour commitments. These core ingredients for a loan application can be summarised as identity verification, collateral, repayment ability and character.
With respect to identity verification, one of the first challenges of growing an agriculture-based loan portfolio is finding the farmers and verifying them. Farmers can be hard to find, and it is challenging to provide them with a financial identity. The people or entities who are best qualified to verify the farmer’s creditworthiness are their local buyers or crop aggregators who know their history of crop production. This is the basis of AVCF models.
The fundamental difference between traditional lending and AVCF lending is that AVCF is a tri-partite model which includes the financial institution, the farmer and the crop buyer or aggregator. Buyers or aggregators have the market knowledge and experience with their network of farmer suppliers, and they are often more sophisticated than individual farmers. This grouping allows a financial institution access to easier communication channels, improved transparency on farmer activity, up to date information on commodity pricing, financial information disclosure and most importantly, improved risk mitigation. A financial institution works with a strong buyer group, or anchor partner, to develop an AVCF product to lend to farmers more easily. A technology partner may also be introduced to manage remote farmer relationships more effectively.
The first stage of any AVCF model (see arrow 1 above), is that the farmer contracts with the anchor business, typically a crop buyer or processor, to consistently supply their crop. This provides certainty for both parties.
In the second stage, (arrow 2 above) the anchor business agrees to share information with the financial institution, with the farmer’s consent, on historical and current sales activity. The anchor business may also nominate farmers to receive finance and agree to deduct loan payments prior to making crop payments to the farmers.
The combination of those first two steps gives the financier confidence to extend loans (see arrow 3). This empowers the farmer to add productive capacity, improve efficiency or simply buy a bigger truck.
Through our case studies we look at how each step is addressed in each country.
The introduction of AVCF has been supported in many Pacific markets, including PNG, Samoa and Fiji by the introduction of legislative reforms to allow the use of additional types of collateral as security for loans under a program of collateral or secured transactions reforms. The reforms allow for the use of movable assets as loan collateral with an online registry to record financial institutions’ respective security interests. Now, assets such as plant, machinery, crops, inventory, invoice receivables and most other non-property assets can be used to meet loan collateral requirements. Today banks and financiers in these markets have a secure, formal method of registering their respective security interests in these asset classes.
PSDI has led the work to implement the new laws and has followed this up with advisory support to multiple financial institutions in the Pacific. Movable collateral is still a new concept for many to understand and historically the banks have had a long-standing preference for using land as collateral. However, in many Pacific markets land is in complex communal ownership structures with historical usage rights or in some markets such as Tonga, entirely owned by the Crown. For finance to grow new lending strategies with broader types of collateral are needed. The AVCF model introduced by PSDI has been a leading example of a practical work-around, giving financiers the safety of big business support while the funds flow down the supply chain. It is still a “work in progress” and many other movable collateral-based product concepts are also yet to be explored.
PSDI Advisor Simon Thompson and Fiji Development Bank executives at an early workshop with members of the Fiji Ginger Growers Association in Lautoni, Fiji, February 2018.
Case Studies
The case studies below show current examples of how access to finance has evolved for hard-to-reach businesses such as remote farmers in the Pacific region. While each story and country is unique they also have some things in common.
Papua New Guinea (PNG)
Vanilla is a crop requiring patience and perseverance. Each vanilla bean comes from a vanilla flower which opens only once and must be hand pollinated by midday on the day it opens before it withers. The bean then takes nine months to grow, before being harvested and air dried to mature for a further period of several months. The payoff is the high quality and strong international pricing for PNG vanilla, now worth more than ten times more than cocoa beans per kilogram. Selling the vanilla is also a challenge. The farmer typically must travel long distances just to find a buyer.
Mand is a vanilla farmer. She and her family have traditional rights to an area of vanilla plants high in the mountains of the Madang province in PNG. Most property in PNG is owned under customary title, meaning that there is no outright property ownership, and such property cannot be used as collateral for borrowing. The buyer for Mand’s vanilla is Kamapim Trading. Kamapim is a local language (Tok Pisin) word meaning “to grow or to develop”. Kamapim’s CEO, Nancy Irwin has built a large network, currently totalling over 13,200 farmers within the Madang province, of which 35% are women. The company is a strong believer in sustainability and ethical business practices. All Kamapim farmers must pre-qualify as a supplier under five pillars:
- Not being involved in logging or mining activities
- No child labour is used
- Only organic farming methods are used
- High hygiene standards must be maintained, with modern sanitation
- All farmers must have a bank account, as all crop purchases are cashless transactions
Given the remote location of these farmers, a cashless network of over 13,000 farmers is quite remarkable. To manage such numbers Kamapim has partnered with agri-tech providers Field Buzz and Cultivar, to build a smart data collection tool for the network. These tools are linked to mobile phones which record details of each farmer including seasonal output, individual sales volumes, prices and quality grading. It also builds an overview of the farm mix, gathering information on other crops they produce such as cocoa, coffee, vegetables as well as other income from market stalls or weaving etc. That data in turn creates an economic identity for each farmer. Kamapim has developed their own identity card for their farmers which formally recognises them as farmers and allows them easier access to banking, especially as many cannot reach government offices for traditional identity cards.
MiBank are a microfinance bank established in PNG since 2004. MiBank aims to deliver affordable savings, loans, and insurance from 16 branches and a wide network of agents across the country. MiBank have a mobile wallet product called MiCash which has allowed them to be the largest single financial services provider to the Kamapim network and extend loans to some under a pilot model.
MiBank have been strong advocates for agri-financing and were trialling pilot AVCF models in cocoa and copra as early as 2018. These had mixed success due to issues with the buying groups and weak systems, but MiBank admits that they learned from each model and gained valuable experience. In 2020 they were invited to tender for a project with the global mobile group GSMA, who are mandated to increase the use of mobile technology for development purposes worldwide. GSMA’s planned agritech program in PNG included a pilot credit product and they were in search of a financing partner. The other partners included in this first PNG pilot were Kamapim and Field Buzz. The consortium aims to support farmers’ pathways to financial inclusion through three steps:
- Development of mechanisms for sharing farm and farmer data that are being collected by agri-tech tools and agri-businesses;
- Establishment of a system for farmer credit scoring; and
- Design, development, and pilot testing of a credit product based on farmer needs.
This project is proceeding well. According to MiBank’s Chief Operating Officer, Trudi Egi, as of May 2023 the bank has approximately 300 farmers accessing credit with a current portfolio of just over PGK300,000 (USD85,000). These farmers have been nominated by Kamapim, based on trading data gathered through the mobile collection mechanism. Traditionally, banks seek financial statements such as an income statement and balance sheet. In the mountains of PNG, the reality is that trading history will be the best evidence available of repayment ability. It shows both revenue and the capacity of the grower.
Each farmer now has a MiCash mobile wallet and Kamapim transfers the payments for vanilla purchases directly to their accounts. The MiCash wallets also allow access for approved farmers to get small overdrafts from MiBank. This is the first time most of these farmers have been able to access credit. PNG is often described as an underdeveloped and somewhat challenging country to operate in, but this level of mobile digital financial service delivery is market leading in the Pacific.
Mand confirms that she could not access finance before she found Kamapim and built a trading history with them. There is no bank near her, and she had very limited means to prove her identity and meet the usual bank requirements for a loan. Her mobile wallet, accessed through her mobile phone, also improves her financial management. “I feel that when I am holding on to cash that I will use it, but when I put it into my account, I am saving it” she said.
Today Mand and her fellow vanilla farmers can access their money immediately in the village. Many small PNG shopkeepers and mobile phone agents prefer to accept mobile payments due to the difficult logistics associated with holding cash and high local crime rates.
Under this AVCF model Kamapim undertake all the client selection and decide which clients can access the credit facilities. MiBank describes it as a totally outsourced product. Mr Egi has told his MiBank staff they must accept that unless something goes seriously wrong, they will never meet their vanilla farmer customers, a vivid indicator of how MiBank’s AVCF model is reaching remote clients.
MiBank does have the ability to see client wallets and transactions so they can see what each client is doing. But never having direct contact is still unusual, even in PNG. Also, at times the Kamapim data is offline due to outages, and they are not able to receive consistent updates on individual client transactions. MiBank say they rely on the tri-partite agreement they have between themselves, Kamapim and Field Buzz which sets out the respective obligations of each party.
MiBank have put in place guarantee support to underwrite 80% of the risk on this portfolio from the PNG Market Development Facility (MDF), an Australian government funded program. They maintain this support is necessary given the semi-agency arrangement of this AVCF model. The remoteness of farmers and the need to outsource relationships are also factors in the risk structuring. So far, the loan portfolio performance has been mixed. At times the portfolio has shown as high as 50% of the portfolio in arrears and Nancy confirms that 40% arrears are not uncommon due to lumpy incomes for farmers. However, she is comfortable that the loan accounts do self-correct as more crops are sold.
Recently MDF announced they are re-structuring their underwriting guarantees. MiBank has agreed to accept the portfolio risk on this initial portfolio when the guarantees are removed soon, because they understand the model. They have been through what they describe as the pilot phase and are now entering the analysis phase. Mr Egi still expects that MiBank will seek more guarantee support in the future for stage two and new government backed guarantee funds are offering up to 100% support.
Kamapim themselves are working on improving the creditworthiness of their farmers and with GSMA support have engaged a credit scoring expert to build a model for these farmers. This will consider farmer capacity, trading patterns and loan performance criteria. Given the strong seasonality of vanilla, there are two harvest windows per year, the farmers may have lumpy cashflows and almost all are reliant on other cash crops to support themselves. Kamapim want the farmers to have more banking options, becoming empowered by their regular farm income to have choices on banking and loans.
This vanilla AVCF model is an exciting and market leading model, overcoming remoteness and the usual challenges of extending credit to the agriculture sector by relying on mobile automation, the strength of a local partner, access to data, and other risk mitigants during this early development phase. However, it is still a work in progress for both Kamapim and MiBank. Although the number of loans is still small, carrying limited risk for the MiBank, the potential from this growing network is significant. The work being done now is creating a pathway to much wider distribution of credit, driven by AVCF models to many other remote farmers.
Samoa
The coconut tree is sometimes called the Tree of Life. It produces a superfood, and every part of the coconut and tree can be used in some way, as food, fuel or ingredient. Vailolo is an organic coconut farmer who supplies a local coconut oil manufacturer with dried copra, the white flesh from the coconut. The copra can be treated using a mix of solar and kiln drying so that it is ready for pressing at the oil factory.
Samoan copra produces high quality organic oil for which there is strong international demand. The copra buyer for Vailolo is Serendi Coco Samoa, a joint venture between a local company Pacific Oil Ltd and Dr Bonners, an American based group specialising in organically and fair trade produced soaps and coconut oil. Every fortnight the company has a shipment to the USA and Serendi Coco need to have stock to fill that constant demand. Their supply chain is critical to them.
Serendi Coco has a formal Supply and Purchase Agreement with each of their participating farmers and that contract becomes the backbone of the AVCF product from the Development Bank of Samoa (DBS). Serendi advise that access to the AVCF has empowered their farmers to extend their collection zones and in doing so nut collection has increased, which in turn increases dried copra production and generates more income for the farmers and dryer operators such as Vailolo.
Vailolo is very proud of his new Toyota Dyna truck, purchased through the AVCF program. Previously he used to gather his own coconuts and some from neighbouring farmers but now he can travel and bring in more raw stock from a wider network of farmers. He has a kiln dryer to speed up the drying process for his copra. He also uses the truck to earn extra income, selling the residue charcoal and coconut shells at different markets and doing odd jobs moving items for friends and family.
Labour is often a constraint in Samoa as many workers travel overseas for seasonal work, but Vailolo can afford to hire more people from local and neighbouring villages and keep his kiln ovens maintained. He is thankful that Serendi Coco has encouraged him to invest more to increase output. It is the main income source for Vailolo and his family.
DBS is the leading local bank for the agriculture sector. Goretti Fau, General Manager Operations says that agriculture and fishing are the focus for the Bank. They first introduced an AVCF product in 2019. This was after an extended period of consultation with a team from PSDI.
The product framework was enabled by Samoa passing the Personal Property Securities Act in 2013 and the commencement of personal property securities (PPS) registry in late 2016. This allows the use of crops and other moveable assets such as vehicles and plant to be used as collateral for borrowing.
Today the copra value chain is the most active AVCF for DBS. They have over WST$500,000 (USD182,000) in this loan portfolio, from a small group of 4 farmers. Three of these are on Upolu, the main island, and one on the island of Savaii. Serendi Coco are encouraging others to join.
Other AVCF models that have been explored in Samoa include a cocoa trial on Savaii Island and a model for taro farmers with a major local supermarket and exporting chain, Ah Liki Group. The Taro farmers sign a supply agreement with the buyer and in turn earned the right to access a line of credit from DBS. Taro requires a lot of land preparation, access tracks to be built, spraying for weed control and fertilisers. In addition, there are other challenges such as transportation costs and land rotation.
Supermarket owners Ah Liki Group wanted a strong supply chain for their taro. They are one of the largest locally based businesses in Samoa with over two decades of business trading. They operate their own supermarkets under the Farmer Joe Supermarket brand as well as other activities including food manufacturing, beverages, agriculture, and wholesale food distribution. Taro is processed in their manufacturing plant and exported to New Zealand, the USA, and other markets.
DBS’s taro AVCF facility peaked at a loan portfolio of $T250,000 (USD91,000) with 30 farmers. As of May 2023, the portfolio was $T100,000 (USD37,000) with approximately 18 farmers. Clyve Westerland, CEO of Ah Liki, noted that the company was happy with the increased production achieved by introducing the AVCF, although there was some added paperwork and administration required. There was also a significant slowdown from the effects of COVID-19. Of Ah Liki’s 30 clients, only one fell into significant arrears. DBS has advised that Ah Liki has assisted the Bank to work through these arrears with the farmer. DBS commented that many taro AVCF clients have since become direct clients of the Bank, often taking larger loans as their AVCF loans were repaid.
The COVID-19 pandemic severely affected AVCF programs in Samoa as markets slowed, extreme caution took over and large government support programs dramatically reduced demand for DBS loans. The Government of Samoa provided its own special COVID-19 related support loans, using DBS as an agent, totalling $T4m (USD1.48m) for micro businesses. That was followed by a further $T5m (USD1.85m) loan facility for medium sized businesses. The Bank stopped all tourism and related lending during COVID-19.
DBS use the AVCF model to address critical loan requirements. The client is referred by the anchor business, helping prove identity and address. The crops and contractual arrangements become the loan collateral. DBS do not seek a separate direct guarantee from the anchor business but say they treat the supply and purchase agreements as an effective form of guarantee. In some cases, such as with copra, they take a specific collateral charge over the trucks and in some cases the kilns as well. In their first cocoa pilot DBS relied on additional plant and vehicles as collateral top-off as well as the underlying cocoa bean crops and contractual arrangements. All of these security interests were registered by DBS on the Samoan PPS registry.
The Samoan Government issued an SME policy paper in 2022 which discussed the challenges of SME finance in Samoa – “their most frequent complaints (lenders) about the acceptability of finance submissions are insufficient information, a lack of confidence in the ability of many SMEs to effectively manage growth, insufficient equity contributions from the borrower, and inadequate collateral.”
Another MSME Strategy paper specifically mentioned the need for DBS to increase the use of movable assets as collateral – “Given DBS is a government-owned bank and is receiving strategic advice from ADB, it can lead the way and demonstrate to the other banks that moveable assets can be used to successfully repay loans in default. This will require the normalisation of legal instruments such as assignment agreements (e.g., of receivables) and warehouse receipts and the active use of the moveable assets register, showing which assets have been pledged against loans.”
Ms Fau says DBS are supportive of this and are actively looking for more anchors to use for new AVCF models. She believes this is the best way to grow their agriculture portfolio. She also likes the pattern that borrowers can move from AVCF models to become direct bank clients, often with larger facilities. Clients who have taken their first step by getting an AVCF loan gain confidence to take on more debt. At the same time the Bank is also gaining confidence and learning through the process.
Fiji
Epeli is a ginger farmer in Lomaivuna, Naitasiri, Fiji. Ginger is a high value crop which grows well in the Fijian climate and is a growing export earner. Last year, exports were F$11m (USD5m) and the Fiji Government has declared a target of increasing ginger exports to F$25m (USD11.25m) within 5 years. That will require investment into land development, farm mechanisation and ensuring the processing plants can handle the increased throughput.
At the farm level the need for access to finance has been taken up by the FDB. PSDI has worked with FDB over several years to support development of expertise around AVCF structures. Through this program, a new AVCF program was developed, including for ginger farmers. To participate, ginger farmers had to meet certain criteria:
- Have a contract with an approved ginger processor (Kaiming Agro Processing Ltd were the initial participant);
- Have access to land for ginger growing; and
- Be a member of the Ginger Growers Association.
The AVCF program commenced in 2019 with the signing of the first Master Agreement between FDB and Kaiming Agro Processing Ltd, a ginger processor based on the banks of the Navua River, close to Suva. The company produces crystallised ginger, glace ginger, pickled sushi ginger, pureed ginger, and ginger juice. A second processor, Frespac Ginger (Fiji) PTE Limited has since joined. Collectively, the processors employ 237 staff, 75% of whom are women. Export markets include USA, Canada, Australia, New Zealand, Germany, and the United Kingdom.
A third party to the Master Agreement was the Ginger Growers Association. They represent over 180 farmers and are active in promoting industry training and financial literacy training for their members. The AVCF model allowed for financial support to both new and existing farmers and allowed grower cooperatives to collectively raise finance for infrastructure such as storage and transportation needs.
Ginger grower Epeli is happy that he has been able to increase planting of both organic and conventional ginger on his farm due to the extra finance. “It really helped us financially – increasing our production and income significantly.”
Shortly after the introduction of the AVCF program, the COVID-19 pandemic caused a slowdown in finance and agriculture activity. At the time of the AVCF launch, FDB had only a low level of portfolio exposure to the ginger sector, but the AVCF program had a significant impact as the bank gained knowledge of the sector, the farmers and the Ginger Growers Association.
Under the terms of the AVCF loan, repayments must be made directly from the ginger processing company. This is one feature of program that protects the Bank as they get paid first, before the crop earnings go to the farmer, where it may be used for other purposes. However, this does increase administrative requirements for the processors and initially in Fiji there were some teething problems.
FDB’s CEO, Saud Minam noted that in their latest portfolio analysis, as of May 2023, there are 22 active farmer loans under the AVCF ginger program, totalling approximately F$287,000 (USD128,000), but they also now have a wider portfolio of ginger farmer loans, where payments are made directly under regular instalment arrangements, totalling a further F$1.2 million (USD536,000). The total FDB portfolio to ginger farmers exceeds F$1.5 million (USD670,000). In 2022, Fiji’s Ministry of Agriculture also agreed to provide a partial interest subsidy on agriculture loans under F$50,000 (USD22,000), to encourage more borrowers to come forward. Farmers such as Epeli now have the capacity to borrow against their crops and grow their family income.
As noted, the agriculture sector as a whole is a vital export earning sector for Fiji. Crops such as taro, papaya, rice, ginger, cucumber, and pineapple are well suited to the warm climate and Fiji has developed special trading arrangements with both Australia and New Zealand under the Bilateral Quarantine Arrangements (BQA) to expedite crop trading with minimal border delays.
FDB has led the introduction of AVCF in Fiji. The product was initially workshopped between the PSDI and FDB in early 2018 after the Fiji Government had passed the Personal Property Securities Act 2017. The product development work continued into early 2019 when the first AVCF pilot was launched for ginger farmers.
This AVCF model has now been adapted for rice and the CEO Mr. Minam noted that although the model is still considered “brand new” to Fiji farmers, he expects it will soon be rolled out for many other cash crops within Fiji, focusing particularly on those crops approved under the BQA. Although some of the new loan products may have different product names the CEO confirmed that the engine room of all these products is the AVCF model.
FDB management believe that the fundamental AVCF principles are ideal for the local market. Mr. Minam commented “we love this product, it is one of the best things introduced here, mitigating the risk concerns we traditionally have over lack of collateral. Under this program, the crop buyer gives us the security we need. It is a win/win for the Bank and the farmer.”
Conclusion
Banks and finance companies recognise that there is strong encouragement from governments and many other stakeholders to boost levels of MSME lending, particularly in the agriculture sector, which underpins Pacific economies. Development banks have a mandate to assist economic development. However, expanding credit to the MSME sector is not a simple as it seems, as illustrated by our case studies. It can be a balancing act to meet the requirements of tight regulatory regimes and risk management policies on the one hand and driving increased lending on the other. AVCF is an important mechanism to assist banks enter the agriculture finance market in a controlled way while mitigating their risks. Many financial institutions in the Pacific have begun the process of developing such products and learning what works best for their local context. As their efforts yield positive results, their comfort will grow, and additional products will be created. PSDI will continue to support this process.
Some key lessons from the case studies discussed can be summarised as follows:
- Farmers must be forthcoming – they should share data, open their books, and sign up to supply agreements if they want to improve their chances of getting access to finance for growth;
- The banks and finance companies are learning too. They need time and experience with the AVCF model to get more comfortable with the credit risks;
- Many developing country markets are still cautious post COVID-19. In many cases, government support programs and loan schemes have reduced demand for borrowing;
- Guarantees and risk support can have their place as banks and finance companies generate more experience. It is important to start somewhere and build knowledge. Small initial steps can lead to bigger steps in the future;
- There is some evidence that AVCF lending can lead to increasing overall sector exposure. In Samoa, DBS happily point to the growth of their direct lending to former AVCF clients, and there are signs that the growth of direct ginger farmer finance in Fiji has been enabled by FDB’s ginger AVCF program;
- Banks and finance companies like and want AVCF products. There are indications that many more models will be rolled out, some may be labelled differently, but many will have AVCF principles as their “engine”.
