Access to financial services for farmers especially smallholders has never been easy. The agriculture business is often considered as a high risk for financial institutions. Suitable tools for assessing and managing risks in agriculture finance can make a difference for smallholders’ access to finance.
“In Rwanda, agriculture finance is still below 10%. Climate change, absence of collaterals, lack of quality inputs, limited financial education, no guarantee of results and profits, are some reasons why financial institutions are hesitant to give loans to smallholders farmers”, explains Patrick Birasa, microfinance advisor and program lead for the STARS program in Rwanda.
Since farmers need cash to improve their farming technics and increase their productivity, it is essential they access adequate financial services. In South Rwanda, Back in 1993, farmers unions and cooperatives decided to come together to start their own system of savings and lending. They created savings and lending groups according to their geographical location, and each member was asked to contribute 200 FRw (0.20 Eurocent) every 2 weeks. Members in need of cash could easily borrow from the group, an amount refundable on an agreed time at a small interest rate. In 2004, the different groups joined efforts and to grow into a microfinance institution (MFI). It was the birth of CLECLAM EJO HEZA Ltd.
Partnership with ICCO Cooperation
CLECLAM EJO HEZA was a partner of ICCO Terrafina Microfinance for many years. ICCO Terrafina supported in providing capacity building and equipment, as well as advocating for the MFI, which as a result got refinancing from Rabobank and Oikocredit. Through this collaboration, the MFI expanded its operations and professionalism in automatizing its operations to reach more clients. CLECLAM EJO HEZA is one of the MFIs working now with the STARS program in the designing and implementing of specific financial products for smallholders. Taking into consideration the geographical location and the need of the local farmers, they have selected suitable agriculture activities and crops to finance.
A-CAT, a tool to assess lending risks for MFIs
Since agricultural lending is still perilous; more knowledge on agriculture and understanding specific risks can help lower MFIs risk perception. ICCO Terrafina Microfinance has developed a tool called Agricultural-Credit Assessment Tool (A-CAT), which is being used by the STARS program to support MFIs. The tool estimates the expected amount needed to finance inputs, labor costs and other costs, as well as estimate the total net income from agricultural activities (using estimated crop yields).
Based on the expected results, MFI staff can see what would be the ideal loan size for the particular crop and whether the client will repay back the loan from the investment.
The A-CAT tool also keeps track of the farmers’ cash amount spent on inputs, labor costs, other costs, and actual crop yields, so the net income can be calculated after the season. An additional advantage is that the client also builds up an agricultural performance. Nevertheless, farmers’ cash needs can be analyzed every month, which greatly increases the MFIs understanding of their clients financing needs.
“CLECLAM EJO HEZA is using the A-CAT to monitor the new groups and individual agri-loan products, developed for the banana (plantain), tomatoes and bean crops. We are now in the pilot phase, with 1,135 farmers having received loans. This is sustainable way of supporting the MFI, this tool can be used for other crops as well”, explains Patrick Birasa.
CLECLAM is also looking forward to finance more value chains, like rice and maize.
The MFI is looking for a strategic investor who can buy considerable number of shares backing the MFI vision to support farmers. Thus, they will increase their capital and be able to propose more services to their clients.