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by Alan de Brauw and Sara Gustafson

Photo by World Bank

Introduction

The Inclusive Agricultural Value Chain Finance project aims to increase knowledge about how to design and implement innovative and inclusive agricultural value chain financing models in Myanmar, Indonesia, and Viet Nam. In these countries as elsewhere, smallholders and other participants in agricultural value chains frequently cannot access the credit necessary to invest in new crops or technologies, manage risks and shocks, and safely carry wealth from harvest to planting. However, several current opportunities, including new technologies and markets, suggest that conditions are ripe to overcome the long-standing challenges to expanding agricultural finance in all three countries. As such, the first goal of the project is to both increase the understanding of agricultural value chain finance models and approaches in all three countries and to enhance awareness of these models.

Agricultural Value Chain Financing in Viet Nam, Myanmar, and Indonesia

In meeting both initial project goals, it is important to be able to place agricultural value chain financing within the context of agricultural finance, as well as policy related to agricultural finance, in all three countries. Some policies and regulations can be particularly helpful in fostering agricultural value chain finance. These include:

• ability for the market to set formal interest rates;
• legal frameworks for collateral alternatives to land, including movable property such as inventories or accounts receivable;
• warehouse receipts systems that allow crops to be safely stored and potentially borrowed against;
• established regulatory frameworks for contract farming, so that participants know that enforcement of the contract is possible by regulatory means;
• inclusive payment systems and transaction frameworks, including the ability to send money quickly by digital means; and
• technology-driven financial architecture that allows potential entry into the finance system by non-traditional financial services companies.

The Inclusive Agricultural Value Chain Finance project has conducted a policy review in all three priority countries, and reports on agricultural value chain finance will be released in 2020.

Across all three countries, we find that fixed interest rates for some formal agricultural loans exist, meaning that the market is not being allowed to fully set interest rates.

Along other policy lines, there is quite a bit of heterogeneity among the three countries. In Myanmar, some loans are allowed without collateral, and technology-driven financial architecture has some potential, but other policies for fostering AVCF development are not in place. In Viet Nam, technology-driven financial architecture exists, as evidenced by the existence of numerous mobile money vendors. However, contract farming opportunities would be enhanced by further regulation and by loosening collateral requirements. In Indonesia, the policy architecture is furthest along: in addition to interest rates, the country has seen some progress along all five of the policy points listed above. Nonetheless, Indonesia does lack an overarching regulatory framework for contract farming.

Discussions and Next Steps

Two further points became apparent during our review.

First, in both Indonesia and Viet Nam, a primary feature of agricultural finance is that one dominant state-owned bank does almost all of the formal lending. In Indonesia, this is the Bank Rakyat Indonesia (BRI), while in Viet Nam, it is the Vietnam Bank of Agricultural and Rural Development (VBARD, or AgriBank). In Viet Nam, in fact, the AgriBank is the only bank with branches in all provinces. As a result, any policies or reforms that might try to liberalize rural finance would or could substantially affect those banks.

Second, in both Indonesia and Viet Nam, some policies that are in place look good on paper, but are not being implemented well in practice. For example, in Viet Nam, small loans are supposed to be available to smallholder farmers without a collateral requirement; however, in practice, the paperwork is apparently so onerous that farmers do not apply for these loans. Similarly, in Indonesia, a warehouse receipts system exists on paper; however, it is not being used by many farmers at present. In both countries, it is important to conceive of ways to not just write down improved policies but to ensure that they are user-friendly enough so that they are actually used.

The project team recently presented its research on this framework in a workshop at the Hotel DuParc in Ha Noi, Viet Nam. Participants included researchers, NGOs, government officials, bankers, and a representative of the International Fund for Agricultural Development. Feedback suggested that participants found the comparisons to Viet Nam useful and, if anything, would have liked to see more countries included in the framework.

Feedback also highlighted the role of microfinance, which plays a relatively large role in Myanmar, in part because of the dearth of rural finance in general in that country, and an active but small role in Viet Nam. In Viet Nam, one challenge to increased microfinance use is that approved microfinance must first pass regulatory requirements, which require some scale to planned lending before they can be cost-effective.

Finally, workshop participants agreed that the information technology environment is changing quickly and can play an important role in agricultural value chain finance in the future.

In the second phase, the project team is seeking partners with which to test models of agricultural value chain finance. The project is specifically interested in finding partners interested in testing the use of alternative forms of collateral, new credit scoring methods, or other technological solutions as substitutes for “business as usual.” The tests would be by randomized control trial to ensure that we can measure the cost-effectiveness of these models for potential scale-up.

             

About Authors

Alan de Brauw is a Senior Research Fellow in the Markets, Trade, and Institutions Division at International Food Policy Research Institute (IFPRI) and Sara Gustafson is a freelance writer.