New Agricultural Inputs Credit Directive to be Issued
The new directive comes after research suggests that farmers have not substantially increased production after 30 years of fertiliser use
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| Khalid Bomba, chief executive officer of Agricultural Transformation Agency and Nega Woubneh (PhD), senior director of Value Chain Programmes at the ATA. |
A new directive that revises the old system of disbursing loans for agricultural inputs, such as fertiliser and seeds, is expected to be issued by the Ministry of Agriculture (MoA) in two months.
The new system was developed in partnership with the Ethiopian Agricultural Transformation Agency (ATA) – an institution set up through funding by the Bill & Melinda Gates Foundation to identify bottlenecks in the agricultural industry and apply systemic solutions.
Major contents of the draft directive were presented to stakeholders by Nega Woubneh (PhD), senior director of Value Chain Programmes at the ATA, on Thursday, October 3, 2013, at Hotel Siyonat.
Changes made to the old system include availing credit through Micro Finance Institutions (MFIs) instead of farmer’s cooperatives and providing a credit voucher to farmers instead of cash. This is done to bar farmers from using loans for other purposes. In addition, the directive also aims to set up a credit fund in case of defaults. This will ease the burden of regional agricultural bureaus, which currently give a 100pc guarantee for agricultural input loans.
Some of these changes were piloted during the beginning of the 2013 planting season in over 32 weredas, in the Amhara, Tigray, Oromia and Southern Regions. The Amhara Saving & Credit Institution (ACSI), Oromia Credit & Saving SC (OCSSCO) and the Cooperative Bank of Oromia (CBO) together disbursed 85.8 million Br for 25,468 wheat farmers. Another 649.6 million Br was availed by the OMO Saving & Credit Institution to 480,000 farmers in the Southern Region.
After the issuance of the directive, however, the changes will be implemented countrywide in time for the next sowing season, according to Seyfu Assefa, senior credit supply expert at the MoA.
Regions will be allowed to draft a more detailed directive to implement the new method as long as it does not contradict the federal directive, he explains.
“The voucher system especially cannot be changed,” he insisted.
The MoA and the ATA have been working on the directive over the past year, according to Seyfu.
The need for the directive came after studies by the International Food Policy Research Institute (IFPRI) revealed that after 30 years of fertiliser use, Ethiopian farmers have not significantly increased production. The major reason for this was the lack of financing for smallholder farmers, after regions refused to guarantee loans due to defaults.
In the old credit supply system, the Commercial Bank of Ethiopia (CBE) provided credit to farmers via regional agricultural bureaus. The latter would then transfer the money to cooperative federations and unions who passed it along to primary cooperatives. Only then would it reach farmers. A farmer then buys inputs from the same cooperative that availed the loans. The money is also returned via the same channel, with regional agricultural bureaus providing a 100pc guarantee to the CBE in case of defaults.
This has cost them dearly over the past few years, as defaults reached nine billion Birr, according to data from the ATA. Some bureaus have since refused to take on the risk, leaving farmers to buy fertilisers or seed from their own pockets and some cooperative unions to provide loans from their own budget.
When cracks showed in the system over a year ago, the Ministry approached the ATA to identify gaps and make recommendations. It is after the ATA made the assessments that it came up with the revised system now included in a directive.
One of the gaps the assessment found was the extra role cooperatives had taken in disbursing loans.
“Cooperatives do not have the tools to do this, as their primary role is to provide input supply and market outputs,” Ewnetu Feleke, analyst of the ‘Input, Output Programme’, told Fortune.
MFIs were picked to disburse loans because, as financial institutions, they are better equipped to assess risk, according to Ewnetu. Moreover, they have a 98pc loan repayment rate
Moreover, as there is a guarantee by regional government in the old system, cooperatives give farmers loans without any risk assessments, leading to defaults.
The voucher system was also introduced to protect against defaults. An MFI will not directly dispense cash to a farmer, but will instead issue a voucher that states the exact amount of agricultural input the farmer can buy. The farmer will then redeem the voucher at a primary cooperative, who will pass it on to its union. The unions will only pay the profit margin to the cooperative. When the time comes to repay the loan, the farmers repay the MFIs directly, unlike previous times.
The credit guarantee fund will be established to take the burden from regional bureaus. This is still in its early stages, according to Seyfu.
“There are consultants that will make recommendations on how we can set up the system,” he told Fortune.
The MoA and the ATA plan to hold consultations on the directive in regional agricultural bureaus that are yet to see it. This will not take more than a couple of months, after which it will be ratified, according to Seyfu.
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