For the country to witness consistent agricultural sector financing, particularly from commercial banks, it is crucial that partnerships among players in financial institution and agricultural value chain are forged, says participants at a workshop on climate smart adoption investment in the cocoa sector.
Participants at the workshop organised by Rainforest Alliance and Convergence recognised the fact that a single sector single-handedly cannot provide the required solutions to tackle the situation of dwindling private sector-particularly commercial investment in the agricultural sector, especially cocoa. The Climate Smart Fiancé Workshop attended by financial institutions, as well as development actors was on the theme, Designing Investment Mechanisms to Finance Climate Smart Cocoa in the Ghanaian Cocoa Sector, held in Accra.
Ghana's agricultural sector finance is characterised by many risks which financial institutions deem as unattractive to engage in. Some of these risks are production risks usually due to reliance or unpredictable rainfall pattern, and fluctuations in market prices. Therefore, smallholder farmers are constantly unable to access loans citing high interest rates charged by commercial banks, and the requirements including collateral which banks require from customers during loan application.
Relationship Manager at the Agricultural Finance Department of the Agricultural Development Bank, Mark Nii Amon-Antonio says cocoa farmers have investment drives on cocoa farms, but the fact that the interest rates are high, they shy away from it.
"Farmers then cultivate little acreage and leverage on the future to see what the future holds. With cocoa whatever is produced is bought so if government is ready to provide cheaper source of financing, farmers will embrace that and will increase production. The non-performing loans of commercial banks are very high and is all agriculture just because they have high interest rates, they are unable to pay back the loans," he said.
For commercial banks to come on-board, there is the need for donor and development partners to provide cheaper source of funds to ensure lending to the agricultural sector as a result of high interest rates, Mr Amon-Antonio states.
"If we do that or government coming in with funds to lend to the agricultural sector that will boost the business particularly cocoa industry. Commercial banks not investing in agricultural sector the solution is to look out for cheaper source of funds from development partners to leverage on that and finance the agricultural sector," he mentions.
Some financial institutions encourage farmers to form cooperative, as a way to help them access some level of credit for their business. For instance, The Agricultural Development Bank traditionally has the mandate to finance the agricultural sector. The bank has put together a group of farmers through a pilot programme at New Edubiase in the Ashanti region by offering finance to the farmers based on acreage under cultivation.
"These schemes are there to address all the shortfalls in not having collateral. What farmers do to address the collateral issue is the joint and several liability where when one fails to pay the loan, the executives organise to make payment," he says.
As the government recently launched the planting for food and jobs initiative, he said: "It is all about providing farmers with seeds, fertilisers, extension services, when all these are done, we belief strongly that agricultural would contribute immensely towards Ghana's gross fomenting product".
Thomas Essel with the Bank of Ghana says the central bank is putting together a new project to facilitate access to funding by farmers or agribusinesses.
"The Ghana Incentive Based Risk Sharing System for Agricultural Lenders is something we are trying to design. Consultants are currently working to design appropriate financing mechanism that would facilitate access to credits," he states.
Mr Essel notes: "It is in the initial stages and even that we cannot start in a very big way. We would start from a small area of selected crops based on the work the consultants are doing".
"Of course we have objectives of getting crops that have potential in earning the country enough foreign exchange. We may also target crops that have import substitution reliance and in that case when we have produced more, we have foreign exchange within the system to be able to retain.
"Apart from these objectives we also have the objective of helping the farmer to see agriculture as a business so that they can earn income that would raise their own standard of living. It will be based on few selected crops but would be expanded as the years go by and as we see that our pilot crops have done well," he indicates.
Helene Roy, Rainforest Alliance Senior Manager, Sustainable Finance Landscape and Livelihoods says for commercial banks to lend to the agricultural sector they need to find ways to de risk their capital.
According to her, the agricultural sector is perceived to risky, adding, "So for the commercial banks to be incentivised, they need to access some new form of capital guarantee and share the risks among themselves, cocoa industry or development financing institutions."
The commercial banks themselves would not necessarily lend directly to the smallholder farmer, but find ways through smaller scale banks or value chain partners to serve as financial intermediaries, she states.
And these small scale institutions or value chain players would need to set up long programmes for smallholder farmers, Roy explains.
According to her there are different ways to do that given the right capital through developing the right financing products for smallholder including cocoa farmers-taking into consideration non-availability of land titles, and being seasonal crop.
"It is also about working through the value chain player and their own systems, the service delivery modules to deliver the financing. The commercial banks can help finance intermediaries to finance smallholder farmers and they need to adapt their credit line and long term products to the cash cycle of cocoa," she notes.
Benjamin Schmerler, Senior Director of Investor Relations at Root Capital says commercial banks need to shift orientation and think about what the market structure does, when financing is needed within the year.
"Commercial banks need to work with specialised banks or local banks, non-financial bank institutions, social lenders, Non-Governmental Organisation (NGOs) to build the capacity of businesses to get them to start servicing credit and help them with a little bit of concessional capital to move them towards growth," Mr Schmerler adds.