Project description and activities

Guaranteed credit to smallholder tea and coffee growers

Under this component (USD 0.680 million), the project will establish a credit system for the members of the primary societies of tea and coffee growers, repayment of loans to growers will be guaranteed by the processing factories. If successful, the scheme may be extended to some of the new cash and export crops ventures funded by the project.

Loans made under the system will not be specifically linked to input purchases. The project approach is that the demand for input depends on the comparative advantages of input application with respect to other priorities of the borrowers for the use of cash resources. Therefore, loans will be extended to all members of the primary societies that will demand credit, irrespective of the purpose for which they wish to borrow. Loans will be made within the limit of what borrowers are capable of repaying from a controllable source of cash income. This amount is set at 50% of the value of the crop that each member of the primary societies delivers for processing. This amount is more than the maximum cost of fertilizers and other chemicals required for efficient cash crop production. Therefore, farmers who decide to use the credit facility to buy inputs are able to do so. In line with the stated approach, the project will not interfere with the use made by the farmers of the input they purchase on credit. Since the project will make a determined effort to convert at least two of the selected coffee growing areas to organic production, the demand for chemical inputs in those areas may be much less than the borrowers creditworthiness, leaving room for funding other household needs, or inputs for food crops, with loan money. Use of part of the inputs purchased on credit on food rather than cash crops is in line with the IFAD and GoR HH food security objectives. However, in estimating the value of the crop delivered by each grower, that is the extent of their guarantee of each individual borrower, the processing companies will assume lower yields than made possible by the full use of the purchased inputs on the coffee or tea crop.

Under the proposed loan administration procedure the chances of loan delinquencies are minimized, since a controllable source of the borrowers’ cash income is firmly in the hands of the processing companies. Tea growers have no other potential buyers of the green leaves. Coffee growers could in principle sell to private traders, but only at considerably lower prices and after processing the fresh cherries into parche at their own cost. Furthermore they would run the risk of losing their membership in the primary society, and therefore their right to preferential remuneration for their coffee crop in the future. Nevertheless, to avoid conflicts of interest at specific sites, and possible sale of coffee cherries to other washing stations by fraudulent cooperative members, the government would discourage the installation of other coffee washing stations in the command area of any one of the washing stations established under the project.

The primary societies will operate the credit scheme in coordination with the processing factories that buy the crops of their members. Three sources of funds for lending by the primary societies will be provided: (i) savings mobilization, in the initial form of a USD 5 membership fee, paid by all members of a primary society who wishes to join the credit scheme, (ii) a project grant to pay for the membership fee of women head of household at Nshili, and (iii) loans from a Rwanda financial institution. The membership fees (and the project grant in favor of the women at Nshili only) will be deposited in an account with a commercial bank, opened in the name of the primary society. This deposit makes up the society equity capital.

Each primary society that has deposited the equity capital will receive a loan from a Rwanda financial institution interested in participating in the scheme. Resources for these loans will be drawn from IFAD to the extent of 75% and from the financial institutions own resources to the extent of 25%. The loan to each society will not exceed the equivalent of 50% of the expected value of the fresh crops sold to the processing factories by all the members of the society who have paid the membership fee. The loan amount will be deposited in the society’ bank account. Loans made by the society to their members using the bank account will be guaranteed by the processing factories. All checks drawn on this account will be countersigned by the processing factory senior accountant or by the financial controller.

The primary societies keep a record of the production potential of their members, this record being routinely checked and verified by the processing factories. The record will show the limit of the creditworthiness of each member, which will be agreed by the processing company. The societies will collect the demand for credit, and the demand for chemicals and other agricultural inputs from their members and channel the requests for inputs to the processing company, who will order the goods on behalf of the societies. The company will keep a record of the individual loans extended to each member by the societies. Therefore, two sets of books will be kept, one by the primary societies and one by the processing company. The latter transactions will be kept separate from the ordinary accounts and separately audited. Audits will include reconciliation of the two sets of books and of the bank account opened by the primary society to operate the lending scheme.

The processing companies will pay suppliers for the inputs ordered by the primary societies drawing checks on the primary societies’ bank accounts such checks being co-signed by the primary societies President and cashier. Cash loans to farmers in excess of the order for inputs will be disbursed to the individual borrowers by the societies, also drawing cash with checks co-signed by the processing company. Having completed input procurement, the company will deliver the goods to the primary societies for distribution to their members. Repayment of loans (principal and interest) into the primary societies bank accounts will be made by the companiy from amounts deducted at the time of payment for the crop to each individual member of the primary societies. The companies will be bound to make such payments within 10 working days from the date of delivery of the crop to the factories, concurrently with the payment made to the growers. Having received the loan repayments, the societies will transfer the funds to the bank that has extended the loan inclusive of the interest due on the bank loan. Such transfer would be made within a period not exceeding one month from the date of the deposits of the individual loan repayments made by the company.

The primary societies will be required to keep their equity capital as a reserve. Loans to individual members will be made at a rate of interest decided by the general assembly of the societies. However, such rate will include a spread over the cost of the loan extended to the society by the bank. The spread must cover the cost to the societies of administering the loans, and some profit to reward the equity capital. The local banks participating in the scheme will charge 4% interest over the rate charged by the RNB to them for the transfer of IFAD funds that will cover 75% of the loans made to the societies, a rate sufficient to cover their transaction costs and profit. The 25% drawn from the banks own resources will be at current interest rates charged by the banks to preferred clients.

All repayment of loans made to coffee growers by the primary societies must be made at coffee harvesting time. Repayment of loans by tea planters may be spread in equal small installment concurrently with the payment of green leaves to the borrowers.

The project will fund a minimum of office equipment and space for the societies, to be installed at the premises of the processing factory within easy access of the members of the societies, some communication equipment, and the training required to operate the equipment supplied. Office equipment will be shared by more than one society. Maintenance will be the responsibility of the factories. The technical assistance required by the cooperatives to run the credit scheme is funded within the framework of the cooperative training assistance provided under the coffee and tea components (see TWIN contract).

Depending on the experience with project implementation, the primary societies will be encouraged in due course to sophisticate their product portfolio, increase savings mobilization, sophisticate their lending terms and conditions, and become full-fledged rural micro finance institutions, developing the relationships with the formal banking system established under the project.

The maximum amount of guarantee that the CPMCCs and NTC can offer at full development against loans made by the primary societies to their members is estimated at USD 400 000 for the coffee planters, and USD 350 000 for the Nshili tea growers (see Working Paper 12). However, the project allocation is limited to USD 500 000 for both the tea and coffee primary societies combined. This amount is sufficient to develop the scheme and to generate the confidence of the participating Rwanda banks to the point that they would be willing to increase their lending to the societies with their own resources, responding to larger effective demand from the cooperative members.

Structure of the component cost. To summarize, the cost of the coffee and tea smallholder credit component is structured as follows:

Table 8