Breakout session 4: NEAR EAST AND NORTH AFRICA

Paper "Financing smallholder farmers and rural entrepreneurs in the Near East and North Africa " by Thierry Maheux (MEN Consultant), Omer Zafar and Mylene Kerallah, IFAD

Chair’s remarks and key points:  Nadim Khouri, IFAD

Note: rural financing was the main theme of this breakout session

• How do we make sure market (and institutional) failures do not prevent small-scale farmers of successfully becoming entrepreneurs? A number of examples were offered to level the playing field. E.g., injecting funds; providing technical assistance; using forward contracts; grouping farmers; adopting a value chain approach.

• Other issues that hinder smallholders include access (to inputs, financing, and knowledge), power relations within value chains, sustainability or how to support farmers in the long term, and positioning primary producers to get a better deal within value chains.

• Which financial instruments are needed to improve small-scale farmers’ opportunities? How do we make sure our actions/projects/models are reaching the more excluded ones? There is a need to develop inclusive financial services in rural areas which must have considerable outreach (to reach far-flung areas). Yet, there is the danger of a trade-off between outreach and sustainability.

• Farmer associations can strengthen business relationships between unequal partners. The aim is to reverse the asymmetrical relationship in the value chain, where the margins often end up upstream and the risks below.

• How can governments (Ministries of Finance) and the private sector be engaged and what instruments to use? In the present financial crisis situation, how do we deal with risk?

Models of public-private partnerships need to be adapted to reality and changing contexts. For instance, many success stories are so because they were built on existent social models. We must be careful of the social impact of different models – look at the gender dimension, cultural issues, and knowledge of the social system for better targeting. The choice of model also depends on the stage of the financial system and the smallholders in the country or the area.

Most examples of scaling-up success stories are qualified, i.e., local. There is a need for research on scaling-up processes, for example by linking grants to loans. Use grants to research these institutional models and then embed them through loans.

Two final points raised: the donor perspective should always consider the need for an exit strategy, and the broader perspective should assess the role of the smallholder in the larger agricultural sector and economy.

Synthesis of discussion

Within rural finance, the discussion looked at what works where (experience and examples, preferably institutional), as well as information exchange, making sure it was not limited to Arab countries, Islamic countries, Central Asia, or Eastern Europe. Generally, what each country, sub-region and region could bring to the overall discussion on rural finance. The main objective for rural financing was how to transfer funds to rural communities in an efficient and effective way and, taking into consideration the present situation of financial crisis, making sure such operations attain a level of sustainability.

Participants agreed that lessons learnt need to be emphasised to assist future implementation throughout the region. For instance, issues of exclusion, power relations and shortage of money in the Sanduq case-study need to be extrapolated and further analysed. Also drawn from this case-study was the influence of private lenders (how some smallholders still received money from private lenders in Sanduq areas, meaning that private lenders were making their portfolio attractive to Sanduq members), the importance of informal channels for remittances in the MENA region, and the short-term nature of these saving and credit systems (and therefore the inability to use them for medium- and long-term financing investment).

The gender dimension must be further analysed, looking at the impact of microfinance on women as a group, and how much freedom they have within their households to use loans. Also acknowledged is the importance of knowing the existing social system before entering it for better targeting. Summing up the advantages and disadvantages of each type of financial system is required for better implementation and scaling-up.

The inclusiveness of financial services to rural areas involves how the more remote areas can be reached. There are high transaction costs in outreach and sometimes there needs to be a trade-off between outreach and sustainability. The challenge becomes greater as we widen the array of financial products – not just credit, but savings, remittances, leasing etc. Local financial models often appear successful, but this success is sometimes qualified. The question was raised about the possibility for further research and new model creation for scaling-up success stories. A proposal came for linking grants to loans - using grants to research institutional models and then embedding them through loans. Grant programmes are traditionally veered towards biophysical research, yet there is more and more demand for research of financial models.

Participants recognised that rural financing for smallholder farmers must take into account their role and contribution to the broader agricultural sector and economy.

The model of transformation of small agriculture into more desirable outcomes has to be identified, as well as how to support smallholder farmers into their transformation. There is also the challenge of creating a so-called level playing field. Despite the presentation’s focus on access to rural finance, we still need to look at how a model fit within contexts, e.g., what is the social impact in the Sanduq case-study, who are the real beneficiaries, and how to overcome abuses. Furthermore we need to think of risk mitigation and how to involve partners in risk-sharing.

How can primary producers be positioned to get a better deal within the value chain? Considering that business relationships are often between unequal partners, the value chain approach must contribute to reversing these asymmetrical relationships to bring margins down the chain and increase risk-sharing. Farmers in associations are better equipped to do this. While we still do not have a clear solution for donor intervention in risk management and market failures, banks are seeing the potential of the value chain approach in providing support to both farmers and agribusiness companies.

Rural financing is as a major constraint for agricultural development and food production. Further challenges for initiatives that work are replication and scaling-up. For instance, what would be the outcome of linking the Sanduq model to the value chain approach, or what are the possibilities for supporting financing across value chain. Participants noted that solutions need to be evolving, e.g., which model to apply where depends on the stage of development of the financial system and the profile of smallholder farmers in a specific country or area.

IFAD should see itself as a catalyst and as such plan for an exit strategy so that other institutions can take over for the long run. Yet, questions still remain of how to link formal and informal financial sectors, and the role of the state and the private sector.