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Financing coffee farmers in Ethiopia: challenges and opportunities Bastin, A. - Matteucci, N. Lux Development (Luxembourg) – Marche Polytechnic University (Italy) FAO Conference on Rural Finance Research 19-21 March 2007 Overview on Ethiopia Ethiopia: one of the poorest countries: ranks 170 out of 177, UN-HDR (2006) • • Recent GDP & GDP/N recovery (mid-90’) • Volatile & unbalanced export • Coffee on total export: from 63% (1995) to 37% (2004), mainly due to price shocks since 1999 • Coffee crisis: huge impact on a small-scale agriculture; low access to rural communities •Many farmers, traders, cooperatives bankrupted •The pervasive (nation-wide) impact of the crisis Big agricultural potential in a poverty trap • Agricultural potential; 84% of population is rural . • Lack of infrastructure: transport, TLC, health, etc. • Natural calamities (drought) in some areas, recent conflicts • Poor agricultural practices and lack of surplus, difficult to mobilize • High quality, organic coffee VS poor value chain • No traditional finance for the poor • Which role for a “sustainable” Microfinance ? (Morduch,1999) • Which credit, saving and risk management instruments ? (Dercon, 2002) A survey to fill the informative gap • No detailed evidence on financial services for . Ethiopian coffee farmers • Only 1 million the outreach of MFI (end of 2004), out of 70 mill. - 84% rural • Our survey on Jimma Zone, coffee-oriented (Oromia, largest Regional State); Summer 2005 • Interview of 120 coffee farmers(random sampling) • Complemented by focus group discussions • Further interviews with financial providers, etc. Jimma Zone in Ethiopia Background Statistics Mean Std. Dev. Median Min. Max. Age (years) 46 10.7 45 25 73 Family Size (n.) 7.2 2.8 7 2 14 Working people (n.) 5.4 2.3 5 0 14 House - road distance (Km.) 2 2.3 1 0 12 House - market distance (Km.) 4.7 4 5 0 15 Land size (Ha) 1.2 0.8 1 0.56 5.5 Coffee size (Ha) 0.6 0.5 0.5 0.07 3.2 First activity income (%) 70.7 13.8 70 40 100 Main risks perceived 1) 2) 3) Coffee price volatility: 85% Coffee Disease: 55% Lack of access to loans: 47% Risk Management instruments: 1) Activity diversification (other crop, animal fattening): 45% 2) Coffee differentiation (organic) : 42% ……… 5) Commercial credit: 14% Risk management VS risk coping strategy, cf. Dercon, 2002 Access to FS (loans) (64% of sample) Source of loan: Frequ. (%) Mean (Birr) - [$] Coeff. Variat. (%) Min. Amount (Birr) Max. Amount (Birr) Friends 16.2 294 [34] 116 60 1,250 Traders 8.8 145 [17] 71 60 300 Money lenders 8.8 193 [22] 69 60 400 Cooperativ. 32.3 115 [13] 30 42 200 MFI 33.8 905 [105] 27 445 1,500 Total 100 330 [38] 52 133 730 Duration and cost of loans by source Source Duration (months) Min - Max Annual interest rate (%) Min Max Friends 2 12 0 120 Traders 5 8 200 660 Money lenders 5 7 120 171 Cooperat. 3 6 0 0 MFI 6 12 11.5 11.5 Use of Loans 1) Consumption (food, clothing, education, house construction): 53% 2) Other productions (trading, animal fattening, other crops) 32% 3) Coffee Inputs: 14% Remember: MFI loans in the sample are only for production Main problem with loans 1) Inappropriate terms (grace period, duration, etc.): 37% 2) No problem: 29% 3) Small amount: 20% 4) High interest rate: 14% FS demand and financial GAP DEMAND Mean Mean (Birr) ($) Min Max Coeff. Var. (%) 20,000 155 2,458 284 100 2,105 243 0 20,000 185 86 (58) - 0 100 - (Birr) GAP (Birr) GAP % (unweighted average) Most useful (potential) FS product • • • Saving products: 64 % Loans: 25 % Saving and loans: 10 % • However, SP mostly unavailable in rural areas (saving “in kind”) SP as a partial substitute for risk management products (insurance) (F) SP could extend the outreach of MFI (I) • • Conclusions • Huge loan gap. Moreover, 1/3 credit is informal: costly and subsistence-oriented • MFIs: 1° provider (1/3 sample). It offers the best conditions. Limited outreach. • MFI loans as enablers of risk management strategies !!! • Further evidence needed on “financial” cooperatives • Clear demand for saving products Policy recommendations • Product Innovations from MFI required: 1) Better tailored production loans (possibly also consumption loans) 2) Saving products for rural communities 3) Increase the outreach of MFI • Training in finance for operators in rural communities (also for cooperatives) • Rural Banks?