FEASIBILITY STUDY ON THE ESTABLISHMENT OF AN AGRICULTURE COOPERATIVE BANK- PPF MECHANISM


Overview

  • Reference: P-MW-AA0-028
  • Approval date: 11/12/2015
  • Start date: 23/08/2016
  • Appraisal Date: 09/10/2015
  • Status: OngoingOnGo
  • Implementing Agency: MINISTRY OF FINANCE
  • Location: Malawi

Description

The study will carry out the following activities:

1.Assessing the options for providing agriculture finance to smallholder farmers: The Study shall:- (a) Examine the various options available for the provision of finance to the smallholder farmers namely:

(i) Price subsidy;

(ii) Subsidized credit; and

(iii) Commercial rate credit; (b) Review and take stock of the history and lessons learnt for the implementation of the various options in Malawi and where applicable other countries; and

(iii) Formulate recommendations on the way forward with their pros and cons, and ranking in terms of their appropriateness and sustainability taking into account the local contextual challenges and opportunities.

2.Assessing the rural finance landscape in Malawi: The study shall assess the existing agriculture and rural finance landscape including financing demand and supply dynamics, the regulatory framework, capacities of oversight institutions and coordination among oversight and institutions as well as among/with implementing bodies. In this regard, the study will examine the following aspects:

3. Reviewing the Malawi experience with agricultural and rural financing schemes: The study shall take an inventory of initiatives and experiences in Malawi targeting agriculture sector and rural populations and draw lessons that should inform the design of the proposed Agriculture Cooperative Bank.

4.Assessing the existing cooperative landscape: The Government's preferred target beneficiaries are small holder farmers who will be served through cooperatives. The study will therefore need to review the cooperative landscape in Malawi including their role, capacity, performance, challenges and opportunities, and propose strategies, institutional reforms and programmes for revitalizing cooperatives. It will also assess their financing needs, and challenges they face in accessing finance to enable them contribute meaningfully to the economy.

5.Assessing the structure/requirements for proposed Agricultural Cooperative Bank against other options: The assessment will consider current economic and social context, agriculture policy priorities and needs of the country and lessons learnt from previous initiatives in proposing various alternatives including an optimal design structure for the proposed Bank.


Rationale

The Government is determined to reduce the fiscal burden imposed by FISP while ensuring that small holder farmers continue to have access to fertilizer and other seasonal inputs. Formal banking institutions cannot be relied upon as small holder farming is perceived as too risk. It is against this background that Government has conceived the idea of establishing a cooperative bank (owned by the cooperatives themselves) to provide loans to this unserved group which happens to be the main contributor to the overall agriculture production and hence the national economy.

The Government has in the past established a number of financial institutions, special funds and programs in order to address credit market failures and provide access to equipment for and inputs for rural enterprises engaged in agriculture. With respect to financial institutions, Government facilitated the establishment of Malawi Rural Finance Company and Malawi Savings Bank which failed to perform as expected. Other interventions included Youth Enterprise Development Fund (YEDEF) and Malawi Rural Development Fund (MARDEF) whose performance remains very low. In the agriculture sector, several programs such as universal subsidies, Targeted Input Subsidies, Starter Pack Initiatives and recently a Farm Inputs Subsidies Program (FISP) have been implemented. In 2012/13 Government established the Farm Input Loan Programme with agricultural clubs and associations as main beneficiaries. There have been mixed outcomes from the various interventions cited above with most of them failing to deliver on a sustainable basis and experiencing low repayments. Given this experience, it is important that a detailed study be conducted to evaluate all the previous interventions, identify the strengths and weaknesses of each intervention, compare and draw lessons from similar interventions in other countries and advise Government on whether the proposed Agriculture Cooperative Bank is feasible in the current environment and whether other feasible options for the same purpose should be considered.

Investigation will also be required on the other categories of farmers that could be targeted by the agricultural cooperative bank to render the institution sustainable by for example focusing on financing value chains.

The study will also look at the type of agricultural enterprises to be promoted for the cooperatives that will make business sense for the smallholder farmers and how the proposed Bank will contribute to export diversification agenda under the National Export Strategy (NES)


Benefits

The expected outputs/outcomes of the study are:

(i) Assessment report on rural finance landscape and regulatory framework environment;

(ii) Assessment report on cooperative movement and structure in the country;

(iii) Report on options for improving access to agricultural finance;

(iv) Design and report on minimum parameters to be met for establishing the various options including a successful and Sustainable Agricultural Cooperative Bank; and

(v) At least 3 scenarios of financial projections including set-up and initial operating costs and for roll-out of the top three recommendations including the option of the Bank


Key contacts

MACHARIA Lilian Wanjiru - RDGS4


Costs

Finance source Amount
ADFUAC 365,000
GovernmentUAC 24,000
TotalUAC 389,000