SPIS Toolbox - Credit Policy: Select/develop Suitable Financial Instruments

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Credit Policy: Select/develop Suitable Financial Instruments

Automated irrigation system in Morocco – largely subsidized by the state (Source: Lennart Woltering)

When selecting or developing a loan product for SPIS it is important to ask the following questions:

• Who? Market oriented producers, no subsistence production, producer groups possible;
• What? Finance for energy source and pumping system used for irrigation; energy and/or water saving technology;
• How much? Establish range of loan sum; % own-contribution of producer; % subsidy;
• When? Range of loan period (years); repayment frequency (months); disbursement in tranches;
  
• Interest rate? From..x..% p.a. to ..x..% p.a. (range);
• Collateral? Equipment, mortgages, additional collateral (guarantee scheme), non-traditional collateral (future harvest, warehouse), leasing scheme with equipment providers.

Loan products for financing SPIS usually:

• have higher initial investment sums with consequently longer repayment periods and/or high installment rates;
• need alternative guarantee schemes/ unconventional collateral;
• have higher interest rate payments due to higher credit risk and long investment period;
• focus on innovative clients, usually investing in high(er) value crops;
• should be strictly oriented towards water capacity available and the farm’s specific requirements;
• use no blueprint; every farm/enterprise is unique!

In order to prevent prohibitive loan transaction costs, consider:

• guarantee funds with public support or insurance;
• leasing schemes with pumping system providers and others;
• group financing approaches for producer groups;
• public subsidies and sponsoring;
• favorable refinancing options for the financial institution (e.g. subsidized interest rates offered by donors/public entities).

In order to overcome the information gap in respect of the new technology, introduce additional activities such as:

• encouraging (potential) clients to get informed and consult technical advice;
• training and sensitization of loan staff on basics about the technology;
• monitoring loan performance closely;
• continuous dialogue with solar power sector.

Note: SPIS clients could become future clients for other financial products (cross selling).

Outcome/Product

• Guidelines and Procedures: including assessment and decision guidelines, target key performance indicators (KPIs).

Data Requirements

• Comparable clients liquidity pattern in current agricultural portfolio.

Compute, prepare

• repayment plan (with varying interest rates, repayment periods and repayment frequencies);
• profitability margins by crops and farm sizes;
• tables for evaluating types of collateral;
• list of eligible crops;
• list of eligible irrigation systems and average investment cost per component;
• list of eligible SPIS configurations and average investment cost per component (see DESIGN and GET INFORMED);
  
• list of eligible types of collateral.

People/Stakeholders

• Management level of financial service providers;
• Experienced credit staff (senior, agrifinance);
• Associations of producers / potential borrowers;
• Agricultural extension services;
• Research and training institutes (e.g. environmental agency);
• Providers of service, technology and inputs.

Important Issues

• Prevent prohibitive transaction costs for borrowers;
• Overcome information gap of financial operator;
  
• Note that standardization potential is limited;
  
• Select excellent loan staff for this segment with corresponding background and experience (train them!).