Attachment 1 - FTF Zimbabwe Access to Finance Concept Note.pdf

Feed the Future Zimbabwe Access to Finance Concept Note

Date: April 11 2023

Country Context

• Only 13% of adults access formal credit due to:

– Lack of financial institutions’ capacity to handle MSMEs

– High perceived risk for MSMEs especially in the agriculture sector

– High interest rates/transaction costs

– Lack of collateral or documents required to apply for credit

– Liquidity challenges

• Cost of funds remain out of reach for most small to medium finance seekers, with agricultural financing going to large, established agro-industrial enterprises

Barriers to Financing

4/11/2023

• Large network of small, fragmented microfinance institutions

– 147 MFIs in Zimbabwe, of which about 120 were active

– 68% headquartered in Harare

– Many did not meet $20,000 minimum capital requirement

• Concentrated banking sector recovering from the 2009 crisis

– 21 licensed banks, with 5 banks holding 65% of banking assets

– Agriculture sector credit was 20% of total bank credit

• Liquidity challenges across entire financial sector and economy

– Multi-currency system since 2009 (primarily dollarized) resulted in liquidity shortages across financial sector

– Major constraint to finance for MSMEs across all sectors

– Banks seek to meet RBZ’s $100 million capital requirements

Financial Market Assessment (2014)

4/14/2023

• Risk averse banks, especially following land tenure reform of 2000: Banks and financial institutions hesitant to lend to the agriculture sector

• High collateral requirements for borrowers: Lack of collateral remains the biggest constraint to financing for the agriculture sector, as banks typically require 100% coverage at a minimum

• High cost of funds at short tenors: Cost of funds remains out of reach for small scale borrowers, with most related financing going to large established agro-industrial enterprises. Banks receive short term deposits (if at all) and funds & thus turn around short tenors

Financial Market Assessment (2014)

USAID Loan Portfolio Guarantees (LPGs)

• Financial institutions need tailor made technical assistance to better understand the needs of MSMEs and develop appropriate products and risk management tools to meet their financial needs.

• Financial institutions need incentives that can help to reduce the high perceived risk of MSMEs in the agriculture sector, as well as women and youth owned enterprises.

• With most financial institutions lacking presence in rural and remote areas, they need more assurance that Implementing Partners will be able to monitor and support farmers to adopt improved technologies and increase their productivity.

• Climate finance is fairly new in Zimbabwe. Most banks do not consider climate adaptation or mitigation when disbursing loans.

Lessons Learned

Problem Statement and Purpose

To adapt to and mitigate the effects of climate change, Zimbabwe must leverage private sector finance and support financial institutions to increase small producers’ adoption of climate-smart technologies and practices, and the ability of vulnerable communities around protected areas to establish ecotourism enterprises and deforestation-free practices.

However, despite significant demand for credit facilities, the lack of collateral and liquidity in the market prevents many small borrowers from accessing finance.

Problem Statement

USAID/Zimbabwe Mission (hereafter the Mission) aims to facilitate a more conducive and inclusive climate investment environment by incentivizing a range of financial institutions, investors, and private sector partners to increase access to finance for smallholder farmers, small & medium enterprises, and communities around protected areas to adopt climate smart technologies and practices, and improved conservation practices.

Concept Purpose

3/14/2023

IF institutional and capacity gaps between smallholder farmers, small & medium enterprises, communities around protected areas and finance providers are addressed, and IF new funds and services are mobilized to meet the needs of these beneficiaries, THEN they will have improved access to finance to enable them sustainably deploy, demonstrate and adopt climate smart technologies and practices, and improved conservation practices in target districts, which are characterized by low and erratic rainfall and frequent prolonged dry spells.

Development Hypothesis

Concept Objectives

• Objective 1: Develop and scale effective partnerships, and new investment solutions to incentivize greater provision of financial services for SMEs, smallholder farmers and vulnerable communities

• Objective 2: Improve ability of SMEs, smallholder farmers and vulnerable communities in target sectors and districts to access formal debt or equity (Demand Side Constraints)

• Objective 3: Improve provision of finance products and services appropriate for SMEs, smallholder farmers and vulnerable communities in target sectors (Supply Side Constraints)

Concept Objectives

Strengthened capacity of financial institutions to increase liquidity

Increased number of SMEs, smallholder farmers and vulnerable communities receive loans

Increased capacity of financial institutions to provide financial services

Strengthened capacity of SMEs, smallholder farmers and vulnerable communities to access financial services

Increased financial products and services that meet the needs of target beneficiaries

Strengthened ability of financial institutions to develop financial products that are appropriate for enterprises and farmers

SMEs, smallholder farmers and vulnerable communities have financial resources to adopt climate smart technologies and practices

Log Frame

• Interventions will be finalized through direct consultations between the financial institutions, private sector partners, and the prospective implementing partners

• Consultations will be:

– On individual basis to protect the proprietary information of each partner as well as to understand their unique needs, and

– Collectively to determine the common needs of all the partners

• All the partners must approve the concept notes before prospective implementing partners can submit them to USAID for review

Evidence-based Interventions

Roles and Responsibilities S/N USAID Implementing Partner Private Sector Partner Financial Institutions

1 Provide technical assistance to beneficiaries to increase their access to finance for deployment, demonstration and adoption of climate smart technologies and practices

Build the capacity of financial institutions to increase liquidity, and develop diverse financial packages and services to beneficiaries

Conduct due diligence on beneficiaries requesting for loans

2 Link qualified beneficiaries to financial institutions for access to loans

Facilitate financial literacy training to beneficiaries to ensure judicious use of credit and timely repayment

3 Monitor the ability of beneficiaries to utilize the loans and make timely repayments, with a goal of zero defaults

Facilitate the monitoring of borrowers to ensure timely repayment of loans and zero defaults

4 Monitor the capability of financial institutions to increase their liquidity, and develop diverse loan packages and services

• DO1: Ability of Zimbabweans to live healthier lives and sustainably adapt to, mitigate, and recover from shocks and stressors strengthened

– IR 1.1: Food and nutrition security enhanced

– IR 1.3: Ecosystem services strengthened

• DO2: Youth contribution to

Zimbabwe’s development progress enhanced

– IR 2.1: Youth innovation, employability, and entrepreneurship enhanced

Strategic Alignment

• Inflation is increasing and Zimbabwean dollar is weakening

– agricultural Inputs more expensive and end products worth less abroad

• Increasing temperatures, and erratic rainfall increase risk of investment across sectors but particularly in the agriculture sector

• Interested financial institutions may not have the liquidity to partner with the activity

• 2023 General Election coupled with above may mean Zimbabwe is entering a volatile social and economic period

Barriers, Constraints, and Risks

• Financial institutions will have the liquidity and appetite to lend out to target SMEs, smallholder farmers and vulnerable communities

• In consultation with SMEs, smallholder farmers and vulnerable communities, financial sector partners will develop appropriate products and tools

• The macroeconomic environment will be favorable for SMEs, smallholder farmers and vulnerable communities lending and borrowing

• With improved access to lending, private sector partners will deploy, and smallholder farmers and vulnerable communities will adopt more climate smart technologies and practices

Assumptions

The target geography is the Resilience Focus Zones:

• Manicaland Province

• Masvingo Province

• Matabeleland North Province

Geographic Parameters

Small & medium enterprises, smallholder farmers, and vulnerable communities in target sectors (i.e., agricultural value chains, eco-tourism, enterprises, wildlife conservation, etc.)

Beneficiary Parameters

Level of Coverage Anticipated

4/112023 22

This Activity is anticipated to benefit a minimum of 200,000 people across the agriculture and environment sectors within the Resilience Focus Zone

Target Population Target beneficiaries will include SMEs, smallholder farmers, women, youth, vulnerable communities that are proximal to national parks and conservancies, and young people with disabilities

Within this Resilience Focus Zone, there will be opportunities to collaborate and coordinate with DG, HAR and Health programming.

Source: Zimbabwe 2022 CDCS Climate Risk Analysis

Other Considerations

Source: USAID Zimbabwe CDCS Climate Risk Analysis, May 2022

• Investments (USD) mobilized to increase the liquidity of financial institutions

• Financial institutions reaching local or regional entities with new finance products or services

• Value of private sector resources leveraged by the USG to support U.S.

Foreign Assistance Objectives

• Number of private sector enterprises with improved participation in the local economy as a result of USG assistance

• Number of USG engagements jointly undertaken with private sector enterprises to support U.S. foreign assistance objectives

Measuring Higher-level Results

• EG.3.2-27 Value of agriculture-related financing accessed as a result of USG assistance

• PSE-3 : Number of private sector enterprises with improved participation in the local economy as a result of USG assistance

• PSE-4: Value of private sector resources leveraged by the USG to support U.S. Foreign Assistance Objectives

• CBLD-9 Percent of USG-assisted organizations with improved performance

• Custom Indicator Increased revenue generated by private sector enterprises as a result of USG assistance

Illustrative Indicators

Landscape of Finance Ecosystem actors: Who are the main actors within the finance ecosystem? What are their priorities, and what would make them effective partners to achieve transformational finance outcomes? What are best practices for building a lasting relationship?

Engaging underrepresented communities: What is the best practice for engaging priority populations across this issue, and how can that engagement be centered for maximum impact and benefit?

Lessons learned: Where have USAID, other development organizations, or financial institutions successfully implemented or supported these types of projects already?

Learning Priorities/Questions

• The Mission is mindful of Congressional concerns not to allow officials of the Government of Zimbabwe, their associates, and others under USG sanctions to benefit from this intervention.

• While there will be engagement with GoZ, no financial and technical assistance will be provided

• Due diligence of potential beneficiaries will be conducted

GoZ Engagement and Political Economy

284/11/2023