Attachment J.7 -  2018 USAID_DRC Finance Needs Assessment.pdf

FEED THE FUTURE

DEMOCRATIC REPUBLIC OF THE CONGO

STRENGTHENING VALUE CHAINS ACTIVITY

ACCESS TO FINANCE ASSESSMENT REPORT

January 8, 2018

This report was produced for review by the United States Agency for International Development. It was prepared by Banyan Global under the authorship of Stephanie Gober and Hubert Nkaotuli.

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Prepared for the United States Agency for International Development, USAID Contract

Number AID-660-C-17-00003, Feed the Future Democratic of the Congo Strengthening Value

Chains Activity.

Implemented by:

Tetra Tech ARD

159 Bank Street, Suite 300

P.O. Box 1397

Burlington, VT 05402

With partners Banyan Global, TechnoServe, World Coffee Research, Search for Common

Ground, and J.E. Austin and Associates, Inc.

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FEED THE FUTURE

DEMOCRATIC REPUBLIC OF THE CONGO

STRENGTHENING VALUE CHAINS ACTIVITY

ACCESS TO FINANCE ASSESSMENT REPORT

JANUARY 8, 2018

Disclaimer: The authors’ views expressed in this publication do not necessarily reflect those of the

United States Agency for International Development or the United States government.

Recommended Citation: Stephanie Gober and Hubert Nkaotuli. USAID/DRC Strengthening Value

Chains Activity Access to Finance Assessment Report. Prepared by Banyan Global. 2017.

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TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................................................. IV

ACRONYMS AND ABBREVIATIONS ........................................................................................................ V

EXECUTIVE SUMMARY

BACKGROUND

PROJECT DESCRIPTION

REGIONAL CONTEXT

METHODOLOGY

ASSESSMENT LIMITATIONS

KEY FINDINGS

DEMAND SIDE

AGRIBUSINESS SECTOR OVERVIEW

COFFEE VALUE CHAIN

NUTRITIONAL VALUE CHAINS

BINDING CONSTRAINTS

BUSINESS DEVELOPMENT SERVICES

SUPPLY SIDE

FINANCIAL SECTOR OVERVIEW

FINANCIAL INSTITUTIONS SERVING AGRICULTURE IN SOUTH KIVU

MOBILE MONEY

RECOMMENDATIONS

BUSINESS DEVELOPMENT SERVICES

FINANCIAL SERVICES

ANNEX A – EXTRACT OF STATEMENT OF WORK FOR A2F ASSESSMENT

ANNEX B – DATA COLLECTION TOOLS (INTERVIEW GUIDES)

ANNEX C – LIST OF PEOPLE INTERVIEWED

ANNEX D – DESK REVIEW: BIBLIOGRAPHY

ANNEX E. SAMPLE OF DEMAND-SIDE ORGANIZATIONS IN

TARGET VALUE CHAINS AND TERRITORIES

SENSITIVE ANNEX F – FINCA FINANCIAL INFORMATION

SENSITIVE ANNEX G – PROCREDIT INFORMATION

ANNEX H – RECOMMENDATIONS OF THE ACCESS TO FINANCE

ASSESSMENT VALIDATION WORKSHOP………………………….………. 80

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ACRONYMS

A2F Access to Finance

AEPV Action pour l’Encadrement des Populations vulnérables (Action for supporting vulnerable populations)

ARD Associates in Rural Development

BDS Business Development Services

CCKA Coopérative des caféiculteurs de Kalehe (Cooperative of Kalehe coffee-growers)

CDF Congolese Democratic Franc

CGAP Consultative Group to Assist the Poor

CPCK Coopérative des Planteurs de Café de Kabare (Cooperative of Kabare coffee planters)

COOPEC Coopérative d’Epargne et de Crédit (savings and loan cooperative)

DCA Development Credit Authority

DFID U.K. Department for International Development

DRC Democratic Republic of the Congo

FI Financial Institution

FPM Fonds pour la promotion de microfinance (Microfinance Promotion Fund)

GAMF Groupe d’acteurs de microfinance du Kivu (Group of Microfinance Actors of Kivu)

GBV Gender-Based Violence

GEL Guichet d’Economie Locale du Sud Kivu (South Kivu Local Economy Window)

GERME Gérez Mieux Votre Entreprise (Start and Improve Your Business)

Ha Hectare

IFDC International Fertilizer Development Corporation

IKYA IITA Kalambo Youth Agripreneurs

ILO International Labor Organization

IPC Internationale Projekt Consult GmbH

JAA J. E. Austin and Associates, Inc.

KACCO Kalehe Arabica Coffee Cooperative

Kg kilogram

MFI Microfinance Institution

MSE Micro- and Small Enterprise

MSME Micro-, Small and Medium Enterprise

MUSO Mutuelles de Solidarité (solidarity mutual fund)

NGO Non-Governmental Organization

OHADA Organisation pour l'harmonisation en Afrique du droit des affaires (Organisation for the Harmonization of Corporate Law in Africa)

ONGD Organisation Non Gouvernementale de Développement (Non-Governmental

Organization for Development)

PAD Programme d’Appui au Développement Durable

POS Point of Sale (terminals)

RWH Rebuild Women’s Hope

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SBCC Social and Behavioral Change Communication

SFCG Search for Common Ground

Sida Swedish International Development Cooperation Agency

SILC Savings and Internal Lending Committee

SME Small and Medium-Sized Enterprise

SOW Statement of Work

SVC Activity Strengthening Value Chains Activity

TA Technical Assistance

TNS TechnoServe

TT Tetra Tech ARD

UNCDF United Nations Capital Development Fund

UPSKI Union of Soybean Producers of Kivu

USAID United States Agency for International Development

VC Value Chain

VSLA Village Savings and Loan Association

WCR World Coffee Research

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EXECUTIVE SUMMARY

BACKGROUND

Tetra Tech ARD implements the United States Agency for International Development

(USAID)-funded Strengthening Value Chains (SVC) Activity in the Democratic Republic of the

Congo (DRC) in collaboration with five international subcontractors, including Banyan Global.

The purpose of the Activity is to increase household incomes and access to nutrient rich crops by linking small-holder farmers to strengthened and inclusive value chains and supportive market services.

The Activity targets the coffee, soybean and dried bean value chains in three territories in

South Kivu. Banyan Global is responsible for Activity Component 4: Enhancing Access to

Commercial Finance, including technical assistance to implement a Development Credit

Authority (DCA) agreement to FINCA RD Congo and ProCredit Bank Congo S.A. The DCA guarantees 50 percent of the value of loans to qualifying borrowers in North Kivu and South

Kivu, up to a maximum portfolio amount of $8,936,870; the DCA’s goal is for 25 percent of cumulative disbursements to be used for loans to support the agricultural or the clean energy sectors. To develop an access to finance plan that reflects existing opportunities and binding constraints, Banyan Global conducted an Access to Finance Assessment, including a desk review of literature and field interviews to assess supply and demand for agricultural financial services in South Kivu. The results of this research are described in this Access to Finance Assessment

Report.

KEY FINDINGS

For the purposes of this assessment, financing is discussed in terms of the supply side (those who deliver financing) and demand side (those who receive or support access to financing). In the DRC, the demand side includes producers and firms in target agricultural value chains, as well as business development services (BDS) providers supporting value chain (VC) business capacity. The supply side includes financial institutions, like banks and microfinance institutions

(MFIs), and mobile network operators who provide digital financial services. Both sides of this

“equation” are assessed in this report to identify existing constraints and offer recommendations for project interventions to expand agricultural lending.

DEMAND SIDE

COFFEE VALUE CHAIN

Coffee production is divided into two main categories: specialty coffee, which is of higher quality and earns higher prices, and ordinary, or artisanal, coffee. There is relatively little local coffee consumption in the DRC, so virtually all production—both specialty and ordinary coffee—is exported. Many small-scale entrepreneurs lack not only business management

FEED THE FUTURE DRC SVC ACTIVITY ACCESS TO FINANCE ASSESSMENT REPORT Page 2 capacity but also expertise in coffee trading and exportation. A sustainable coffee market must ensure the quantity and quality of coffee available for international buyers.

The SVC Activity has an objective of promoting at least 50 containers of specialty coffee, requiring an estimated $3.25 million per year in working capital financing for cooperative or private washing stations. The dry-milling services required to produce 50 containers of specialty coffee will need approximately $1.3 million in working capital. In addition, there may be significant demand for new washing stations, which can cost up to $45,000 for the purchase of processing equipment and construction.

NUTRITIONAL VALUE CHAINS

In SVC’s nutritional value chains—soy and dried beans—farmers use some of their production for home consumption, while the rest is sold. Soybeans are sold to mills for processing into high-protein foods including soy flour, soy biscuits, soy milk, and MOSOSO (a mix of maize, soy and sorghum used for children’s porridge). These processors are mostly start-ups run by youth and women and have significant funding needs to increase production quality and quantity that can meet market demand.

Beans are often planted along with other crops, including cereals and coffee. Beans are usually consumed as-is, with little to no value added processing. There is currently no bean processing company in South Kivu, although SVC is studying the feasibility of pre-cooked beans. Bean producers lack access to credit and to quality inputs, are unfamiliar with good agricultural practices, and have poor cost control, which can lead to a loss of almost 40 percent of producer’s investment.

BINDING CONSTRAINTS

Value chain actors confirmed that loans from banks and MFIs are very difficult to obtain.

Farmers interviewed for this assessment complained that loan terms offered by financial institutions (FIs) are often not adapted to agricultural cycles and the seasonality of activities.

Additionally, many key interviewees mentioned high interest rates and being unable to borrow because of insufficient collateral. In addition to limited access to flexible financing options, many of the agribusinesses and farmers interviewed for this report do not qualify for financing due to their lack of sound business systems and financial statements, credit history, or business growth plans.

All populations living outside of major metropolitan areas have difficulties accessing banks and

MFIs, but women and female youth may have disproportionate challenges. Requirements for

(land) parcel guarantees often precludes women and youth from accessing credit because women do not own land (because the land is not in their name, because they are sharecroppers, or because formal land titling is generally uncommon). Low levels of participation, leadership and decision-making authority of women and youth in cooperatives, and requirements for women to have their husbands’ permission to participate in cooperatives, serve as a barrier for women and youth to access credit through cooperatives.

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BUSINESS DEVELOPMENT SERVICES

Almost every person interviewed in this assessment stated that value chain stakeholders, from producers to associations to cooperatives to private companies, lack business and financial management capacity and possess a limited understanding of market variables (e.g., disaggregated market demand). For producers, the need for financial literacy education was frequently mentioned. These constraints impede stakeholders’ ability to access finance and limit their capacity to expand, diversify and grow their operations. Binding constraints exist at many levels:

Producer Level: Basic financial literacy education is needed as well as business and financial management training. Agri-businesses need more advanced financial assistance, including the development of historical and projected financial statements.

Intermediary/Institutional Level: Intermediary firms (small and medium-sized enterprises, cooperatives), including BDS providers, often lack an in-depth understanding of the agriculture sector and its needs.

BDS providers can potentially address these skill-level constraints among the project’s targeted small and medium-sized enterprises (SME) population. However, many of the BDS firms in

South Kivu do not have the range of technical skills required by the project’s agribusiness SMEs and farmers. Many of the region’s BDS providers remain dependent on donor funding and have developed services tailored to project-specific needs. The project will make a careful assessment of existing BDS providers to determine the most suitable partners and carefully craft a market-driven model that will not distort the BDS market and ensure it builds local capacity and is sustainable.

SUPPLY SIDE

FINCA AND PROCREDIT

Under the DCA agreement, FINCA and ProCredit must increase agricultural lending in the

Kivus, with a target of using at least 25 percent of the $8.9 million in guaranteed loans (over

$2.2 million) for loans supporting agriculture or clean energy. Each bank has two branches in the region, in Bukavu and Goma, and lending is currently limited to a zone 30-50 kilometers from their branches.

FINCA. FINCA offers standardized microfinance products with monthly repayments. Its interest rates range from 28.8 percent to 72 percent per year (amortized or “dégressif”), with loan sizes ranging from $50 to $150,000; the maximum loan duration is 36 months. FINCA has almost 50,000 customers in DRC, with over 7,600 loans outstanding for a total portfolio of

$6.5 million. FINCA’s management stated during the assessment that they prefer to keep standardized loan products, recognizing that this may exclude agricultural borrowers who do not have regular, non-farm income.

ProCredit. ProCredit’s current loan terms include only monthly repayments, but the bank is willing to consider other repayment schedules adapted to agricultural cycles. ProCredit’s minimum loan size is $5,000 and they require 100 percent collateral for loans over $5,000; land or house titles are required as collateral for loans over $30,000. ProCredit’s maximum loan duration is 60 months for repeat borrowers. ProCredit has over 290,000 customers in the

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DRC, with almost 19,000 loans outstanding for a total portfolio of $205.6 million. The agricultural portfolio currently has 49 loans totaling $2.8 million.

MOBILE MONEY

Mobile money can provide a cost-effective way to serve low-income or rural customers.

FINCA and ProCredit both offer financial services via mobile phone, allowing a bank account holder to transfer funds via phone, or to use a point of sale (POS) terminal to withdraw or deposit cash. It is important to note, however, that these mobile money systems are currently limited to transfers (not loan payments) and require a smart phone with a data connection, which are significant barriers for many rural farmers.

Mobile money and digital payments have great potential to improve access to financial services for agricultural operators in remote areas. However, it is also important to consider the potential risks of furthering the use of this technology and its impact on how men, women and youth access financing. Further assessment is required to ascertain its best role in supporting expanded agricultural lending. In addition, training in the secure and appropriate use of mobile money is needed as an integral part of financial literacy courses.

Table 1 summarizes some of the key binding constraints identified through this assessment.

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Table 1. Summary of Mismatches between Financial Services Demand and Supply

Problem Explanation

High interest rates • Agricultural activities have a low profit margin, most producers are small, and all levels of VC (producers, processors, transporters) complain of high interest rates.

• For FIs, refinancing, transaction, operational, and risk costs are all high.

Loan amounts and term • FIs loan amounts and maturities may be smaller and shorter than needed by VC stakeholders.

• DCA guarantee coverage is limited to micro- and small enterprises.

Repayment terms are not linked to agricultural cycle

• Farmers want loan repayments set to match seasonal agricultural income cycles.

• For FIs (except ProCredit Bank), repayment is monthly, and it’s not easy to change products and systems just for one project.

• Cyclical repayment could create liquidity problems for MFIs.

Low capacity/lack of business information

• Producers, cooperatives and SME agribusinesses lack business and financial skills to prepare financial information for loan requests.

• Banks generally want to have a professional partner who is able to provide business information and document activity levels, without which the bank is likely to reject the loan request.

Start-up/Lack of experience • Agribusiness SMEs may be small, start initiatives without much experience.

• No FI finances start up projects, even with strong potential.

Mobile money with a smartphone • The mobile money applications currently offered by banks require a smartphone with a data connection, which is too expensive for many farmers.

RECOMMENDATIONS

While most agribusinesses have limited business and financial management acumen, they are reluctant to pay for training or capacity building in these areas. The project will need to creatively explore how to craft incentive-based contracts for BDS providers to work in this ecosystem. The SVC team will develop capacity building approaches that ensure their sustainability without alienating beneficiaries unaccustomed to paying for these services.

SVC plans to conduct a competitive process to select BDS provider(s) to deliver training to eligible soy and bean value chain stakeholders, selecting firms and individuals with the most potential to provide demand-driven business support services. SVC will coordinate with other projects and donors, such as the USAID-funded food security and governance programs, Elan

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RDC and UNCDF, to leverage their investments in business training for agricultural stakeholders and create synergies with ongoing efforts.

TechnoServe’s planned technical assistance to the coffee sector will include business and access to finance training; these efforts will be designed and implemented with support from the access to finance (A2F) team. The SVC A2F team will work with TechnoServe to tailor its existing training materials to the local context, including additional content on financial literacy, financial and business management and business planning. Assistance to access financing will be supported through partner BDS providers.

SUPPLY SIDE

A top priority for the A2F team is to support FINCA and ProCredit to leverage their DCA to expand agricultural lending. Planned activities include:

• Training bank staff on the DCA eligibility rules

• Providing information about the coffee, soy and bean VC production cycles and processes

• Supporting the banks in developing pipelines of agricultural loans, facilitating banks’ connections with farmers, cooperatives and SMEs in target value chain

• Coaching bank staff in undertaking due diligence on agricultural businesses and supporting the loan approval process

As part of building the bank pipelines, the A2F team will assist partner banks to evaluate their existing financial products and services in relation to some of the most common constraints expressed by agricultural stakeholders (see Table 2). In turn, the team will work with partner banks to tailor existing products to reflect sector demand. USAID has also indicated that it is willing to amend the DCA guarantee agreement to add medium enterprises to the definition of qualifying borrowers, which would make loan guarantee coverage available to more agribusinesses in the targeted VCs.

Table 2. Possible Solutions to Common Agricultural Financing Needs Needs Possible Solutions

Funds for living expenses, especially during the gap period between planting and harvest

Explore possibilities for spreading out or staggering cooperative payments so that producers’ revenue streams better match their cash flow needs. Train FI staff to better evaluate farm income and financial flows and repayment capacity for off-cycle loans. Target both women and youth.

Loans with repayment terms aligned with farm income cycles

Support FIs in analyzing farm income cycles and financial information, helping them to adapt their loan products.

More flexible collateral conditions

Help FIs: (1) adjust collateral requirements ( particularly land titles) to account for the risk protection provided by the DCA guarantee; (2) explore methods to use agricultural assets as collateral (assigning crop payments, etc.); (3) develop cash flow-based lending approaches;

(4) eliminate requirements that require husbands to sign on behalf of their wives (in line with the 2016 Family Code).

Longer-term loans

(maturity of more than three years) for capital

Assist FI partners to restructure current loan terms and conditions.

Support FIs in seeking new, longer-term funding sources (e.g. from

PROPARCO).

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Lower interest rates Assist FIs to evaluate actual performance and risk of agricultural loans.

Support FIs in seeking new, lower-cost funding sources (e.g. from

PROPARCO).

Digital finance Provide financial education for farmers and different stakeholders to understand and use mobile money. Work with bank partners to expand their use of electronic payment systems.

Integrate financial literacy and training on mobile phone use

Target women and youth with financial literacy and mobile phone use training in business development services. Financial literacy training will include: how to budget; business diversification; marketing and sales; cash/flow planning.

Integrate social and behavior change communication (SBCC) on gender equality and youth inclusion for all borrowers into all BDS services

Integrate SBCC modules on gender equality and social inclusion in household agricultural decision-making (including access to finance) into business development trainings.

Tailor services to the needs of women and youth

Support FINCA and ProCredit to develop schemes, lending products, and BDS to mitigate the difficulties faced by women and youth in accessing credit (group lending, acceptance of different forms of collateral). Engage the Women in Coffee and Cocoa Initiative (IFFCA)

Platform and the Project Youth Platform in the design of these products.

Link DCA guarantee to credit to existing models of public-private partnerships

Build upon existing models of public-private partnerships between large coffee buyers and cooperatives, such as the Strauss Coffee and

Women Rebuild Hope Coffee Cooperative (which finances seasonal agronomy training and the construction and revitalization of washing stations) to include loan products and business development services targeting women and youth.1 Such packages might include pre-financing and off-season loans to women and youth cooperative members. 2

1 World Coffee News. Strauss Coffee Committing to Long-Term Women Producer Support Program, March 10, 2017.

2 OpenIdeo. Women Rebuilding Hope: Providing Access to Financial Resources to Women Coffee Farmers in the

DRC, June 2016.

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BACKGROUND

PROJECT DESCRIPTION

In May 2017, USAID awarded the Feed the Future Democratic Republic of the Congo

Strengthening Value Chains Activity to Tetra Tech ARD (TT). Tetra Tech implements the

Activity in collaboration with five international subcontractors: TechnoServe (TNS), World

Coffee Research (WCR), Search for Common Ground (SFCG), Banyan Global, and J.E. Austin and Associates, Inc. (JAA). The purpose of the Activity is to increase household incomes and access to nutrient rich crops by linking small-holder farmers to strengthened and inclusive value chains and supportive market services.

The SVC Activity is designed to complement USAID investments in governance, peace and stability, access to finance, food security, health, education, and environment, in order to strengthen the foundation for durable peace in eastern DRC. It applies a nutrition-sensitive value chain and market systems development approach that combines technical assistance and capacity building for value chain actors, credit facilitation, making market linkages, public-private partnership development, social behavior change communication, and advocacy to support nutritional crop (dried common bean—Phaseolus vulgaris—and soybean) and specialty coffee value chain development in South Kivu. The Activity targets three territories in the South Kivu province—Walungu, Kabare and Kalehe—over a period of five years (2017 – 2022).

The SVC Activity includes the following components:

• Component 1: Build capacity of vertical and horizontal actors in targeted value chains

• Component 2: Enhance coffee production

• Component 3 (Cross Cutting): Develop and implement public private partnerships

• Component 4 (Cross Cutting): Enhance access to commercial finance, including through technical assistance to implement Development Credit Authority agreements

Banyan Global is responsible for SVC Activity Component 4: Enhancing access to commercial finance, including technical assistance to implement DCA agreements. In September 2016, USAID and the Swedish International Development Cooperation Agency (Sida) signed Loan

Portfolio Guarantee Agreement 660-DCA-16-003 with two financial institutions, FINCA RD

Congo and ProCredit Bank Congo S.A. The DCA guarantees 50 percent of the value of loans to qualifying borrowers, up to a maximum portfolio amount of $8,936,870 ($3.5 million for

FINCA, $3.5 million for ProCredit, and the remainder unallocated). Qualifying borrowers are defined as non-sovereign Congolese individuals, associations, groups, micro- and small enterprises (MSEs), village savings and loans associations, and non-governmental organizations

(NGOs) that have their primary business activities located in North Kivu or South Kivu provinces.

The DCA has an objective that at least 25 percent of cumulative disbursements by each bank under the guarantee be used for loans to qualifying borrowers that directly or indirectly support the agricultural sector and/or the clean energy sector. Banyan Global will develop an

FEED THE FUTURE DRC SVC ACTIVITY ACCESS TO FINANCE ASSESSMENT REPORT Page 9 assistance plan to ensure strong utilization of the DCA for the agricultural sector. To develop an access to finance plan that reflects existing opportunities and binding constraints, Banyan

Global assessed supply and demand for agricultural financial services in South Kivu. The results of this research are described in this Access to Finance Assessment Report.

REGIONAL CONTEXT

The South Kivu province has eight territories: Shabunda, Fizi, Walungu, Kabare, Kalehe, Uvira, Mwenga and Idjwi.

The SVC Activity is focusing on the territories of Kabare, Kalehe and Walungu.

Over 70 percent of the population of South

Kivu is involved in agriculture. There are two seasons in the year, with regular rains, and the climate is appropriate for developing tropical, cereal and cash crops.

The soil is generally good for the development of agriculture.

The average population density in the DRC is 36 people per square kilometer. With an average population density of 86 people per square kilometer in 2014, South Kivu is the

DRC’s fourth most densely populated province, after Kinshasa, North Kivu, and

Kongo Centrale. The Kivus are a mountainous region, with arable land making up only 13 percent of the area but containing about 70 percent of the region’s population. Population density can therefore reach 400 inhabitants per square kilometer in some places. Small producers are obliged to farm land on slopes, which are often subject to erosion and less suitable for agriculture. Soil is overexploited, leaving producers to cope with low soil productivity or even infertile soil.

South Kivu is subject to considerable demographic pressure, notably due to large rural to urban population movements caused by regional conflicts and resulting insecurity, as well as by high population growth rates. Agricultural activity has dropped significantly, and this, along with the deterioration and lack of maintenance of road infrastructure, has resulted in poverty and malnutrition.

Coffee is an important cash crop for producers and can provide 25 to 40 percent of household income, paying for children's schooling, health care, food, clothing and lodging. However, nearly 95 percent of producers have small plots, ranging between 0.5 and 3 ha. Few coffee planters can earn a living with coffee alone.

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METHODOLOGY

The access to finance assessment consisted of a desk review of literature and field interviews and was conducted by Stephanie Gober, Banyan Global’s Senior Associate, Access to Finance, and by Hubert Nkaotuli, Banyan Global’s Access to Finance Specialist in DRC. An extract of the original Statement of Work for the A2F Assessment as well as interview question guides, the list of persons interviewed and the bibliography can be found in Annexes A-D.

The objective of the assessment was to evaluate supply and demand for agriculture financing for target value chains in project territories. The purpose of the desk review was to gather basic data on the following:

Demand Side (farmers/producers, cooperatives, firms and BDS providers)

• Agricultural and agribusiness SMEs in targeted value chains;

• Sources of financing for agricultural SMEs;

• Perceptions of the financial sector with regards to the agricultural SME sector;

• Business development services available in target areas.

Supply Side (financial institutions)

• Financial sector stability, constraints, and opportunities;

• Trends in lending;

• Banks, MFIs, credit unions, cooperatives that are providing financial services to the agriculture sector in the designated geographic location, including:

o current level of lending to the agricultural sector;

o outstanding portfolio levels;

o information on lending products;

o general terms and conditions offered to clients (interest rates, repayment terms, level and type of collateral required);

o physical presence in rural areas – how many branches and where are they located;

• Financial sector perspectives on why financial institutions do not lend (or consider it risky to lend) to the agribusiness/SME sector;

• The status of mobile banking and possible applications in agricultural financing.

Interview questionnaires were developed to guide field interviews, which were generally conducted by both finance experts. Key questions for demand-side stakeholders focused on:

• Their perspective of their specific sector;

• Description of their individual business;

• Self-evaluation of their needs in terms of training and capacity-building;

• Prior experience with borrowing or other financial services;

• Their view of agricultural credit in the region (availability, constraints, etc.); and

• The experience of BDS providers with giving business and financial training in the agricultural sector.

On the supply side, questions for FIs focused on current agricultural and SME lending products and practices, constraints to lending to targeted value chains, and the potential for mobile banking applications in agricultural financing. The team also interviewed a mobile network

FEED THE FUTURE DRC SVC ACTIVITY ACCESS TO FINANCE ASSESSMENT REPORT Page 11 operator, with questions focused on services offered, experience working with targeted agricultural value chains in South Kivu, and perspectives on sector needs.

For field interviews, Mr. Nkaotuli arranged meetings in August 2017, coordinating with representatives from other SVC components to minimize multiple interviews with the same beneficiaries, and to take advantage of group security arrangements for visits outside of Bukavu and Goma. August meetings focused primarily on demand-side stakeholders in various locations in target territories. Ms. Gober arrived in Bukavu at the end of August to participate in the project’s annual planning workshop and continued the A2F assessment with Mr. Nkaotuli, starting in Bukavu and then travelling to Goma to meet with selected demand-side stakeholders, as well as with regional branches of financial institutions. The assessment mission ended in Kinshasa with meetings at the FINCA and ProCredit headquarters, and with other

DRC donor partners and projects. In addition to meetings with SVC team members in target territories, Mr. Nkaotuli and Ms. Gober jointly conducted 38 field interviews in Bukavu, Kabare, Goma, and Kinshasa, and provided a final debriefing to the USAID mission.

The results of the draft report were presented in a workshop with USAID, DCA partner institutions, and other stakeholders on November 16, 2017 for validation and to inform the development of the assistance plan and of capacity-building activities for DCA partners. The recommendations of the workshop are included in this revised report where appropriate and are summarized in Annex H.

ASSESSMENT LIMITATIONS

The Interview Guides in Annex B were used to inform stakeholder interviews rather than as formal survey tools. Although the team sent questionnaires to financial institutions electronically to collect specific data, many of the institutions did not return the completed questionnaires, despite several requests by the A2F team. This affected the quantity of financial sector data included in the assessment. The study is limited to the three SVC target territories.

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KEY FINDINGS

For the purposes of this assessment, financing is discussed in terms of the supply side (those who deliver financing) and demand side (those who receive or support access to financing). In the DRC, the demand side includes producers and firms in target agricultural value chains, as well as BDS providers supporting VC business capacity. The supply side—the organizations providing financial resources and services—includes financial institutions like banks and MFIs, and mobile network operators who offer digital financial services. Both the demand and supply sides may lack capacity or have constraints which create obstacles (binding constraints) to accessing finance. This section discusses the key actors and constraints on both the demand and supply sides regarding access to finance in the coffee, bean and soy value chains in targeted territories of South Kivu.

AGRIBUSINESS SECTOR OVERVIEW

Agricultural activity in the territories of Kabare, Kalehe and Walungu is characterized by several common characteristics along with discrete differences among the coffee, bean and soy value chains. This section touches on these as they relate to firm- and institutional-level issues.

A series of regional conflicts has contributed to a difficult business environment in South Kivu, which is a significant challenge for entrepreneurs. Transportation infrastructure is dilapidated.

There is widespread insecurity, and trade channels such as roads, ports, borders and markets are often militarized. Central and local governance is weak, and transparency is absent. The multiplication of government interlocutors, who sometimes harass and request bribes, creates high transaction costs for entrepreneurs. The capacity of state structures to implement development policies is low. There has also been a drop in agricultural and economic production and productivity over the past 20 years, with massive movements of people into urban centers, abandoning agricultural activities.

Bukavu and Goma are the two major urban centers of the region and are connected by Lake

Kivu, a major waterway in the region which is often used for agricultural transport. Road access between the two cities is poor.3

Because of the close proximity to the eastern border of DRC, there is significant competition in the region from Rwandan, Burundian and Ugandan products, which dominate the manufacturing and agribusiness market. A significant amount of South Kivu agricultural production (e.g., an estimated 40 percent of coffee grown) is sold in Rwanda. The majority of agricultural operators are small producers with small land plots, and a few large land-owners who farm parts of their

3 It takes all day to drive from Bukavu to Goma through Kalehe (a distance of approximately 200 km), three hours to travel by boat, and five hours to travel by car via Rwanda.

FEED THE FUTURE DRC SVC ACTIVITY ACCESS TO FINANCE ASSESSMENT REPORT Page 13 land and rent the rest to small producers and sharecroppers4. Table 3 shows the approximate numbers of agricultural producers in each of SVC’s target value chains and territories.

Table 3: Number of Producers by Value Chain and by Territory

Kabare Kalehe Walungu

Coffee 9,738 - 10,000 8,861 - 15,000 5,000 – 9,400

Soy 12,466 15,983 3,360

Beans 67,031 121,111 210,996 Source: ITAPEL 2016 and stakeholder estimates

International NGOs play a large role in revitalizing, supporting and connecting actors from different sectors. International development projects have helped create agricultural associations, cooperatives and even private companies which are the principal operating entities in the target value chains. Most cooperatives have about 1,000 to 2,500 members. Although it was difficult to obtain comprehensive data on the number of organizations at various levels of the three value chains, the table in Annex E provides an indicative list of stakeholders, their activities, and locations.

COFFEE VALUE CHAIN

In terms of monetary flows and specialization of stakeholders at different value chain levels, coffee is the most developed of SVC’s three target value chains. The coffee value chain includes associations, cooperatives and private companies all playing significant roles in cultivation, processing and trade. Some of these organizations were established using donor funding, and much of the knowledge and technology used in coffee cultivation and processing has been provided and supported by international donor projects for washing stations such as those operated by CPCK, CCKA, KACCO and RWH. Cooperatives and associations often lack the skills and management capacity to operate on a commercial, sustainable basis. Although some entities are doing well, the sector as a whole is not yet profitable—with a range of high operating costs that make the coffee lest competitive. Additionally, many farmers do not understand the financial advantages of selling coffee for wet-milling rather than home processing.

Both Arabica and Robusta coffee is grown in South Kivu. As shown in Figure 1, below, coffee production is divided into two main categories: specialty coffee (about 10 percent of total

South Kivu coffee production), which is of higher quality and earns higher prices, and ordinary coffee (90 percent of total South Kivu coffee production). There is relatively little local coffee consumption in the DRC, so virtually all production—both specialty and ordinary coffee—is exported5. About 40 percent of coffee from South Kivu is sold as ordinary coffee to Rwandan traders, and most of the remainder (about 50 percent of total coffee production) is sold as ordinary coffee to international buyers. Many smaller entrepreneurs lack not only business management capacity but also expertise in coffee trade and export.

4 Nationally, 53 percent of farmers cultivated less than 2 ha and 19 percent cultivated more than 2 ha. 86 percent cultivated their own land, 11 percent rented land and the rest accessed land through sharecropping (WFP 2014).

5 SVC will work with local producers to meet demand for specialty coffee in high end domestic markets, including hotels and urban supermarkets.

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Specialty coffee is wet-milled at washing stations, which results in higher quality (see Table 4).

Many washing stations are owned by cooperatives, although there are also privately-owned washing stations in South Kivu. Cooperatives purchase coffee cherries from producer members, complete the wet-milling, and then sell the parchment coffee to dry milling companies to be hulled into green coffee. Buyers such as Starbucks purchase specialty coffee at the green coffee stage, and they pay the highest price, but due to quality and cash flow constraints (discussed below), it is estimated that producers sell less than one-fourth of coffee cherries to cooperatives for wet-milling and processing as specialty coffee. The rest is sold as lower-priced ordinary coffee.

Table 4. Wet-Milling Specialty Coffee in South Kivu: An Overview of the Process Main Steps Who? What’s Involved?

1. Harvesting coffee cherries

Farmers

(especially women)

Picking coffee fruit and transporting to washing stations the same day.

2. Depulping coffee cherries and drying beans

Washing Stations

(cooperatives or private companies)

Depulping machine removes outer fruit; beans are soaked to remove mucilage and then dried on racks in the sun. Papery outer layer remains on bean, leaving parchment coffee, which is transported to dry mill.

3. Milling parchment coffee

Dry Mills (private companies)

Removing outer layer from parchment coffee using hulling machinery, leaving green coffee to be sorted and packaged.

4. Selling green coffee Exporters

Traders

Transporters

Selling green coffee to international specialty coffee traders and buyers.

Ordinary coffee is sometimes home-processed by farmers, resulting in lower quality products.

Ordinary parchment coffee is sold to local traders, who sell to Rwandan traders or to local dry mills for hulling into green coffee. Dry mills sell both ordinary and specialty coffee on the international market.

Some private companies in the coffee VC started as cooperative or associative structures and then moved to private ownership. Private companies with modern factories are better able to compete with processors in neighboring countries such as Rwanda. These companies are relatively sophisticated in their management and have been able to take advantage of market opportunities with international buyers like Starbucks and Westrock Coffee.

Figure 1, below, shows the flow for ordinary coffee production and specialty coffee production in South Kivu. It also lists typical financing needs at different levels of the value chain.

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FEED THE FUTURE DRC SVC ACTIVITY ACCESS TO FINANCE ASSESSMENT REPORT Page 16

FINANCING IN THE COFFEE VALUE CHAIN

According to an agronomist from the past USAID-funded Kahawa Bora Ya Kivu (Kivu Specialty

Coffee) project, an average cooperative member has 390 coffee trees. A tree may yield one to two kilograms (kg) of coffee in a good growing season. (Note that an average coffee plantation has 1,500 to 2,000 trees per hectare (ha), which means that an average coffee farmer is cultivating less than a quarter hectare of land.) Producers’ revenue will vary widely, depending on how much of the crop is sold as ordinary coffee, at lower prices, and how much is of sufficient quality to sell as specialty coffee.

Table 5, below, gives a case example of the average net income for a cooperative selling the majority of its coffee as specialty coffee. In this scenario, revenue for specialty coffee averaged

$0.47 per kg of cherry coffee, giving a producer with the average 390 trees up to $367 in revenue with optimal yield of 2 kg per tree. Producers selling their harvest as ordinary coffee might receive only $0.34 per kg of cherry coffee, earning almost 40 percent less revenue.

The example described above and in Table 5 is for a cooperative working with Coffeelac, a large dry mill with a sales contract with Starbucks and memoranda of understanding with three cooperatives for purchasing their wet-milled production for specialty coffee. Although specialty coffee has the highest profit margin, most of the firm’s revenues come from ordinary coffee, creating some tension between the different producers. Coffeelac has access to international financing at comparatively low interest rates (8 percent per year vs. the DRC average of over

20 percent), which allows the company to provide working capital financing at 10-16 percent per year to its major cooperative suppliers. Using this financing, the cooperatives can purchase coffee cherries from their farmer members, making a first or advance payment at harvest time and a second payment to members after the company receives the final payment, when the overall quality and final price of the coffee is known (i.e., how much was first grade quality and was sold at international premium prices vs. how much was under-grade and sold for lower prices).

These working capital loans from the large dry mill company are one type of financing available to cooperatives. The loans are used to pay the cooperatives’ operating expenses, including the first payment to producers for the coffee cherry crop. These first payments are made at harvest time and not during the hard period before the season, when producers incur most of their costs. These timing constraints can cause farmers to choose to sell their production as ordinary coffee to make quick cash or even to sell their coffee before it is harvested, for a set price. Other informal and formal types of credit exist, although they are often expensive, short-term, and for small amounts. For example, small producers may resort to informal financing or advances made by traders on their future harvests or usurious loans from money changers.

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Table 5. Average Cash Flow and Revenue for a Major Coffee Cooperative and

Producer Members Average

Kg $US

COOP WORKING CAPITAL CASH FLOW

Cash In

Working Capital Loan from Dry Mill

$ 113,323.60

Cash Out

Coffee Cherry Purchased by Coop 242,490 $ 83,126.97

Parchment Coffee Produced by Coop 48,676

Cherry to Parchment Ratio 4.98

Coop's Wet-milling Expenses

$ 29,658.81

NET CASH FLOW from Coop Working Capital

$ 537.82

COOPERATIVE NET INCOME

1st Quality Export Sales 33,841 $ 187,723.61

Undergrade Sales 2,845 $ 4,085.83

Parchment Sales 2,859 $ 3,383.95

Total Revenue 39,545 $ 195,193.40

Cherry to Green Coffee Ratio 6.13

Repay Principal Dry Mill Working Capital Loan

$ 113,323.58

Interest on Dry Mill Working Capital Loan

$ 5,701.51

Dry Mill Service Expenses

$ 45,409.35

Total Expenses

$ 164,434.44

NET INCOME FOR COOPERATIVE

$ 30,758.95

GROSS REVENUE FOR MEMBER PRODUCERS

Sale of Coffee Cherry to Coop $ 83,126.97

Net Income for Cooperative $ 30,758.95

Total Gross Revenue for All Member Producers $ 113,885.92

Gross Revenue/Kg of Coffee Cherry 242,490 $0.47

Source: Average of financials for three major coffee cooperatives in 2015.

For producers, “crédits de soudure” (“hunger loans”, or loans to cover gaps in the agricultural cycle) were the most frequently cited financing need. In the period between planting and harvesting, farmers may have little or no cash flow to cover family living costs. Coffee producers are almost completely excluded from borrowing, despite their business operating and investment needs to finance replacement trees on aging plantations, labor for tree

FEED THE FUTURE DRC SVC ACTIVITY ACCESS TO FINANCE ASSESSMENT REPORT Page 18 maintenance and harvesting, plowing and depulping equipment. One cooperative reported receiving a five-month loan of $5,000 from ProCredit last year. The loan was secured with the title to the cooperative’s office and was used to make small advances ($20-$100) to help cooperative members cover living costs. Unfortunately, this type of advance as well as crédits de soudure can lead to over-indebtedness, as the loan disbursements are not directly tied to the farmers’ production income.

Because Coffeelac produces both ordinary and specialty coffee, some cooperatives complain that Coffeelac delays its working capital advances for specialty coffee, so that more farmers will sell their harvest to Coffeelac as ordinary coffee rather than waiting another week or two for cooperatives to make first payments on specialty coffee.

Specialty coffee is sold by the container of 19,200 kg each. The cooperative in Table 5 above produced 1.76 containers (33,841 kg of specialty coffee divided by 19,200 kg per container), with purchase and wet-milling costs of about $113,000, or almost $65,000 per container. The

SVC Activity has an objective of promoting at least 50 containers of specialty coffee, requiring an estimated $3.25 million per year in working capital financing for cooperative or private washing stations. The dry-milling service expenses shown in the example above averaged almost

$26,000 per container ($45,409 for 1.76 containers), implying a cash flow need of $1.3 million to produce 50 containers of specialty coffee. In addition to these potential working capital financing needs, there may be significant demand for new washing stations. The purchase of processing equipment and construction of a station can cost up to $45,000, which can be amortized over five years.

Dry mills also have significant financing needs, requiring large investments. However, these financing needs have not been evaluated here because they exceed the targets of the DCA guarantee, and these firms often have access to cheaper financing outside the Congolese market.

NUTRITIONAL VALUE CHAINS

Table 6 presents an overview of soy and bean production and consumption practices in SVC’s three target territories.

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Table 6. Soy and Bean Production in South Kivu Crop Kabare Kalehe Walungu

Soy - Grown in North

Kabare, Luihi, Berava

- Average production of

2 tons/ha

- Grown in North

Kalehe

- Soy is heavily produced around

Mushinda, Nduba with an average of 700 kg/ha

Beans - Grown heavily in

North Kabare,…