ZimbabweAgFinancialMarketAssess_Volume1_Final.pdf

FEBRUARY 2012

This publication was produced for review by the United States Agency for International Development. It was prepared by Weidemann Associates, Inc.

ZIMBABWE

AGRICULTURAL AND RURAL LIVELIHOOD

FINANCIAL MARKET ASSESSMENT

VOLUME I

FEBRUARY 2012

This publication was produced for review by the United States Agency for International Development. It was prepared by Weidemann Associates, Inc.

i

ZIMBABWE AGRICULTURAL AND

RURAL LIVELIHOOD

FINANCIAL MARKET ASSESSMENT

VOLUME I

Submitted by:

Weidemann Associates, Inc.

Submitted to:

USAID/Zimbabwe

Contract No.:

Raise Plus IQC No. AID-613-TO-11-00003

Period of Performance:

October 2011– February 2012

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Zimbabwe Agricultural and Rural Livelihood Financial Market Assessment – Volume I ii

ACKNOWLEDGEMENTS

Weidemann Associates Inc. appreciates the extensive support and cooperation of all who participated and assisted in the development of this financial market assessment.

Of particular note is the contribution of personnel from many companies, producers, communities, associations, non-governmental organizations, donors and the Government of Zimbabwe who took the time to patiently explain their business and financial relationships to the assessment team and how the availability or lack of finances affected their lives and work and how they overcame challenges. Some of these people traveled at their own expense to be able to meet with the team members. We thank them all for offering their time and resources..

Our special thanks go also to the USAID staff in Zimbabwe for their support in facilitating this study, for providing the team with direction and assistance in obtaining the information needed to conduct the assessment.

Members of the assessment team:

Arvin R. Bunker, Team Leader Tafireyi Chamboko George Gray James Hochschwender Onisai Machiridza Jackqeline Mutambara Erickson Mvududu Eliot Takaindisa With administrative support by Rufaro Shumba and Ximena Navajas.

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CONTENTS

Acknowledgements ............................................................................................................................................... ii

Contents ............................................................................................................................................................... iii

Acronyms & Abbreviations .................................................................................................................................... v

1. Executive Summary

1.1 Study Objective and Approach

1.2 Historical Background

1.3 Current Situation with Agricultural Value Chain Finance

1.4 Conclusions

1.5 Potential Solutions and Interventions

2. Historical Background

2.1 Zimbabwe Formal Financial Sector

2.2 Pre-1998

2.3 Land Reform and Hyperinflation Period—1999 to 2008

2.4 Multi-Currency Era/Dollarization

3. Policy Framework and Legal and Regulatory Regime

3.1 Interest Rate Policy

3.2 Requirement for Statutory Reserves

3.3 Adjustment of Local Costs to Multi-Currency Values

3.4 Indigenization Policy Impact on Investment Decisions

3.5 Money Market

3.6 Cellular Banking Services

3.7 Collateral Security

3.8 Microfinance and Non-Bank Financial Institutions

3.9 Lease Purchase

3.10 Collateral Management

4. Shared Financial Environment and Common Activities of Value Chain Actors

4.1 Assessment Approach and Methodology

4.2 Current Siuation by Stage in the Value Chain

4.3 Financial Instruments by Value Chain Segment

4.4 Savings and Loan Groups

5. Supply and Demand for Financial Services by Value Chain

5.1 Funding for Farm Input Suppliers

5.2 Funding of Producers

5.3 Funding of Processors and Traders

5.4 Funding of End Markets

5.5 Summary Funding Ten Value Chains

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5.6 Summary of Production Costs and Income

5.7 Summary by Value Chain

5.8 Projections for 2011/12

5.9 Summary Findings and Financing Gaps of Ten Value Chains

6. Constraints to Access Credit

6.1 Policy and Environment

6.2 Formal Finance Sector Constraints

6.3 Market and Other Factors

6.4 Informal Sector Constraints

7. Conclusions, Opportunities and Recommendations for Interventions

7.1 Opportunities and Recommendations

References

Annexes

Annex 1. Contacts Annex 2. List of Organizations Annex 3. Selecting Value Chains v

ACRONYMS & ABBREVIATIONS

A1 & A2 Small- and Medium-Scale Farmers AfDB African Development Bank Afreximbank African Export Import bank Agritex Agricultural Technical and Extension Services AMA Agricultural Marketing Authority ARDA Agriculture and Rural Development Authority ASPEF Agriculture Sector Productive Enhancement Facility CBZ Commercial Bank of Zimbabwe CFU Commercial Farmers Union CGA Cotton Ginners Association CMA Collateral Management Agreement COTTCO Cotton Company of Zimbabwe CRI Cotton Research Institute CSB Corn Soya Blend DAPP Development Aid from People to People DOC Day Old Chicks DRC Democratic Republic of Congo DZL Dairibord Zimbabwe Limited ESAP Economic Structural Adjustment Program f.o.b. Free on Board FAO Food And Agricultural Organization FDI Foreign Direct Investment FTLRP Fast Track Land Reform Program GMB Grain Marketing Board GMO Genetically Modified Organism ha hectare HPC Horticulture Promotion Council HVEV High Value Export Vegetables ICAC International Cotton Advisory Committee IDBZ Infrastructure Development Bank of Zimbabwe IFAD International Fund for Agricultural Development (IFAD) IRD International Relief and Development kg Kilogram KYC Know Your Customer km Kilometer MAMID Ministry of Agriculture, Mechanization and Irrigation Development MFI Microfinance Institution MIS Management Information System MTP Medium Term Plan 2011-2015 MS Multicurrency System MT Metric Ton NADF National Association of Dairy Farmers of Zimbabwe NASSA National Social Security Authority Natbrew National Breweries NGO Non-Governmental Organizations POSB People’s Own Savings Bank vi

POTRAZ Postal and Telecommunications Regulatory Authority of Zimbabwe PSF Productive Sector Finance Facility PTA Bank Eastern and Southern African Trade and Development Bank, also known as the

Preferential Trade Area Bank RBZ Reserve Bank of Zimbabwe SA South Africa SACCO Savings and Credit Cooperatives SADC Southern Africa Development Community SAFEX South African Futures Exchange SHF Small Holder Farmer SNV Netherlands Development Organization SOW Statement of Work TIMB Tobacco Industry and Marketing Board TTA Total Transformation Agribusiness UHT Ultra High Temperature UNICEF United Nations Children’s Fund VAT Value Added Tax VCA Value Chain Analysis VETCO Veterinary Company WFP World Food Program WRS Warehouse Receipt System ZABG Zimbabwe Allied Banking Group ZAMFI Zimbabwe Association of Microfinance Institutions ZAQP Zimbabwe Assured Quality Pig Scheme ZAR South African Rand ZCFU Zimbabwe Commercial Farmers Union ZETREF Zimbabwe Economic and Trade Revival Facility ZIMACE The Zimbabwe Agricultural Commodity Exchange Zimvet Zimbabwe Veterinary Service ZWD Zimbabwe Dollar ZMPT Zimbabwe Medium Term Plan, 2011-2015

1. EXECUTIVE SUMMARY

1.1 STUDY OBJECTIVE AND APPROACH

This study seeks to identify and describe the financial transactions that exist in ten agricultural sector value chains from input suppliers, to crop and livestock production, to trading and processing companies, and delivery to end markets.1 The assessment also identifies constraints to provision of financial products and services that slow rebuilding the agricultural productivity to modern standards, and suggests opportunities for growth of the sector as well as interventions that donors and/or governments can pursue to speed economic development.

The assessment team conducted stakeholder consultations with more than 120 companies, public institutions, individuals, or groups of individuals. In addition to the stakeholder consultations, many financial institutions and agricultural input suppliers, processors, traders and buyers compiled information for use by the team. Prior documents and existing data relating to financing and the agricultural were consulted during the study.

This volume presents the background historical setting, the legal, policy and regulatory environment, the assessment approach, financial instruments by value chain segments, summary of demand and supply for each of ten value chains, analysis of the constraints to lending and the resultant credit and other financial services gaps to agriculture value chains, overall conclusions and description of potential interventions to improve agricultural finance in Zimbabwe. Volume 2 presents detailed analyses of value chain finance for each of ten selected value chains.

1.2 HISTORICAL BACKGROUND

Zimbabwe’s present agricultural finance crisis has its roots in the early 1980s, with a slow but steady economic decline throughout the decade and the brief experiment with market-led economic policies during the Economic Structural Adjustment Program (ESAP) in the 1990s. The period can be characterized by continuous recourse to unsustainable, fiscally redistributive, and short-lived expansionary policies aimed at increasing agricultural incomes and industrial minimum wages, without enough attention paid to issues of productivity and growth. Persistent revenue and expenditure mismatches turned budget deficits into a key contributor to macroeconomic instability, accompanied by low growth rates, high budget deficits, high inflation, low foreign exchange reserves, and weak balance of payments positions, reduced productivity and competitiveness of the agricultural sector and its related value chains.

Persistent price distortions, massive asset stripping and corruption in public enterprises resulted in a rapidly declining gross domestic product (GDP), and financial and agricultural sectors over most of the period and lower real incomes.

However, since dollarization and the introduction of other corrective macroeconomic measures in 2009, Zimbabwe has begun a rebound with significant economic growth over the past two years including a restarting of key components of the financial sector. A massive infusion of resources from the government ($300 million) and development partners ($74 million) and increased bank sector support ($331 million) in 2009-2010 helped a return to growth in production of most agricultural products from

1 The ten value chains are maize, soya beans, cotton, diary, poultry, banana, sugar beans, groundnuts, tea, and export vegetables.

low points in 2008-09.

Many Zimbabweans that were interviewed by the financial sector assessment team conducting this assessment were optimistic that the agricultural and financial sectors can and will fully recover their past important contribution to the regional economic environment. The assessment team agrees with those assessments; the country possesses valuable agricultural resources and relatively well skilled agribusinesses and financial services companies and many capable small scale producers. The recovery, however, is still fragile and economic and political shocks can quickly reverse the progress of recent years.

1.3 CURRENT SITUATION WITH AGRICULTURAL VALUE CHAIN

FINANCE

The major policy documents related to provision of financial services to agriculture are in place; major changes in laws are not required. The administration of those laws according to most of the stakeholders consulted is often arbitrary and frequently demonstrates rent-seeking by public administration units.

Effective and efficient administration by the public sector that promotes sustained economic growth of the financial and agricultural sectors is in as short supply as are deposits in financial institutions with which to make loans to the agricultural sector.

Because the value of rural land was removed as an asset for collateral, lending for agricultural production declined drastically in 2000 and has yet to recover. . Only urban or industrial properties qualify as collateral for loans. A decade later no solution is in sight for definitive possession of rural land. In part because of the delay in identifying a solution, but also because much of the infrastructure on productive farms has disappeared. All of the A2 farms visited by the evaluation team were cultivating a small portion of the area previously cropped. Some new farmers impressed the evaluation team with their knowledge of how to farm their land; others appeared to be learning quickly by searching out sources of information and assistance. These farmers could cite lessons learned and could explain to the assessment team their plan (unwritten) to develop their farm. While few of these more successful farmers are not yet fully trained nearly all will become skilled farmers. In the areas observed and visited by the assessment team less than one-third of A2 farms are operated by these emerging farmers. These emerging farms still have limited resources and cultivate a relatively small portion of their land.

Commercial banks are well positioned and capable of providing financial services to large and medium sized agribusinesses, and to very large farms and to a few new large commercial farmers. No private sector institutions or set of institutions are now prepared to provide appropriate and viable financial services needed by most new large commercial farmers and the new smallholder farms.2 However, the

2 To more effectively describe and measure the participation of producers in the agricultural finance system this assessment utilizes three groups of producers, as follows:

1. Large Commercial (LC) producers. This group includes large corporate farmers, A2 farmers that are producing on more than 7 hectares of their land, and includes larger communal area, old resettlement, and a few peri-urban farmers that operate their land and resources to maximize company or household income.

Production for household consumption may also occur but does not affect investment decisions on commercial crops.

2. Small Commercial (SC) producers. This group includes A1, most communal area, and most peri-urban farmers that grow at least one crop each season with the objective to maximize household income. To better manage risk many SC producers will grow two or more crops designed to earn household income.

Most of these farmers also grow crops or livestock products for household consumption.

3. Non-commercial (NC) producers. These farmers produce crops or livestock primarily for household consumption, although if yields are high will sell surplus product. These include subsistence producers who banks still recovering from hyperinflation and dollarization and rebuilding deposit bases, have relatively high reserve requirements (25%), have limited or no access to interbank borrowing and without adequate supervision may be having portfolio performance problems. Therefore, the have limited cash they are willing to lend on terms and at a cost that is viable for most agricultural value chain borrowers who could use credit to expand operations. Interest rate margins are far higher than averages in other countries in the region (20 percent for less than prime borrowers versus 5 percent).

High interest rates are compounded by a multitude of additional fees that can double borrowing costs for all but elite customers. There is a lack of any truth in lending law that would require banks to explain in detail to their customers the actual annual percentage rate of their borrowings, as is the case throughout Southern Africa.

Donors are beginning to make headway in training small farmers to produce commercially, but the production of small commercial farmers is a tiny portion of the total agricultural production needed to feed the country and to restart utilization of the abundant natural and human resources available to Zimbabwean agriculture.

Effective and pervasive rural and agricultural financial institutions will begin to develop only when public sector agricultural direct lenders such as AgriBank, CBZ, and ZB Bank discontinue lending to producers.

Until that happens agricultural production finance will be insufficient, untimely, directed primarily toward larger borrowers and to those within preferred classes or political orientations.

The microfinance industry, that as recently as 2004-2005 was a thriving and vibrant element of the financial landscape in Zimbabwe has virtually disappeared with the exception of one MFI that is a subsidiary of a commercial bank. MFIs’ portfolios were decimated with hyperinflation and then dollarization. It will take substantial investments for their re-establishment, and there are few investors who will invest enough in the current uncertain political and economic environment of Zimbabwe to bring an MFI up to achieving economies of scale. Also, without significant donor inputs supporting complimentary services to MFI lending,3 the role of MFIs in agriculture value chain finance is limited to informal traders.

Many of the VCs are not well functioning as there are very limited numbers of buyers and sellers and limited access to certain key markets or certain players who are introducing distortions to their markets (maize, groundnuts, cotton, sugar, tobacco). This has negative implications for access to finance for small holders and smaller and medium size processors and traders/wholesalers. The Zimbabwe economy is characterized by a few large players, a few medium and small sized commercial players, and lots of nearly non-players such as subsistence farmers and local informal traders.

Gender is an issue with regard to access to finance in the value chains studied because Zimbabwean women encounter significant discrimination in the matter of ownership rights. Access to land and other property rights is essential for women’s survival in rural areas for growing subsistence crops and customary law still does not allow women land ownership, rights to property of a deceased spouse and other property rights limitations.

in most seasons produce fewer products than they consume, and may produce an occasional commercial surplus, but are generally not dependent upon the sale of crops into the market for their livelihoods.

3 The types of additional services that would make microfinance lending viable would include such services as technical or business skills training and/or extension services, market access facilitation, etc.

1.4 CONCLUSIONS

Despite multiple constraints in Zimbabwe to effective and efficient operations of financial institutions, a majority of commercial banks have managed to restart and grow their businesses. In a few significant ways, the current economic and business environment contributes positively to restarting institution and contributes to a relatively fast rebuilding of equity and business operations. Those positive factors include:

1. Shortage of funds to lend means financial institutions can charge very high interest rates along with high fees to borrowers who are eager to acquire resources that will enable them to restart and grow their own enterprises.

2. Because of limited funds, the banks have the opportunity to select the most reliable payers, usually larger corporations, as the recipient of their loans.

3. Lack of supportive regulatory environment is constraining both micro and small business lending by making it unnecessarily expensive for banks to provide such services and at the same time limiting existing non-bank financial institutions access to financial resources by prohibiting them from providing savings services.

4. In part because of the liquidity issues and in part to facilitate risk management, some companies are aligning their operations with other businesses and building value chains with a greater level of integration. This results in each participating company doing a larger share of their business among members of the integrated group. These integrated companies allocate and share funds among themselves. In some cases these arrangements accelerate money turnover rates, which reduce costs by reducing the total amount of borrowed funds and at the same time reducing risk by enhancing communications and building trust between members of the integration. Poultry value chains are the most visible application of integration in Zimbabwe. The trend in Zimbabwe is consistent with the trend toward greater integration of broiler production that has occurred in other countries. Integration of egg value chains is occurring but the practice is less widespread than broiler production.

1.5 POTENTIAL SOLUTIONS AND INTERVENTIONS

Given the current political and economic environment in Zimbabwe, the study team sees several potential activities that could improve access to financial services in the ten value chains studied. Most of them can and should be effectively applied across the ten value chains studied. The listing of these opportunities is intended to provide a wide range of possible areas for donor intervention without implying that USAID do something about it, as the scope of this assessment did not include activity design.

These potential solutions and interventions fall into four categories: policy and legal environment; formal finance sector; market and other; and informal finance.

1.5.1 POLICY AND ENVIRONMENT

Much of the policy and legal environment constraints could be reduced by a combination of the following adjustments, policy changes or activities. Any of them alone would make some difference, but any combination would have multiplier effect on value chain access to finance.

1.5.1.1 POLITICAL INSTABILITY EFFECT ON INVESTMENT

The maintenance of a stable overall macro-economic and political environment will do much to improve the confidence in the banking system and investment environment. With up to US$2.2 billion cash circulating in the informal sector, the opportunity for mobilizing savings and other deposits is very significant and could resolve a significant portion of the liquidity constraint.

Recommended Actions: USAID already has a program (Zim-ACP) that is working on advocacy for resolution of macroeconomic environmental issues that are constraining finance of agricultural value chain. The assessment team supports the continuation of their efforts.

1.5.1.2 LENGTHY LEGAL PROCEEDINGS TO RECOVER PLEDGED ASSETS AND

LIMITED CONTRACT ENFORCEMENT

As stated in the Biz CLIR assess in 2010, non-capricious application of the rule of law is a necessity for stable economic growth in Zimbabwe. In addition, any intervention that would result in streamlined legal proceedings for recovery of pledged assets would introduce needed discipline into loan and contract farming repayments and thereby reduce defaults to banks and other creditors.

Recommended Actions: Effective procedures for local arbitration and enforcement based around contracts that agree to use local people of good standing (priests, headmen, or uninterested business people) to arbitrate on contract disputes, and agree to be bound by the results of such arbitration and may also invoke local constabulary to enforce the results should be assessed for possible replication by contract farming operations in Zimbabwe. Such arrangements can be both faster and more effective than formal legal procedures. Another element of that approach could incorporate USAID’s HI FIVE program in Haiti use of value chain stakeholder workshops to get to the root of and resolve a culture of poor repayment.

1.5.1.3 COMMERCIAL BANK DEPOSIT, RESERVE REQUIREMENT IMPACT ON LOANS

AND ADVANCES

Under the current circumstances of less than adequate bank supervision, the higher reserve deposit rate is appropriate to ensure the stability of the banking sector. However, as proper and effective supervision of risk management in the banking sector returns the Central Bank will regain use of the deposit reserve requirement as a primary fiscal policy over availability of credit in the economy. Proper bank supervision would also allow bringing deposit reserves back into RBZ, thus providing resources for it to resume its proper role as the lender of last resort to the commercial bank sector.

Recommended Actions: USAID should support improved commercial bank regulation as opportunities to do so arise. Here again, the Zim-ACP project is already in place and can look for and act upon those opportunities as they arise.

1.5.1.4 PUBLIC SECTOR AGENCIES COMPETING AGAINST PRIVATE SECTOR

FINANCE BUSINESSES

Support of the African Development Bank recommendation to privatize Agribank and other non-viable government parastatals would reduce the market distortions in the agricultural finance sector and thus encourage commercial bank expansion of credit in the agricultural sector. It would also reduce the drain on GOZ limited financial resources by eliminating the continual need to recapitalize this non-viable institution.

Recommended Actions: USAID could support a feasibility study for the privatization of Agribank though it would be appropriate that costs be significantly shared by the GOZ to demonstrate their commitment to acting upon the results of that study.

1.5.1.5 LACK OF SUPPORTIVE MICROFINANCE AND SMALL ENTERPRISE

LEGISLATION

The GOZ is challenged to come up with a workable National Microfinance Policy. The lack of such a policy is stifling the recovery of the microfinance sector. Getting the GOZ to pass a supportive policy will take some time. Zimbabwe may also want to look to develop a more integrated way of improving access of micro and small enterprises to credit.

Recommended Actions: The following is a series of steps that USAID could take to support the recovery of the micro and small enterprise finance in Zimbabwe:

1. A quick though temporary fix to microfinance sector recovery is for USAID, through its Zim- ACP project to lobby the GOZ to waive for a period of 2-3 years the moneylender/microfinance license renewal requirement for MFIs to provide the time to develop a realistic microfinance regulatory and supervisory framework.

2. Support the development of such a MFI framework would include removing the legal impediments to MFIs transacting in savings and micro insurance, money transfers, accepting remittances and leasing instruments for MSEs, business loans including value chain finance as well as consumption. A prerequisite to USAID support would be the GOZ demonstrating a sincere interest in a less prescriptive framework.

3. USAID might want to sponsor a study to detail a more comprehensive approach to the collateral policy problem for small and microenterprise lending with alternative options evaluated in the context of Zimbabwe. This approach prevents the compartmentalization of microfinance with loan amount ceilings that preclude MFIs growing with and continuing to provide financial services to their most successful entrepreneur clients.

1.5.1.6 CONSUMER PROTECTION - ESTABLISH A “TRUTH IN LENDING” LAW

Current practices of many banks and MFIs include adding on significant fee charges on top of interest without informing borrowers of the total cost. Annual reports of many commercial banks indicated that those banks are earning more income from fees than from interest. Some form of financial education complemented with a “truth in lending” regulation would in the end serve both borrowers and lenders.

Recommended Actions: USAID through Zim-ACP provides short term technical assistance to assist consumer, farmer, and small and large business groups to lobby for truth in lending legislation and to assist the GOZ to write a coherent and implementable truth-in-lending law.

1.5.2 FORMAL FINANCE SECTOR

For every constraint within the financial sector itself there are one or more opportunities for improving access to financial services beyond even what existed before hyperinflation and dollarization that USAID could take to improve access to finance in the value chains assessed.

1.5.2.1 LIMITED AND MOSTLY SHORT TERM DEPOSITS AND LIMITED SAVINGS

SERVICES

Now that the economic situation in Zimbabwe is stabilizing, demand for savings services are rising. There is tremendous potential for tapping into those resources in both rural and urban areas to significantly improve bank liquidity and thereby provide the means for filling value chain funding gaps. Current village savings and loans groups, because of their loan costs (5 percent/month interest or more), are not well suited to serve all of the household income fluctuation needs. Therefore, as part of improving liquidity of the financial system while inclusively serving the needs of the population, more effective efforts through new savings products and mechanisms are needed. Past studies have shown that by combining savings services and products between poor, low, and medium income people, a financial institution can keep its average cost of saving down low enough to viably serve the savings demand and needs of the poor (Robinson 2002).

Recommended Actions: Have a savings product expert assess the degree to which existing savings products in Zimbabwe across commercial banks, building societies, MFIs and other formal and informal groups are meeting the savings needs of value chain actors. Follow that work with a series of stakeholder workshops of users and providers to exchange information and ideas of more appropriate and viable savings services. Any further USAID support should build local capacity for ongoing savings product development both within and outside of individual financial institutions and in close coordination with mobile banking service development.

1.5.2.2 TECHNOLOGY AND LIMITED RURAL INFRASTRUCTURE

A new electronic age in finance circles in Zimbabwe is currently bursting onto the financial scene with four banks launching new electronic services within the last few months and others actively investigating and/or developing their electronic banking services. In addition, three cellphone companies are also introducing mobile money services, though the largest of these is using a bank to actually process the transactions. The introduction of electronic payment, lending, deposit, and withdrawal, along with other financial services will likely significantly change the landscape of financial services in Zimbabwe over the next decade. From prior USAID learning some intervention options are recommended. Most current branchless banking initiatives have been led by the private sector. The best role for USAID is as facilitator and catalyst in areas of development objectives in financial services. Focus should be “on providing support in a way that incentivizes the private sector to come up with solutions that can have developmental impact and be commercially viable.” (USAID SHARE FS Series). USAID/Zimbabwe and other donors are already providing support to pilot efforts in mobile money services in Zimbabwe through the AgriTrade facility. Care needs to be taken to not duplicate efforts and leave as much as possible to the private sector to fund and implement.

Recommended Actions:

1. Support the development of a regulatory framework pertaining to telecommunications companies handling of cash transactions and/or savings accounts independent of any partnership with a regulated financial institution licensed to manage deposit accounts. Bring in persons with direct experience with the formulation and implementation of more than one configuration of such regulatory frameworks should be brought in from outside of Zimbabwe together with private sector actors subject to those different sets of regulations in order to provide insights into the advantages as well as potential pitfalls of the different regulatory frameworks.

2. Sponsor representatives of a cross section of ministries and user groups (not private sector providers as it should be in their own best interest to invest in finding out what they need to know about the issues surrounding mobile money regulation and supervision) participation in regional conferences and/or study tours to countries that are more advanced in regulating mobile money.

3. Because the private sector has such a dominating role in the development of these financial services, USAID should look for public-private sector partnership (PPP) opportunities to leverage private sector (financial institutions, bankers association, interested third party businesses providing consultancy or technical or other services, such as Switchnet, telecommunications companies, application developers, etc.) resources towards increased provision of services in more rural areas as well as towards more vulnerable groups including women and youth with the objective of creating more viable employment opportunities. One area for a PPP is development of savings products that capitalize on existing mobile technology infrastructure. Experienced developers of such cellular savings services should be brought in as consultants as part of the savings product development process describe in the above recommendations for accelerating savings mobilization.

1.5.2.3 LACK OF LONG TERM FUNDS FOR EQUIPMENT AND INFRASTRUCTURE -

ESTABLISH IDENTIFY PRESERVED AND BULK WAREHOUSE RECEIPTS

A Zimbabwean warehouse receipts system (WRS) could start now save for political differences in public administration. The prior system emphasized bulk products, suitable for large scale producers. Using much of the same laws, institutions, and experience a warehouse receipts system more suitable for small farmers could start soon, with minimal need for public oversight, and funded totally or near totally by users. This would be a system for identity preserved agricultural products that can be stored for a period, such as for fertilizer, bagged grain, or UHT milk, or frozen vegetables, and broilers.

Recommended Actions: The following complementary actions together are needed if an effective, broadly reaching WRS is to emerge in Zimbabwe.

1. Through Zim-ACP support the reopening of a commodity exchange that is authorized to deal in all agricultural commodities, including maize and wheat. This will result in more market-based and rational agricultural investments that will encourage farmers to select higher value crops as determined by markets resulting in improved small farmer incomes and improved foreign exchange earnings.

2. Zim-ACP could support establishing the economic feasibility for identity preserved warehouses focusing on agricultural commodities and business needs of small and large commercial farmers and related input suppliers and agricultural commodity buyers.

3. USAID should support the African Development Bank recommendation that GMB be privatized as part of reducing the burden of non-viable parastatal organizations on the government budget and their distortion of domestic markets. To encourage that transition USAID could support public-private partnerships for the analysis and evolution of those GMB facilities into a key element of whatever warehouse receipts system is developed.

4. USAID should draw on the experiences in using a cashless system of smart cards and mobile phone cards for rapid access to funds credited to a farmer accounts in order to increase efficiency of the overall WRS such as used by the National Bulk Handling Corporation in India. (USAID Dec 2011)

1.5.2.4 RURAL FINANCE INSTITUTIONS

Since independence, the GOZ has sustained financial institutions that focused on providing financial services to farmers, agribusinesses, and rural residents. Guaranteed by government and sometimes with no collateral required, repayments were periodically as low as 50 percent, which then required periodic recapitalizations from public resources, all well-known results of public sector agricultural financial institutions. Additional direct government or donor investments cannot repair these effects.

Recommended Actions: USAID could support the design of a comprehensive program to provide a package of technical assistance to financial institutions that desire to provide services and products suitable for activities and investments in rural areas for agricultural production and smaller agribusinesses that will meet the demand for a modern agricultural system. It will require revitalized existing institutions or new institutions. Such private rural financial institutions would:

a) Provide credit to medium commercial farmers in the range of 100 to 300 hectares and small and medium sized agribusinesses. Some of the smaller commercial banks may determine that their competitive advantage will be to learn to serve well rural areas and in the process learn to serve well commercial farmers and rural businesses and agro businesses. One or more of the building societies or merchant banks may determine that rural areas can be served profitably.

b) Provide credit to small commercial farmers and microenterprises. Small commercial banks such as Trust Bank as well as the financially and organizationally stronger MFIs could learn to serve this market if they are willing to expand beyond urban areas, introduce products suitable for agricultural production and learn the economics of rural areas and agricultural production, trading and processing market segments. It is unlikely that MFIs will soon address the rural market without subsidies. Principle reasons are their lack of rural infrastructure and their loan products are too expensive to be viable for the businesses.

In considering support to establish a sustainable rural financial services program that has sufficient capacity and resources to serve small farmers and other rural customers the following principles are suggested:

1. The institution is private sector owned devoid of government or donor ownership or presence on the Board.

2. The regulatory environment and supervisory norms are prudential, adapted to risks inherent in rural and agricultural settings, protective of public deposits, if allowed, and inclusive for investors of moderate resources.

3. Governance is allocated by amount of investment, save that any individual investor or defined group of investors may exercise more than 20 percent of the shareholder votes.

4. A minimum share of loans is utilized in rural areas: at least 60 percent of all public deposits from rural areas be loans to rural individuals and businesses if the rural finance institution can take deposits from the public; and if no public deposits are accepted, loans to rural individuals and businesses will total not less than 75 percent of all loans.

5. Whole farm or whole household financing is used as the basis for lending instead of crop based financing. While households (HH) may not qualify for a crop loan, they may qualify for a whole farm loan and whole farm loans reduce the frequency of multiple lenders per HH.

Training of farmers and other value chain participants would enhance farmer’s access to credit. First is technical training that will enhance farmers’ ability to maximize yields of the crops they are growing. The second is business skills training such as business planning and financial education, including how to approach and work with banks and manage a successful loan application. This same business skills and financial education training would also apply to other micro and SMEs in the value chains in order to improve their business performance and thereby their access to credit and other financial services. One important note about training is that it will complement the development of rural financial institutions.

However, experience has demonstrated that the value of training drops to almost zero when participants perceive that they need to do the training in order to be able to access credit.4 USAID could support the following in the area of training to enhance access to credit:

a) The Commercial Farmers Union (CFU) may need technical support in developing a simplified certification of experienced farmers to be trainers/extensionists to facilitate them becoming part of any official (GOZ or private) extension service.

4 The authors’ personal experience over several decades in several countries on three continents including Africa.

a. As part of that certification process, USAID will want to consider providing short term TA in commercialization of their services to see how the new farmers can pay for their services. One potential solution would be for the prior farmers to work on a crop share basis; if the crop does poorly the advisor is paid little or nothing, if the resulting crop is very large the advisor is paid very well.

b) 2. A second part of the solution would be for the GOZ and donors to support the use of mobile technologies in training and extension services to new farmers to minimize ongoing extension costs. The private sector is becoming more and more the provider of choice for many farmers when it comes to introducing new agricultural technology including investments to improve farm infrastructure. As part of that process, USAID may consider TA to input providers or agricultural product buyers in extending extension services to new farmers. Support should be partial and usually build in a declining share of costs covered by donors.

Other technical assistance factors that will contribute to the success of such rural financial institutions in Zimbabwe include:

1. Support of studies that will help resolve the restrictions on growing GMO crops that significantly restrict competitiveness in export markets for major crops and animal products.

2. To reach high or maximum yields will require major new investment in agricultural production systems, especially irrigation systems, rural power systems, appropriate mechanization implements for small farmers, conservation agricultural systems, and others. USAID should look to identify specific research to complement that being done by other donors that will enhance the performance of agricultural value chains as a whole based on market-determined priorities. As international and domestic markets are dynamic and subject to unpredictably varying factors, USAID will have to be vigilant in assessing possibilities.

3. Resolution of collateral for rural land is a key ingredient to recovery of agricultural productivity.

Resolution to this issue will help expand agricultural lending while serving to highlight other significant constraints.

4. Without other complementary inputs of training and strong linkages to markets, finance alone will not produce stable and sustainable growth in these agricultural value chains. For these reasons, the assessment team considers that the growth in agricultural lending will require several years to fully develop.

1.5.3 MARKET AND OTHER FACTORS

1.5.3.1 IMPROVING GENDER EQUALITY

There are gender issues that if properly addressed could improve productivity, profitability and food security in most of the ten value chains. Acknowledging that Zimbabwe’s customary Family Code grants very few rights to women,5 improving women’s control of financial assets will require proactive adjustment of loan product design as well as internal loan policies. It is important that lenders to farmers incorporate the whole farm into credit analysis, including recognizing the contribution of women as valuable as those of men to success of the farm household.

Recommended Actions: USAID, through Zim-ACP and Zim-AIED can do the following to improve gender equality in Zimbabwe:

5 80 per cent of rural households are unregistered customary marriages, which means limited access to land ownership and inheritance of land and other assets.

1. Encourage private sector lobbying for changes in customary Family Code to provide more equal rights to women in ownership of land and other assets.

2. Provide technical assistance through a series of workshops for commercial bank and other formal and non-formal financial institutions in the proactive development of internal policies and procedures and loan products and savings services tailored to improving women’s access to financial services.

3. Support the creation versions of financial education materials, financial products including savings, money transfer, loan as well as mobile banking services and promotions and explanations specifically tailored to women.

1.5.3.2 IMPROVE CONTRACT FARMING APPROACHES

Contract farming is expected to decline rapidly for most products once effective and efficient rural financial services are established. For the next several years, however, contract farming is an essential tool.

Recommended changes in current USAID support:

1. Companies wishing to engage in contract farming should adopt the client selection procedures commonly used by commercial banks. Those contract farming operations that are supported by NGOs should be given training in client selection and credit management procedures.

2. When credit is part of a program or project, governments, donors, and their development partners should help select borrowers only when guaranteeing repayment to the institution at risk.

3. Legislation that limits the sale of commodities to the parties that have supplied inputs may appear to facilitate contract farming. Nevertheless in the long-term, experience in other southern African countries suggests that such legislation promotes potentially oppressive arrangements that nearly always favor the buying companies at the expense of the growers. In the first year of legislation to strengthen cotton contract farming saw growers obliged to accept a lower price than they would have preferred, and in the second year, growers were again obliged to bear the brunt of the steep fall in cotton prices that occurred mid-way through the 2011 marketing season without any opportunity for negotiation. Experience elsewhere6 has also shown that such arrangements can be used by contract farming companies to prevent the entry of new parties into the subsector.

4. Zim-ACP’s support of legislation to support contract farming should address the issues of arbitration and contract enforcement, but should not seek to tie growers to specific companies beyond the repayment of any outstanding loans.

Zim-ACP together with Zim-AIED might encourage simplifying financing of contract farming by introducing some form of Purchase Order Finance, in which traders or processors issue Purchase Orders to farmers for specific or minimum amounts of product and provide a certain guaranteed value for the crop. Those Purchase Orders become legal documents that producers take to a financial institution that has agreed to accept them as legal collateral for an input loan. This approached is currently being used in Kenya, Uganda and Tanzania as well as in South Africa. It will need to be adapted to the specific circumstances of Zimbabwe, but the accumulated experience should make that process much easier and shorter.

6 In Tanzania, the tobacco sector has strenuously resisted the entry of new companies that might compete for product and could potentially offer both investment and higher prices to growers. Existing legislation that requires the licensing of buyers has been used to exclude new entrants to the subsector.

1.5.3.3 CREDIT BUREAU FOR AGRICULTURAL PRODUCERS AND RURAL

RESIDENTS

Having a more extensive credit bureau that includes rural borrowers as liquidity improves in the financial system will provide a double strengthening thereof. First, it will facilitate financial institution lending.

With more verified information available about borrowers, banks will have an easier time deciding to whom to lend. On the other hand, borrowers with a good credit rating will be able to shop around for the credit they need, which will better balance their negotiating power with financial institutions, thus increasing competition in the financial market. Conversely, financial institutions and/ or other credit providers (input suppliers, agro-dealers, exporters, etc.) with a robust credit reporting system in Zimbabwe will be able to better avoid lending to people who cannot or will not repay. That will in turn improve two things; loan default rates and the willingness of suppliers and processors and exporters to provide input credits to farmers for production. It should also help reduce side selling in contract farming as farmers and other borrowers realized that it is worth more to their families and businesses and farms to make the repayment rather than succumb to the temptation of a lower price from an itinerant trader or competing buyer to whom they are not contracted.

It will take several years to develop existing credit bureau service to the kind of robust and reliable system needed. It will also require legislation to protect consumer/borrower rights against misinformation in the system. However, that does not make it any less of a priority in developing a stronger and more secure financial system in Zimbabwe.

Recommended Actions: A proposal to donor(s) to support a rural credit bureau should be developed by the private sector institutions (including financial) that will benefit. It can build upon existing services.

However, it should include development of positive in addition to the existing negative credit reporting so that levels of credit given to any one borrower can be more accurately assessed. Different types of financial institutions (commercial, merchant and savings banks, MFIs, etc.) as well as credit providing retailers, wholesalers and public services companies should contribute information to it.

1. Regional technical assistance (TA) can be brought in as needed to advise on rapid expansion of positive and negative credit information, and perhaps even multiple credit bureaus that also serve rural areas including farmers. TA might also be required to develop credit bureau regulation and consumer/ borrower rights protection legislation for quick resolution of misinformation.

2. Credit bureau support should ensure that there are links between urban and rural credit references as people move between the two areas and potentially can access credit in both places.