Value Chain Financing: Changing the Perspective of

Improving the Provision of
Financial Services to the Livestock
Sector in Ethiopia
Presented at AFRACA’s East Africa Sub
Regional Workshop: Financial
Intermediation for Growth and Wealth
Creation in Africa
Wolday Amha (PhD)
Kampala, Uganda, May 19-21, 2010
The Role of Livestock Sector
• Source of food
• Provide inputs for crops in the form of draft
power and organic fertilizer
• Contributes to the export earnings
• Used as a form of wealth accumulation
• Hedge against crop failure
• Source of cash to cover major incidental
• Serves as a means of transport
Livestock Population of Ethiopia
Livestock Type
Total Livestock
Interventions to Improve the
Livestock Sector
• Improve productivity through breed improvement
• Develop livestock technology package for
pastoralist areas
• Expand the availability of feeds
• Expand small ruminants in the highland
• Upgrade the veterinary services
• Promote semen production center (AI)
• Integrated and range land management
• Expand poultry production
• Improve the processing of livestock products
Objectives of the Study
• The overall objective of the study is to improve
and enhance access to financial services that
are appropriate to livestock producers and their
enterprises in Ethiopia. The specific objectives
• Review the performance of livestock credit in
selected countries
• Review and analyze previous credit programs
(for the past 20 years) in Ethiopia
• Review the lessons learned in delivering
financial services to livestock sector
• Identify the strategic interventions to improve
financial access to livestock producers
Study Approach and
• Both quantitative and qualitative
instruments were used to obtain
information on the delivery of financial
services in the livestock sector. The study
involved in reviewing the literature,
conducting field surveys and in-depth
interviews/discussions with key informants
and personal observations of the
Limitation of the Study
• This study is mainly constrained by the
non-existence of reliable disaggregated
and consistent data on livestock credit.
Many of the available secondary
information and reports focused on
agricultural credit or rural finance, which
made it difficult to get disaggregated data
on livestock credit.
The review of past projects indicate
the following
• Adoption of livestock technologies increase production and
productivity and income of households and rural finance is a key
intervention to assist farmers to use the technologies.
• Credit demands of smallholder dairy farmers with crossbred cows
are expected to be higher than those subsistence farmers.
• Borrowers are not homogeneous in terms of their need for credit and
that the marginal productivity of credit would be different even
among different borrowers in different locations.
• An accurate assessment of farmers’ liquidity position is important for
the finance providers in order to obtain the greatest impact from
• Credit can have the desired impact where there is a functioning and
sustainable credit delivery system that allows smallholder livestock
farmers’ access.
• Market participation and savings mobilization are major
determinants of the amount of credit demanded by farmers.
• Subsidized credit delivered by formal banks and government/donor
projects has been a common feature of formal livestock credit
programs in Ethiopia.
• The AIDB, currently know as the Development Bank of Ethiopia
(DBE), provided credit component provided funds for:
• (a) Service Cooperatives to purchase flour and oil mills and
construct storage building;
• (b) farmers to purchase draught oxen and implements (funds are
channeled through Service Cooperatives);
• (c) Producers Cooperatives and Service Cooperatives in the dairy
farming through the purchase of crossbred heifers (using loans
channeled through Service Cooperatives); and
• (d) Miscellaneous lending to enable AIDB to diversify its lending for
agricultural development.
• The major problems of AIDBs’ credit extended to rural households
• (a) inappropriate credit policy and delivery system which limited
coverage in terms of outreach and credit diversification;
• (b) dissolution of cooperatives in 1990 which took the loan from the
bank; (c) problems of enforcing contracts;
• (d) limited branch networks and proximity;
• (e) unfamiliarity with the bank procedure to access loans;
• (f) low productivity and lack of technologies for productive
• (g) inadequate infrastructure;
• (h) inadequate provision of complementary services; and
• (i) lack of coordination between the bank and government
• The ACDI/CEE study revealed that financial schemes of NGOs and
institutions do not follow sound and sustainable financial principles
in Ethiopia.
• The micro-credit initiatives before the issuance of the microfinance
law of 1996 in Ethiopia had the following features:
• The entire orientations of the micro-credit initiatives or activities in
Ethiopia (pre 1996) were geared towards a project concept.
• The real interest rates (the actual interest rates deflated by the
annual rate of inflation) in subsidized government and NGO
programs were negative.
• High default rates
• The lending institutions and employees did not enforce financial
discipline, provided donor and government funds kept on flowing.
• The micro-credit programs focused entirely on the provision of loans
to beneficiaries. Saving products were forgotten in the delivery of
financial services to the poor.
• With few exceptions, formal credit programs in SubSaharan Africa have fallen short of expectations.
• Subsidized credit programs have led to misallocation of
resources, have typically not led to significant increases
in adoption of new technologies, or have not succeeded
in replacing traditional money lenders.
• The inefficiency of the lending institutions contributed to
the high default of clients
• Inappropriate financial products which did not match with
the needs of the livestock producers and their
• Subsidized loans.
Lessons learned
• The use of credit is more efficient when the
structure of the loan term is tailored to meet the
needs of livestock producers, processors,
traders, etc.
• Loan duration and repayment conditions should
be related to the size of the loan, the nature of
the activity to be financed, the cash flow pattern
it generates, and the risks involved.
• Focus should be given on saving mobilization,
charging lending interest rates on a market basis
and financial sustainability of the lending
• The effectiveness of the delivery of financial services to
livestock producers and their enterprises also depends
on the legal and regulatory environment in which the
finance providers operate.
• Given the above problems of government projects,
banks, service cooperatives and NGOs, policy makers
and individuals involved in development activities to
rethink and redesign new strategies for the delivery of
financial services to smallholder livestock producers
through sustainable financial institutions.
• Access to finance has a significant impact on
increasing production, productivity, adopting
improved livestock technologies and increasing
the income of smallholder livestock producers;
• Developing a financial systems or institutions
that reach the remote and disadvantaged
households is a critical challenge in delivering
financial services to the livestock producers than
the finance or capital;
• Livestock producers and their enterprises require a
range of financial services such as loans, savings,
insurance, etc. Savings by livestock producers should
precede and have linkage to credit so that the members
have a sense of ownership to the scheme and also
understand that it is not charity but a loan repayable as
per the terms of the contract;
• The financial products of finance providers should be
demand or market driven and flexible in nature which
addresses the needs of livestock producers and their
• Financing the livestock sector creates an additional set
of risks;
• Smallholder livestock farmers in rural areas face high
transaction costs compared to those residing in urban
and peri-urban areas and collateral is relatively limited,
often less documented and more difficult to liquidate;
• Information to assess ability and willingness of borrowers
to repay the loan is difficult and expensive to obtain;
• Formal banks hardly provide financial services to
smallholder livestock producers;
• Finance should be given essentially for livestock
production, processing and marketing activities;
• Linking finance providers themselves;
• Subsidized loans were unsustainable and, in most
cases, distorted the financial markets and developed
dependency behaviour on the side of beneficiaries.;
• Many of the subsidized projects/programs drained the
scarce government budgets;
• There is a need to ensure capacity building and training
of livestock producers, members and managements of
livestock cooperatives and commercial livestock farmers;
• There is need to build the skills of livestock producers
through relevant training;
• The financial providers, particularly the rural finance
providers, require capacity building support to address
the needs of livestock producers and their enterprises;
• Formal banks, MFIs and financial cooperatives should
tailor their activities to provide financial services to
livestock producers and livestock enterprises;
• Proper coordination has to be ensured between the
various stakeholders involved in livestock production,
processing and marketing and finance providers;
• There has to be a clear law on property rights and a
dedicated judicial mechanism like debt recovery tribunals
to assist banks, MFIs, financial cooperatives and others
in recovering their dues expeditiously;
• Government projects and NGOs forgive loans for
political and social reasons which undermined a sound
credit culture and blurring the distinction between grants
and loans.
• Community sensitization and mobilization strategies
adopted should focus on ensuring that money is given
out on a loan basis and not a grant;
• There should be provision of leadership training to both
leaders and members of cooperatives;
• Directed loans to finance specific livestock activities
influence borrower decision on what to produce;
• Development of sustainable market opportunities;
• There should be an enabling regulatory framework which
promotes innovations in delivering financial services to
livestock producers and their enterprises.
• Huge demand for livestock loan
• Absence of tailored financial products
• Very limited effort to provide financial
services to pastoralists (absence of
sustainable finance providers)
• High production and market risks and
absence of livestock insurance
• Weak member managed financial
institutions to serve remote producers
• Lack of innovations
Strategies to Improve Financial
Access to the Financial Sector
• Creating an Enabling legal and Regulatory
• Establishing Sustainable Finance Providers
– Operational and Financial Sustainability and
Increasing Outreach
– Building the Institutional Capacity of Finance
– Human Resource Development
– Systems Development
– Capacity to Mobilize Loan Capital
• Developing Demand Driven Financial
Loan for oxen in order to provide draught animal power
Loan for to purchase improved livestock breeds
Loan for cattle fattening
Loan for rearing sheep and goat
Loan for dairy development
Loan for poultry production
Loan for honey production
Loan to purchase feed, veterinary drugs
Loan to establish small-scale livestock processing enterprises
Loan to build barns, water supply systems
Loan for livestock traders
Loan for transporters
MFIs in Ethiopia provide 65% of their loan to the livestock sector
• Additional products and innovations
– Value chain financing
– Improve Access through Credit Guarantee
– Use of In-kind Credit System
– Inventory Finance
– Savings Mobilization
– Livestock Insurance (AEMFI’s initiatives)
Capacity Building of Livestock Producers
Developing Appropriate Project to Promote
Financial Access to Livestock Producers
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