January 31, 2016

Grant Incentives Change Bank’s Behavior

Grant Incentives Change Banks’ Behavior

USAID-FinGAP proves investment in commercial agriculture pays off for all involved

Anyone who makes a New Year’s resolution knows how difficult it is to change behavior. However, if the change is made easy and we can experience the rewards, we just might find that the new behavior becomes second nature.

That’s what the USAID Financing Ghanaian Agriculture Project (USAID-FinGAP) set out to do when the project launched its yearlong performance-based grant incentive program. Financial institutions have long been reluctant to provide financing for agricultural entities in Northern Ghana due to the inherent risks, both perceived and actual. Yet, using grants as incentive for lending, USAID-FinGAP has whetted the appetite of the financial market. Through supported lending efforts, financial institutions have learned that they can successfully finance this sector, improving and expanding their portfolios while fueling critical agricultural activities.

“USAID-FinGAP’s grant radically expanded our agribusiness loan portfolio.”

– Andrew Ahiaku, Head of Agribusiness Banking at Barclays Bank

“USAID-FinGAP’s grant radically expanded our agribusiness loan portfolio,” Andrew Ahiaku, Head of Agribusiness Banking at Barclays Bank, said. “It has resulted in behavioral changes among our relationship managers who are now motivated to see agribusiness deals through.”

At the start of the program, fourteen participating financial institutions (PFIs) collectively committed to disburse an estimated $31.5 million in incremental financing to agribusinesses, along the maize, soy, and rice value chains, for a total grant award of $1.32 million. Six PFIs quickly exceeded their original lending commitment and were rewarded with additional grant money for additional financing. As the program wraps up, USAID-FinGAP anticipates that eleven PFIs will have loaned out over $50 million, in turn receiving approximately $1.5 million in grant payments.

The PFIs involved in the program consisted of five universal commercial banks, three rural and community banks, two cooperative credit unions, a social impact investor, a financial NGO, a microfinance institution, and a savings and loans company. The diversity of the grant recipients contributed to the success of the program since it addressed the varied financing needs of a wide range of clients all along the value chains. Commercial banks provided relatively large working capital and capital financing to medium and large agribusinesses, while the social impact investor provided the needed financial and human capital to revive a major animal feed processing company. The rural and community banks, the savings and loans, and financial NGO were crucial in meeting the input, mechanization, and production needs of nucleus and smallholder farmers.

While the grant incentive program has helped increase financing to agribusinesses, it has also enabled PFIs to build capacity and enhance their own operations. Grants drawn by the PFIs have been used to cover items such as operational costs in agricultural lending, staff training, and acquisition of office equipment and vehicles for loan administration and monitoring. A number of the PFIs have set up agricultural desks and recruited staff to specialize in agribusiness and risk management.

Under the grant program, several PFIs received hands-on technical assistance from Business Advisory Service (BAS) providers within the USAID-FinGAP network. The BAS providers identified credible agribusinesses looking for financing, assisted with business plan development and loan applications, and trained them in business and financial management. The vetting and training processes resulted in viable agriculture loan portfolios and mitigated risk as loan repayment improved.

The relationships developed between PFIs and BAS providers are far reaching. When Bucobank collaborated with BAS provider Nunyuie Brothers Co., Ltd. (NBL), Bucobank was able to source funds for on-lending, and 82 female-led enterprises in the Upper East Region accessed previously unavailable financing to engage in the production and aggregation of maize, soy, and rice, enhancing and expanding their businesses. Bucobank found that these women’s groups have been able to complete repayment successfully.

With the grant award, Tumu Cooperative Credit Union (TCCU) became more than a lender. TCCU used its grant to purchase a tractor, a maize sheller, and a truck. For a fee, credit union members could hire the equipment for land preparation, processing, and transportation during cropping seasons. The payoff for the community resulted in better quality grains for better prices and additional markets.

“The working capital and ploughing services provided by TCCU has enabled most of our members to increase maize production.”

– Abiba Buccon-Tommie, Women’s Group Member

TCCU member Abiba Buccon-Tommie benefited from both the access to financing and the upshot of the grant. “I could only cultivate a few acres of maize because of the high cost of improved seed, fertilizer, and hired labor,” the member of a smallholder women’s farming group said. “The working capital and ploughing services provided by TCCU has enabled most of our members to increase maize production. This has helped us earn more income to meet our family needs and pay our children’s school fees.”

USAID-FinGAP plans to implement a second program early in 2016 with an increased number of PFI grantees, targeting higher investments into the targeted maize, soy, and rice value chains. Leverage will be increased to 50 to 1, with $50 of private capital invested in agribusiness for every $1 of USAID grant support. With the continued success of the program, eventually agricultural lending in Northern Ghana by financial institutions will become second nature.