Notes from call w Brian Milder (CEO) Tue March 15

Next steps 

• Kenya is a focus country so will connect w Aceli team there as we go deeper on Kenya entry point

• While Brian himself is not super versed on DeFi is has spoken about Goldfinch with Tim Rann with Mercycorps and sees the parallel; will connect us w Tim to discuss further 

• Conceptually, potentially an interesting role for DG to play where we are not a lender but providing TA and putting up some capital that unlocks capital from other lenders. Analogous to a "Backer" in the Goldfinch model and similar to Ethix token holders in EthicHub

Context

• Brian started at Root capital, helped setup CSAF (17 social impact ag lenders incl Rabo, Triodos, Oikos, Responsability, etc). 

• CSAF lenders mostly LatAm focused, high value export commodities (fair trade and organic coffee). Loans are dollar based, 6-9 month duration 700k average loan size

• CSAF wanted to push local banks to increase their lending to local SMEs and extend to domestic food crops.

• A lot of Aceli’s effort goes in educating and motivating local lenders to be more aggressive via incentives

• Donors are putting up cash for loan guarantees and subsidies and want to see the impact outcomes that result

• End game is for local govts to see the value of this and provide subsidies akin to CDFIs and new market tax credits in the US 

What does Aceli provide to lenders and who are the borrowers? 

• On a 130k loan, total subsidy is 11k; half in cash parked in reserve account for a loan loan guarantee) and half is operating subsidy

• Guarantee is at the level of a lenders portfolio, not tied to individual loan. Overall bank NPA Is 2%, agri is 3.5%. Aceli puts 5% of total portfolio value in a reserve account so the bank can manage to 6-7% losses which allows it to grow its borrower base and be more inclusive without messing up its realized loss ratio

• The operating subsidy is meant to cover transaction costs and are bonuses for lending to a new borrowers, gender inclusivity, support environmentally friendly activity 

• Launched in Sep 2020; 330 loans so far, targeting 480 in 2022

• 10% of loans are to agri-input dealers, 30% to primary production (coops and mid size farmers), 30% post-harvest handling + storage and 30% processors

• Target ticket size of 25k to 1.7mn; $50k annual revenue businesses who employ 5 FTE or source from 25 smallholders 

• Exploring a product for off grid energy for farms.

What are the unique challenges of co-ops?  

(i) member awareness and financial literacy

(ii) how to balance paying members as much as possible vs. retaining earnings to invest in sustainability of the cooperative

(iii) lack of professional mgmt 

What are financing needs and good products for co-ops? 

• Separate seasonal working capital needs from longer-term growth capital

• WC products need to allow for multiple disbursements and calculate interest on declining loan balances (not total loan size as some do)

• Growth capital for investing in value add processing equipment / infrastructure are needed; long-term bullet loans are not good

• Revenue based financing is good for borrower but is this attractive for lenders, esp with a coop that doesn't have a long history 

What data needs to be collected for impact metrics?

• Monthly reporting template that needs to be filled in by banks; they find it to be a pain but are doing it

What TA is provided to Agri SMEs? 

• For smaller SMEs: Africa mgmt institute runs a series of learning labs (biz and financial mgmt) + coaching for mgmt teams. 7 month program

• For larger, SME chooses from a panel of TAs who do a diagnostic and agree to a 3-6 month engagement; Aceli covers 75% of the cost (SME covers remainder)

Relevance to India or Ethiopia?

• CSAF members don’t work in India (except Responsability which does a bit)

• Not going to Ethiopia, lots of restrictions on capital

Background info on Aceli from Dec 2021 “Learning Report”

• Incentives that encourage existing private lenders to increase their lending to agri SMEs

• Two offerings for lenders: (i) First-Loss Coverage ranging from 2-8% for loans of $25K-$1.75M and (ii) origination incentives and impact bonuses for funding smaller SMEs. 

• Examples of things that garner impact bonuses: gender inclusivity, Food Security and Nutrition (domestic consumption rather than export) and Climate Smart Ag 

• Also provide technical assistance to borrowers (Agri SMEs)

• 205 loans at $130k average loan size in Year 1, ~50% first time borrowers

• High leverage on incentives: $26.6mn in lending unlocked by $2.2mn in donor incentives

• 5 Year Targets: “Our target here is $200M in incremental income for over one
  million farmers and workers relative to $60M in total cost (i.e., $3+ in incremental income for every $1 in donor funding). These costs include $40M in financial incentives for lenders, $10M in technical assistance to SMEs and lenders, and $10M in project management (note: the costs of data & learning and innovation are not included in these figures).

• “Ultimately, we aim to demonstrate a high-leverage, high-impact model and build an evidence base that convinces policymakers in Kenya, Rwanda, Tanzania, and Uganda to fund similar financial incentives on a larger scale. This would provide an exit for donors while strengthening the enabling
  environment to sustain continued investment and inclusive growth in the agriculture sector.