updated as of AUGUST, 2012 Nib International Bank COMPANY BACKGROUND Founded in 1999, Nib International Bank S.C. (NIB) is one of Ethiopia’s banks. Also, with 6% of its lending allocated to agriculture, NIB had fastest-growing private banks, with total assets having grown 64% the highest share of total loan portfolio dedicated to the sector. between 2008 and 2010 to reach $400 million. It is headquartered NIB is owned by 3,316 shareholders, of which Nib Insurance Company in Addis Ababa and operates a network of 48 branches, providing S.C. (6%), Moplaco Trading Co. Ltd. (4.6%), and Mr. Seid Hussein Ali extensive coverage throughout the country. NIB employs a workforce (2.1%) are the three largest. The Bank’s Board of Directors is com- of about 1,700 people and serves more than 181,000 customers. prised of 12 Ethiopian nationals who are responsible for formulating In 2010, NIB had the largest market share of loans to the Ethiopian strategy and approving major policies and risk limits. agriculture sector, providing nearly 29% of all lending by private NIB’S INCLUSIVE BUSINESS MODEL The Ethiopian economy is based on agriculture. In 2010, the sector ac- working capital from NIB to purchase farmers’ fresh coffee cherries and counted for 43% of GDP and employed 85% of the population. Coffee process them through the wet mills. Farmers benefit by receiving a com- is a particularly important crop—it represents 35% of all export revenues petitive price from the cooperative at the time of sale and then a second and employs more than a million smallholder farmers. Ethiopia is currently payment, or dividend, out of the cooperative’s net profit (calculated after the largest producer of coffee in Africa and the fifth largest in the world. all exports and debt payments are complete). Combining the first and In 2010, the country’s coffee exports were valued at over $500 million. second payments, farmers typically receive a share of two-thirds of their cooperative’s gross revenues. Gross revenues for the 2010 harvest aver- NIB is the market leader of the private banking sector in lending to agri- aged $100,000 but in some cases exceeded $300,000 per cooperative. culture. To maintain and grow this position, the Bank aims to expand its reach into rural areas and to continue to strengthen its risk management TechnoServe’s role is to help the cooperatives make effective use of the practices. In support of these goals, NIB is providing access to finance for wet milling process to produce higher value-added coffee. TechnoServe cooperatives of smallholder coffee farmers as part of the Coffee Initiative provides technical assistance in operating and managing the wet mills, as in East Africa. The Coffee Initiative is a $47 million program funded by well as close collaboration in the business development and governance the Bill and Melinda Gates Foundation and managed by the US-based of the cooperatives. For instance, it helps them organize and register non-governmental organization TechnoServe. Its goal is to increase the formally, provides their leaders and farmers with training and technical incomes of coffee farmers in Ethiopia, Kenya, Rwanda, and Tanzania by support, and creates linkages with other players along the coffee value increasing the quality and quantity of coffee they produce. chain. One TechnoServe business advisor works closely with two to three cooperatives at a time, and coordinates local specialists that can provide In Ethiopia, participating cooperatives range from 300 to 500 smallholder additional training and agronomy services. In addition, TechnoServe helps farmers who average approximately three-quarters of a hectare of land the cooperatives negotiate and export their coffee directly to buyers each. Nearly 40% of NIB’s bank branches are outside of Addis Ababa, instead of working through intermediaries. providing a foundation on which to reach these farmers. Beyond physical access, the Bank’s inclusive business model hinges upon partnerships for TechnoServe’s support for the cooperatives not only helps build their ca- financial risk-sharing and farmer capacity-building. pacity, but in doing so, helps mitigate NIB’s risk in lending to the coffee sector. TechnoServe also helps mitigate NIB’s risk by getting involved at For financial risk-sharing, NIB entered into an agreement with IFC estab- the due diligence stage, using its on-the-ground knowledge and experi- lishing a three-year, up to $10 million facility to provide working capital ence to help the bank identify the best cooperatives to invest in. The due loans to cooperatives working with TechnoServe. The facility offers up diligence process first considers technical aspects, such as the amount of to $250,000 per cooperative, disbursed against cash flow requirements coffee available, levels of competition around the cooperative, suitability and collateralized by coffee stocks. The program is designed such that of the wet mill site, and availability of labor. TechnoServe then helps the cooperatives should be able to repay their working capital loans within cooperative to develop a leadership team and assesses the leaders’ skills one year entirely through the sales of their coffee. However, IFC will cover and commitment to ensure strong governance. The final stage of due up to 75% of any credit losses NIB incurs. diligence involves supporting the cooperative to prepare a business plan In order to qualify for the working capital loans, cooperatives must and have it approved by member farmers. At any stage, a cooperative have the capacity to produce high-quality washed coffee that earns a can be ruled out of consideration for NIB’s working capital loans, which premium in the market—the product of using the wet milling process to gives them strong motivation to fulfill its due diligence requirements. remove the skin and pulp from coffee cherries, and then wash and dry TechnoServe also plays an important role in ensuring that the coopera- the coffee beans. During the coffee harvest, the cooperatives use the tives comply with environmental and social best practices. 46 Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio CASE STUDY Nib International Bank DRIVERS FOR NIB’S INCLUSIVE BUSINESS MODEL •• Underserved but significant business opportunity in lending to the Ethiopian coffee sector •• NIB’s commitment to support small farmers and promote sustainable growth in the coffee sector •• Need to mitigate risk in lending to the agriculture sector in Ethiopia Despite the size and importance of the ag- to low-quality, unwashed coffee in export riculture sector, and of coffee in particular, markets. Furthermore, global demand for high Ethiopian banks are often reluctant to lend quality or specialty coffee is increasing, making due to the inherent risks of weather-dependent it the fastest-growing segment of the coffee agriculture and the challenges of lending to export market. This represents an untapped op- smallholder farmers with no formal collateral or portunity in Ethiopia, where only 20% of coffee credit history. In fact, the general trend over the today is produced and sold as high-quality in last year has been for private banks in Ethiopia export markets. to allocate smaller portions of their total loan IFC’S ROLE AND VALUE-ADD Over the life of the risk-sharing facility, the portfolios to agriculture. volume of coffee processed by borrowing IFC’s risk-sharing agreement of up to $10 million Nevertheless, agriculture remains one of cooperatives is projected to increase to 4,000 with NIB facilitates access to finance for coop- Ethiopia’s most promising sectors, and NIB’s metric tons with an increasing share sold as eratives of smallholder coffee farmers in Ethiopia. inclusive business model is designed to capture high-quality—a strong indication that they Given the risks associated with lending to the the business opportunity associated with its will be able to repay the loans they take out. weather-dependent agriculture sector and a dif- growth potential while at the same time miti- Furthermore, TechnoServe’s capacity-building ficult regulatory environment, access to finance is gating the attendant risks. is designed to help build cooperatives that are one of the key challenges to scaling up and improv- sustainable after the organization phases out its ing the quality of coffee production in the country. TechnoServe’s analysis suggests that in assistance, representing potential repeat busi- IFC’s agreement with NIB not only reduces NIB’s fi- recent years, high-quality washed coffee ness for NIB. nancial risk but also demonstrates confidence in the has received, on average, a 50% premium producer side of the country’s coffee sector. IFC’s value-add also lies in its experience working on environmental and social best practices in sectors RESULTS OF NIB’S INCLUSIVE BUSINESS MODEL characterized by large numbers of smallholder •• Working capital loans to 62 cooperatives made up of 45,000 farmers farmers. In particular, IFC has been able to contrib- •• Cooperatives have exported two million pounds of green coffee, receiving an ute its experience with sustainability standards and, average premium of 40% ($0.75 per pound) above the price of low-quality, in collaboration with TechnoServe, help improve unwashed coffee wastewater and coffee pulp disposal practices. •• Increase in cooperative revenues of approximately $1.5 million •• 8% growth in NIB’s agriculture lending portfolio in 2010 In 2010, NIB made working capital loans to 62 stewardship, transparent economic practices, cooperatives made up of 45,000 smallholder social responsibility, and operational health and coffee farmers. With TechnoServe’s support for safety. The recommended practices and associ- the wet mill model, the cooperatives produced ated training content were developed through and sold high-quality, washed coffee directly close collaboration between TechnoServe and to 12 international buyers in Europe and the IFC. Each cooperative received 12 unique train- United States. They received on average 40% ings before the start of the coffee harvest, for ($0.75 per pound) more than they previously a total of 744 trainings delivered to cooperative received for low-quality, unwashed coffee, leaders, employees, and farmers in 2010. translating into a total of $1.5 million in added For NIB, the working capital loans have allowed revenues. Over 1,500 full- and part-time wet it to remain a leading lender to the agriculture mill jobs were created. sector and to expand its portfolio even further, IFC’s Investment: TechnoServe also supported the cooperatives to increasing its lending by 8% in 2010 over the $10 million risk-sharing facility implement a broad set of sustainable business previous year. practices by providing trainings in environmental Inclusive Business Models — Guide to the Inclusive Business Models in IFC’s Portfolio 47