CASE STUDY Grupo FinTerra, S.A. de C.V., SOFOM, ENR (FinTerra) COMPANY BACKGROUND Grupo FinTerra, S.A. de C.V., SOFOM, ENR (FinTerra) is a specialized, the company has become the largest of the independent agribusiness non-deposit taking financial institution called a Sociedad Financiera non-bank financial institutions in terms of loan portfolio size and de Objeto Multiple (sofom or non-bank financial institution) which shareholders’ equity. The company’s senior management hails from specializes in lending to small, medium, and large farmers and top-tier international banks. At the end of 2011, FinTerra employed 70 agribusinesses in Mexico. FinTerra is one of several agribusiness non- staff in 11 branch offices in key agribusiness states in Mexico. bank financial institutions nationwide. Since its founding in 2004, FinTerra’s INCLUSIVE BUSINESS MODEL FinTerra estimates there are approximately 4.9 million farmers in Mexico, using FinTerra financing; and in some cases providing technical of which approximately 90% may be considered micro or subsistence assistance through the crop cycle. This structure reduces the farmers. The company’s target market consists of the remaining 10% transaction costs FinTerra would incur to reach, select, and provide of small, medium, and large farmers. FinTerra’s service model for small loans to small farmers directly. farmer loans consists of grower financing, distributor financing, and spe- •• Second, to mitigate credit risk, FinTerra asks the agribusiness to cific crop financing programs. FinTerra offers its clients working capital assume some part of the risk. This kind of structure enhancement and asset finance at reasonable interest rates. Working capital finance permits FinTerra to avoid having to seek collateral from farmers meets farmers’ input needs from planting to harvest (a credit cycle of for small loans which would be complex and costly or difficult to typically seven months to one year), while asset finance supports their complete since approximately half the agricultural land in Mexico investments in infrastructure and equipment (tenors of up to five years). is not individually owned, leading to cumbersome and lengthy FinTerra’s key competitive advantages have been its fast response time pledge, collateralization, registration, execution, and recovery in processing credit applications, which is particularly important in the procedures. Further, FinTerra reduces lending risk by working agriculture sector, its agribusiness industry focus, experienced business with agribusinesses that have built strong relationships with their origination team, and innovative financing solutions. suppliers over many years, making it less likely that farmers will break contracts. Moreover, farmers have additional incentives to FinTerra finances the working capital needs of small farmers—mostly maintain contracts such as ongoing access to lower-cost inputs and those with annual sales under US$50,000, as per FinTerra’s definition— a guaranteed or above-market price from the off-takers in some primarily through grower financing programs. Under these programs, cases. FinTerra also mitigates climate risk by requiring borrowers to FinTerra’s borrowers are farmers who sign promissory notes with FinTerra, contract crop insurance. but who receive their loans via the companies to whom they sell their •• Third, as small farmers may not have formal financial statements crops—mostly in the form of farm inputs such as fertilizers and seeds. or credit histories, FinTerra has developed a simplified credit FinTerra also enters into agreements with these companies, called off- process taking into account a number of key factors such as takers. To repay FinTerra, farmers instruct their off-takers to deduct the production costs and yields, number of years of experience, and equivalent loan and interest amounts from their payments at the end of access to water. harvest. The off-takers, in turn, benefit from having FinTerra finance their suppliers, whose numbers can reach several thousand farmers, rather FinTerra also finances small farmers indirectly through its distributor than doing it themselves. Grower financing programs also enable small financing facilities and specific crop financing programs. Under farmers to access inputs and financing at lower cost than if they were to distributor finance, FinTerra finances fertilizer and seed distributors that seek financing from informal sources. provide inputs on credit to farmers. Once farmers sell their produce, they repay the distributors for the cost of inputs, enabling the input FinTerra’s grower financing programs are structured to address the key distributors to repay FinTerra. Specific crop financing programs are constraints that financial institutions experience in lending to small originated through a credit scoring methodology which enables the farmers: farmer to receive a very fast response time with a financing product •• First, as direct lending to small farmers creates high transaction that is customized for a specific crop. costs, FinTerra works through agribusinesses that have off-taker agreements with small farmers. Each agribusiness assists FinTerra in selecting the farmers who will participate in the financing program based on pre-determined criteria; purchasing inputs for farmers 1 Inclusive Business Models CASE STUDY Grupo FinTerra, S.A. de C.V., SOFOM, ENR (FinTerra) DRIVERS FOR FinTerra’s INCLUSIVE BUSINESS MODEL •• Significant demand for formal agribusiness finance in an underserved market creates a business opportunity •• FinTerra’s mission to provide finance to farmers and agribusiness-related industries and services Farming involves a number of risks, including segment. Subsidies are available for all loans local and foreign weather conditions, tariff made to small producers borrowing for the and subsidy regimes, freight costs, and pest first and second times. As per FIRA’s definition, infestations. It is particularly hard for small- these are producers with annual incomes of up scale producers to obtain the financing they to 1,000 times the minimum daily wage, which need because—in addition to the risk factors is currently approximately US$5. Although FIRA above—they tend to have limited credit history subsidies are declining, the availability of these and collateral, and the transaction costs of subsidies has helped financial institutions like servicing small loans are high. Most banks have FinTerra in their initial lending to small farmers. traditionally prioritized consumer, housing, and IFC’S ROLE AND VALUE-ADD Demand for formal agribusiness finance in rural corporate lending over agricultural production areas is expected to grow as the credit culture Specialized non-bank financial institutions in and other agribusiness-related sectors. As a spreads in Mexico and replaces informal sources Mexico may access funding from FIRA, but are result, in Mexico, lending from the banking of finance. The expected growth in demand for expected to tap financial markets directly within sector in primary agriculture production is lower agribusiness finance has created a business three years of their inception. IFC has a strong role than in most other sectors (as a percentage of opportunity for banks and non-bank financial to play to support agribusiness non-bank financial financing to the sector’s respective GDP). institutions like FinTerra whose mission drives its institutions in this transition. In 2008, IFC provided Most of the funding for lending to agricultural ongoing product development in small farmer a MXN 15 million (US$1.1 million) credit line to producers and other rural enterprises in Mexico financing. FinTerra has gained significant expe- FinTerra with a 7-year tenor. comes from trust funds set up by the central rience in financing small farmers over the past IFC financing has enhanced FinTerra’s credibil- bank in 1954, called Fideicomisos Instituidos seven years, and continues to refine its business ity, and supported its efforts to raise money from en Relación con la Agricultura (FIRA). In addi- model and products to enable small farmers to private financial markets. Further, as the non-bank tion to funding, the Mexican government also gain access to financing in an efficient and cost- financial institution sector is loosely regulated, IFC provides guarantees and subsidies to banks and effective manner. is playing a key role in providing prudential guid- non-bank financial institutions targeting this ance through its financial covenants. In addition, IFC is helping FinTerra to develop ad- vanced credit risk management tools through IFC’s RESULTS OF FinTerra’s INCLUSIVE BUSINESS MODEL Small and Medium Enterprises Finance Program •• Loan portfolio CAGR of 27% between 2005 and 2011 in Latin America and the Caribbean. These tools •• Loan portfolio of approximately US$100 million in 2011 will help FinTerra to expand its reach to small and medium enterprises in Mexico’s rural areas. •• Reached over 2,000 small farmers per year through grower financing programs since 2004 FinTerra financing has benefited farmers in over farmers represented approximately 15% of its 20 states in Mexico, as well as a range of sub- loan portfolio and approximately 85% of its sectors such as grains, fruits and vegetables, number of clients. dairy, and livestock. The company has dem- Since it launched operations in 2004, FinTerra onstrated strong growth with a loan portfolio has worked with several companies through compound annual growth rate of 27% between grower financing programs to provide loans to 2005 and 2011. At the end of 2011, FinTerra’s meet the working capital needs of over 2,000 loan portfolio was approximately US$100 small farmers per year in various subsectors in- million with total assets of US$115 million. cluding grains, sugarcane, and milk production. Approximately 80% of the loan portfolio was FinTerra has also reached approximately 500 to primary agriculture production and 20% was IFC’s Investment: 1,000 farmers per year through distributor fi- agriculture-related industry and services such $1.1 million in long-term debt financing nancing facilities, primarily in grain production. as farm input distributors, grain commercializa- tion, water management, and food processing. FinTerra’s grower financing programs to small Inclusive Business Models 2