Growing Potatoes on the Shores of Nile: A Successful Experiment in Islamic Microfinance

An abundance of fertile arable land, water resources on the shores of Nile and the presence of a hardworking farming community in the region have led a Sudanese microfinance outfit, the Al-Anaam Microfinance Company to partner with several financial institutions, e.g. the Bank of Sudan, the Islamic Development Bank, the Farmers’ Bank, the Investment Bank and the United Capital Bank to embark on several agri-based social empowerment projects. In a recent initiative, the partnership was expanded to include producers of seed potatoes from the Netherlands. Through the partnership, Al-Anaam provided to 104 farmers in Alshahynab region in Khartoum state with the inputs for production of potatoes. The inputs by the overseas partner included provision of improved seeds as well as the transfer of technology for highly mechanised farming. The size of financing for the pilot project amounted to SDG1,908,466 (USD325,000). The financing amount per farmer was pegged at around SDG20,000 (USD3375) to cover the cost of the seeds, fertilizers as well as jute for storage. Al-Anaam introduced highly mechanised farming in the form of seeders, furrowers and potato harvesters leading to substantial savings in cost of manual labor. The production cycle for the crop was 3 months and 3 weeks. Al-Anaam also provided new solutions for guaranteeing and marketing through a contract between the farmer and the owner of cold-storage. Under this contract, the latter provided for direct storage of the crops and became the guarantor of the former with Al-Anaam; the crops were to be released only when the farmer paid back to the company. The pilot project indicated that the ROI for one feddan of imported seed varieties was 121 percent compared to 78 percent for local varieties. This indicates a promising and sustainable future for this crop. The in-built guarantee mechanism also ensured in a repayment rate of 97 percent in case of seed funding and 98 percent in case of jute funding.

Al Anaam Microfinance is an initiative of the Al-Anaam Commercial Company. It was established on 19th January 2012 as a private company registered under the Sudanese Company Act 1925 as the first company owned by the private sector offering microfinance services with a vision “to be one of the best practionerss in the field of microfinance” and “make provision of appropriate technology and expansion of microfinance, leading to a greater increase in production and income for farmers, thereby reducing poverty and achieving a decent life for beneficiaries.” It aims to provide access to credit services to about 12600 customers by 2017. Its various products include financing of needs arising out of cultivation of vegetables on small farms, animal production, house construction and renovation, the needs of craftsment, artisans, students and professionals. Various non-financial services include: training for MF beneficiaries, staff of banks and MFIs, preparation of feasibility studies and evaluation studies and technical support for MSMEs and performance evaluation of MFIs.

The pilot project involved financing for growing potatoes in Alshahynab village in Karary locality of Khartoum State. It involved financing to 104 farmers for purchase of potato seeds and jute for storage. A total number of 5088 sacks, each sack weighing 50kg of imported varieties (Pliny, Ageeba, Mondial, Safari) were provided involving a funding of SDG 1908465.6 (actual payment SDG 1855905.6) for a period of eight months. The guarantee mechanism involved personal guarantees plus contract with cold-storage facility (requiring direct storage of crops at the facility) under which the crops would be released to farmers against payment to the MFI. The project also involved financing of jute alone to 30 farmers for purchase of 7720 sacks involving a funding amount of SDG 506280 (actual payment SDG 494730) for a period of 6 months against personal guarantees backed by group trust collateral.

The following table provides the financial details on the cost and revenue of one feddan grown by imported potato seeds as compared to local potato seeds.

The Model:

The model essentially involves the following contracts and arrangements:

  1. A smart partnership between Al-Anaam Microfinance Company (AMF), the Islamic Development Bank (IDB), the Central Bank of Sudan (CBOS) and other FIs to form a mudaraba with AMF as the Mudarib. IDB extends a qard hasan loan to the mudaraba
  2. An industrial salam between Al-Anaam Commercial Company (ACC) and the Mudaraba managed by AMF for import of potato seeds by former
  3. A cash purchase of potato seeds by ACC from Steta of Netherlands that also transfers the technology of mechanized farming to ACC
  4. A salam between farmer and AMF under which farmer receives seeds and jute from AMF
  5. A storage agreement between farmer and cold-storage-owner for direct lifting and storage of potatoes against issue of warehouse receipts
  6. Warehouse receipts are instruments for settlement of salam debt between farmer and AMF

Advantages of Model

The hardworking smallholder famers received a package of financial, technical, warehousing and marketing services leading to a significant enhancement in productivity and in the incomes of the farmers. The cost of one feddan of imported seeds was 14245 SDG compared to 10120 SDG of local seed. However, the Net Profit and ROI for the former was SDG17255 and 121% compared to SDG7880 and 78% respectively.

For the microfinance providers and funds, here is a low-risk investment with repayment rates at 97-98 percent with high social impact. The ratio is expected to move higher. Hitherto, agriculture was perceived as a high-risk investment compared to trade and industry.

Comparison of Costs and Revenues

Particulars Cost (SDG)
Local Variety Imported Variety %age
1 Land rent + land preparation by tractor + field operation (sowing, weeding, cleaning etc.) 2840 2840 100
2 Pesticides + fertilizers 980 980 100
3 Seeds 2100 3300 157
Total (A) 5920 7120 120
4 Harvesting costs (cutting + collecting etc.) 500 650 130
5 Marketing costs (transport + backing + cold storage) 3700 6475 175
Total (B) 4200 7125 170
Total (A+B) 10120 14245 141
6 Revenues 18000 31500 175
7 Profits 7880 17255 219
8 Return on Investments 78% 121% 155

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Under the model, the crops are to be store in cold storage and not to be released until the farmers repay back to the MFI. The storage allows matching of supply with changing demand conditions in domestic as well as overseas markets, so that prices are not unduly depressed and the farmer realizes normal prices.

ACC that imported potato seeds and worked directly with farmers earlier faced a credit denial by foreign seed producers is now able to finance the purchases with funding by the Mudaraba.

Potato is a promising crop with a high potential for horizontal and vertical expansion. It has the potential of being a staple food as well as a cash crop. The experiment has demonstrated that the risk associated with potato cultivation can be reduced to fairly low and acceptable levels. Indeed the experiment is an excellent example of safe, efficient and sustainable production along with sustainable Islamic microfinance.

Mohammed Obaidullah | March 30, 2015

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