The Finance Sector in African Agriculture

According to AgriFin, approximately “$11 billion of investments are needed each year to achieve the desired expansion of agricultural output” in Sub-Saharan Africa, but repeatedly, sources express that financial support is nearly absent in the African agriculture sector. As the World Bank Group explains, “commercial banks and financial institutions have been reluctant to finance agribusiness because of perceived sector-specific risks, transaction costs, and institutional capacity in financing institutions.” However, several institutions are taking the leap and making an effort to meet smallholder farmers half way.

While it is reported that fewer than 15% of lenders are offering services to smallholder farmers because of potential risks, our CEO, Richard Lackey, pointed out earlier this year that blended finance eliminates those risks because the returns on investment are “enhanced by the leverage gained from the collaboration of philanthropy and private finance.” The World Bank Group echoes this approach, suggesting that the potential for private equity, venture capital, and impact investment collaboration leads to a resilient agriculture sector in Sub-Saharan Africa. What is more, Forbes explains that some banks are taking less traditional routes to accommodate rural area farmers and their communities. For example: “instead of looking to traditional collateral, Standard Chartered uses the value of the commodity being financed as collateral for input financing—as opposed to conventional mechanisms where collateral is secured through physical assets and balance sheets.” On the farmers’ side, Forbes highlights that clustering into a cooperative provides an added advantage when lending to a group of farmers, mitigating risks because the farmers are dependent on one another instead of the loan by itself.

Organizations committed to improving food security through finance include but are not limited to: Lending for African Farming (LAFCo), which is a KfW/AgDevCo initiative in cooperation with Root Capital;  responsAbility, which provides a variety of adaptable financing options for rural areas; and Africa Agriculture and Trade Investment Fund (AATIF). AATIF is a public-private partnership focused on clients who are in dire need of financial support, “aiming to improve food security and provide additional employment and income to farmers, entrepreneurs and labourers alike by investing patiently and responsibly in efficient local value chains.” Additionally, the FAO spotlights MicroSave who acknowledges financial limitations, and delivers “credit offerings [that] allow providers to better meet smallholder agricultural finance needs by aligning repayment requirements with harvest cycles.” Finally, another well-known organization, AGRA, is committed to supporting smallholder farmers through three specific approaches:

  • unlocking credit for smallholder farmers by investing in loan guarantee funds that can be used to leverage much larger loans from commercial banks;
  • training farmers and farmer organizations in financial literacy; and
  • partnering with financial services providers to develop and offer affordable and appropriate saving, borrowing and insurance products.

Though current statistics are not in favor of strong financial support in African agriculture and interest rates have been reported to be exponentially high for borrowers, the innovative approaches provided from these examples are the keys to addressing financial barriers to growth within the agriculture sector and agribusiness.