Sep 25, 2022

Mawazo Writing Africa

Writing about the main

Sector mismatch widens agri-SME financing gap

Small and medium-sized agricultural businesses (agricultural SMEs) in sub-Saharan Africa struggle with an annual funding gap of US$74.5 billion (or 83 percent), according to a survey by the Commercial Agriculture for Smallholders and Agribusiness (Casa) program .

The State of the Agri-SME Sector – Bridging the Funding Gap survey revealed a disproportionate funding pattern that favors a small number of ‘market-leading’ and ‘potentially adequately-served’ agri-SMEs players

According to the analysis, more than half of the total funding is provided by local commercial banks, which typically invest in more mature agribusiness SMEs – for example, established aggregators and local processors of corn or rice millers serving regional or national markets service.

“Many of these low-end agribusiness SMEs will never be able to achieve full graduation to full commercial capital,” added d He commissioned private sector engagement officers at the Center for Agriculture and Bioscience International (Cabi) and hired mindset, learning and communication leader (Casa), Alvaro Valverde.

“What is needed is a more coordinated Approach to ensure that all available sub-commercial finance is channeled to the best candidates among agricultural SMEs.”

Various Groups

Non-Banking Financial Institutions (NBFIs) provide at least US$2 billion dollars, which accounts for more than 10 percent of financing, and serve a slightly broader group of agribusiness SMEs, but mostly use reduced-risk products like factoring or leasing with scarce collateral.

But this financing is also aimed at more mature larger agribusinesses, which represent a very small share of less than five percent agribusinesses in the market, leaving a huge financing gap for agribusinesses who do not yet have a financial track record.

International donors often focus on NBFIs in SSA to provide additional funding opportunities in rural and underserved areas.

The promise of NBFIs to However, increasing access to finance is frustrated by the high cost of that capital, limiting the wide acceptance of this channel across SSA.

Commercial banks fill the lion’s share of the funding gap, lending nearly $10 billion out, more than 60 percent of lending to agriculture -SMEs in sub-Saharan Africa. But even these are primarily concentrated in urban areas, according to the study, creating funding gaps for rural agribusiness SMEs.

The researchers found a slower maturity of the local banking sector in SSA, often even higher costs related with serving agricultural SMEs.

However, East Africa was notable for having a more mature sub-sector of commercial banks with an agricultural-specific division or focus compared to the rest of SSA; These agriculture-focused banks are often able to offer innovative products not found in the more general commercial banks.

Brian Milder (CEO of Aceli Africa) reported that “most commercial banks are among the partners of Aceli have access to some type of subsidized capital and/or loan guarantee for their agricultural SME loans such as the Business Development Fund in Rwanda, PASS in Tanzania or the Agricultural Credit Facility in Uganda.”

Additionally he notes that in East Africa, “Aceli finds that the average bank loan size among our partners is much lower ($100,000 minimum) than that of social lenders ($300,000 minimum).”

Effective funds and social lenders steered $2bn Public Development Banks (PDBs) bid $1bn and play a major role not only in direct lending to agribusiness SMEs, but au ch in providing catalysing options for private sector lenders, such as B. Loan guarantees.

SSA PDBs are often more focused on agriculture as a broad sector than on agriculture SMEs, due to the importance of the sector in the region. Private equity and venture capital funds funded $0.5 billion of total lending.

Climate Smart Farming

Despite the urgency of climate change in the agricultural sector, funding has not been able to respond to emerging needs caused by climate change.

Therefore, investing in low-carbon agricultural technologies, products and services to help farmers adapt to climate change and investing in nature-based solutions that promote sustainable growth to address the Ways food value chains are working to curb their production of greenhouse gas emissions.

Also, almost all climate action funds target mitigation measures, rather than supporting ways for agriculture to respond to the climate crisis by less than two percent of the global share of climate finance – or $10 billion – for the small bä rural agriculture.

CASA’s State of the Argi SME Sector Report concludes that the challenges include high costs of supplying agricultural SMEs and a high risk perception in rural markets and low willingness to invest by potential borrowers and high costs for borrowers to service these loans.