Financial inclusion of African smallholder farmers and agrifood SMEs
foodFIRST Round Table November 19, 2019
Following the public meetup on the report of the EU Task Force Rural Africa on the 5th of March 2019, foodFIRST convened a round table meeting with a large group of Dutch stakeholders to respond to the task force's call-to-action to improve access to private finance for African farmers and small and medium enterprises (SMEs). The meeting also aimed to follow up on Rabobank Foundation's, ICCO's and AgriProFocus' report "Critical Capital for African Agri-Food SMEs" presented at last year's international foodFIRST conference "Team up with African Agripreneurs" held in Utrecht on the 1st of June 2019. This report called upon participants to define concrete steps towards a coalition of willing stakeholders to jointly work toward the design of innovative instruments and approaches in making critical capital available for agri-food SMEs and the realization of a more transparent 'value chain of investment environment' (July 2018). The topicality of this theme was furthermore highlighted by the Dutch government's recent policy note on food security, which seeks to promote inclusive and sustainable growth in agriculture (SDG 2.3), in particular by increased production and income for smallholder farmers in the period 2016-2030. To make this potential a reality, supportive and enabling (public) policies are needed as well as public and private investments.
The round table was chaired by Cees Veerman (former Dutch Minister of Agriculture). The Dutch development actors that participated, sought complementarity between those directly active in the financial sector as well as those who are supporting agri SMEs, including farmers, to build and strengthen capacities to become entrepreneurial and bankable. Closing remarks were delivered by the Director of the Sustainable Economic Development department, Steven Collet. The round table took place on November 19th, 2020 at the foodFIRST premises in The Hague. It was carried out under the Chatham house rules. The list of participants is attached.
Presentations
Francesco Rampa, Head of ECDPM’s FOOD programme, presented the perspectives on the role of agriculture and access to finance from the point of view of the EU, including the recommendations of the report of the EU High Level Task Force Rural Africa. He highlighted that, in principle, there is plenty of capital available and that money/equity is not the problem. The problems lie with sufficient working capital, especially for smallholder farmers and entrepreneurs. Furthermore, he underlined the need for patient capital. The requirements of blended finance instruments such as AgriFI, an EIB Investment Facility, seem to be too restrictive. He suggested putting more financial resources in the sustainable agriculture window (pillar 1) of the External Investment Plan (EIP). It would be advisable to direct pillar 2 (technical assistance) concretely towards farmers and entrepreneurs. Furthermore, more effort is needed to create an enabling policy and institutional environment (pillar 3) as well as improving the coordination between the three pillars. Interesting political platforms to further this policy agenda are upcoming meetings within the AU and between the EU and AU. Ongoing climate financing discussions and mechanisms provide another opportunity for agri-financing. Eric Holterhues, director Oikocredit Netherlands, introduced the work of Oikocredit. Since 1975 Oikocredit has been working in the field of financial inclusion starting with microcredits. Over time the organisation has become more involved in investing in agriculture, agribusiness and farming and renewable energy. Drawing on Oikocredit’s experience, Holterhues identified, in particular, the following challenges:
Having spent considerable time as an investor in the agri-business and in developing environments, he highlighted how difficult it is to build a profitable portfolio in the agricultural space. As potential solutions he then mentioned:
Report of the discussion
Participants agreed on the importance of accelerating and upscaling of investing in small scale businesses in the agri-food space in Africa. African countries highly depend on agriculture and the sector contributes to the attainment of the sustainable development goals by leading to economic growth, employment creation, poverty alleviation and addressing gender inequality problems especially among women. A ‘best practice’ was given in which women who carry out subsistence farming are financed through SACCOs, enabling them to have both a source of livelihood and income.
Given that agriculture is faced with multiple risks and issues of profitability, local financial institutions deem the sector to be a risky venture and ‘unbankable’. As a consequence, they are shying away from investing in it. Also, international development financers find it challenging to build a profitable portfolio in agriculture. Furthermore, local governments committed to allocate 10% of their public expenditure to agriculture and rural development but have failed to live up to this 2014 Malabo Declaration promise. This leaves the agriculture and food sector structurally underinvested. A political economy approach is required to seek to unlock this persistent lack of public investment at country level, especially for non-fragile countries. External threats, conflicts and fragility are compounding factors to an already difficult under-invested sector.
International financing can make a positive development impact by bridging this investment gap. However, participants emphasized that in principle sufficient investment capital is available but that there is a greater need to provide working capital to smallholder farmers and agrifood SMEs in the value chain. And the provision of any capital needs to be really ‘patient’ given the risk profile involved. Providing long-term financing for purchasing e.g. fertilizers and machines with extended grace periods are supportive mechanisms. Seeking short term gains and ‘financialization’ will not serve the financial needs of small-scale farming communities. Innovative ways to de-risk investing in Africa’s agricultural development should continue to be explored by financial actors. Furthermore, farmers need a growth perspective and hence a perspective on larger loans. Adequate timing is also very important. Credit requests should be dealt with swiftly and timely so that farmers will be able to deploy the provided capital before the planting season. In this regard, a call to build ‘one digital solution’ was made to facilitate the application process.
Coordination and collaboration of financial institutions will help diversify risks, harmonize policies and promote the blending of finance for agriculture. Development finance institutions and other financial actors need to not crowd out each other. Blending of finance from different financial players would definitely increase resource mobilization and diversify risks. However, the requirements of blended finance instruments were deemed too restrictive and hence the EIP’s AgriFi-facility for instance remains underused. It would be extremely helpful to put more resources in the sustainable agriculture window of EIP and its technical assistance facility has to be targeted directly to farmers and sme’s. More farmer training is needed as many local governments have stopped providing the required extension services. Better coordination between the different EIP pillars should help to remedy this situation. Enhancing the professional capacity of smallholders and agrifood SMEs by providing the right technical assistance will promote their potential to attract financing as their investability will increase. Some participants claimed that investing in farmers is not the key problem but presenting the right business case to banks is. Financial institutions are still insufficiently presented with good proposals. TA-funds should be used for assisting to build a solid investment case. In those instances where a solid business case remains difficult to develop, a blending solution should be explored.
Local and regional value chains are important mechanisms to secure markets for agriculture products, add value and improve returns for smallholders’ farmers and agrifood SMEs. Unfortunately, there is still a lack of local and regional functional value chains in African countries. Their absence has a direct detrimental effect on, in particular, smallholders’ income and livelihoods. Given its importance, local and international institutional actors should focus their assistance on integrating smallholder farmers into value chains, thus connecting them in a more transparent way to local and regional markets. Useful lessons could be drawn from operating value chains in, for instance, Kenya where smallholder farmers are connected to the urban market in Nairobi. Creating functional value chains may contribute to solving the persistent issue of lack of security and collateral of individual farmers. In this respect, reference was made to a guarantee fund that has played a constructive role in Dutch post-war agricultural development, the so-called Borgstellingsfonds. Furthermore, a more equitable distribution of returns throughout value chains would benefit the farmers’ livelihoods and income. This would require end-consumers to pay a fair price for the produce they purchase. For the moment, this remains, however, elusive but efforts should continue to push for a fairer distribution of gains throughout value chains.
Using and applying digital technology in the agricultural sector should be further promoted. In addition to improving the access to market information, it will facilitate the delivery of financial services such as credit and insurances (derisking) in the sector. Digitalisation of agriculture financing is the strategy to achieve financial inclusion. The EU had already invested in the digitalisation of agriculture through the financing of the Technical Centre for Agriculture and rural development to promote innovation, invention, research and technological transfer. Africa has experienced a digital breakthrough with the use of mobile money which has helped the formerly unbanked populations to get financial services. An example being M-Pesa of Kenya that has made it possible for SMEs to bank and be able to access credit. AgriCredit makes it possible for SMEs to use their mobile phones to receive and pay loans. More “M-Pesa kind of initiatives” are needed so that farmers can quickly access loans and other financial services. Digital financial services may help advance and fasten up the loan approval process. However, the issue of privacy, data collection and ownership should be addressed and ‘financialisation’ should be avoided.
Farmers that organise themselves in farmer organisations or entrepreneurial cooperatives remedy many of the risks identified above. Focusing on subsistence farmers only will make finding appropriate funding challenging. That is not to say that finding and selecting truly entrepreneurial cooperatives is easy. Finding such a cooperative will facilitate the financing of its activities and the fulfilment of its financial obligations. More attention should be given to those cooperatives who want to take the next step towards commercial viability. And to support the many initiatives that are already happening on the ground. Those will be the sustainable ones as they are fully owned by the local farmers themselves. Agriterra is building very interesting experiences with their “internal capitalization strategy”, whereby the members of the cooperatives invest in e.g. their own processing plants to add value (small amounts of like $30 per family).
During the discussion a number of important observations were made and solution-oriented initiatives identified which deserve to be highlighted:
Steven Collet, director of the department for sustainable economic development closed the meeting. He emphasized the importance of market-based finance systems, also for a viable economic future of smallholders. By taking extra risks “development funding” can trigger other (commercial) funders to invest in facilities and credit funds for those groups of agri entrepreneurs f/m – including farmers - who cannot access commercial funding as of yet. Cooperation and seeking complementarities between financial institutions and organisations working on strengthening SME’s and cooperatives seems very effective and efficient.
Follow up actions
The round table helped to promote a common understanding of the key challenges in creating more financial inclusion for smallholder farmers and agrifood SMEs in Africa. Furthermore, it contributed to a better insight into the programs of the “financial institutions” and those of the implementing agencies working towards institutional strengthening and capacity building. This should trigger further cooperation amongst participants building on the complementarity of their respective “core businesses”. On the policy and political level, it is important to monitor the implementation of the report EU-AU High-Level Task Force Rural Africa, in particular the financial recommendations. FoodFIRST will stay in close contact with the task force members Francesco Rampa and Kees Blokland and with LNV and BuZa/IGG/DDE so as to review the progress made with EU/EC and AU/AUC in implementing the report.
The round table was chaired by Cees Veerman (former Dutch Minister of Agriculture). The Dutch development actors that participated, sought complementarity between those directly active in the financial sector as well as those who are supporting agri SMEs, including farmers, to build and strengthen capacities to become entrepreneurial and bankable. Closing remarks were delivered by the Director of the Sustainable Economic Development department, Steven Collet. The round table took place on November 19th, 2020 at the foodFIRST premises in The Hague. It was carried out under the Chatham house rules. The list of participants is attached.
Presentations
Francesco Rampa, Head of ECDPM’s FOOD programme, presented the perspectives on the role of agriculture and access to finance from the point of view of the EU, including the recommendations of the report of the EU High Level Task Force Rural Africa. He highlighted that, in principle, there is plenty of capital available and that money/equity is not the problem. The problems lie with sufficient working capital, especially for smallholder farmers and entrepreneurs. Furthermore, he underlined the need for patient capital. The requirements of blended finance instruments such as AgriFI, an EIB Investment Facility, seem to be too restrictive. He suggested putting more financial resources in the sustainable agriculture window (pillar 1) of the External Investment Plan (EIP). It would be advisable to direct pillar 2 (technical assistance) concretely towards farmers and entrepreneurs. Furthermore, more effort is needed to create an enabling policy and institutional environment (pillar 3) as well as improving the coordination between the three pillars. Interesting political platforms to further this policy agenda are upcoming meetings within the AU and between the EU and AU. Ongoing climate financing discussions and mechanisms provide another opportunity for agri-financing. Eric Holterhues, director Oikocredit Netherlands, introduced the work of Oikocredit. Since 1975 Oikocredit has been working in the field of financial inclusion starting with microcredits. Over time the organisation has become more involved in investing in agriculture, agribusiness and farming and renewable energy. Drawing on Oikocredit’s experience, Holterhues identified, in particular, the following challenges:
- The need for long-term financing with a grace period (for the purchase of fertilizers, land and machines);
- The persistent lack of security (such as mortgaging the land) and/or collateral;
- Farmers are confronted with market pressures and other external threats (such as climate change, diseases and high price volatility);
- Unorganised, low-educated, ill-equipped smallholder farmers with little financial resilience;
- Lack of public extension services and other facilities.
Having spent considerable time as an investor in the agri-business and in developing environments, he highlighted how difficult it is to build a profitable portfolio in the agricultural space. As potential solutions he then mentioned:
- The professionalization (capacity building) of smallholder farmers;
- The enlargement of the operating scale of farmers, allowing them to invest in, for instance, mechanization;
- More equitable distribution of returns throughout the value chain requiring consumers to pay a fair price;
- Government taking up responsibilities through conducive policies.
Report of the discussion
Participants agreed on the importance of accelerating and upscaling of investing in small scale businesses in the agri-food space in Africa. African countries highly depend on agriculture and the sector contributes to the attainment of the sustainable development goals by leading to economic growth, employment creation, poverty alleviation and addressing gender inequality problems especially among women. A ‘best practice’ was given in which women who carry out subsistence farming are financed through SACCOs, enabling them to have both a source of livelihood and income.
Given that agriculture is faced with multiple risks and issues of profitability, local financial institutions deem the sector to be a risky venture and ‘unbankable’. As a consequence, they are shying away from investing in it. Also, international development financers find it challenging to build a profitable portfolio in agriculture. Furthermore, local governments committed to allocate 10% of their public expenditure to agriculture and rural development but have failed to live up to this 2014 Malabo Declaration promise. This leaves the agriculture and food sector structurally underinvested. A political economy approach is required to seek to unlock this persistent lack of public investment at country level, especially for non-fragile countries. External threats, conflicts and fragility are compounding factors to an already difficult under-invested sector.
International financing can make a positive development impact by bridging this investment gap. However, participants emphasized that in principle sufficient investment capital is available but that there is a greater need to provide working capital to smallholder farmers and agrifood SMEs in the value chain. And the provision of any capital needs to be really ‘patient’ given the risk profile involved. Providing long-term financing for purchasing e.g. fertilizers and machines with extended grace periods are supportive mechanisms. Seeking short term gains and ‘financialization’ will not serve the financial needs of small-scale farming communities. Innovative ways to de-risk investing in Africa’s agricultural development should continue to be explored by financial actors. Furthermore, farmers need a growth perspective and hence a perspective on larger loans. Adequate timing is also very important. Credit requests should be dealt with swiftly and timely so that farmers will be able to deploy the provided capital before the planting season. In this regard, a call to build ‘one digital solution’ was made to facilitate the application process.
Coordination and collaboration of financial institutions will help diversify risks, harmonize policies and promote the blending of finance for agriculture. Development finance institutions and other financial actors need to not crowd out each other. Blending of finance from different financial players would definitely increase resource mobilization and diversify risks. However, the requirements of blended finance instruments were deemed too restrictive and hence the EIP’s AgriFi-facility for instance remains underused. It would be extremely helpful to put more resources in the sustainable agriculture window of EIP and its technical assistance facility has to be targeted directly to farmers and sme’s. More farmer training is needed as many local governments have stopped providing the required extension services. Better coordination between the different EIP pillars should help to remedy this situation. Enhancing the professional capacity of smallholders and agrifood SMEs by providing the right technical assistance will promote their potential to attract financing as their investability will increase. Some participants claimed that investing in farmers is not the key problem but presenting the right business case to banks is. Financial institutions are still insufficiently presented with good proposals. TA-funds should be used for assisting to build a solid investment case. In those instances where a solid business case remains difficult to develop, a blending solution should be explored.
Local and regional value chains are important mechanisms to secure markets for agriculture products, add value and improve returns for smallholders’ farmers and agrifood SMEs. Unfortunately, there is still a lack of local and regional functional value chains in African countries. Their absence has a direct detrimental effect on, in particular, smallholders’ income and livelihoods. Given its importance, local and international institutional actors should focus their assistance on integrating smallholder farmers into value chains, thus connecting them in a more transparent way to local and regional markets. Useful lessons could be drawn from operating value chains in, for instance, Kenya where smallholder farmers are connected to the urban market in Nairobi. Creating functional value chains may contribute to solving the persistent issue of lack of security and collateral of individual farmers. In this respect, reference was made to a guarantee fund that has played a constructive role in Dutch post-war agricultural development, the so-called Borgstellingsfonds. Furthermore, a more equitable distribution of returns throughout value chains would benefit the farmers’ livelihoods and income. This would require end-consumers to pay a fair price for the produce they purchase. For the moment, this remains, however, elusive but efforts should continue to push for a fairer distribution of gains throughout value chains.
Using and applying digital technology in the agricultural sector should be further promoted. In addition to improving the access to market information, it will facilitate the delivery of financial services such as credit and insurances (derisking) in the sector. Digitalisation of agriculture financing is the strategy to achieve financial inclusion. The EU had already invested in the digitalisation of agriculture through the financing of the Technical Centre for Agriculture and rural development to promote innovation, invention, research and technological transfer. Africa has experienced a digital breakthrough with the use of mobile money which has helped the formerly unbanked populations to get financial services. An example being M-Pesa of Kenya that has made it possible for SMEs to bank and be able to access credit. AgriCredit makes it possible for SMEs to use their mobile phones to receive and pay loans. More “M-Pesa kind of initiatives” are needed so that farmers can quickly access loans and other financial services. Digital financial services may help advance and fasten up the loan approval process. However, the issue of privacy, data collection and ownership should be addressed and ‘financialisation’ should be avoided.
Farmers that organise themselves in farmer organisations or entrepreneurial cooperatives remedy many of the risks identified above. Focusing on subsistence farmers only will make finding appropriate funding challenging. That is not to say that finding and selecting truly entrepreneurial cooperatives is easy. Finding such a cooperative will facilitate the financing of its activities and the fulfilment of its financial obligations. More attention should be given to those cooperatives who want to take the next step towards commercial viability. And to support the many initiatives that are already happening on the ground. Those will be the sustainable ones as they are fully owned by the local farmers themselves. Agriterra is building very interesting experiences with their “internal capitalization strategy”, whereby the members of the cooperatives invest in e.g. their own processing plants to add value (small amounts of like $30 per family).
During the discussion a number of important observations were made and solution-oriented initiatives identified which deserve to be highlighted:
- Important to distinguish between the various groups of farmers, not everyone aspires to be an entrepreneur;
- How to design the support to subsistence farmers as they don’t fit into the more commercial models. The approach of One Acre Fund is a very interesting one. Very small farmers enter into a credit scheme that is too small for banks and commercial lenders. However, with this small credit (approx. $100) they are able to increase their incomes by some 50%;
- Building on M-Pesa there is now the so-called “Agri-wallet”, an app where farmers can save for agricultural input. These can then be sourced from local dealers who are integrated into this system. These suppliers have to comply with basic quality standards of their inputs, like seeds etc;
- The instrument of guarantee funds came up frequently. BuZa/DDE has already created many facilities for this purpose. At the level of the farmers, insurances (crop, inputs etc, even health) are a very important means to de-risk the commercial challenges
- The recently established IDH €100 million Farmfit Fund is a public-private impact fund for smallholder farmers. The Fund’s innovative structure de-risks investments in smallholder farming and helps drive sustainable impact by showcasing the commercial opportunity represented by smallholder farming finance, with guarantees from USAID.
- Avoid confusing credit and investments. Most small farmers need (seasonal) credits but not necessarily investments;
- VU and WUR are involved in research which they are willing to share. E.g. the study WUR is carrying out in 4 pilot countries in Ethiopia, Burkina Faso, Niger and Kenya to work directly with ministries of agriculture instead of working with the ministries of planning/development/economic cooperation in order to focus more directly on agriculture;
- Another interesting offer is that students could very well be involved in research on issues that the participants of this round table are coping with.
Steven Collet, director of the department for sustainable economic development closed the meeting. He emphasized the importance of market-based finance systems, also for a viable economic future of smallholders. By taking extra risks “development funding” can trigger other (commercial) funders to invest in facilities and credit funds for those groups of agri entrepreneurs f/m – including farmers - who cannot access commercial funding as of yet. Cooperation and seeking complementarities between financial institutions and organisations working on strengthening SME’s and cooperatives seems very effective and efficient.
Follow up actions
The round table helped to promote a common understanding of the key challenges in creating more financial inclusion for smallholder farmers and agrifood SMEs in Africa. Furthermore, it contributed to a better insight into the programs of the “financial institutions” and those of the implementing agencies working towards institutional strengthening and capacity building. This should trigger further cooperation amongst participants building on the complementarity of their respective “core businesses”. On the policy and political level, it is important to monitor the implementation of the report EU-AU High-Level Task Force Rural Africa, in particular the financial recommendations. FoodFIRST will stay in close contact with the task force members Francesco Rampa and Kees Blokland and with LNV and BuZa/IGG/DDE so as to review the progress made with EU/EC and AU/AUC in implementing the report.
