Agri-lending: Lessons learned from Ghana

Through incentives, training and technical assistance, USAID’s 5-year Financing Ghanaian Agriculture Project (FinGAP) has changed the way financial institutions and business advisory service providers engage in agriculture.

With financing, micro, small and medium enterprises are able to acquire machinery © USAID FinGAP

Since its launch in July 2013, FinGAP has facilitated over €123 million of finance and investment to over 2,700 agribusinesses in northern Ghana’s maize, soy and rice value chains, easily beating its target of unlocking €60 million of lending. How has it done this and what can banks and governments in other ACP countries learn from the project?

Build capacity

FinGAP’s main focus has been to cultivate a market for business advisory services provision and build capacity at more than 50 financial institutions by providing them with training on financing tools, introducing them to potential partners and clients, and changing the way they approach the agriculture sector. Before the project, many banks viewed agriculture as very high risk but, with the number of non-performing loans in FinGAP’s portfolio lower than the industry average, it has been able to demonstrate that the sector is a profitable business opportunity, says Amanda Grevey, manager of economic growth at Palladium, which implemented FinGAP.

Andrew Ahiaku, head of agribusiness finance at Barclays Bank Ghana – which outshone other participants by expanding its agri-lending in maize, soy and rice value chains from around €565,000 to just over €48 million – says FinGAP helped the bank develop the right structure and capacity to support agriculture financing. Ahiaku has learned that banks must develop a formal agri-lending strategy, create a dedicated team headed by an official who is senior enough to “engage in a meaningful way” with top management, and invest in training its members.

Manage risks

Although the risk of lending to agriculture is not as high as traditionally perceived, it is vital to guide financial institutions towards available risk management tools, as FinGAP has done, states Ahiaku. A solid risk management strategy meant that Barclays Ghana has suffered just two bad loans since the launch of FinGAP: lending GHS20 million (€3.5 million) to a poultry farmer and a GHS800,000 (€142,000) loan to an aquaculture farm, although there are discussions for one of them to be rearranged.

FinGAP also helped Barclays Ghana limit its risk on some deals by introducing it to Eximguaranty, a local provider of credit guarantees to financial institutions that lend to small and medium-scale enterprises in Ghana. Some of the bank’s clients have also been supported by the Ghana Agricultural Insurance Pool, a group of Ghanaian insurers that mostly offer drought index insurance for maize and soya. Programmes like Ghana Planting for Food and Jobs, which provides a guaranteed market for a farmers’ produce, also give banks more confidence to lend to the sector.

Develop new products

To lend sustainably to smaller agribusinesses, banks must create innovative lending products. FinGAP has introduced banks to more than 33 tools, including collateral-free loans. Financing through the value chain is one way of avoiding the need for collateral. In 2015, for example, Barclays Ghana indirectly financed small maize producers via a GHS3 million (€533,000) loan to a poultry farmer who used the funds to buy and lend them inputs. Collection rates from the smallholders – who repaid the poultry farmer in kind with feed – were above 98%, which encouraged the bank to double the facility in 2016. Barclays Ghana has also introduced collateral-free ‘business instalment loans’ of up to GHS200,000 (€35,500) for smallholder farmers and aggregators, who repay them immediately after production has been completed.

Incentivise and support first movers

More than three-quarters of the financing facilitated by FinGAP was at least partly driven by a pay for results scheme that awarded grants to banks that met set lending targets within specified time periods. “It’s worked fantastically as a stimulus,” says Grevey.

By initially targeting banks that already had a clear interest in expanding their agrifinance portfolios, FinGAP was also able to use their earlier success stories to demonstrate to other banks what was possible and create an atmosphere of competition, Grevey adds. However, around 50% of lending through FinGAP has been through just two banks – Barclays and Ecobank. According to Ahiaku, who has called for FinGAP to be re-run, the sector still needs at least another two banks with a similar appetite.

Helen Castell

The Technical Centre for Agricultural and Rural Cooperation (CTA) is a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). CTA operates under the framework of the Cotonou Agreement and is funded by the EU.