Bridging the gap

Unable to meet conventional collateral requirements, small and medium farmers across ACP countries often fail to secure bank finance. Perceived as high risk, having poor financial management and offering modest returns, their situation is compounded by the high costs of extending traditional banking to rural areas, which deters many lenders.

Agriculturally, Africa should be a net exporter, says Akinwumi Adesina, Nigerian Minister for Agriculture and Rural Development. Delivering a keynote speech at CTA’s recent conference on “Revolutionising finance for agri-value chains” (Fin4Ag), Adesina reported that instead of this, African countries currently spend around US$35 billion each year on food imports. With more than 750 people, including private sector executives, government officials and farmers’ representatives from some 80 countries gathered at the event, the Minister emphasised that minimal irrigation, poor infrastructure, limited value-adding, high postharvest losses and - most importantly - lack of access to credit means that Africa’s farmers are failing to fulfil their potential.

In Kenya, Rwanda and Uganda, less than 10% of the population has formal access to credit and less than 4% have a bank account. Too many banks continue with a traditional and outmoded approach, warned Michael Hailu, CTA director, curbing farmers’ profits and driving young people from agriculture. On average, a mere 5% of domestic resources are allocated by most developing country governments to the agricultural sector. But Africa is at a tipping point, Hailu believes, and the time has come to focus on solutions and scaling up success.

Currently, 90% of investments in African agriculture are made by farmers themselves. “This is not acceptable,” said Lamon Rutten, CTA programme manager for policies, markets and ICTs. “Farmers are ready to see themselves as businessmen, rather than just subsistence producers, but investments need to increase for farmers to be more profitable and banks and financial institutions need to see farming as a business that is worth supporting.” Theo de Jager, president of the Southern African Confederation of Agricultural Unions concurred, asking why farmers should shoulder the burden of agricultural financing and not make money just like any other business. Nothing is possible in the modernisation of agriculture without agri-financing, he asserted, and whilst there are no easy solutions, the bridge between farmers and financiers needs to be better supported.

Understanding farmers’ needs

Improved communication is a vital part of that bridge. Financiers need to understand the constraints faced by farmers and farmers need a better understanding of inclusive agri-finance products, something which was highlighted more than once during the 5-day conference. In the case of Equity Bank (see Viewpoint, Inclusive access to finance), a holistic approach that combines lending with advisory services is helping the bank protect its portfolio whilst supporting customers to gain credit as well as build repayment records.

Training enables farmers to have a better understanding of the financial products and tools on offer. For example, the One Acre Fund provides a complete service bundle of seeds, fertilisers, credit, training, postharvest management and market support, which is enabling farmers to produce a surplus and achieve a profit of US$250 in a year. Repayment rates are 98%, with field officers in Rwanda working to overcome transport and distribution problems and ensuring that farmers get the advice, support and credit they need. Currently working with 180,000 farmers, One Acre aims to support 500,000 farmers by 2016.

Understanding customers’ needs underscores the approach used by MicroEnsure, which currently provides crop insurance to around 60,000 farmers in Eastern and Southern Africa. A further 1,000 farmers have taken out hurricane index insurance in the Caribbean. MicroEnsure’s aim is to provide reliable protection with simple, innovative products at low or no cost. However, to make insurance more inclusive, more companies need to change their processes and accept thinner profits, says MicroEnsure’s Agrotosh Mookerjee. Telecom companies willing to offer a free product, for example, are helping to change market perceptions about the need for insurance. Value added products, such as crop advisories and weather forecasts, are also stimulating insurance uptake and allowing farmers to further mitigate their risks (for more on index insurance see Spore 164 Dossier - Index insurance: managing risks).

Evolving ICTs

Mobile phones and other ICTs are revolutionising the way in which agri-finance and insurance is delivered, as demonstrated throughout the Fin4Ag conference sessions, including the Plug and Play Day. Since 2009, Zoona has processed nearly 1 million eVouchers to facilitate bulk payments for specific purposes. Clients for the service have included the governments of Malawi and Zambia, as well as WFP and FAO. In Malawi, eVouchers delivered via SMS or scratchcard enable 60,000 farmers involved in a subsidised farm input scheme to buy hybrid seed from local dealers.

In Ghana, the Visa-supported Rice Mobile Finance project is a mobile payment platform to support the rice value chain, increasing transparency, reducing side selling, facilitating money transfers and providing financial inclusiveness to thousands of farmers. In Nigeria, the electronic wallet system has helped reduce corruption in fertiliser supply schemes and farmers are now accessing subsidised farm inputs via their mobile phones. According to Nigerian minister Adesina, the system is now being adopted in other African countries, with interest also being shown by Brazil, China and India.

The first digital clearing house in Jamaica has recently been launched, utilising Web-to-SMS technology to connect small farmers to buyers. Using SMS, Agrocentral allows farmers to alert buyers when they have a crop to sell, via a central website. In the same way, buyers can post a request to buy a certain crop which is relayed to farmers via SMS. Middlemen are thus eliminated and margins increased.

Legislation and enabling policies

However, whilst ICTs are certainly revolutionising agri-finance, they are not the panacea. In Madagascar, a simple but successful community inventory credit system involves over 80,000 farmers storing their crops - mainly paddy but also cloves and coffee - at home in the family compound. The system has been wholeheartedly adopted by two leading microfinance institutions, resulting in close to 100% repayment rates and seasonal price stabilisation.

The success story was revealed as part of cross-country report which examines the lessons learned from community, public and private warehousing in Madagascar and eight other African countries. The report, commissioned by CTA, the French development agency, AFD, and the International Fund for Agricultural Development, also examines the legislation that supports or constrains warehouse financing (see Spore Special Issue on Structured Trade). Uganda, for instance, introduced specific legislation in 2006 and 2007 to encourage public warehouses and could provide a model for other countries. But in practice, it depends on the enabling environment and, even if there is political will, as has been the case in Côte d’Ivoire, it can still take a long time to introduce enforceable legislation.

Daniel Gad, owner and managing director of Omega Farms, a leading vegetable producer in Ethiopia, insisted that legislation and enabling policies for agri-financing are key and warned that most policies lack full commitment and are subject to change. “The capital value of farmers is enormous,” he said, valuing it as a US$280 billion business opportunity. “So why is it so difficult for governments and bankers to take a risk?” (see box, A change of focus in the Pacific). Gad emphasised that cultural perceptions need to change, and that central banks need to make lending easier, so that people, including the youth, move higher up the value chain.

In Brazil, government support for agri-finance has led to the development of farmer IOUs - Cedula de Produto Rural (CPRs) - which are issued on the basis of future crop or cattle sales. These have proved highly effective for medium-sized commercial farmers. A farmer with 100 head of cattle, for example, would not have the credit rating to attract a big bank, but can now enter a sophisticated financial market. Over the years, electronic CPRs have been developed and have now become the basis for many other forms of agri-financing. For example, CPRs can be auctioned through an electronic network or commodity exchange or bundled to sell to pension funds.

In 2013, over 600,000 CPRs were legally registered in Brazil, with billions of US dollars flowing to farmers. With agricultural production in Brazil more than doubling between 1991 and 2004, the World Bank has identified CPRs as one of the best ways forward for agri-finance. However, says Rutten, CPRs can only operate within an enabling environment, which may be country-wide, or if this proves too difficult, may be made specific to certain sectors where conditions can be met, associations are approved by government, and collateral registry and arbitration systems established. Nevertheless, the system is attractive to farmers and investors alike and inspires farmers to become more commercial.