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Looking to the future for credit and finance solutions


SmartMoney International’s CEO, Michael Spencer, argues that financial institutions need to develop closer working relationships with the rural communities they seek to serve

© SmartMoney International


Smallholder farmers in Africa continue to face numerous hurdles accessing credit or loans to increase their production. Amongst other factors, partnerships are key to addressing this, but governments need to take the lead, state experts from the sector.

To improve smallholders’ access to agri-finance – either unilaterally, or in partnership with other actors – governments hold the most power and responsibility, emphasises Jerry Parkes, managing principal at agriculture-focused impact fund manager, Injaro Investments. He adds that governments must lead the development of agricultural value chains and harness the resources of the private sector, financial institutions, donors and NGOs. Governments should also champion digitisation to partner, where appropriate, with private sector agribusinesses, stresses Buddy Buruku, digital financial services consultant at the World Bank’s think tank, Consultative Group to Assist the Poor.

Governments moving in the right direction include Ghana, which is rolling out a national ID and digital address system, under which locations and properties are all given a unique address code, to help farmers (and others) access formal financial services, explains Buruku. Big agribusinesses should now accelerate a switch from cash to digital payments, to not only speed up payments to farmers but allow individual smallholders to build a digital profile to make for easier and quicker risk scoring by potential lenders. Buruku argues that such digitisation pushes should start with big government agencies such as Ghana’s Cocoa Board, which has the power to implement policy directives to digitise payments.

In Uganda, digital farmer profiling helped lead to the creation of Igara-Buhweju Tea Farmers’ Savings and Credit Cooperative Organisation (see Spore article, Farmers Mapping Increases Incomes for Tea Farmers), which uses the profiles to provide input loans to farmers, notes Chris Addison, CTA senior programme coordinator for knowledge management. Blockchain technology, he adds, also holds huge promise to digitise agri-finance and agriculture overall, so would benefit from more government support.

Capitalising on concessionary capital

To lend to smallholder farmers, commercial banks first have to borrow at rates that are very expensive in some countries. However, if governments provided banks with subsidised loans at so-called ‘concessionary’ rates especially for the sector, banks would be able to lend more to smallholders and still earn a profit, states Andrew Ahiaku, head of agribusiness at Fidelity Bank Ghana. This has worked in Ghana, where the government-funded Export Trade, Agricultural and Industrial Development Fund charged 2.5% to lend to commercial banks, which were then allowed to charge borrowers up to 12%, ensuring a margin of around 9.5% to cover their credit risk.

Development banks, foundations and other donors should also invest more money at concessionary rates in blended finance agriculture-focused funds, especially those with longer lifespans, while also subsidising risk-mitigation tools like insurance and paying for technical assistance to support farmers, advises Parkes. Simon Schwall, CEO of agricultural insurtech OKO, would also like to see donors partnering more with promising start-ups, providing them with early stage funding or funding to expand into areas that are not yet commercially viable.

Agri-finance consultant Matthew Olaide Adetunji, however, believes that subsidised capital – as used by Nigeria’s ‘intervention funds’ – should be scrapped if it crowds out private investment. For example, Nigeria’s government recently privatised the Bank of Agriculture and licensed NIRSAL National Microfinance Bank in a bid to improve access to affordable agri-finance while also attracting private capital. These “very promising” privatised initiatives are designed to run as private banks but have grassroots networks to reach farmers and other agribusinesses, he notes.

Increasing innovation impacts

A more flexible, responsive approach to agri-finance innovations by financial regulators will also help, as witnessed by insurance service provider ACRE Africa in Kenya, Rwanda and Tanzania, recommends Stella Ndirangu, financial inclusion specialist at the insurance service provider. For example, when ACRE (initially Kilimo Salama) began bundling insurance with seed and selling it through Kenyan agrodealers, the distribution method was not approved under Kenya’s Insurance Regulatory Authority. However, the regulator allowed the pilot to scale up and then worked to amend the policy (see Spore article, Making Index-based Insurance Profitable). Regulators in Tanzania and Rwanda also responded to ACRE lobbying to remove taxes on crop insurance to help make it more affordable.

Developing regulatory ‘sandboxes’ to allow small-scale testing of innovations by private firms in a controlled environment would also encourage innovation, as would launching competitions for innovators, believes Schwall. Adopting agri-tech solutions to serve harder to reach segments would help drive down the cost for commercial banks of offering credit to smallholders, encouraging them to scale up lending, adds Ahiaku.

The potential of partnerships

The development of value chain finance solutions is also enhanced by multi-actor partnerships with different actors such as banks, multilateral financial institutions, savings and credit cooperative societies, insurance service providers, input suppliers, produce offtakers and farmer organisations working in a ‘closed circuit’, suggests Ndirangu. Such partnerships would enable farmers to receive financial solutions for the best inputs, plus risk management solutions to improve production, she adds.

Commercial banks and microfinance providers would reach smallholders in rural areas more affordably by jointly creating a network of points of sale through which all products are available, suggests Schwall. Teaming up with private sector businesses to create bundled special offers – for example, offering free insurance credit when a customer buys phone credit or a discount on fertiliser from a specific supplier when taking a loan with a certain bank – could also incentivise take-up of financial products, he says.

Michael Spencer, CEO of SmartMoney International, argues that a closer working relationship with the rural communities they seek to serve would benefit all organisations involved in agri-finance. Creating financial products that meet the unique needs and constraints of rural markets can only be achieved by relocating staff to rural communities for an extended period and also recruiting, training and partnering with local members of those communities, he says.

Farmer organisations also need to become more proactive about working with aggregators, as this would reduce financial institutions’ cost of serving farmers, suggests Ahiaku. Fidelity Bank Ghana, for example, is currently in talks to support 40,000 smallholders by connecting an input dealer through aggregators to farmer organisations and then finally to the last mile. “As a result of this partnership, the input dealer reduced her prices, the bank dropped its rates and the risk was largely mitigated,” he states. “These partnerships are essential.”

Helping smallholder farmers tap the credit and financial solutions they need to grow remains a multi-faceted challenge, and one for which there are no easy answers. However, with more cooperation and innovation, spearheaded by stronger government leadership and support, there are great opportunities ahead.      

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