Financing cost impedes agribusinesses in Africa

Access to finance emerged as the greatest priority for agribusinesses in Africa and cost of finance cited as the biggest impediments, a new survey has revealed.

This is not surprising, given that across the continent less than five per cent of commercial bank lending goes to agribusinesses.

The inaugural ‘Africa Agribusiness Outlook’ has noted that the issue is not just about access to finance, it is about the cost of finance and availability of financial instruments that are adapted for the agricultural sector.

“It is also about making agriculture attractive, viable and profitable rather than being looked at as a risky endeavour. Given the importance of the agricultural sector to many African economies, we believe this is an area that needs to be given urgent attention,” the survey stated.

The survey, which is titled ‘Agribusiness in unprecedented times: Challenges and opportunities for Chief Executives Officers in Africa’, is an initiative by the Alliance for a Green Revolution in Africa (AGRA) and KPMG East Africa, in collaboration with the Partnership for Inclusive Agriculture Transformation in Africa (PIATA).

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Although a lot of businesses are struggling, they are also determined to survive COVID-19 and emerge stronger.

The survey, therefore, sought to understand the priorities, opportunities and constraints for businesses operating within the agricultural ecosystem in Africa, and to give voice not only to the private sector in Africa, but to outline potential pathways for actions that would result in a thriving agribusiness sector in Africa.


Constraints

According to the report, value chains in most African contexts are not complete since smallholder farmers, for instance, do not have a guaranteed market which makes it difficult for banks to lend.

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Financial solutions available to some are small scale and some use digital platforms. Funding provided may not help them grow their agribusinesses as most use the funding for consumption purposes.

Financial institutions find it easier to lend to medium and large-scale farmers because they have collateral.  

They are also in closed value chains so banks are more comfortable with them as they are assured the payments will come in.


Available finance

It emerged that available types of finance differ by providers, requirements, returns required and period of investment.

Grants are limited but were noted to be very valuable for innovation and start-ups, and investment funds, including private equity and venture capital funds which have high rates of return required by investors, and they only invest in high growth businesses.

Lenders are risk averse and demand at least 120 per cent collateral.  

Finance for smallholder farmers is equally hard to come by. Financial institutions (banks, microfinance institutions) and non-financial institutions (mobile money providers and fintechs) have made short-term finance much more accessible.

However, such funds are very expensive and only viable for short-term trade finance.

Also, provision of seasonal finance for smallholder farmers remains the biggest problem as banks are reluctant to lend.

Serious risks such as poor rainfall, crop failure, pests and diseases could be mitigated by crop insurance, but this has not taken off across the continent.

“Financiers indicated that finance was available, but SMEs and smallholders were not able to meet the set requirements. SMEs may not have adequate reporting structures, staff capacity or business processes, whilst the major challenge for smallholders, as identified above, is operating in unstructured markets,” it said.


Recommendation

The survey noted that the entire agriculture sector had a huge financing gap that needs to be bridged to make real change and reach the required scale.

It has, therefore, recommended a financing mechanism that is structured.

“This could be anything from longer repayment terms to end of season payments to flexible collateral requirements, to blended finance instruments,” it said.

Governments need to increase spending in the sector to motivate private sector businesses, funders and investors to also invest.

Governments could also allocate budgets to provide guarantees to commercial banks to allow farmers to borrow money at concessionary rates and less stringent requirements to allow them to invest in their farms - mechanise, irrigate, among others.

“Farmers and AgriSMEs need technical assistance support that goes beyond agronomic services. They need services designed to help improve their chances of securing finance. Firms which provide technical assistance services have an important role to play here in helping SMEs prepare their applications and educating them on the requirements,” it added.


Keynote

-    Agribusiness is the business sector encompassing farming and farming-related commercial activities. The business involves all the steps required to send an agricultural good to the market: production, processing and distribution.

-    It is well documented in economic history that agricultural growth was the starting point of the economic transformation of many developed countries.

-    Massive resources, therefore, need to be poured smartly into the sector to achieve industrialisation and economic prosperity goals as a continent.