Moving towards integrated financing system for smallholder farmers in Africa

Despite the importance of the agricultural sector to African economies, access to finance especially for smallholders remains a key challenge restricting the growth of a sector that is crucial for job creation and economic growth on the continent.

AGRA’s 2017-2021 strategy seeks to catalyze an inclusive agricultural transformation in Africa by increasing income and improving food security for 30 million farming households in 11 focus countries.

AGRA knows that timely access to a wide range of affordable financial services like payments, savings, insurance and loan products is crucial for Small and Medium sized Enterprises (SMEs) including Farmer Based Organizations (FBOs) and farming households to enable them to invest in appropriate technologies, to manage cash flows, to adapt to climate chocks, and to facilitate growth.

AGRA’s approach is to build an inclusive agricultural finance system based on partnerships and opportunities that will cater for the financial and capacity needs of governments, financial institutions, SMEs and farmers. The strategy draws from an agricultural finance system composed of three critical integrated components that can make the system grow and develop in an inclusive manner.

The first component addresses the supply of capital that has the right cost and risk profile to be deployable in agriculture. National governments and development finance institutions (DFIs) have the capacity and capital that can de-risk financial institutions by offering them capital that can be blended with private sector capital to reduce the cost and risk of that capital. AGRA supports Governments, donors and DFIs to design and deploy such blended finance vehicles for agriculture that mostly seek to reduce the credit risk, the cost of lending and to provide capacity building for lenders and borrowers.

The second component addresses the providers of financial services and how they can finance the agricultural sector. These providers often have experienced that financing the agricultural sector is risky and costly. AGRA has developed models that reduce the costs and risks of lending, through risk sharing among value chain actors, wholesale lending to rural financial institutions or SMEs or through the use of digital solutions. AGRA supports financial services providers in the deployment of these models and facilitates the linkages to blended finance facilities and potential borrowers.

The third component addresses the users of financial services: agricultural SMEs, rural financial institutions and ultimately the smallholder farmers. The bankability of these entities is often limited by their management and governance capabilities, the lack of quality data and their limited accessibility. AGRA supports providers of innovative solutions that help to reduce the cost of reaching these actors with financial and non-financial services. Most solutions use digital channels and mobile money to achieve scale at reduced cost.

AGRA’s 2017-2021 strategy seeks to catalyze an inclusive agricultural transformation in Africa by increasing income and improving food security for 30 million farming households in 11 focus countries.

In short, AGRA gives grants, technical assistance and brokers partnerships with governments, financial services providers and agricultural entrepreneurs, to improve the functioning of the agricultural finance system and to buy down the risk of developing and deploying innovative financial solutions:

1
Blended finance: A financial solutions whereby risks of agricultural lending are divided according to the risk appetite of each funder. Governments and donors often take higher risks than commercial banks.

2
Value chain finance: A financial solutions whereby risks and costs of lending are shared among stakeholders that share their interest in growing a specific crop or accessing certain assets (input dealers, off takers, primary producers, equipment sellers)

3
Digital finance: A financial solutions whereby the digital rails reduce costs of delivery of financial services and enable the use of alternative data for credit scoring.

Through its activities, AGRA has shown that:

1
Government funds can unlock 4.75 times the volume in private capital for agricultural finance if coupled with technical assistance for both borrowers and lenders

2
Banks and value chain actors like input and processing companies can share the risk for input finance on a 60-40% basis

3
Digital solutions can reach millions of smallholder farmers with affordable and relevant solutions that make them more resilient

Further Resources

AGRA Strategy for Inclusive Agricultural Finance System
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