Bankability metrics bridge the language between lenders and Agri-SMEs
To bridge the lending gaps between agricultural entrepreneurs and financiers, AGRA in partnership with the Center for Financial Inclusion (CFI) and SCOPEinsight have identified a standardized set of bankability metrics to help unlock over US$65 billion for Agricultural Small and Medium Enterprises (Agri-SMEs) in Africa.
“Agriculture represents the largest opportunity to reach the Sustainable Development Goals by 2030, yet the sector is chronically underfinanced,” said Hedwig Siewertsen, the Head of Inclusive Finance at AGRA. “Most Agri-SMEs face challenges convincing lenders that they can productively use and repay the loans they are requesting,” she added.
The metrics were developed through a research that involved in-depth analysis of thousands of company profiles and loan portfolio data, as well as interviewing over 90 active industry actors in Agri-SME lending. The metrics serve as the common language between lenders and Agri-SMEs, ensuring that companies know what information to provide, enabling lenders to rapidly screen the loan eligibility of the company. This efficiency gain reduces the cost of making loans, which is one of the main bottlenecks for lenders when assessing companies that require smaller loans.
“No bank will lend money to a company that cannot prove that they are performing well,” added Siewertsen. “Traditionally companies complain about the lack of collateral (land titles, property) which inhibits their access to finance, however these new metrics prove that banks can accept other types of data points to ensure their loans are within their risk appetite.” She added.
“We identified three common lender behaviors that hinder lending for the Agri-SMEs,” added Henry Bruce, the Director for Research at the CFI.
First, the researchers found that lenders were uncertain about what metrics were the most relevant at each stage of the deal screening process. Secondly, lenders tend to collect a large amount of generic business information without prioritizing what is most important to them. Lastly, lenders tended to ask for all the information early on in the deal screening process, thus burdening the companies requesting a loan without guaranteeing that they had met the minimum requirements.
To reduce the burden for companies, the researchers developed a simple template for companies to fill out the General Information on their loan request sufficient for most lenders during the pre-deal screening stage.
After completion of the General Information, Bankability Screening is the next step. The researchers identified three key areas to inform the credit-worthiness of companies. These are: Business Activity, Governance and Financials.
While Financial performance metrics are straightforward to define, ascertaining the quality of the business activities and governance is more challenging, and most lenders were previously unable to clearly identify the specific metrics for these indicators.
Leveraging insights from the databases on loan portfolios and rating reports for agricultural companies, CFI and SCOPEinsight’s found that Business Activity quality can be assessed through three main metrics that include: Top three products; Top three clients; Contract and pricing. The information used to assess the quality of Governance include: Turnover of managerial staff; Time commitment of business managers; Separation of board and management authority.
These metrics prove that criteria other than collateral and Financials are just as important in assessing the bankability of Agri-SMEs. “If adopted, the metrics would accelerate information sharing between Agri-SMEs and lenders during the pre-due diligence phase, and increase the flow of capital to the Agri-SMEs,” said Marise Blom, the Chief Operating Officer at SCOPEInsight.
The proposed bankability metrics which are available through AGRA’s website, complement a lender’s assessment of the loan request itself that is focused on the business plan and financial projections, and could include lender-specific requirements such as social or environmental impact.
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Established in 2006, AGRA is an African-led and Africa-based institution that puts smallholder farmers at the center of the continent’s growing economy by transforming agriculture from a solitary struggle to survive into farming as a business that thrives. Together with our partners, we catalyze and sustain an inclusive agricultural transformation to increase incomes and improve food security for 30 million farming households in 11 African countries by 2021.