On day Three of the AGRF Summit, the Deal Room continued in its mission to help companies source finance, with its session: Innovative Financial Solutions for Africa’s Agribusiness Sector.
In sub-Saharan Africa, Agribusiness enterprises – often smallholder farmers and rural SMEs - are the backbone of the economy and the main producers of food. But they often lack the capital to grow - there is a USD 170 billion funding gap to smallholder farmers across the world, and agricultural SMEs are often regarded as un-investable.
Ms. Barbara Schnell, Director, Sector Policy, KfW Group, an expert in private sector development began by outlining her bank’s 800 million Euro portfolio, that works with Germany’s ‘One World no Hunger’ special initiative to support 700,00 smallholders and SMEs to sustainably increase productivity and income. She thinks that perceived risk is responsible for the funding gap and that often the very organizations that need it, mainly SMEs, are too big for micro finance initiatives, yet too small for the big banks. Ms. Schnells’ solution is to cater to a whole target group, providing not just finance, but seeds, fertilizer and advice.
Hon. Muhammed Sabo Nanono, Minister of Agriculture and Rural Development, Nigeria stepped in to demonstrate how his government is addressing finance risks that compliment private investment in weak value points. A key requirement is that the private sector needs to help government realize its agenda, and His Excellency gave the example of the huge mechanization program currently underway, driven by the private sector.
A diverse and exciting panel went on to highlight the importance of connecting value chains when considering finance options. Mr. Ibrahim Magagi Gourouza, COO, Grow Africa argued for greater capacity in farm management, basic accounting, business planning and development if companies are to present them as ‘investment ready’. Ms. Tanja Havemann, Founder and Director, Clarmondial agreed that Africa needs all types of funding – grants to build capacity, equity, long-term financing, capital expenditure, and working capital, and that these are best met by different types of funders. USAID, for example, as a secondary guarantee mechanism, can do things that normal banks cannot and help in de-risking investments.
Mr. Jeremy Oppenheim, Founder and Managing Partner, SYSTEMIQ gave a more sober assessment of the situation, citing a recent report (https://aceliafrica.org/bridging-the-financing-gap-unlocking-the-impact-potential-of-agricultural-smes-in-africa) on the risks and returns of loans to the agriculture sector that deemed them twice as risky, with returns of 4-5 percent below what could be generated by loans in other parts of the economy. He argued that for capital to flow, risk needs addressing, and returns need to improve, and that no amount of blended finance will solve the problem. Investments need to be de-risked and the only way is to take a whole value chain approach: it is impossible to de-risk an individual investment – if the cold chains don’t exist or the processing isn’t reliable, the whole chain fails. His solution is to address the entire value chain, not just going straight to the farmer. The panel all agreed that there are limited investment opportunities because of poor value chains, but that blended finance can push the private sector to accept higher risk and a reduced ticket price.