Despite the fact that innovative financial models have been developed across Africa, relatively little finance options are available to smallholder farmers.
Hedwig Siewertsen, the Head of Inclusive Finance at the Alliance for Green Revolution in Africa (AGRA), says the challenge has been the reluctance of most financial institutions to invest in small-scale farmers for a number of reasons.
First, they lack collateral or securities, the farming business model is too unpredictable and the individual farmers’ portfolios are too tiny.
Additionally, she points out that banks have often lacked the technical expertise in agriculture and traditional loan models that factor in unique aspects of the sector.
For example, lenders require investors in the agricultural sector to start repaying their loans immediately, without taking into account the seasonality of farming, demanding repayment when farmers have no income instead of when crops have been harvested and animals sold.
Going forward, governments and development finance institutions have had to step in to increase capital supply that has the right risk and return profile for agricultural finance.
Siewertsen notes that one innovative financing model that has worked well in Kenya is the Programme for Rural Outreach of Financial Innovations and Technologies (Profit).
Piloted between 2010 and 2019, the programme opened up access to capital and provided technical assistance so that small-scale rural enterprises, including producer-based organisations, became bankable, more profitable and more capable of attracting additional private investment to serve more farmers.
In a case study she co-authored with colleagues on the blended finance instrument, Siewertsen explained that Profit used two financial instruments (a credit guarantee fund and a credit line) together with the technical assistance funds created incentives for lenders to issue more agricultural loans.
Through concessionary financing from the International Fund for Agricultural Development, the government provided affordable liquidity to four microfinance institutions to address their funding constraints.
The government also deposited a partial guarantee fund into two participating banks to lower the risk of their agricultural portfolios.
The two financial institutions, the Agricultural Finance Corporation (AFC) and Barclays Bank of Kenya (now ABSA Bank), started implementation under the risk sharing facility in February 2017.
Under the credit facility, Profit provided four microfinance banks with a credit of Sh600 million repayable over a ten-year period with a grace period of four years and a target outreach of 135,000 smallholder farmers.
By September 2018, their outreach was to 234,351 smallholder farmers, with the full amount disbursed and turned over twice.
Siewertsen says it is clear from the Profit successes that enhancing credit guarantee schemes for the agricultural sector and expanding crop and livestock insurance options with appropriate technical assistance is an effective use of limited public financial resources to de-risk agriculture.