Using data and performance to solve the access to finance challenge for agri-SMEs
Read how we used data and performance to develop bankability metrics. The new bankability metrics incorporate robust sector data, and research deepens the sector’s understanding of how to close the estimated $65 billion annual financing gap for agri-SMEs in Sub-Saharan Africa.
A persistent disconnect
Every day in emerging markets, farmers struggle to access the inputs and markets they need to increase their yields and incomes to improve their livelihoods. Though there are innovative financial products and approaches to financing the agricultural sector, medium and small agribusinesses that deliver the essential services to farmers still lack access to funding, which is essential to help them grow. On the other hand, lenders have faced challenges in obtaining the right kind of information in lengthy and expensive due diligence processes from these businesses, making them shy away from lending to agri-SMEs. Unfortunately, agri-SMEs may not operate to the norms, standards, and expectations of lenders. Although there is an increasing number of examples that form outliers in this reality, generally speaking, there are still two different worlds that struggle to understand one another: lender and agri-SME.
Cracking the problem
Last year, SCOPEinsight and the Center for Financial Inclusion (CFI), with support from Alliance for a Green Revolution in Africa (AGRA), embarked on creating a bridge between agri-SMEs and financiers. The team researched over 90 lenders and industry actors and analyzed SCOPEinsight and the Council on Smallholder Agricultural Finance (CSAF) data to understand some of the driving factors behind the significant financing gap.
The research revealed the following:
– Lenders currently require a large amount of information and spend enormous time and resources to source and assess agribusinesses’ bankability. Not only does this result in high transaction costs, but the inefficiency results in fewer businesses being screened and leads to larger ticket sizes.
Standard Measurement Tools are Effective
The research demonstrated that the following root problems must be addressed if access to finance becomes a reality for agri-SMEs. Among these are:
1. A professionalization process for agri-SMEs needs to be in place, so agri-SMEs have a roadmap to become more professional (and thereby meet market requirements). By more “professional,” we mean that the agri-SMEs is using systems and processes that are accessible, auditable and understandable by outsiders like lenders. The prohibitive collateral requirements that many financiers have stemmed from Central Bank regulations and requirements and the lack of any other reliable proof that the SME can deploy and repay external funds.
2. A common language (i.e., the Bankability Metrics) makes the interaction between SME and banks easier because there is agreement on professionalism defined in indicators/measures. The metrics also offer an alternative risk assessment instead of collateral requirements.
From this research, we propose two solutions: 1. Agri-SMEs follow a roadmap to help them professionalize, and 2. Use a common language (e.g., Bankability Metrics)
Solution #1: A standardized, data-led professionalization process for agri-SMEs
SCOPEinsight collects data from thousands of SMEs and can understand what aspects of an SME’s operations may help them meet lenders’ expectations. SCOPE assessments measure the most critical aspects of running an agribusiness and comprise eight dimensions of professionalism.
These dimensions are internal management, financial management, operations, sustainability, production base, market, external risk, and enabling environment. SCOPE assessments contain over 200 data points, and so we analyzed this data to map correlations. This extensive analysis uncovered that planning, budgeting, sourcing, and support from capacity builders are essential factors in graduating an agri-SME towards bankability. For a less mature agri-SME to become bankable, they need to focus primarily on:
- Recordkeeping & monitoring
- Marketing strategy
- Financial Management
While, these factors may seem as though they are qualitative, SCOPEinsight, however, has developed a standard set of indicators to measure proficiency (or rather professionalism) in these areas. Through using a standard measurement tool, agri-SMEs can know where they need to improve and communicate on their performance with lenders.
We have several examples of where applying a standard tool has enabled capacity builders to develop tailor-made programs to address the gaps identified and subsequently help the agri-SME access finance. One such example is a recent project with the IFC and Heineken in Ethiopia which used SCOPEinsight’s standard measurement tools to identify and strengthen weaknesses among 39 agribusinesses, 23 lead farmers, and 14 unions. The project’s results showed that $1.8M was mobilized in short-term financing through local MFIs for 29,000 farmers with virtually zero defaults.
Solution #2: Common Language: Bankability Metrics
The Bankability Metrics focus on business activity, financial performance, management capacity, and governance. The team analyzed the wide variety of lenders’ metrics to identify metrics with the most significant common ground and those most effective in screening creditworthiness. Each lender has a unique risk appetite, so the metrics do not identify benchmarks for bankability but rather provide a common set of metrics.
A vision for the future
The Bankability Metrics, along with a market-oriented graduation system, can feed into a portal facilitating linkages between (agri-SME and financiers), lower costs (of due diligence and technical assistance), decrease financiers’ risk, and improve visibility. A standard list of limited metrics would facilitate the lenders’ process and allow lenders to identify the agri-SMEs that meet their pre-screening requirements. This is a more efficient process of selecting agri-SMEs for the due diligence phase, and the agri-SMEs are of higher quality as they meet the lender’s requirements. This will lead to a higher success rate against lower costs.
How can YOU start to use the metrics?
The Bankability Metrics can be used by all industry leaders: donors, business development service providers, and lenders alike.
Are you a lender? Then you can request prospective agri-SMEs to submit bankability metrics during the pre-screening process, early in the discovery phase. This can help you make a pre-due diligence decision with greater efficiency.
Are you an agri-SME? When you request a loan, you can proactively submit these metrics to lenders, improving your chance of receiving finance.
Are you a donor? You can embed the bankability metrics within your agri-SME programs. Not only will this help agri-SMEs access finance, but they can also help you measure programmatic effectiveness as these are quantitative.
Are you technical assistance or business development service provider? Use these metrics to identify the agri-SME’s weak points and build their capacity accordingly.
ACCESS The Bankability Metrics and Resources
You can access the Mobilizing agricultural finance report.
You can access the accompanying Data collection form for the Bankability Metrics.
Contact us today to learn how you can embed this into your organization’s standard workstream.
 SCOPEinsight measures eight dimensions of professionalism: internal management, operations, sustainability, financial management, market, external risk, enabling environment, and production base.
 High professionalism scores in the marketing strategy (including pricing and market monitoring), internal organization (including risk and compliance), governance, and business planning dimensions increased the likelihood of an agri-SME receiving a loan, implying increased creditworthiness. Surprisingly, though financial management was ranked amongst the top influencers of loan likelihood, the analysis validated the research findings that metrics related to business professionalism, management, and governance are critical in determining creditworthiness.Back to news