How to close the agricultural financing gap
In a recent report on agricultural finance, ISF Advisors outlined the challenges of lending to small agribusinesses like agri-SMEs, particularly in sub-Saharan Africa and Southeast Asia. The report also included four long-term change priorities for closing the agricultural financing gap. These priorities align closely with the work that we have been doing for the past twelve years. This article summarizes the findings from ISF Advisors’ report and offers some approaches towards making the necessary changes to bridge the $106 billion financing gap.
The challenges of agricultural financing
According to the ISF Advisors report, there is a $160 billion financing need for an estimated 220,000 agribusinesses in sub-Saharan Africa and Southeast Asia (excluding India). However, formal finance channels currently provide an estimated $54 billion, which is only a third of what is needed. The remaining $106 billion constitutes the financing gap for these agribusinesses.
When it comes to formal finance for agribusinesses, the most common financier is local commercial banks. These banks usually invest in mature agribusinesses, and often ones that serve in established markets. The loans often have high interest rates and can be aided by risk guarantees from public donors. On the other hand, the least common financier is private equity and venture capital funds, despite the need for equity for higher-risk agribusinesses. Most loans provided include some sort of subsidy, due to the higher risk profiles and limited cash flow of agribusinesses.
In general, agribusiness investment profiles are judged on profitability, risk exposure, and investment readiness. The agribusinesses that are the most mature in these dimensions are more likely to be financed, often disproportionately so. These are estimated to represent less than 5% of the general market. Conversely, agribusinesses that are immature in any of these dimensions will find it more difficult to receive a loan, partially because financing them can come at a high cost.
Important paths for closing the financing gap
The report suggests that blended finance may be a solution to providing finance to agribusinesses. While there are currently many agribusinesses that receive loans with either small amounts of subsidy or large amounts of subsidy, it is more difficult to work between the two extremes. Reaching these agribusinesses will require a more sophisticated approach. One option is using specialized funds, for example funds for climate resilience.
In the conclusion of the report, ISF Advisors shares four change priorities that must be addressed to systematically closing the financing gap. These priorities are:
- Helping larger numbers of agribusinesses become investable prospects,
- Helping local banks and funds serve smaller, less commercial agribusinesses,
- Increasing the efficiency and effectiveness of blended finance, and
- Creating an infrastructure for climate-specific finance.
In the following sections, we will go more into depth on each of these priorities and how organizations can work to address them.
1. Helping larger numbers of agribusinesses become investable prospects
For local banks to be able to provide finance to agribusinesses, there need to be more bankable agribusinesses available. There are multiple ways to increase these numbers. For example, organizations can work directly with agribusinesses and select ones that can be market leaders. Government support can also be very helpful in this venture, particularly through targeted and consistent agricultural policies.
In both endeavors, gaining deeper insights into local agribusinesses is very important. A simple way to gain these insights is through assessments. By assessing the maturity of agribusinesses along important aspects of agribusiness professionalism, it is easy to see their strengths and weaknesses. For organizations working directly alongside them, this can lead to more targeted assistance. For governments, a more general assessment at scale can give an overview of an entire agricultural sector. Governments and ministries can then use the results to direct support and inform policies.
2. Helping local banks and funds serve smaller, less-commercial agribusinesses
As well as improving agribusinesses, it is also important to help banks serve smaller agribusinesses that may not yet have reached traditional standards of bankability. These agribusinesses require local finance with low costs. While subsidies may help in the short-term, ideally, the local financial institutions would develop a solution that would require less subsidy to sustainably serve this market.
One important aspect to helping these local banks is to help them communicate more effectively with other actors working to support agribusinesses, including BDS providers, multinationals, etc. Data, and specifically the Bankability Metrics developed by SCOPEinsight and the Center for Financial Inclusion (CFI), with support from the Alliance for a Green Revolution in Africa (AGRA), can be used as a common language for all actors. These metrics collect the necessary information about agribusinesses for lenders to do their pre-due diligence. Lenders and agribusinesses can then work together to create an investment pipeline based on lenders’ risk appetites.
3. Increasing the efficiency and effectiveness of blended finance
While blended finance is already widely used, it could be used more efficiently and effectively. For the agricultural sector specifically, it is important to improve blended finance usage so it can reach more agribusinesses sustainably. While many other forms of finance have been growing and improving over the years, blended finance has been more static. If stakeholders work together, however, then they can figure out a way to use subsidies in a smarter and more transparent way.
One requirement for smarter blended finance is more data and reporting requirements. To see how agribusinesses use the funding provided to them, and to see if specific funding causes more effective results, agribusinesses can be assessed both before and after they receive funding, with similar assessment tools to the ones described above. The standardized reassessment process makes it clear when and where agribusinesses are improving. Comparisons to benchmarks, such as national, regional, and global standards, can also help to provide context for the status of the agribusiness.
4. Creating an infrastructure for climate-specific finance
Climate change has been a growing reality for years, and as climate impact has increased, funding towards mitigating this impact has grown more important. However, many financial institutions do not yet know how to channel their funding in the right way. For climate-specific finance to work properly, it is important to develop new models that can properly track the effects on mitigation and adaptation.
To determine climate finance, it is important to have climate knowledge and data regarding how agribusinesses currently work. A good agribusiness assessment tool will track things like an agribusiness’s sustainability and ability to handle external risks, such as climate change. This data can be used to track the effectiveness of climate finance. If sustainability becomes an element of bankability, then this data could be added to metrics like the ones mentioned above and used to determine which agribusinesses best fit the new parameters.
Working together to finance agribusinesses
All the suggestions laid out in the ISF Advisors report are ones that must be worked on in tandem. No one organization can solve the access to finance challenge for agribusinesses. However, if we work together, we can make a real difference.
Are you interested in helping agribusinesses access finance? Contact us today to see how we can help your agribusinesses.Back to news