How to Facilitate Access to Finance for Agri-SMEs
Introduction
One of the most persistent challenges for agri-SMEs in emerging market countries is the difficulty they have accessing finance. Agribusinesses do not meet market requirements to attract funding, often because they are not run like businesses. And financiers – which range from local financial institutions, regional and social lenders, social and global investors – find the agricultural sector risky and expensive to service. So, how can we facilitate access to finance for agri-SMEs? And how do we mitigate lenders’ risk perception? Through developing a common language – whereby agri-SMEs would understand the lending criteria and lenders could better evaluate agri-SME’s risk. This language is referred to as “Bankability Metrics”.
Developing Bankability Metrics
Earlier this year, SCOPEinsight and the Center for Financial Inclusion (CFI), with funding from Alliance for a Green Revolution in Africa (AGRA), sought to create a bridge between agri-SMEs these financiers. To do this, three things need to be in place: 1. A process of graduation for agri-SMEs for that they have a roadmap to become more professional (and thereby meet market requirements), 2. Common bankability metrics to support the pre-due diligence phase of the deal flow. This is a powerful pre-screening tool and can help agri-SMEs understand the lending requirements much better and 3. The metrics, when coupled with the graduation of agribusinesses delivers a pipeline of pre-screened agri-SMEs to lenders. This helps not only to streamline the lending process but also to de-risk investments through more reliable, comparable, and transparent data.
“These metrics are important because they will make it easy for the finance sector to standardize the pre-screening of agri-SMEs.”
– Hedwig Siewertsen, Head of Inclusive Finance at AGRA
The Process
To address this financing gap and improve information flows between lenders and agri-SMEs, SCOPEinsight, CFI, in partnership with AGRA, interviewed and researched 90 lenders and industry experts, analyzed datasets from CSAF members and SCOPEinsight, and conducted a literature review to develop a set of bankability metrics. Which can make the communication between all stakeholders easier and more standardized.
Key Findings
While the report on the actual metrics will be officially disseminated in the first quarter of 2021, it is sufficient to say that there are several interesting correlations between some SCOPEinsight’s dimensions of professionalism and agri-SME’s ability to access a loan. For example, internal management, market performance and internal management are all critical elements in accessing a loan. ). 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.
The Way Forward
The bankability metrics along with the market-oriented graduation system will feed into a Portal facilitating linkages (agri-SME and financiers), lower costs (of due diligence and technical assistance), and decrease the risk for financiers. Using the common bankability metrics as the linking pin, lenders can pre-select those agri-SMEs that meet their criteria so they can spend their due diligence resources on promising agri-SMEs. This is how we facilitate access to finance for agri-SMEs.
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