How to facilitate access to finance for agribusinesses
One of the most persistent challenges for agribusinesses 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 to regional and social lenders to social and global investors – find the agricultural sector risky and expensive to service. So, how can we facilitate access to finance for agribusinesses? And how do we mitigate lenders’ risk perception? Through developing a common language – whereby agribusinesses can understand the lending criteria and lenders can better evaluate agribusiness’s risk. This language is referred to as “Bankability Metrics.”
Developing Bankability Metrics
In 2020, 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 agribusinesses and these financiers. To do this, three things need to be in place:
- 1. A process of graduation for agribusinesses where 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. These are a powerful pre-screening tool and can help agribusinesses understand the lending requirements much better.
- 3. The metrics which, when coupled with the graduation of agribusinesses, deliver a pipeline of pre-screened agribusinesses to lenders.
This helps not only to streamline the lending process but also to de-risk investments through more reliable, comparable, and transparent data.
To address this financing gap and improve information flows between lenders and agribusinesses, SCOPEinsight and 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. This research was used to develop a set of bankability metrics, which can make the communication between all stakeholders easier and more standardized.
There are several interesting correlations between some SCOPEinsight’s dimensions of professionalism and agribusiness’s ability to access a loan. For example, market performance, financial management, 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 agribusiness 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 between agribusinesses and financiers, lower costs of due diligence and technical assistance, and decreasing risks for financiers. Using the common bankability metrics as the linking pin, lenders can pre-select those agribusinesses that meet their criteria so they can spend their due diligence resources on promising agribusinesses. This is how we facilitate access to finance for agribusinesses.
Are you interested in reading the full report? Download it here.
Contact us today to learn how you can use these metrics in your own projects.Back to news