ByObiora Madu

Trade Development ConsultantDG – African Centre for Supply Chain

THE CHALLENGES OF FINANCING SMALL FARMERS AND MSMES IN

AFRICA:How Agricultural Value Chain Finance can be a Rescue

OUTLINE

• OPENING STATEMENTS

• INTRODUCTION

• MSME/SMALL FARMER CHALLENGES IN AFRICA

• NEW PERSPECTIVES TO AGRICULTURE

• AGRICULTURAL VALUE CHAIN & EVOLUTION OF AVCF FINANCING

• VALUE CHAIN FINANCE FLOWS/MINIMUM STANDARDS

• SMALL HOLDER FINANCING RISKS & MITIGANTS

• THE IMPACT OF EXTERNAL SHOCKS

• CASE STUDY – NIGERIA

• CONCLUSIONS & RECOMENDATIONS

Opening Statements

According to the UN population statistics, 61 per cent of Africa’s population is in rural areas (UN, 2007). Although declining, 57 per cent of income in rural areas is from farming; therefore an increase in agriculture productivity can play an important role in relieving poverty (Llanto, 2006).

The importance of smallholder farming in Africa is highlighted in the fact that 95 per cent of agriculture production is from smallholder farming (Seymour, 2010).

Processing

Input supply

Trading

Trading

Retailing

Consumption

Production

Post-harvest handling

Research

Communication

Transportation

Government Policies and Regulations

Input supply

Technical and business training services

Financial Services

Market Information and Intelligence

AGRIC VALUE CHAIN

Source: Adopted from Ferris (2007)

MAJOR CHALLENGES OF SMES IN AFRICA

• Access to finance had been singled out as one of the major challenge impeding the survival and growth of start-up SMEs in Africa.

• Incidence of multiplicity of regulatory agencies and taxes which has always resulted in high cost of doing business.

• Corruption, lack of transparency, very high bureaucratic costs.

• Poor or Missing Infrastructure: African agriculture generally suffers from major competitiveness constraints due to poor or missing infrastructure.

Challenges of Small Producers

Technical expertise (right yields, export quality, disease, climate)

Market access (retailers dealing with small producers)

Financial access (link to the above – lack of security, feasibility of financing small farmer)

“You can’t do today’s job with yesterday’s methods

and be in business tomorrow"

Anonymous

Dual Face of Agrifood Markets Enhanced Presence of Modern retailers Popularity of Traditional retail markets

UNPACKAGED LOCAL VEGETABLES & FRUIT

April 19, 2023 NEPC / MULTIMIX 9April 19, 2023

HANDLING OF BANANA IN NIGERIA

April 19, 2023 NEPC / MULTIMIX 10April 19, 2023

HANDLING OF BANANA IN PHILIPPINES & CAMEROON

April 19, 2023 NEPC / MULTIMIX 11April 19, 2023

Defining Value Chain Finance

Value chain finance – financial products and services flowing to and/or through a VC to address the needs of those involved in that chain, be it a need for finance, a need to secure sales, procure products, reduce risk and/or improve efficiency within the chain.

Objectives:•Align and structure financial products to fit the chain•Reduce costs and risks of finance

VCF Approach – to understand the value chain and its participant needs and structure finance and services to best address them.

Growers

Storage & warehousing

Retailers & wholesalers

Exporters

Input suppliers

Seeds, fertilizers, pesticides, livestock feed, medicines, farm equipment

Farmers, dairy units, fisheriesand other livestock growers

Storage facilities for grains, fruitsvegetables; cold chains & logistics

Inventory, trading & marketing

Pre & post-shipment commitments

Processing plants, packaging facilities etc.

Processors

Demand Needs of finance

VCF: Demand side

Tools to Mitigate Market Risks• Use of futures and options• Warehouse receipts as well as warehouse

storage capacity• Market information services• Contract farming• Insurance• Access to technical assistance

Some risk management tools are more practical for agro-industries and wholesalers, but can stabilize prices and reduce risks for all producers and bankers.

MINIMUM STANDARDS & KPIs FOR SUCCESS

• The provision of credit, savings, guarantees or insurance to or among value chain actors

• The creation of strategic alliances through financing extended by a combination of value chain actors and financial institutions

• The offering of tools/services to manage price, production or marketing risks

• Design sustainable value chain finance interventions.• Facilitate information flow from the value chain to

financial markets.• Design interventions with ‘integrated components’

that focus on increasing access to finance.

Impact on external factors onAgri-Value Chain Financing

The volatility occurring in global financial markets as well as climate change is becoming a major challenge to agriculture in general and smallholder farmers in particular. These have brought serious and long term consequences, including escalating unemployment, loss of income and foreclosure of enterprise, for real economies across the world.

(CASE STUDY - NIGERIA

NIRSAL) Nigeria Incentive-based Risk Sharing System For Agricultural Lending

17

NIRSAL ($500m assets to stimulate lending financial institutions)

De-risk agriculture finance value chain

Build long-term capacity

Institutionalise incentives for agriculture lending

NIRSAL Objective

Goal

Expand bank lending in agricultural value chains

Risk sharing Facility ($300m)

Insurance Facility

($30m)

Technical assistance

facility ($60m)

Bank incentive

mechanism ($10m)

Agricultural bank rating

scheme ($100m)

Shares lending risks with banks (e.g. 50% loss incurred)

Link insurance products to the loan provided by the banks to loan beneficiaries

Build the capacity of banks, micro-finance institutions

Build capacity of agricultural value chains

Expand financial inclusion

Targeted incentives that move banks to a long term, strategic position and commitment to agricultural lending

Rate banks according to their effectiveness of lending to agriculture.

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Fixing the Broken Agri Chain

Production

•Poor extension•Supply of inputs•Low productivity•Outdated farming practices

Supply Chain Processing Marketing

• High wastage •Lack of storage• Poor transportn.• Many intermediaries

• No assured supply of inputs• Lack of processing facility•Technology

•Poor infrastructure•Lack of grading• No market linkages

Broken chain increases credit risk, increases cost of produce and limits credit flow

Questions