By Obiora Madu Trade Development Consultant DG – African Centre for Supply Chain THE CHALLENGES OF FINANCING SMALL FARMERS AND MSMES IN AFRICA: How Agricultural Value Chain Finance can be a Rescue
Dec 31, 2015
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)
Dual Face of Agrifood Markets Enhanced Presence of Modern retailers Popularity of Traditional retail markets
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