Whether for profit or social motives - and often both - an increasing number of investors are targeting opportunities in African agriculture. At the same time innovative approaches for deploying aid to support farming businesses linked to smallholders are emerging. This blog provides a snapshot of who is doing what, where and how.

12 April 2013

Don’t beat up the banks, they can’t fix African agri-finance on their own

I have attended countless conferences and workshops on African agriculture – in South Africa, Mozambique, Ghana, Tanzania, Ethiopia, Europe and the US. There’s always a panel session on access to finance. The discussion usually follows a similar script.

Farmers and entrepreneurs complain about the high cost of finance. “We cannot afford 25% interest rates”, they say. Governments insist banks should lend more to the agriculture sector. The banks say there are too few investment opportunities; and they are forced to charge high interest rates because of macroeconomic fundamentals and the unavoidable fact that agriculture is risky.
“A quarter of our clients’ fields were under water” a Mozambican banker told a conference in Maputo earlier this month (the result of recent floods in the Limpopo Valley). “We are not making money on our agriculture loan book”.

In the discussion that follows there’s often a lot of scepticism. Surely the banks could try harder to find good investments? They should get out into the field, learn more about agricultural economics and develop affordable loan products that meet farmers’ needs.
In AgDevCo’s view, criticising the banks misses the point. Most agribusiness opportunities in Sub-Saharan Africa are greenfield or early-stage, without a strong balance sheet or management track record. Yields and markets are uncertain. The weather is always a factor. Commercial banks are just not set up to provide finance to that type of client.

Banks are – at least they should be – conservative institutions which seek to protect their depositors’ capital by taking manageable risks and earning a steady return. Would you be happy if your bank was investing your savings in unproven agriculture businesses?
What the African agriculture sector needs is risk capital in the form of equity and long-term loans. There is a strong case for subsidising risk capital for African agriculture because, while agriculture will never deliver spectacular financial returns, it can have a hugely positive impact on employment creation, rural economic growth and food security.

Where will the risk capital come from? There are private equity firms targeting African agriculture but they are looking for large deals (typically $5 million +) which are in short supply. The development finance institutions, such as the IFC and CDC group, are slowly getting back into agriculture but they also seek large deals because of high transaction costs.
Social impact investment funds like AgDevCo, Root Capital and Acumen can play a role. Unlike traditional venture capital, they raise money from a combination of charitable, government and commercial sources which allows them to take (a little) more risk and accept a (slightly) lower financial return in order to achieve high social impact.

Social impact investors can fill the agri-financing gap by investing a few hundred thousand dollars or more – bundled with professional, hands-on management support – to help SMEs grow into the commercial debt and equity markets. As with any venture capital investment there will be failures as well as successes. However, those successes could help kick-start a profitable agriculture sector.
So go easy on the banks, they are supposed to be (!) boring, conservative investors. What African agriculture needs is capital with more risk appetite - and plenty of patience.