Money Talks, but it’s not speaking to Agriculture

This article was originally published in The Sunday Times on August 22, 2024.

A major contributing factor is Africa’s heavy dependency on food imports as a result of low domestic production and processing. The African Development Bank estimates that the continent’s net food imports will grow from US 35 billion in 2015 to over US $110 billion by 20251. This reliance makes the continent particularly susceptible to price increases driven by external factors such as the war in Ukraine, climate change, and disruptions to supply chains. To build more resilient food systems, increasing local production and processing, and nurturing a robust domestic market are essential.  

This is where small and medium-sized enterprises (SMEs) come into play. With around 44 million SMEs operating across sub-Saharan Africa, they are the backbone of the agricultural sector and essential providers of employment for the youth and income for countless communities. SMEs are crucial engines of growth in Africa, and their success is intrinsically linked to the continent's overall economic and political stability. Despite their critical importance, these enterprises face a significant financing gap. In fact, 40% of SMEs in Africa cite access to finance as the primary constraint on their growth[2].   

The Financial Mismatch  

Finance is the fuel for growth for many businesses, including for African SMEs. Access to affordable loans and credit is essential to invest in innovation, scale operations, and compete in local and international markets. However, most financial products available from commercial and local banks across the continent are not designed to meet the unique needs of agricultural SMEs.  

The problem isn’t the absence of capital in African financial markets but rather a mismatch between what SMEs need and what financial institutions can offer. For financial institutions agriculture is a high-risk sector due to its vulnerability to external factors such as climate change and market volatility. Compared to other market segments such as infrastructure or energy, agriculture simply has a higher cost and risk and is more fragmented. It is therefore more difficult for banks to lend to Agri-SMEs, resulting in high interest rates, stringent collateral requirements, and short repayment periods.  

For instance, in Ghana, interest rates can exceed 30%, making it nearly impossible for SMEs to secure loans without subjecting themselves to enormous financial strain. Even when loans are approved, they often come with terms that fail to account for the realities of agricultural cycles. SMEs in agriculture need at least 90 days for crops to mature, yet they are often required to start repaying loans immediately after receiving the loan. The unpredictability of weather patterns, exacerbated by climate change, further complicates matters. Unexpected droughts or floods can drastically reduce productivity, making it even harder for these enterprises to meet their financial obligations.  

This mismatch between available financial products and the unique needs of agricultural SMEs stifles their potential for business growth. Without access to financing that is tailored to their circumstances, these SMEs are unable to innovate, expand and contribute to Africa's high need of creating employment opportunities, trade and food security.  

From risky to investment-ready   

One of the critical barriers to financing agricultural SMEs is their perception as “unbankable” by traditional financial institutions. This perception stems from several challenges these businesses face: inconsistent market demand, insufficient financial documentation, limited collateral, and a lack of access to technology and digital tools. Compounding these issues is a low level of financial literacy and weak cash flow management, which further erodes the confidence of lenders.  

At IDH, we are committed to making SMEs investment-ready by strengthening their financial governance and building a track record that can instil trust in banks. We connect SMEs with the right financiers, integrating them into strong financial networks and offering technical assistance in areas such as financial statements, cash flow management, and broader business operations.  

Our efforts go beyond making SMEs bankable. We actively derisk financial transactions by helping SMEs access markets. We first assess the market demand and then work with SMEs and smallholders to produce in accordance with this demand. we foster long-term partnerships with reputable buyers, both locally and internationally. By securing these reliable market linkages, we help ensure a consistent demand for SMEs' products, significantly reducing the volatility that often plagues small businesses in the agricultural sector. Banks and other investors, more confident in the SMEs' stability and cash flow, are increasingly willing to provide the financing needed for growth.   

A prime example is the Grains for Growth (G4G) program in Ghana, which IDH implements with support from the Mastercard Foundation. The program aims to develop inclusive and economically sustainable grain supply chains by helping agricultural SMEs become more investment ready. Through the program, IDH provided technical assistance, offering capacity-building initiatives and creating business profile summaries to help SMEs improve their investment strategies. Recognising that banks are more likely to lend when SMEs have established relationships with credible off-takers, the program concentrated on improving market access. It facilitated partnerships with reputable buyers, enhanced product quality to meet market standards, and developed SMEs' capacity to scale operations and enter new markets. This while engaging financial institutions in stakeholder platforms, fostering valuable dialogue around SME financing.  

The result is impressive. Since the start of the program in 2019, Grains for Growth managed to mobilise $23.6 million in financing. This includes $20 million in direct SME investments for crop production and aggregation, $1.56 million in loans from six banks (Calbank, CBG, Ecobank, ABSA, Sinapi Aba, and Republic Bank), and over $2 million in grants.   

Bridging the Gap: An Investment Network for African SMEs    

But improving investment readiness is only part of the solution. If we are to truly transform Africa’s food systems, we need a concerted effort to bridge the gap between SMEs and the financial sector.   

This challenge goes beyond financial readiness; we need an integrated approach. Commercial banks, local financial institutions, microfinance organisations, and impact investors must collaborate with the agricultural industry to develop solutions tailored to the realities of SMEs. This includes creating loan packages with lower ticket sizes than what is offered today, as well as lower interest rates, longer repayment periods, and terms aligned with agricultural cycles. Additionally, incorporating climate insurance into financial products can mitigate the risks of unpredictable weather, offering both lenders and SMEs the security needed to thrive in a volatile environment. Lastly, it is essential for banks to establish strategic partnerships with organisations such as IDH that support SMEs with technical assistance and business development in order for them to meet requirements. 

We are committed to fostering deeper engagement between SMEs and the financial sector. Together we can strengthen African SMEs, boosting local food production, creating more jobs, reducing reliance on imports, and ultimately, building more resilient food systems. A thriving SME sector would have a ripple effect across the continent, driving inclusive economic growth and improving food security for millions of people.  

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