Sector mismatch widens agri-SME financing gap

Friday April 22 2022
Agri- SMEs at work in a farm

Most commercial banks have access to some type of subsidised capital and/or credit guarantee for agri-SME lending. PHOTO | FILE


Agricultural small and medium-enterprises (agri-SMEs) in sub-Saharan Africa are grappling with a $74.5 billion (or 83 percent) annual financing gap, says a survey by Commercial Agriculture for Smallholders and Agribusiness (Casa) programme.

The survey, The state of the agri-SME sector – Bridging the finance gap, revealed a disproportionate financing pattern favouring a small number of “top of the market” and “possibly adequately served” tier of agri-SME players

According to the analysis, more than half of the total financing is supplied by local commercial banks, which typically invest in more mature agri-SMEs — for instance established aggregators and local processors, such as maize or rice millers, serving regional or national markets.

“Many of these agri-SMEs at the bottom are never able to make a complete graduation to fully commercial capital,” added private sector engagement officer at the Centre for Agriculture and Bioscience International (Cabi), and engagement, learning and communication lead (Casa), Alvaro Valverde.

“What’s needed is a more coordinated approach to ensure that whatever sub-commercial finance is available is applied to the best candidates among agri-SMEs.”

Different groupings


Non-banking financial institution (NBFIs) provide at least $2 billion, making for more than 10 percent of the funding and serve a slightly broader group of agri-SMEs, but mostly deploy de-risked products, such as factoring or leasing, with tight collaterals.

But this financing is also skewed toward more mature larger agri-SMEs that represent a very small fraction of less than five percent of the agri-SMEs in the market, leaving a huge funding gap for agri-SMEs that have yet to develop a financial track record.

International donors often focus on NBFIs in SSA to create additional financing opportunities in more rural and underpenetrated areas.

However, the promise of NBFIs to increase access to finance is offset by the high costs of this capital, limiting the broad adoption of this channel across SSA.

Commercial banks fill the lion’s share of the financing gap issuing nearly $10 billion, more than 60 percent of the loans given to agri-SMEs in sub-Saharan Africa. But even these, according to the study, primarily focus on urban areas, leaving gaps in financing available to rural agri-SMEs.

The researchers noted a slower maturity of the local banking sector in SSA, with often higher costs associated with servicing agri-SMEs.

East Africa, however, was distinguished as having a more mature sub-sector of commercial banks with agri-specific divisions or foci relative to the rest of SSA; these agri-focused banks are often able to provide innovative products not found at the more general commercial banks.

Brian Milder (Aceli Africa CEO) reported that “most of the commercial banks among Aceli’s partners have access to some type of subsidised capital and/or credit guarantee for their agri-SME lending such as the Business Development Fund in Rwanda, PASS in Tanzania, or Agricultural Credit Facility in Uganda.”

In addition, he noted that in East Africa “Aceli is seeing that the average loan size of banks among our partners is much lower (at least $100,000) than social lenders (at least $300,000)."

Impact-oriented funds and social lenders contributed $2 billion. Public development banks (PDBs) offer $1 billion and play a major role in not just direct-lending to agri-SMEs but also in providing catalysing options to private-sector lenders, such as credit guarantees.

SSA PDBs will often focus more specifically on agriculture as a broad sector rather than SMEs, due to the sector’s importance in the region. Private equity and venture capital funds financed $0.5 billion of the total lending.

Climate-smart agriculture

Despite the climate change urgency in the agriculture sector, financing has failed to respond to emerging needs occasioned by climate change. 

Hence affecting investment in climate-smart agriculture technologies, products and services to help farmers adapt to climate change, and investing in nature-based solutions that prompt sustainable growth, to changing the way agri-food value chains work in mitigating their production of greenhouse gas emissions.

Also, almost all climate funding is targeted at mitigation measures, rather than supporting ways for agriculture to adapt to the climate crisis with less than two percent of global climate finance – or $10 billion – channelled to small-scale agriculture.

The state of the argi-SME sector report from CASA concludes that challenges include high costs to serve agri-SMEs, high perceptions of risk in agricultural markets and low levels of investment readiness amongst potential borrowers and high costs for borrowers to service these loans.