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Demystifying Access to Finance for Agribusinesses Through Innovation

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Demystifying Access to Finance for Agribusinesses Through Innovation

Every single working day, Sipporah wakes up at 4.am to board a public service vehicle from Kawangware to Muthurwa market in Nairobi Central Business District to pick up fresh traditional vegetables all the way from Kisii so that she can stock up her shop for the days’ business. Having operated the business for 4 years, she has been in the same cycle without expanding since whatever she makes is consumed by her household leaving her with nothing to plough back to the business for expansion. However, for the short time that she has been with SokoHela, she has been able to source for orders from nearby hotels and thereby increase her sales volume because we took the initiative of understanding her financial needs and giving her a product that could unlock her ultimate business potential.

Investing in the agricultural sector is often regarded as one of the most efficient and effective ways to promote food security and reduce poverty, but it is also a profitable business opportunity with massive growth potential. It’s estimated that the investment opportunity in agribusiness assets in emerging economies runs into the billions of dollars. Equally important, the need to invest in agriculture will only increase, due to rising global population and growing consumer preferences for higher value, quality, and safe foods. It’s estimated the demand for food will increase by 70% by 2050, and that meeting that demand will require at least $200 billion annually in investments.

Despite this opportunity, most small-scale agribusinesses in developing countries lack access to reasonable financing options for working capital and for acquiring productive assets. These companies fall into what is known as the “missing middle,” and face a combination of unrealistically high collateral requirements and unaffordable interest rates.

These businesses need reasonable financing options to, among other solutions, access improved inputs and acquire better on-farm practices so as to increase production. They also require financing to invest in post-harvest practices that can reduce food losses, improve the quality of products, and add value to the crops produced via processing. As the effects of climate change grow, agribusinesses will have to increasingly invest in sustainable production systems and climate adaptation technologies.

A farmers’ or agribusiness’ decision to invest is strongly influenced by his or her access to financial instruments. If appropriate financial instruments are lacking, or do not match the needs of the agribusiness, it may be discouraged from adopting technologies that can improve the efficiency of their businesses. In other words, productivity in the agricultural sector benefits from improved access for farmers and agribusinesses to financial instruments that are tailored to their needs.

Demand for finance in agriculture spans a range of different types of capital, from short-term trade finance to long-term debt and equity investment. Farmers and agro-enterprises require an assortment of capital to succeed. This includes, for instance, short-term working capital that farmers use to purchase farm inputs on a seasonal basis or that agribusinesses use to purchase raw materials from farmers or to operate a leased agro-processing facility. The need for finance also includes medium-term financing for farm or agro-processing equipment, as well as long-term debt and equity investments to acquire capital goods and land.

The particular conditions of agricultural businesses often require tailored financial products. This creates an opportunity for different types of financial intermediaries and providers of capital to develop innovative products and to play a variety of roles in addressing the unmet financial needs in the agriculture sector.

Nevertheless, finding the right investment opportunity is not easy. According to McKinsey, investing in the food and agribusiness sectors requires a high level of understanding of specific crops, geographies, and sometimes-complex value chains that encompass inputs, production, processing, and retailing. Additionally, many of the relevant investment opportunities are in geographies that are unfamiliar to a number of investors, and their profitability rests not only on crop yields but also on how different parts of the value chain perform.

However, sensing an opportunity, investors are moving fast to capture value from technological innovations and improved efficiencies in food and agriculture. Since 2004, global investment in the food-and-agribusiness sector has grown threefold to more than $100 billion in 2013, according to McKinsey analysis. Food-and-agribusiness companies on average have demonstrated higher total returns to shareholders (TRS) than many other sectors: the TRS of more than 100 publicly traded food-and-agribusiness companies around the world increased on average by 17 percent annually between 2004 and 2013, compared with 13 percent for energy and 10 percent for information technology companies.

The renewed investor interest in the agricultural business is leading to quicker innovations in agricultural finance. Many of these innovations are helping to dispel misplaced perceptions of risk associated with the sector by demonstrating fast commercially attractive returns and offering alternative options to risk-adverse finance conditions, such as high collateral requirements, unaffordable interest rates and rigid repayment terms. Innovations in agriculture finance are building momentum for agricultural transformation in developing countries by mobilizing new resources, facilitating faster introduction of new technologies and addressing expensive barriers of traditional agricultural finance.