African Agricultural Sector in Urgent Need of Access to Finance

Access to finance is critical for agricultural transformation, wealth creation and long-term prosperity in Africa. Inadequate financing of agriculture has been a major impediment to the sector, especially for smallholder farmers, their organizations, and small and medium agro-enterprises which lack basic financial services.

It is clear that agriculture remains an integral part of the African economy. This is one sector that provides livelihoods to more than 70 percent of the population in some African countries and contributes an estimated 25 percent to GDP. Despite its central importance much of the potential of the sector remains unrealized, with low productivity characterized by low use of mechanization and quality inputs, fragile environments and increasing land pressure.

To boost agricultural productivity and achieve much needed agricultural transformation in the continent, significant financing is required. Yet, Africa’s agricultural sector today attracts less than 5 percent of the lending from formal financial institutions, leaving farmers and agricultural enterprises starved of the capital they need to operate and grow their enterprises.

The shift from subsistence-oriented agriculture to commercial agriculture will require resources at all levels of the agricultural value chains. However, Africa, and particularly Sub-Saharan Africa, lags behind other regions of the world in supplying financial services to the agricultural sector . In particular, smallholder farmers and agri-enterprises in Africa lack the required investment capital and access to financial services necessary for growth and productivity.

The limited financial investment in African agriculture is attributed to many factors including the high risk profile of smallholder farmers, low productivity and returns, inadequate infrastructure, unclear property rights and uncertainties around land tenure, and weak policy and regulatory environments. Tackling these challenges requires significant investments on many fronts. Indications are that there are sufficient funds in the continent and among key potential partners that can be used to achieve the ambitious CAADP transformational goals and the Malabo commitments. These resources are both in the public and private sector domains. What is required are new and innovative ways to mobilize these resources, especially through raising more catalytic funding by African governments and multilateral institutions and catalyzing greater investment from the private sector, including from African entrepreneurs, emerging southern donor countries and foundations.

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Why are new ways of financing African agriculture necessary now? With the enormous financial needs of the agricultural sector today, there is clearly need to explore and develop new and innovative ways to finance the sector. Approaches and tools that have been used in the past have not been very effective, or at best, not appropriate, and hence, the huge unmet demand for capital in the sector, especially for smallholder farmers and informal small and medium enterprises (SMEs).

New ways of financing African agriculture are necessary in order to engage new partners, especially those from the private sector. Innovative financing tools geared towards the private sector are particularly important, given the centrality of private investment in growth in frontier and emerging economies.

Over the last decade or so, the main driver of economic progress across African countries has arguably not been ODA flows, which remain the most important source of public finance,but growth underpinned by private sector activity. This trend is likely to continue in the foreseeable future. Hence, private sector involvement is inevitable for any innovative financing effort initiated by the public sector. Likewise, innovative ways are required to mobilize resources from other sources such as philanthropies and non-traditional sources.

Accordingly, new tools are required to mobilize resources to complement traditional resource flows, such as FDI, government investment and ODA. The unmet demand for finance, which cuts across almost all agricultural value chains in Africa, is further justification for the need to pursue new ways of financing. Additional impediments to financial access include lack of collateral, complex land tenure systems, weak coordination among different actors in the value chain, and limited financial literacy among farmers.

The perceived/inherent risks associated with agriculture make it less attractive to financiers vis-à-vis other sectors, and this is more so the case in Africa than anywhere else. This places added urgency to devise ways of effectively addressing these challenges.

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