African Rural and Agricultural Credit Association

1. Generating action to overcome poverty and crises African Rural and Agricultural Credit Association Smallholder-inclusive Value Chain Financing – Best Practices Karen Tibbo Dakar, 20 November 2013

2. Smallholder-inclusive Value Chain Financing – Best Practices Documenting best practices in smallholder-inclusive agriculture value chain finance in Africa • Increasing agriculture productivity • Currently uncompetitive, with perceived high risk and low returns • Agricultural value chains • Offer methods and tools to increase the productivity and performance of agriculture • Value chain finance • Opportunity to expand financing for agriculture • And improve efficiency by facilitating increased financial access and lowering costs and risks • How to bring smallholders into value chain finance - inclusive business models • Mainly subsistence agriculture • ard to reach by financial institutions

3. Smallholder-inclusive Value Chain Financing – Best Practices The challenge • For smallholders – • to become more efficient, market-oriented & profitable so they can be credit worthy • For financial institutions – • how to increase their support to the agricultural sector, especially smallholder farmers • This report aimed to answer the question: • What strategies are being used to scale-up provision of financial services that support commercialization of smallholder production? • We looked at a range of financing facilities: • Bank loans, Private equity, Credit guarantees, Microfinance • Matching grants, Catalytic funds, Patient capital • Government finance initiatives • We looked at inclusive business models • And we brought the two together

4. Smallholder-inclusive Value Chain Financing – Best Practices Our Approach to the Study: methodology • A survey of AFRACA members • AFRACA has 106 member organizations • We received 22 responses: • 19 covered 3 out of the 8 financing facilities (bank loans, microfinance and government initiatives) • 3 were not aware of a model of finance smallholder-inclusive value chains • We worked with responses that were available for follow-up interviews and provided clear information on how they finance smallholder-inclusive value chains • We used our own networks to obtain information from the remaining 5 financing facilities

5. Smallholder-inclusive Value Chain Financing – Best Practices Innovative Funds Common objective: • Delivering development finance to catalyze private sector innovation • Preparing agribusinesses to become ‘investment-ready’ Matching Grants • E.g African Enterprise Challenge fund, prepares companies for commercial finance with grants and interest-free loans Catalytic Funds • Invest social venture capital in greenfield businesses, starting from scratch Patient Capital • long term finance used to support infrastructure development in early stage, high risk commercial agribusinesses

6. Smallholder-inclusive Value Chain Financing – Best Practices An example of a financing facility (1) • Catalytic Funds – AgDevCo - established 2009 • Successes • Establishing public-private partnerships in 5 countries to catalyse billions of private investment triple agricultural input • Linking thousands of smallholders to commercial farm enterprises • They provide a full service package of extension advice, seeds and inputs on credit to farmers • Additional income available through dividend payments • Challenges • Expensive – needs to be close to the ground to support projects • Takes longer to prepare a company for commercial financing than planned (7-10 yrs) • Hard to get funding for infrastructure (irrigation), which requires long term loans (20 yrs) • Key learning points • Creating sustainability by letting farmers fail

7. Smallholder-inclusive Value Chain Financing – Best Practices Findings (1): Successes • How are smallholder farmers being integrated into value chains? • Inclusive business models are providing a vehicle to aggregate smallholder farmers • There are different ways of aggregation and there no one approach • Two broad scenarios emerging: • Farmer associations becoming commercial entities • Where farmer associations are weak, intermediaries secure financing for smallholder farmers • Inclusive business models also support increased productivity by smallholder farmers through access to TA and credit for inputs. Some are even building in an ‘upside’, where farmers are part owners in an agribusiness • This supports transition from subsistence to commercial agriculture

8. Smallholder-inclusive Value Chain Financing – Best Practices Findings (2): Successes Why are inclusive business models attractive to financial facilities? • They significantly reduce the operating cost of lenders because of the economies of scale • They significantly reduce the risk of lending compared with lending to individual farmers • The coordination of farmers is left to the association or intermediary • Being part of a chain provides a guarantee that loans can be repaid

9. Smallholder-inclusive Value Chain Financing – Best Practices Findings (3): Challenges Why are inclusive business models only a step on the way to achieving value chain finance? • Not all inclusive business models link farmers to finance • A farmer association still won’t necessarily meet the requirements of a commercial lender (a bank) until it has an established track record • Even if finance is provided to association the interest rates can be prohibitively high particularly for grains crops. • There are supply side constraints that limit lending to smallholders

10. Smallholder-inclusive Value Chain Financing – Best Practices Findings (4): Opportunities • Why are partnerships between financing facilities needed? • Most financing facilities cannot provide the toolkit of financing needed for value chain finance • Opportunity for larger banks to learn from smaller rural banks who have a long history of working with farmers • Businesses at different stages of development require different funds at different times • Funding requirements of a start-up business offering low return and high risk cannot be met by commercial finance • Need grants and loans to support business as they mature and provide a pipeline of ‘investment-ready’ projects

11. Smallholder-inclusive Value Chain Financing – Best Practices Findings (5): Opportunities • How donor funds and commercial funds can work together • To reduce risk • To increase returns on investment

12. Merci! Thank you! Generating concerted action to overcome poverty and related crises Tel: +44 (0)1273 252045 IEmail: enquiry@wasafiriconsulting.com I Web: wasafiriconsulting.com Africa: Kigali City Tower, 14th Floor  | Plot no. 6418, Avenue du Commerce | P.O.Box 6428 Kigali | RwandaI Europe: The Dock, Wilbury Villas, Brighton, BN3 3EL, United Kingdom