Financing Agribusiness in Sub-Saharan Africa: Opportunities, Challenges, and Investment Models

Worldwide, agriculture and the agribusiness industry are facing a multibillion-dollar financing gap. Estimates of the global demand for smallholder agriculture finance are as high as US$450 billion. Within Sub-Saharan Africa alone, an estimated US$11 billion of investments are needed each year to achieve the desired expansion of agricultural output in the region.

This study examines financing agribusiness in Sub-Saharan Africa, where expanding food markets driven mainly by income growth and rapid urbanization are creating demand for high-value agribusiness products, new supply chains, and supporting services in the agribusiness industry. Using multiple analytic methods, it looks at the supply and demand for finance by agribusiness in distinct value chains at the same time. The report offers enhanced understanding of gaps and opportunities in agribusiness financing.

Several constraints curb agricultural financing. Limited access to affordable finance for working and investment capital remains one of the greatest challenges to the growth of agriculture, agri-SMEs, and even large agribusiness. For banks, the primary reason for limited supply of agribusiness finance with adequate tenors is the lack of specialist knowledge of agriculture and agribusiness among their staff. Many do not have the skills to analyze an agribusiness plan or assess agricultural related risks. Others did not have awareness or capacity to use innovative financial products and services for agribusiness. Despite the challenges, the banking sectors in these countries are highly optimistic about the future of agribusiness finance. All banks surveyed in the four countries stated that interest in agribusiness would continue to grow steadily in the next decade.

Interest in agribusiness alone is not enough to cover the financing disparity. Integrated solutions involving multiple stakeholders

The most important source of finance for small and medium sized enterprises is informal credit. Large scale operations are fully commercial, rely on and have access for formal credit. Credit from input suppliers, once an important source of financing for farmers and other value chain actors, appeared to be a declining source of financing at both farm and off-farm levels.

Credit from commercial banks is becoming an increasingly important source of financing, particularly among medium- and large-scale farms and cooperatives at the farm level, and for input suppliers, processors, and marketing and distribution actors. Many banks noted that technical assistance from development finance institutions (DFIs) provided important impetus for experimentation with new financial products and services.

Private equity, venture capital, and impact investment are increasingly becoming important sources of financing for agriculture and agribusiness in Sub-Saharan Africa. Financing agribusiness through agricultural investment funds is on an upward trend. Agribusiness investment funds provided capital to agribusiness through diverse instruments, such as equity, debt, debt and equity, and guarantees.

Multinational corporations are growing their investments in agriculture value chains in many places in East and West Africa, by creating new links and relationships to their third-tier suppliers. This adds value and improves productivity and quality of agricultural products. Multinationals surveyed expressed a desire to further expand and the majority identified farm production

The World Bank and IFC continue to support agriculture projects and agribusiness. These projects focus primarily on supporting the delivery of credit at the retail level through credit lines, matching grants, and credit guarantee funds. Other projects support services delivery and expansion into rural areas and for technical assistance. Most of the IFC projects mainly supported commercial banks and investment projects with technical assistance components. The IFC also supported agribusiness through specific advisory services projects.

Policy and regulation are critical components to expanding agriculture financing. Respondents emphasized the importance of government creating a business climate that is more conducive to doing business, especially for SMEs. They also noted that governments should make agriculture a priority sector, including providing incentives and support to foreign investors to attract more capital.

Working capital, innovative financing products and services, and finding new ways to overcome the challenges farm and off-farm providers face when seeking access to credit are important considerations when designing financial services and development interventions.

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