How can Africa's agriculture SMEs get more funding, policy support?

NAIROBI — Funding and policy environments are hindering the success of small- and medium-sized enterprises working in agriculture across the African continent, according to speakers at this week’s AGRF virtual summit. As SMEs are key intermediaries between smallholder farmers and the markets where their products are sold, these challenges can prevent many from reaching scale — and for some, it threatens their survival. SMEs make up about 40% of the total gross value of the agriculture value chains in sub-Saharan Africa, according to AGRF, a global forum for African agriculture. SMEs work with farmers for access to inputs, such as fertilizer or irrigation, in order to increase yields, as well as access to storage to reduce post-harvest loss. They also work in areas such as logistics, trading, processing, cold chain, and food safety, among other services. These companies are key drivers of economic growth, playing a crucial role in innovation in the agricultural sector and creating jobs across the continent, according to Soléne Prince-Agbodjan, credit portfolio manager at Agri-Business Capital Fund. Speakers at the summit offered advice on how to turn this around. From the SME side, this includes building trust and showing consistency to funders, as well as improving internal structures. It also includes these companies coming together with a unified voice to ask for specific policy changes. From the funder side, there is a need for a better understanding of the agricultural cycle, and its need for long-term funding, as well as making the decision to fund fewer companies with larger sums of money. “Finance to unlock and help SMEs grow, expand, improve and innovate is absolutely essential,” said Sara Mbago-Bhunu, director of the East and Southern Africa division at the International Fund for Agricultural Development. ‘Patient financing’ SMEs will become increasingly vital as urban centers in Africa grow, and the middle class expands, said Ousmane Badiane, distinguished fellow at the African Association of Agricultural Economists. People with rising incomes are demanding food that passes safety standards, is processed, packaged, and often ready to cook, he said. Because of this, SME growth should be “a central element of development strategy today in Africa,” he added. But despite their importance, SMEs are considered the “missing middle” — often seen as too big to receive microfinance and sometimes too small or risky to access sufficient capital from traditional debt or equity lenders, Prince-Agbodjan said. Given these restraints, agriculture SMEs across the continent have cash flow and liquidity challenges, Mbago-Bhunu said. It’s difficult to find financing for the agricultural sector itself because it’s seen as risky, she added. Commercial banks are often not willing to finance the needs of these agricultural companies. Another issue is that banks don’t necessarily understand the agricultural cycle. Agriculture requires “patient financing” that is long-term and responsive to agriculture business cycles, said Jane Maina, managing director at Vert Ltd., a Kenya-based company that specializes in the export of vegetables and processed fruit products. “The solutions exist. We have the opportunity to apply proven and successful financial instruments and proven and successful food insecurity solutions.” --— Samir Ibrahim, chief executive officer, SunCulture For SMEs, the COVID-19 pandemic has exacerbated these challenges, with supply chain disruptions making it difficult for many to operate. Many companies have struggled to maintain the cost of doing business, including paying salaries, taxes, and rent, Mbago-Bhunu said. Appealing to investors These types of businesses can go through graduation processes as their companies grow, which impacts what sort of access they have to different types of finance. This could include funding from donors, angel investors, vulture capitalists, institutional investors, strategic investors, and governments. Agricultural SMEs will likely need different types of funding at different stages of their business, said Samir Ibrahim, chief executive officer and co-founder of SunCulture, a company that creates off-grid solar-powered irrigation systems. To move from donor funds to commercial funding sources, it’s important for a company to hit its metrics to show that it's growing, Ibrahim said. Consistency and trust are also key. “The more trust you build from the people that are funding you, the easier time you will have raising money,” he said. While criteria for accessing financing from financial institutions varies from lender-to-lender, investors generally like to invest in companies that have demonstrated positive revenue growth, have good margins and cash flow, Agri-Business Capital Fund’s Prince-Agbodjan said. Investors also want to see that the company has a well-defined market, and has in place contracts and partnerships. The company should also have good corporate governance and management, she added. But financial institutions also need to adapt, she said. They should cater their financial products to the needs of agricultural SMEs and also increase the simplicity and clarity of their lending conditions. Cutting bigger checks In order for SMEs to scale, there needs to be a shift in how funding is spent in the sector, Ibrahim said. This includes a pivot toward focusing on the agricultural solutions that have worked and provide targeted funding to these companies. In recent decades, donors have funded multiple agricultural interventions with relatively small amounts of money. This is the ‘spray and pray’ approach,’ he said. This was necessary to figure out which interventions were effective. “Now, as we have evidence of what sort of interventions work, I think we need donors and multilaterals to start cutting much bigger checks for much fewer interventions,” Ibrahim said. Funding also needs to happen at a quicker pace, he said. There is also a need for more mergers and acquisitions in the sector, in order to reduce overhead costs and create integrated businesses that can scale, he added. Smart partnerships at national levels with commercial banks are also crucial, Mbago-Bhunu said, as well as crowding-in of public finance that is targeted effectively. Unified voice Poor policy environments in countries also make it difficult for SMEs to start businesses or reach scale, Mbago-Bhunu said. Most of the policies and programs that exist, especially from a financing perspective, are geared towards larger organizations, said Nicholas Alexandre, global head of commercial at LORI, a logistics platform for the cargo-transport value chain in Africa. “If you ask ministries of agriculture, they tend to either focus on the production side, the farmer cooperative side, or the large companies,” said Atsuko Toda, director of the agricultural finance and rural infrastructure development department at the African Development Bank. To change this, SMEs must engage with the public sector in a unified voice, for the first time, advocating for specific policy recommendations, Ibrahim said. This could include underscoring the benefits of public-private partnerships and advocating for catalytic funding tools, such as targeted, time-bound subsidies. “There are a million things we could do from a policy perspective,” Alexandre said. Multilaterals such as the African Development Bank, governments, and the private sector also need to come together in a stronger way to support SMEs, Ibrahim said. “The solutions exist. We have the opportunity to apply proven and successful financial instruments and proven and successful food insecurity solutions,” he said. “But we need everyone on board.”