KIGALI – One narrative around obstacles to financing for agriculture in Africa started to shift away from risk aversion to lack of understanding at the Mastercard Foundation’s Young Africa Works Summit in the Rwandan capital on Friday.
A number of speakers at a session titled Unlocking Agrifinance for Youth went as far as to say the problem was not so much about managing risk, but rather lack of knowledge.
The consensus opinion among quite a number of delegates, from farmers to World Bank employees to fund managers, was that banks just didn’t understand agriculture.
Some delegates at the session in Kigali on the summit’s second and final day expressed surprise that bankers who were able to create profitable ways to finance individual purchases of homes and cars had so far been unable to find a way to tap into the potentially lucrative market of young farmers in Africa.
The Young Africa Works summit is focusing on finding ways to achieve sustainable and meaningful livelihoods for youth in the agricultural sector. The event directly involves young people, 50 of them as delegates, “to help understand and explore their journeys, including the challenges they face, in securing meaningful economic opportunities”.
The barriers to raising finance – including a lack of collateral and/or savings or even a banking track record, low or non-existent credit scores and a perception that youth will default on their loans – are well-known.
Still, agriculture is a sector widely identified as having the potential to defuse Africa’s ticking timebomb: a booming young population and a growing unemployment crisis. In addition to the aforementioned huge potential workforce, Africa has most of the world’s arable land. Another advantage is that farming is labour intensive and requires relatively little skill.
The potential looks great. Agriculture is “Africa’s undepletable gold mine” in the words of one young delegate to the Mastercard Foundation’s second annual summit. Also, young Africans are moving into agriculture and innovating like never before.
Yet banks continue to shy away from providing finance. For many raising finance is the critical challenge.
Kola Masha, managing director of Doreo Partners, who was moderating the session, noted that raising funds was even harder for young African farmers today than it had been before.
Because of hereditary practices, Masha said, young farmers today started with smaller plots after properties had been carved up over many generations. This also meant they had less collateral to try to raise a loan. In addition, he said, they frequently had less access to family labour than previous generations as competition for labour had increased.
Using projections of population growth and the average cost of setting up a basic smallholding, Masha estimated that African agriculture would be facing down an shortfall of $165 billion by 2035.
At the mention of this number there seemed to be an audible intake of breath in the room. Breathing steadied quickly, though, after panellist Andrew Youn, executive director and co-founder of the One Acre Fund, stepped in to say that he thought the notion that financing agriculture was risky was “largely a myth”.
“We are one of many examples of organisations dispelling that myth,” he said.
The One Acre Fund, which provides smallholder farmers with asset-based financing and agricultural training, expects to serve 520,000 farmers this year and, Youn says, their repayment rate is above 95 percent. He added that the repayment numbers were no different for youth. In fact, he said, “youth are some of our best customers”.
He said young farmers were more likely to adopt innovative practices that improved productivity and were also more likely to see themselves as professionals.
So what’s the difference, one might wonder. One difference, as with most specialist organisations, is the level of understanding and engagement.
Youn says One Acre Fund sees a lot of opportunities to enhance productivity when working with young farmers. The company doesn’t just give a loan but rather gives a loan in the context of training and various other targeted value-added services.
He added that with 70 percent of Africa’s youth engaged in farming and seeing farming as their profession there was a “wonderful opportunity to provide targeted value-added services”.
“These things are not that hard to do,” he said.
The basics of farming, he added, be it seed spacing or timing of planting and so on, were not complicated and there were many entities keen to partner to provide technical assistance.
Roy Parizat, senior economist for agriculture global practice at the World Bank, agreed that traditional commercial banks are “petrified” of lending to agriculture.
There were a number of disincentives, Parizat told the same session, such as these potential customers being out of sight. Even if you could read the signs, you can’t generally see smallholders and what they are doing. Also, the loan sizes were often small yet required as much due diligence as with any other loan, reducing the profit margin.
But, he said, “when you peel back some of the layers it is because they don’t understand the true risk”.
Parizat said he thought what was necessary was to build a system that understood agriculture. The system should ask questions such as: Are farmers applying good practices, are they using the right inputs, are they producing the best products for their area and the market?
He said as a banker there was nothing more scary than someone who didn’t have a credit history turning up without collateral. But, he added, it was possible to build a system that understood the risks of the business they were in without this data, in other words for people who had been financially excluded up till this point.
He added that banks “needed to take responsibility for understanding where there is a market and designing their products around that”.
– African News Agency (ANA)