The need to create innovative financing mechanisms for Africa’s farmers and revaluate existing ones is becoming increasingly critical as the continent faces compounded challenges, including climate change, low productivity, and conflict.
This was highlighted during a session at the recent 10th African Regional Forum on Sustainable Development (ARFSD), where the industry called on policymakers to assess the needs of farmers and enhance access to funding if they expect Africa to meet the Malabo Commitment to end hunger by 2025, or the Sustainable Development Goals (SDGs) by 2030. Collaborative efforts, private sector engagement and strategic partnerships were identified as key to making an impact and advancing these goals.
The agricultural sector is the economic backbone of Africa, where an estimated 33 million smallholder farms and the farmers who live on them contribute to 70% of the continent’s food supply. Africa produces all the principal grains and other diverse crops, including rubber and cocoa in the tropical regions; soya and sorghum on the plateaus; tea, coffee, and flowers in the high-altitude areas; as well as Mediterranean crops. However, climate phenomena such as El Niño and increasing extreme weather events, due to climate change, such as tropical cyclones, floods and droughts, are decimating crops, and the resilience of the land and its ability to adapt are being pushed to their limits. Meanwhile, the demands on this vital resource are reaching critical thresholds.
Climate change also modifies the properties of soil, both chemically and physically leading to land degradation. Soils become less fertile, lowering crop yields and this impacts on agricultural production. Land degradation is already a major issue in Africa, due to poor soil health, and this is threatening the foundation of its citizens’ livelihoods – because they cannot afford to mitigate it.
The president of the African agricultural transformation institution, AGRA, Dr Agnes Kalibata, estimates that land degradation costs farmers up to $1,400 per year. According to the global research partnership CGIAR, 65% (494 million hectares) of Africa’s soil is currently degraded. Eighty-three percent of sub-Saharan Africans rely on this land for their livelihood. As a result, yield gaps on the continent are wide, ranging from as little as 2% to over 50%.
Substantial investment in Africa’s agricultural sector is needed, however, the visible impacts of climate change have caused investors to be wary. Other funding impediments include default risks and political risks. Giving farmers access to the right financial resources to address land degradation and climate change challenges would result in more progress being made towards achieving the objectives of the African Union Agenda 2063, which include the transformation of African agriculture and food security.
Closing the gaps
With the Russia-Ukraine war having increased global food insecurity by impacting production and crop exports out of the former agricultural powerhouse of Ukraine, a significant opportunity exists for Africa. By improving yields and insuring them against climate risks, African farmers could help close the gap, unlocking immense economic growth and development potential. Tapping into finance would also help farmers expand into the 60% of arable land that is still uncultivated on the continent.
As part of the Comprehensive African Agricultural Development Programme (CAADP), an initiative that forms part of the African Union Agenda 2063, African governments have committed to allocating at least 10% of their national budgets to agriculture and rural development. But this might still not be enough.
Another way in which governments could assist farmers is through subsidising climate insurance. Farmers with their limited resources are reluctant to take out premiums due to the cost, making derisking the industry not only the answer but also a huge economic opportunity. The reduction of risk would encourage investment. Private sector involvement is critical to driving investment, innovation and addressing the challenges in the industry.
Making an impact
The work of parametric insurer and financial affiliate of the ARC Group, African Risk Capacity Limited (ARC Ltd.), exemplifies the impact that is possible through addressing farmers’ specific needs and forging strategic partnerships. “There is no story that can be told about African development without taking into account agriculture and the need to protect investments in the sector,” says ARC Ltd. CEO Lesley Ndlovu.
The company provides insurance to small- to medium-scale farmers in Africa through micro or meso products. With micro insurance, farmers’ assets are insured, and their income is protected, and with meso insurance, banks are insured against a portfolio of loans. “A severe drought in a region will result in a spike in defaults. These defaults can be protected by insurance to avoid the accumulation of risk,” says Ndlovu. As a result, banks can free up more lending than they would usually be comfortable with, helping enhance access to finance so that farmers can invest in improving productivity and income.
ARC Ltd. has also been involved in several projects across Africa targeting farmers. In Côte d’Ivoire, the company, together with the Côte d’Ivoire Environment and Sustainable Development Ministry (MINEDD) and the United Nations Development Programme (UNDP), initiated a climate insurance pilot for agricultural value chains, run in collaboration with the FUSCOP RIZ CI “COOP-CA”, a federation of rice producers and their board of directors. Following the successful pilot, and with more partners on board, such as the World Food Programme, the project was expanded to include cocoa production with the aim of replicating it further across other agriculture value chains, such as cotton and maize. The project issued its first payout earlier this year of 16 million CFA francs to 3 594 rice and cocoa producers.
In the Horn of Africa, ARC Ltd. is helping fight the impact of the dual hazards of drought and excess precipitation on farmers in Djibouti. The first-ever multi-year, multi-peril agreement on the continent was signed in 2023 between the government and the ARC Group. It has given the country access to five years of disaster risk management capacity building and disaster risk insurance coverage for drought and excess precipitation.
ARC Ltd. has also partnered with the US Government (USG) on a $11.7 million project over three years to protect vulnerable smallholder farmers and African governments against climate risks. “Our priority with this grant is to provide coverage to 19 states,” explains Project Head and ARC Ltd. Chief Operating Officer Ange Chitate. “With the support of the USG, we will be refining and developing innovative products to meet the evolving needs of these countries.”
The project has two goals. The first is to work closely with governments so that they can better manage natural disasters by using parametric insurance. In a collaborative approach, ARC Ltd. customises risk models for countries and helps governments integrate parametric insurance into their policy frameworks.
The project also aims to increase the uptake of parametric insurance by working with the African Union and regional economic communities. The significant advantage of parametric insurance is that it enables a rapid payment of claims, typically within 10 business days of a disaster, to fund emergency relief efforts and rebuilding.
ARC Ltd.’s plans for the continent’s agricultural sector include developing demand-driven micro and meso insurance and diversifying beneficiaries – including pastoralists locally and humanitarian organisations globally.
With escalating climate risks, innovative financing solutions like parametric insurance have significant potential to safeguard farmers’ livelihoods and drive development across the continent. Increased awareness and understanding are essential to encourage uptake. More investment in this space and policy reforms are also imperative to scale up climate risk management strategies and to empower Africa’s farmers.
