Unlock the impact potential of agricultural Small and Medium Enterprises in Africa

The African Development Bank Group and the Government of Canada announced the establishment of a new special fund to support Africa’s small and medium-sized enterprises (SMEs) in the agriculture sector

Global experts meeting during a panel session at the second international summit on food production in Dakar called for accelerated avenues to close the financial gap in agriculture and address barriers to the growing finance market for agricultural Small and Medium Enterprises (SMEs).

The discussions come in the wake of supply chain disruptions as a result of COVID-19 pandemic, the war in Ukraine, rising inflation, high commodity prices that have led to increased food and nutrition insecurity.

The session, titled, Closing the Financing Gap was moderated by Alan Kasujja, Presenter, BBC World Service.

At the summit, the African Development Bank Group and the Government of Canada announced the establishment of a new special fund to support Africa’s small and medium-sized enterprises (SMEs) in the agriculture sector.

The Agri-food SME Catalytic Financing Mechanism aims to catalyze and de-risk investment for agriculture SMEs. It will also strengthen agricultural value chains and improve food security across the continent.

The experts urgedlenders to explore blended finance to help de-risk agricultural transactions, reduce transaction costs and attract private financing by improving the risk-return ratios.

“A key challenge of the sector is the understanding of the risks…We need blended finance for things that are riskier to be done,” said Wagner Albuquerque de Almeida, Global Director for Manufacturing, Agribusiness and Services at the International Finance Corporation (IFC).

Trade and Development Bank head Admassu Tadesse said financing agriculture is not as risky as is often perceived. “It depends on which part of the cycle. We focus on the tail end, where is there is low risk,” he said.

Agri-SMEs’ biggest sources of financing are local commercial banks. However, banks prefer to invest in larger, more mature enterprises such as established aggregators and local processors who command regional or national market, Tadesse noted.

Danladi Verheijen, Co-founder and CEO of Verod Capital, a private equity investment firm, stressed that agriculture should be seen as an investment opportunity.

“Investors want to get in where there are high returns,” he said. He noted that one of the challenges in agriculture is finding the scale of businesses attractive enough for financial intermediaries to engage with them.

Panelists also noted that food value chains in Africa are currently not set up to maximise the potential of our food system. This growing realization has jolted players in Africa’s agricultural sector to seek practical solutions to restore the continent’s food security.

There is vast potential for establishing production and trade links, as well as synergies between different actors along the entire agribusiness value chain: producers, processors and exporters.

“All the elements need to come together. You need to have an ‘airbag’ if things go wrong,” said Dr. Heike Harmgart, Managing Director for the Southern & Eastern Mediterranean, European Bank for Reconstruction and Development.

Speakers also urged farmers and agri-SMEs to “reclaim their power” through cooperatives. “We need to help them to be organised to create clusters, and cooperatives and to create a sense of professionalization into the sector”, said Albuquerque de Almeida

Agreeing with Almeida, Dr. Olagunju Ashimolowo, the Vice President, Operations for ECOWAS Bank for Investment and Development urged governments to identify cooperatives to manage farmers. He also asked livestock owners to properly channel the funds in a way that would be “attractive and bankable.”

The African Development Bank’s Africa Adaptation Acceleration Program (AAAP) digital agriculture annex is deploying digital technologies targeted at smallholders, agri-SMEs and value chain actors  to build actors to use digital technologies in agricultural practices.