Boosting agriculture through innovative lending partnerships

Promoting agribusiness

Boosting agriculture through innovative lending partnerships

The growth of small-scale agriculture in developing countries is being held back by critical underfunding. To address this challenge, CTA was the lead organizer of an international conference which explored an innovative approach for agricultural finance – the blending of private, philanthropic and public funding to leverage greater capital flows into smallholder value chains. The Blending4Ag conference was held to improve practices in mobilising agricultural finance, and help forge new partnerships for mitigating and sharing risks in smallholder funding.

At present, less than one-quarter of the financing needs of smallholder farmers in developing countries are met, leaving an annual financing gap of more than US$150 billion (€133.4 billion). Most of this unfulfilled demand for financing, which amounts to $84 billion (€74.7 billion), comes from 88 million smallholder farmers engaged in loose value chains – farmers who regularly produce surpluses and sell them in the market. The bulk of the financing requirements come from local markets that trade in crops such as wheat, maize and cassava.

If current trends persist, this financing gap will continue to stifle smallholder value chain development in the coming decades. Behind the funding gap is the reluctance of private financiers to lend to smallholder farmers, based on a perception of unacceptably high risks.

More efficient use of public finance, which is currently the main source of bank lending to smallholders, offers significant opportunities for accelerating the growth of agricultural finance, especially as a means of leveraging private sector funding. Known as blended finance, public-private lending partnerships have already proven to be effective in a range of sectors including energy and infrastructure.

The Blending4Ag conference examined the largely untapped potential for using blending tools to leverage finance for agriculture, and particularly to unlock more private funding to develop agribusiness in the smallholder sector. "For the formal lending sector, agricultural finance is still perceived as a high-risk business, and this is inhibiting transformation of smallholder agricultural production and value addition, in turn negatively impacting on economic growth and job creation in developing countries," said CTA Director Michael Hailu. "Blended finance is a promising formula to unlock private capital flows using public finance as leverage."

Focusing on practical aspects of blending finance for agriculture, the conference sought to contribute to the knowledge base on how this can best be done. The event, which brought together key stakeholders from agriculture, finance, public and private sectors, investigated various blending schemes that are currently in operation and assessed some of the principle challenges to developing this approach to galvanise better funding of small-scale agriculture in the future.

"Smallholder finance is more complicated than the financing of infrastructure or power plants, for which blending techniques have so far been mostly used," said Lamon Rutten, Manager of Policies, Markets and ICTs at CTA. "Special efforts are needed to cross the last mile, and also, to ensure that as a result of the financing, smallholders benefit from higher and more sustainable revenues. The conference brought together the different groups who, through innovative types of collaboration, can deliver blended structures that effectively reach smallholders."

Specific topics included, how to achieve leverage in unlocking private funding for smallholder agriculture through public resources, scope for developing local currency financing, partnerships for effective financing of climate change adaptation and resilience, and risk management and other support structures.

One case study presented during the conference examined the design of a fledgling financing facility aimed at increasing lending to smallholder farmers in Ghana, to improve productivity and promote climate smart agriculture in the cocoa sector. The plan involved offering a guarantee mechanism to some of the country's local financial institutions as an incentive for them to lend to smallholder cocoa farmers and farmers' associations. The session shared the progress they had made, including constraints, lessons learned and ideas for future schemes.

The Blending4Ag conference was held in Brussels on 7-8 November 2016. It was organised by CTA, the African Rural And Agricultural Credit Association (AFRACA), the international financing platform Convergence, the Initiative for Smallholder Finance (ISF) and the Organisation for Economic Co-operation and Development (OECD).