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Paving the way for agricultural finance

August 9, 2016

The International Conference on Best Practices in Rural and Agricultural Finance held on 1–3 August 2016 in Kigali, Rwanda, aimed to fast-track the replication of functional models in rural and agricultural finance. Although increased funding was committed to agricultural finance, it was acknowledged that long-term sustainable financing would only be possible if the private sector was fully on board. The importance of strong value chains to enable smallholder farmers to be profitable was also deemed to be a crucial precondition of successful agri-finance.

The latest in a series of conferences on agri-value chain finance organised by the African Rural and Agricultural Credit Association (AFRACA) and CTA has just successfully concluded. With 250 participants from 33 countries representing 110 institutions, the event was the largest such conference held in the continent so far in 2016. Hosted by the Development Bank of Rwanda (BDR), the conference was supported by Rwanda's Ministry of Finance and Economic Planning, the International Fund for Agricultural Development (IFAD) and Access to Finance Rwanda.

Rwanda's Minister of Agriculture, the vice-governor of its Central Bank and the CEO of BDR, opened the conference by highlighting the event's aim of fast-tracking the replication of functional models in rural and agricultural finance. BDR's CEO announced the allocation of an additional €90 million (US$100 million) for agricultural finance, and stressed that if these funds were to make a meaningful contribution to alleviating rural poverty, then the private sector would have to fully come on board in the implementation of innovative financing schemes.

The Minister noted that while the rising demand from population growth and the need to create meaningful jobs for Africa's young people might be viewed as a challenge, these were in fact a huge opportunity for the continent. But to capture this opportunity, the Minister emphasised that it would be necessary to change the way that Africa has been doing business. In fact, unprecedented socio-economic change is necessary in Africa, and innovation-intensive market-driven growth of the economy, including agricultural private sector investments and increasing use of technology, will have to drive future inclusive development.

The sessions that followed highlighted the many models that have been tested in recent years and that have been shown to work. Even though (according to African Development Bank data), only 5% of Africa's farmers access formal credit, these models demonstrate that as long as they are able to produce for the market, farmers can be included in the modern financial system, not just to make and receive payments through mobile phones but also, to access working capital and investment finance. Although it is still proving difficult for governments to give up control, increasingly, governments are realising this is not the best way forward. Instead, they are refocusing on creating a proper enabling environment and supporting public-private partnerships that leverage the skills and financial muscle of the private sector.

Creating strong value chains and then leveraging them to bring finance to smallholder farmers was a common theme that came out of a number of highlighted success stories. A value chain approach was determined to be critical for successful micro-finance for agriculture. For example, simply relying on the traditional group lending approach is not sufficient as it does not really change the risks to which farmers are exposed. Loans for mechanisation work best when the equipment is used to produce crops under contract with a large buyer. A viable dairy sector can only be developed by systematically working with all stakeholders, from farmers to milk factories, and then anchoring finance along this chain.

Several speakers stressed that a precondition of successful finance is that farming is profitable, and that an organised value chain provides the means to distribute improved seeds and other inputs and provide farmers with adequate extension services. An organised value chain also makes it possible to reduce post-harvest losses, unlocking value for all stakeholders. Financiers were urged to change the way they look at agriculture: rather than complaining about its risks (including those related to climate change) and avoiding the sector, they should look for ways to manage these risks.

Participants formulated a series of recommendations for upscaling and replication of successful agri-finance models, including:
• Create a database of such models.
• Identify 'centres of excellence' that would be able to convey intelligence on specific models (participants identified a number of such centres).
• Publicly recognise/award banks that make particular efforts to develop rural and agricultural finance.
• Shift government policy and political will with respect to agri-finance, and in particular, increase government support to risk absorption instruments (such as guarantee funds and insurance schemes).
• Encourage financiers to embrace technology and those who can bring innovative technology to farmers.
• Systematic adoption of partnership approaches.
• Continued drive towards a mindset change among African decision-makers from public and private sectors, towards the acceptance that, without sustainable agricultural growth, there will not be inclusive and sustainable economic growth in the continent.

Participants agreed that, with current knowledge on successful financing schemes for agriculture, there is no longer any reason to avoid the sector. Rather, financiers should now be able to mainstream rural and agricultural lending in their institutions' operations – if necessary, building the necessary skills and products one commodity at a time.

Find out more

Blended Finance: Call for Innovative Partnerships for Bolstering Agricultural Finance

Rural finance crucial to developing agriculture in West Africa

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