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Mobilising private capital flows into smallholder-inclusive agricultural value chains

The annual AFRACA Central Bank Roundtable and Policy meeting delved into risk-sharing financing mechanisms in African agriculture.

April 19, 2017

In Sub-Saharan Africa, agriculture accounts for 70% of the labour force and between 25% and 70% of the GDP in most countries. However, according to the African Development Bank (AfDB), less than 3% of total commercial bank lending goes into the agricultural sector in Africa. A major constraint facing farmers in investing in sustainable land use management at scale and increasing quality food production is lack of access to financing.

Central banks and governments in the continent can make a difference in tackling these issues. But how best to engage these actors? This was one of the key questions discussed at a roundtable meeting held on 29 and 30 March 2017, at the headquarters of the West African Development Bank (BOAD) in Lomé, Togo. Entitled ‘Adaptability of Risk-Sharing Financing Mechanism in African Agriculture’, the meeting brought together central bank representatives, development partners and other stakeholders from West Africa and beyond, to draw a practical roadmap for the sustainable inclusive development of the finance sector in the continent. The event was organised by the African Rural and Agricultural Credit Association (AFRACA) alongside its periodic policy meetings, and counted with support from CTA and BOAD.  

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Highlights of the meeting 

The challenges in the agricultural and financial value chains call for a systemic change, participants at the meeting agreed. This change will be generated by the creation of an incentive risk-based sharing system to support agricultural lending in African countries. This will be possible through de-risking agriculture value chains, reducing transaction costs and unlocking financial flows into the agriculture sector at scale across the continent.

To roll out this Risk-Sharing Facility initiative, “it is expected that West African countries committing to this initiative will set aside significant domestic investments to be utilised in incentivising and leveraging the private sector to lend to the agriculture sector”, said Matthew Adetunji, representative of CTA at the roundtable.

In Nigeria, for example, the development of such as a comprehensive risk-sharing system has already positively impacted on the levels of agricultural finance and development. However, the Director of the Nigerian Incentive Based Risk Sharing for Agricultural Lending (NIRSAL), Aliyu Abbati Abdulhameed, nuanced that "risk-sharing system should go beyond the level of financing alone, it should encompass creating market opportunities and designing profitable business models so as to attract banks to lend to value chain actors". He also stated that, based on experience, risk-sharing financing mechanism alone won't work for African agriculture financing sustainably. According to him, experts should consider blended finance models that generate both impact and returns for agribusiness financing.

inline1 riskCTA was recognised and awarded by AFRACA for its support in the promotion of smallholder-inclusive agricultural finance in Africa.

At the central bank level, experts at the meeting identified promotion of policies for adapting comprehensive risk-sharing models for agribusinesses, creation of market opportunities for private sector investment and capacity development for financial institutions as solutions to currently inadequate agricultural finance.  

The lack of agrifinance expertise within the financial institutions was another key topic of discussion. Participant experts shared country experiences and opinions for improving financial institutions' capacity development for agrifinance. According to Matthew Adetunji, “the meeting was able to reach a tangible milestone in establishing a possible partnership for training of financial institutions on agricultural finance. AfDB, CTA and AFRACA were identified as organisations that can champion the promotion and sensitisation of best practices in incentive risk-based sharing models, blended finance for agriculture models and capacity development of financial institutions.”

A solid partnership between AFRACA and CTA    

CTA has been partnering with AFRACA since 2013. Through their partnership, they have sought to build a platform for central bankers to periodically deliberate on policies and interventions to enhance inclusive finance access to rural communities in Africa. The Blending4Ag conference jointly organised by CTA and AFRACA in November 2016 represented the culmination of this partnership. The conference focused on the strategic use of international and national development finance and philanthropic funds to mobilise private capital flows into smallholder-inclusive agricultural value chains in developing countries.  

“Afraca has been a key partner of CTA in our joint efforts to engage the financial sector in delivering greater support to the agricultural and rural development sector. We have worked together closely in bringing financial institutions such as central banks to the table and engaged them in policy dialogue on the possibilities and opportunities of improving the rural and agricultural finance environment in Africa. We look forward to continuing our partnership with Afraca in delivering on this crucial task."
Michael Hailu, CTA Director

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