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Great need for financing agribusiness on the continent

Food security is one of the key challenges facing the African continent, but to get land planted and help their countries become self-sustaining, farmers need financing.

Small-scale farmers in Africa will be playing a key role in feeding the world over the next decade or two.

Small-scale farmers in Africa will be playing a key role in feeding the world over the next decade or two.

Funding African farmers who may not have any collateral to cede in return for a loan can also be a challenge for the financial services sector.

In August Kofi Annan, Chairperson of the Alliance for a Green Revolution in Africa (AGRA), highlighted the need to continue forging ahead with the goal of the United Nations to halve the number of people who go to bed on an empty stomach by 2015. Annan was speaking before Africa’s inaugural African Green Revolution Forum (AGRF) meeting, held in Ghana in September. The forum aims to accelerate the green revolution in Africa.

“We will be looking to governments for leadership to create an environment that will enable agriculture to prosper and grow and we will be looking to the private sector to drive and sustain that growth,” said Annan. “Working together we can achieve a food secure and prosperous Africa.”

AGRF promotes investments and policy initiatives that aim to drive income growth for African farmers in an environmentally sustainable way. The forum also aims to showcase the progress that has been made in unlocking Africa’s agricultural potential through new investments and public-private partnerships.

“As Secretary General of the United Nations, I called for a uniquely green revolution in Africa to meet the Millennium Development Goal of halving hunger by 2015. And six years later, I am encouraged to see that the Green Revolution has taken hold and is gaining momentum.

“We have reached global consensus that agriculture is Africa’s lifeline and, from that realisation, we are gaining global support and funding commitments as well as the support of African governments and the attention of the private sector. But we need an action plan to translate this momentum into tangible support for Africa’s farmers,” said Annan.

However, to substantially increase food production in Africa, there must be a comprehensive and integrated approach to improve the productivity, profitability and sustainability of smallholder farmers, while keeping environmental effects in mind, he added.

Finance needed

In July, banks, policy makers and researchers called for increased access to finance for African farmers. Laurent Sedogo, Minister of Agriculture, Water Resources and Fisheries in Burkina Faso, said: “We need to look very carefully at how we can increase national budgetary and private sector support for our farmers.”

Sedogo was speaking at the second annual Comprehensive Africa Agriculture Development Programme (CAADP) day. “This day gives us the opportunity to strengthen the links between the African private sector, the development partners and farmers’ organisations. It is an opportunity for us to review the progress of CAADP since 2003 and also for us to identify the challenges and the solutions to them,” he added.

This year, CAADP had a specific focus on how to get banks to support the work of African farmers. The day was hosted by Burkina Faso’s government and organised by the African Union Commission (AUC) and the New Partnership for Africa’s Development (NEPAD) Planning and Coordinating Agency in partnership with the Forum for Agricultural Research in Africa (FARA).

CAADP is based on two major principles: The pursuit of a 6% average annual growth rate at a national level in the agricultural sector, and the allocation of 10% of national budgets to agriculture.

According to Martin Bwalya, the Head of CAADP at the NEPAD Planning and Coordinating Agency, the “reason why we are focusing on the banks this year is because the evidence on the ground shows that in order for us to boost agricultural productivity in Africa, we need to direct our attention towards increasing access to finances for farmers in Africa.”

During discussions at the meeting, representatives from the farmers’ organisations highlighted how the problem of funding and access to finances requires new thinking and new solutions that go beyond what is being offered by banks today.

Representatives from the private sector highlighted how they see agriculture as a serious business venture. However, they also felt that it was important for African agriculture to be moved away from a subsistence focus to a commercial focus, and that there are financial incentives on the market that can be accessed to do this.

Finding solutions

Clive Tasker, CEO of Standard Bank Africa, says that “commercially viable agriculture can yield food for millions and eliminate hunger.”

However, finding the finance to get farms that can produce on a commercial level off the ground has not always been easy. Jacques Taylor, Head of Agriculture at Standard Bank Africa, explains that financial institutions have not been inclined to lend to the agricultural sector for a variety of reasons.

These include the fact that clients are remote; the lag between investment needs and expected revenues; the absence of useable collateral; the high risks banks need to consider relating to predicting the weather, pests, diseases and prices; small farm size and small individual transactions, and underdeveloped infrastructure.

As a result of the challenging environment, says Taylor, “Standard Bank believes that the only way to effectively offer solutions to this sector is to partner with key players in the agriculture value chain, high profile foundations and NGOs (non-governmental organisations) who can assist with operational management.”

He explains that this assistance includes providing a system through which small farmers can improve efficiencies in all areas, from accessing inputs, improving yields and linking into the market to developing infrastructure and transferring skills.

Taylor adds that the reason agriculture in Africa is seen as a high risk area is quite often a result of failures along the agricultural supply chain. As a result, he says, Standard Bank focuses on the agricultural value chain and understanding how businesses in the value chain depend on each other. In addition, agriculture has to be driven by market demand, so there must be a secure market for the commodity, and farmers must be able to produce crops at a profit, says Taylor.

Standard Bank Group Limited has branches in 17 African countries including Angola, Botswana, Democratic Republic of Congo, Ghana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Nigeria, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

Through these branches, it supplies specialist services through agricultural experts that can offer banking and financial services.

Taylor explains that the bank focuses on the full value chain within agriculture and its solutions include providing working capital, term loans, soft commodity trading as well as structured finance.

Offerings are specifically tailored to the needs of the market. For example, in Zambia, the bank allows farmers who are dependent on seasonality and are in the process of harvesting one crop to access finance for the next season’s crop before paying the first loan back to the bank.

In addition, the bank offers longer term loans, of up to ten years, which has not historically been the case in Zambia.

The bank also works out the productive value of land, and then uses that figure to work out how much money can be advanced.

Taylor says that a large part of Standard Bank’s business is in agriculture, which is core to the bank’s strategy across Africa. The sector is so important that last December the bank set up an agricultural unit, and an agricultural offering was officially launched to the market in February this year.

The fact that agriculture contributes significantly to African countries’ economies – and gross domestic product (GDP) – means that the demand for financial services in the agricultural sector is high, especially as many financial institutions have avoided this sector in the past.

“The large share of agriculture in Africa’s GDP suggests that strong growth in agriculture is necessary for overall economic growth – growing agriculture means growing economies across the whole continent,” says Taylor.

“Small farmers in Africa will be playing a key role in feeding the world over the next decade or two. The cost of producing food in first world countries is extremely high and land is scarce. On the other hand, sub-Saharan Africa has enormous natural, physical and human potential,” Taylor adds.

He explains that the continent uses less than 25% of the arable land and less than 14% of the irrigation potential. Globally the demand for food is rising 3.3% per annum, yet the supply of land increases by 1% per annum.

“With agricultural land in developed countries shrinking as urbanisation expands, food production will be seen to be the critical resource which Africa can supply to the world,” says Taylor.

The article has been republished courtesy of African Trader

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  • Hector Dambuza

    We are currently looking for land to install renewable energy in Africa.My standard business model is:
    1. The municipality give me a 20+ year land lease at or near the landfill site and mitigates permits, etc.
    2. The municipality contracts to provide MSW for 20+ years.
    3. The PPA with the utility guarantees to purchase the power at a certain rate for 20+ years.
    4. My company owns and operates the system and receives all revenue including tip fee if there is any.
    5. I agree to give back a percentage of net profits to the municipality that is greater than their current revenue from the landfill.
    6. I also usually require the municipality to pay an upfront deposit to cover some of the front end costs and to show that they have skin in the game.
    7. I roll the return of their deposit into the financing so they are made whole.

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