Using agri-finance to boost staples-led agriculture transformation

Published on

April 20, 2016

In a market analysis for AGRA, Dalberg sheds light on the financial sector’s service of smallholders in Kenya, Tanzania, and Ghana, and identifies opportunities for progressive partnerships between formal and non-formal financial service providers, including value chain actors.  The analysis also looks at the role of ICT solutions to increase impact.  AGRA is a Learning Lab partner, committed to sharing knowledge that will build the industry.

Summary by Dalberg’s Nneka Eze and Anne Makhulo

By some accounts Africa has arrived at the tipping point of the green revolution of agriculture transformation; financing is a key lever to unlocking this transformation. The Financial Inclusion for Smallholder Farmers in Africa Program (FISFAP) was formed with the conviction that strengthening the financial and agricultural value chains, as well as the delivery mechanisms between them, will improve access to finance for farmers and other value chain actors, leading to increased food security and farm incomes. The program targets 728,000 farmers in Ghana, Kenya, and Tanzania and in each country is targeting high potential ‘breadbasket’ regions and staple crops grown by a large number of farmers.

Dalberg and partner Nathan Associates carried out a needs assessment of the financial services landscape in Ghana, Kenya, and Tanzania along select value chains to guide FISFAP’s intervention and partnerships.  The team reviewed over 180 publications and reports and conducted in-country field visits with over 75 stakeholders.  This summary of findings is followed by a link to the full report below.

Kenya boasts generally high financial access and a relatively high level of innovation in product design and delivery. However, lending to Agriculture remains low at 4% of total commercial lending with only 15% of rural borrowing coming from financial institutions. Tanzania has the highest proportion of total lending to agriculture out of the three but is encumbered by tight government control and generally low financial inclusion and inefficient value chains. Agri-finance is dominated by four banks which provide 70% of this credit and 92% of Agriculture lending in Tanzania is for trade with only 8% towards production. Ghana has low financial inclusion, low mobile money penetration, and the highest interest rates of the three ranging from 35% - 40%. Across the countries, financial service providers face internal governance challenges, information asymmetries, high risk levels, limited capital and lack of capacity for adequate product development and management. In all three countries, the staples markets are fragmented, highly informal and cash based with only 9% of farmers in Kenya, 4% in Tanzania, and 5% in Ghana receiving payments for their produce through formal financial service providers. 

Figure 1: Country snapshot - Ghana, Kenya and Tanzania
Figure 1: AGRA FISFAP Dalberg report

For farmers themselves, financial inclusion means developing a range of appropriate, low-cost financial services that help them overcome challenges in their economic and personal livelihoods.
Generally, far more financial solutions are required that provide large amounts of liquidity once or twice a year, that offer bullet repayments, and that allow for the provisioning of harvest income across the long hungry season. 


Figure 2: Farmers financing needs through the agricultural cycle
Figure 2: AGRA FISFAP Dalberg Report

Financial service providers suggest that attractiveness of value chains for lending is driven by perceived market efficiency and the presence of more formalized marketing channels. The efficiency of value chains across the three countries differs by crop and market structure more so than geographic location. Across all three countries, for instance, maize production is characterized by having the greatest need (i.e., a large number of farmers not currently accessing finance) but also the highest barriers to impact (i.e., low literacy rate among farmers, high rate of subsistence farming, and inefficient markets). Bank access to the value chain tends to be downstream, at the level of aggregators, nucleus farmers, and processors. The banks prefer this, as they are more comfortable working with established businesses with large balance sheets who can push credit and pull produce through the value chain. Unfortunately, banking models do not exist that effectively link formal banks directly to smallholder producers.

In order to more effectively link banks to smallholder producers without the necessity of laying out expensive branch infrastructure, FISFAP can leverage AGRA’s networks to broker relationships between formal and non-formal financial service providers as well as value chain actors to create more robust markets. Brokering relationships between financial service providers would effectively utilize the financial depth of commercial financial service providers and the reach of semi-formal and informal financial service providers.

Figure 3: Landscape of Financial service providers in Tanzania and leverage points for FISFAP
Figure 3: AGRA FISFAP Dalberg Report

Access to information or lack thereof is a challenge in product development, risk assessment, and product pricing. Research and analytics are vital in product development and are a public good FISFAP can create. Innovative design and application of ‘Big data’ solutions can support the creation of alternative credit rating tools e.g., based on mobile phone and mobile money usage patterns.

Partnerships are critical to the development of agri-finance due to agriculture’s high level of complexity which calls for integration to deliver sustainable results. These partnerships should exist in the coordination of donor and government programs as well as structured trading partnerships that incorporate public partners, private organizations including off-takers, financial service provider, and value chain actors.

In these three countries and across Africa, the “smallholder finance industry” is gradually forming. Financial and adjacent market providers are identifying partnerships and increasing collaboration and transparency. Philanthropic and commercial capital markets supporting them are further behind, but activity is increasing.  There is very interesting, early-stage experimentation in new or adapted models for reaching smallholders, most notably in digital or digitally-enabled financial services in local and regional markets. The replicability of these innovations is uncertain—they depend greatly on the maturity of telecoms ecosystems and underlying infrastructure—but some innovations have the potential to scale across new markets. Market actors who have a long-term stake in the viability of the local agricultural market must be the primary focus of incentives to participate. Local and regional governments have a large role in structuring those incentives.

Download the full 150-page report for extensive analysis of these markets, including the landscape of financial institutions.  

About the Author(s)

Learning Lab Partner

Alliance for a Green Revolution in Africa (AGRA) facilitates FISFAP, an initiative that aims to reduce food insecurity and increase the incomes of about 700,000 smallholder farmers in Kenya, Tanzania and Ghana by February 2020 by working with financial institutions and agriculture value chain actors.

Press release: AGRA and The MasterCard Foundation partnership 

Learning Lab Implementing Partner

Dalberg is a strategic advisory firm specializing in international development and global challenges. They have extensive expertise in rural and agricultural finance, including having authored the landmark study Catalyzing Smallholder Finance 

Dalberg jointly implements the Learning Lab with GDI, conducting "deep dive" studies for the Fund for Rural Prosperity as well as the MasterCard Foundation's rural and agricultural finance portfolio. On, Dalberg also shares knowledge and learnings from outside of its work with the Lab.

Would you recommend this content to a peer?