How to bridge Africa’s agriculture financing gap

Simon Kinuthia, a career banker and the Head of Agribusiness at Absa Bank Kenya PLC, explains why the bank with one of the largest footprints in Africa is targeting the agriculture sector with a number of loan products and how partnerships between banks and other players can bridge the gap in financing.

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[rt_dropcap_style dropcap_content=”anks tend to shun lending to agriculture, with less than 4% of commercial loans going to the sector in a country like Kenya. Why is financing for the sector such a huge challenge in Africa?”]

Challenges such as vagaries of weather, unstructured subsistence farming, slow adoption of agri-technologies, price instability, perishability of goods and poor infrastructure have contributed to the minimal interest financiers have had in agribusiness over the years.

Kenya, for example, boasts some of the most resilient small and medium enterprises (SMEs), which play an important part in the country’s economic and social development. However, they have been denied the opportunity to grow into conglomerates due to limited access to credit.

How can this gap be bridged?

We need collaborations and partnerships among agribusiness companies, financiers, producers and governments for effective design and financing of solutions. For example, there are opportunities to mobilise capital for investment in the distribution of farm inputs to small-scale farmers, who comprise 60-70 percent of the population of subSaharan Africa.

Globally, farmers apply 135 kg of fertilizers per hectare while in sub-Saharan Africa that figure is close to 17 kg, according to the Food and Agriculture Organization (FAO).

The cost of fertilizers can be prohibitively high for the farmer. High ratio of imported fertilizers or raw materials) and complex logistics processes (handling, storage, and transportation of bulk cargo to factories) contribute to the high costs.

It is encouraging to see governments across the region offering fertilizer subsidies to small-scale farmers. However, financial institutions such as banks can do more, through lending, to boost their purchasing power for inputs such as seeds and fertilizers as well as enable access to the credit needed for servicing operational costs.

What encouraged you, as Absa Bank, to take more interest in the sector?

At Absa, our purpose is to bring possibilities to life for our customers and stakeholders. We accomplish this by linking people’s goals and aspirations to the financial and nonfinancial resources they require to achieve those goals.

It goes without saying that the agriculture sector needs, deserves and must have support.

It is imperative that we agree on the kind of investment needed and effective and efficient mechanisms for delivering this investment for the entire value chain to produce the results we desire for the Africa We Want as captured in Africa Agenda 2063.

The importance of the agricultural sector in Africa is underlined by the fact that it accounts for up to 80% of employment, 20% of total exports, and 40% of GDP.

What is the bank’s approach to financing the agriculture sector?

We assist the sector by taking a value chain approach and focusing on key actors in agribusiness. Our customers include input suppliers, primary producers, aggregators, processors, retailers, and exporters of agricultural commodities.

Our approach is informed by a long-term framework that we use to review individual sector dynamics, as well as additional engagements with clients to understand their financing requirements. We can provide appropriate financing to clients with established markets and successful business models using this approach.

The financing is tailored to their working capital, asset finance, and business expansion requirements, with loan repayments tied to cash flow cycles relevant to the agriculture sector.

Have you partnered with any other institutions involved in supporting agricultural enterprises?

Partnerships and collaborations are among our key growth pillars. We have a number of ongoing partnerships as well as others that are in the works. I can give two examples of partnerships: the Africa Guarantee Fund, which provides risk share guarantees for customers with successful business models who qualify for lending but lack collateral, and a collaboration with the Kenya Investment Mechanism (KIM).

The latter is a five-year USAID project that encourages private investment and accelerates enterprise-driven development. Through these partnerships, the bank has been able to expand its lending and risk appetite to all counties in Kenya via its 83-branch network.

Furthermore, we have invested in process improvements to achieve an average decision time of 48 hours for MSME applications, same-day account opening for sole proprietors, and up to 48 hours for limited accounts subject to necessary approvals.

There are several solutions by various banking institutions targeting the agriculture sector. What makes your solutions stand out from others?

While developing solutions for the agriculture sector, we provide holistic solutions to meet the trade and working capital needs of agribusinesses, as well as transactional banking, which is how businesses collect cash/receivables and make payments, including using our Absa online digital capability. Our asset finance solutions can help you finance your mechanization and agri-tech needs.

We also offer forex risk management solutions such as forward contracts to hedge currency fluctuations for agri-commodity exporters and interest rate swaps to help hedge interest rate variation risks for clients borrowing in foreign currency. We also have agribusiness specialists across our continental footprint to walk the journey with our clients or potential customers by providing the technical and financial insight, expertise, and customized funding structures within the agribusiness space.

Through the Wezesha Biashara programme, for example, we work with entrepreneurs to get things done and grow their businesses. We support small and medium enterprises (SMEs) with business insights, networks, and expertise to transform their business. For business continuity, we have partnered with leading insurance providers to offer business insurance solutions designed to protect the business owner, employees, and their investment against the unexpected risks, with options for flexible premium payment plans.

Who can benefit from the Wezesha Biashara product?

Our doors are open to entrepreneurs, big or small, starting out or seasoned, to have conversations and identify relevant solutions to grow their business. We have simplified banking for SMEs through Absa One Account, a zero maintenance fees account where you can do all your business banking from.

The Wezesha Biashara proposition is available to businesses in all sectors, including actors in the agribusiness value chains. In addition, we provide business customers with the right tools to run their day-to-day transactions with ease. These include mobile collection solutions (Buy Goods and Paybill), Absa Business Banking app to transact anywhere any time and a robust Internet banking platform.

Wezesha Biashara provides unsecured lending of up to Ksh10 million payable in 72 months, up to 95 percent assetbased financing and working capital financing. To boost our customers’ trade operations, we offer LPO financing and invoice discounting of up to Ksh50 million as well as unsecured bid bonds of up to Ksh10 million.

Absa recently launched a product for women in business. What does it offer?

As a key segment of the population, women make up half of the continent’s population and 40 percent of the labour force in crop production. To this end, we have a tailored business account known as “SHE” for women entrepreneurs across different industries, including agriculture, that provides them with unsecured lending of up to Ksh5 million, business development skills, and resources such as networks, coaching and mentoring needed to build successful agribusinesses.

What does it take for one to be looped into the programme?

We will need the standard documentation, which includes copies of ID, Kenya Revenue Authority PIN, and company documents from the region in which it is registered. One can contact any Absa branch to speak with a member of our team, which includes SME relationship bankers.

How did you respond to the challenging business environment in the wake of the Covid-19 pandemic?

During the Covid- 19 pandemic, Absa Bank Kenya launched a comprehensive credit relief programme. Over 59,000 loan accounts totalling over Ksh62 billion were restructured. We advanced over Ksh9 billion to SME customers while going above and beyond banking by providing training sessions to help them navigate the pandemic’s impact on their businesses.

The government launched a Ksh10 billion Credit Guarantee Scheme in 2020 to cushion SMEs against the Covid-19 pandemic. How has this been of benefit to you?

The scheme is one of several collaborations that have helped to provide a de-risking mechanism that allows the bank to finance SMEs with successful business models that lack adequate collateral.

How optimistic are you about the future of Africa’s agricultural sector?

Due to the high rate of unemployment, there is an uptake of agribusiness as a profitable economic activity and a provider of better income; attracting the youth who comprise the majority of Africa’s population.

As Absa, we are seeing an increase in agriculture-based SMEs with successful business models, which we are able to provide with holistic solutions and help scale up their operations.

We take a comprehensive approach to SME empowerment, in which business owners are trained on business sustainability, fundraising, bookkeeping, and networking in order to assure profitable operations through individualized propositions and products.

The bank intends to accomplish this by utilising both financial and non-financial resources, demonstrating how they work with entrepreneurs to get things done and expand their businesses. Absa Bank is constantly working with various partners to develop propositions that support the growth of the SME sector.

We, as Africans, are extraordinary people who always find solutions and ways to get things done. Absa refers to this distinct tenacity as ‘Africanacity’. That’s how we get things done. We are committed to doing whatever it takes to provide the best services and products to our customers across the African continent. We’re all about finding ways to make your ideas a reality.

Your parting shot?

Financial institutions will undoubtedly have a significant role to play in efforts to solve the problems in Africa’s agriculture. SMEs play an important role in enabling sustainable food systems in Kenya and throughout Africa. Working with a bank like Absa Bank Kenya has value for agribusiness SMEs because we value partnerships and collaborations. We are excited to be our clients’ trusted advisors as we build long-term relationships.

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