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Financing Agricultural Growth in Africa

Excerpted from This is Africa.

Photo credit: This Is Africa
Photo credit: This Is Africa

Whether it is traditional bank lending or private equity, and from major agribusiness to microfinance, one theme stands out — a change in mindset is needed, in which African agriculture is seen as a business opportunity, not a charity sector.

“What we have seen is a shift towards agricultural development as an engine of economic growth so that agriculture can provide the resources for other sectors as well – for education, for health, for overall advancement,” says Gary Toenniessen at The Rockefeller Foundation. “And that requires private sector involvement to a much greater degree. If all you are trying to do is provide food relief, then that goes through governments and UN agencies. But if you really want economic growth then you need a private sector that is working across the agricultural value chain.”

“If you really want economic growth then you need a private sector that is working across the agricultural value chain.”

Wiebe Boer, chief executive officer of the Tony Elumelu Foundation, concurs. “My first engagement with agricultural development was in 2007, when I was part of a team at McKinsey working on developing the national strategy of Kenya. Agriculture was one of the six sectors we chose to focus on. Nobody else on the team wanted to touch agriculture, because they thought it was not interesting, it was not sexy. So I took on the sector.”

Back then, he recalls, the assumption was that agriculture was a development sector drawing in government and donor money. Fast forward six years and all that has changed. “If you were doing an agricultural strategy now, the primary focus would be getting investors in, domestic or foreign, whether for large or small-scale agriculture, and then the government role is more unlocking, providing incentives etcetera. Completely different.”

The tools to finance agriculture in Africa have expanded and multiplied in recent years. Still, despite this progress, the sector’s fundamental insecurity remains an obstacle that will require more than funding mechanisms to overcome, according to Mr Sindazi of Standard Bank. “The risks in the sector are so high that it is difficult to predict which investments will fail and which ones will succeed,” he says. But as focus on agricultural development in Africa continues to grow, so does the expertise and the range of risk taken on across project portfolios.

Despite his caution, Mr Sindazi concludes that concrete steps can be taken to mitigate risks to lenders and keep funds flowing to where they are needed in the sector.

Such steps include “the use of innovative funding structures that hinge on: securing a solid off take before we fund; using a team of specialist contract managers to manage the farmers and crop growing; using appropriate insurance policies that help to offset most of the perils associated with farming; and rigorous due diligence. The monitoring and control provided by a team of back-office experts provides the comfort required to continue the provision of funding to the agricultural sector.”

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