Agriculture Funding in Africa is ripe for Innovation

By Roux Wildenboer and Simon Kinuthia;
How does the bank which funds the largest number of agriculture sector transactions in South Africa, utilise its skills and knowledge to improve food security and become a force for good across the African continent?

This is a key question we ask ourselves as we look at the rapidly evolving primary and secondary agriculture landscape in Africa and the impact it has on the continent.
This discussion is important as whilst there has been progress, the African continent still lags behind other areas in terms of productivity and yield efficiency. The demographic dividend offered by a young and growing population is counter-balanced by high-degrees of inequality, accentuated by recent global events such as the Covid-19 pandemic and growing geopolitical tensions.

This has translated into volatility in food prices, making food security a top priority in countries across the region.While South Africa has a world-class agriculture sector at both a primary and secondary level, the rest of Africa is characterised by a vast number of small-scale and subsistence farmers which leads to a far more fragmented environment for funding.

This is further compounded by price volatility and currency fluctuations as well as under-developed supply chains. This means that financing of transactions can be a high-risk endeavour for inexperienced teams. For example, 2022 was an incredibly volatile year in the agriculture sector with many people being caught out with margin call exposure.

In some cases, these were in excess of a billion Rand, highlighting just how volatile the sector is.

This volatility has meant that a number of bank lending partners have faced challenges, therefore decreasing their appetite for funding.
Trade on the African continent is also complicated with issues around Euro and Dollar liquidity – a factor that has become a major challenge for new capital projects in an environment where borrowing costs are on the rise.

Agriculture is a funding-intense business and as we look at the fragmented nature of the sector on the continent, the role of funders is key to creating value outside of traditional investment banking models.

It’s key that we don’t look at projects in isolation, but rather that we view the ecosystem as a whole.Strategically, we have a focus on the funding of the import and export value chains as this is where we have the ability to do deals of sufficient size and impact. If we look at the projects we are working with, we are identifying opportunities where we can collaborate with key partners.Ultimately, we want to know that we are making a tangible and sustainable impact on the agricultural sector.

In Kenya, Absa has a robust value proposition anchored on four approaches of access to relevant and actionable information, access to coaching and mentorship, access to markets and access to sustainable finance.This seeks to empower various stages in the agriculture value chains for clients’ unique needs – both debt and non-debt – while looking at the whole eco-system.

The Central Bank of Kenya reports that only 4% of gross commercial banking debt flows to the sector which reflects the risk profile attached to it. Agriculture is the bedrock of the Kenyan economy, contributing a quarter of its Gross Domestic Product and providing nearly 70% of
rural employment. This is characterised by fragmented land ownership, smallholder farming models, low adoption of climate-smart agriculture and exposure to unpredictable weather conditions.

Financing the sector requires unique and holistic solutions.Absa continues to empower agribusinesses by working closely with partners and regulators to advance the flow of sustainable finance.A recent reference is our agreement with Hello Tractor to enhance the adoption of
mechanisation where the smallholder farmers pay per use to access tractor services rather than having to incur upfront acquisition costs.
Absa also provides working capital to the Kenyan Tea Development Agency which is used to purchase inputs and other working capital.

Previously, many growers relied on microfinance with high interest rates but now with cheaper access to finance, there is more liquidity to allow their businesses to grow.

Our structural financial impact is apparent in Mozambique. We have helped establish import lines of $60 – $70m over the past few months to import wheat, maize and crude vegetable oils to be processed into edibles.

In the Ivory Coast, Absa has funded a cashew processing facility which is now one of the largest cashew processing facilities in the world. In Tanzania, we have invested $45m for a sugar production facility with a combination of capital expenditure as well as working capital.

This aligns closely with our intent of delivering transformative projects that are not short-term in nature but deliver long-term impact and play into supporting food security aspirations and sustainability goals.

Absa has identified agriculture on the African continent as one of its key growth sectors. Our expertise in and long-term commitment to Africa’s agricultural sector means that we can collaborate with government, private companies, and funders to work together to unlock the opportunities that our diverse continent has to offer.