AFRICA AGRICULTURE STATUS REPORT 2016

Introduction
Agriculture remains an integral part of the African
economy. The sector provides livelihoods to more
than 70 percent of the population in some African
countries and contributes an estimated 25 percent
to GDP. Despite its central importance much of
the potential of the sector remains unrealized,
with low productivity characterized by low use
of mechanization and quality inputs, fragile
environments and increasing land pressure.
To boost agricultural productivity and achieve
much needed agricultural transformation in the
continent, significant financing will be required.
Yet, Africa’s agricultural sector today attracts less
than 5 percent of the lending from formal financial
institutions, leaving farmers and agricultural
enterprises starved of the capital they need to
operate and grow their enterprises (Snyder, 2016).
Access to finance is critical for agricultural
transformation in Africa. The shift from
subsistence-oriented agriculture to commercial
agriculture will require resources at all levels of
the agricultural value chains. However, Africa,
and particularly SSA, lags behind other regions
of the world in supplying financial services to
the agricultural sector (IFC, 2013). In particular,
smallholder farmers and agri-enterprises in Africa
lack the required investment capital and access
to financial services necessary for growth and
productivity. The limited financial investment in
African agriculture is attributed to many factors
including the high risk profile of smallholder
farmers, low productivity and returns, inadequate
infrastructure, unclear property rights and
uncertainties around land tenure, and weak policy
and regulatory environments. Tackling these
challenges requires significant investments on
many fronts.
Indications are that there are sufficient funds in
the continent and among key potential partners
that can be used to achieve the ambitious
CAADP transformational goals and the Malabo
commitments. These resources are both in
the public and private sector domains. What is
required are new and innovative ways to mobilize
these resources, especially through raising more
catalytic funding by African governments and
multilateral institutions and catalyzing greater
investment from the private sector, including from
African entrepreneurs, emerging southern donor
countries and foundations.
This chapter examines some of the recent
innovations in financing Africa’s agriculture. It
begins by exploring the financial needs of the
agricultural sector in Africa and the sources and
instruments that have been used to address
these needs. The chapter then examines
several promising new ways and approaches for
improving access to sustainable financial services
for agriculture and agro-enterprises in Africa. The
focus in the chapter is on novel approaches and/
or products to address existing access challenges
and to attract new types of investors or sources of
capital to the agricultural sector.
Rationale for new ways of
financing
Why are new ways of financing African agriculture
necessary now? With the enormous financial
needs of the agricultural sector today, there is
clearly need to explore and develop new and
innovative ways to finance the sector. Approaches
and tools that have been used in the past have not
been very effective, or at best, not appropriate,
and hence, the huge unmet demand for capital in
the sector, especially for smallholder farmers and
informal small and medium enterprises (SMEs).
In the 1980s and 1990s, state-led lending to the
sector through agricultural development banks
did not achieve much because many of these
institutions were not sustainable, as they were
weighed down by heavy debts. This gave way to
private approaches, notably microfinance, relying
mainly on group lending. While microfinance
helped in reaching the unbanked in the
agricultural sector, the approach faced limitations
in addressing agricultural financing issues. The
focus in recent years has been on innovative
financing, encompassing among other things,
financial innovation.
Innovation is critical because the continent needs
to design new and fit-for-purpose instruments
that could help deal with the emerging trends,
challenges and opportunities. Innovations are key
to mobilizing additional resources to complement
traditional resource flows in the agricultural sector
in Africa. Aid and public expenditure in African
agriculture have generally declined and there
is little sign that this pattern is changing. Africa
therefore needs to be innovative by demonstrating
how proactive it is by injecting its own domestic
1
Contributions
were received
from Osman
Aymen A. Ali,
Enock Yonazi,
and Amadou
Bamba Diop,
all of AfDB.
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