AFRICA AGRICULTURE STATUS REPORT 2016

and also incentivize farmers through provision of Interest
Drawback Program (IDP) to be paid quarterly based on the
agricultural project (Box 7.2). The guarantee ranges from
about 30–75 percent depending on the agricultural value
chain involved.
Another recent example of the use of guarantees is by the
Standard Bank of South Africa. It established a US$100
million facility to provide financing to small-scale farmers
and agricultural businesses in Africa. To mitigate the high
risk that characterizes agriculture and increase commercial
lending to the sector, loans are guaranteed by AGRA and the
Millennium Challenge Account (MCA). One of the lessons
learned is that banks should have a real interest and be
incentivized to become involved in agricultural lending.
Training bank staff in the specifics of agricultural lending is in
most cases a prerequisite for successful schemes.
The flip side of credit guarantees in general is that they tend
to diminish the incentive of lenders and borrowers to diligently
monitor repayment. In addition, given that most experiences
reflect dependence on government and donor subsidies,
the sustainability of guarantee funds is questionable (FAO,
2013a).
The African Risk Capacity: The African Risk Capacity
(ARC) is a recent initiative aimed at merging disaster relief
with concepts of risk pooling and transfer for sustainable
development in Africa. The ARC is a specialized agency of
the AU designed to assist member states resist and recover
from the havoc of natural disasters through a weather
insurance mechanism. In this system countries purchase
insurance against a crisis, say drought, and are compensated
once it is determined that the country has experienced the
risk. ARC Limited was established by the ARC Agency in
2013 to provide sovereign weather risk insurance coverage
to African countries. It is a mutual insurance company owned
by its members (participating governments and “returnable
capital” contributors DfID and KfW, while their capital remains
in the company). Up to 7 African countries have signed on
to the schemes, with coverage of about US$178 million. So
far, three countries, Mauritania, Niger and Senegal have
received compensation from the scheme.
To play an even greater role in risk management in the
continent, the ARC Agency needs capacity enhancement in
modeling and data collection. So far, the agency is only able
to handle risks associated with drought, yet Africa is also
prone to other risks such as floods and cyclones. Extending
the Agency’s capacity to cover such risks is therefore
critical. The capacity of the Agency capacity to support
member states also needs enhancement. This is important
considering that so far only seven African countries are
participating in the risk program.
Result-based financing
As part of the agenda for development effectiveness, new
efforts are being made to relate development finance more
closely to outcomes achieved, rather than to inputs used.
Given the importance of agriculture in socio-economic
development in Africa, issues of result-based financing
are becoming increasingly important in the sector. Four
types of result-based mechanisms have been identified:
prizes and award to incentivize research and development;
development impact bonds for front-loading capital for
social interventions; performance based contracts; and
advanced market commitments to provide guarantees
for future markets for a product. In the agricultural sector,
this mechanism has been successfully applied in fertilizer
subsidy schemes, whereby the governments are only
receiving donor funds once the subsidy has reached the
farmers on time.
A particular type of result-based financing that is taking root
in the continent is impact investment: The aim of impact
investment is to generate positive social and environmental
impact alongside financial returns. Thus, the main
distinction between this type of investment and other forms
is the focus on positive social and environmental change.
This type of financing is already attracting a wide variety of
investors, both individual and institutional. Investments are
typically through funds, with clear social and environmental
goals. Although relatively new and initially focusing on
investments in education, health, social housing and
microfinance, the interest in this instrument for food and
agricultural investments in Africa is growing, as shown by
the Global Impact Investors Network (GIIN) 2016 Impact
Investor Survey .
While a compelling case exists for results-based financing
in Africa, significant untapped potential remains due to
several bottlenecks in and out of the sector. These include
the fact that results-based financing is often difficult to
develop and implement, a lack of awareness of their
existence, lack of adequate or appropriate financing
sources, lack of appropriate corporate structures and lack
of appropriate policy and institutional frameworks.
Financing to support women and the youth
Providing financing to agriculture is particularly challenging
for both adult female and youth farmers. The challenges to
women relate to their traditional role in the household that
often restricts their control over assets and constrains their
engagement in productive activities. Women often have
limited control and ownership over land, and thus, the ability
to access loans, which more often than not, requires land
as collateral is not easy. Transforming African agriculture
AFRICA AGRICULTURE STATUS REPORT 2016
163