AFRICA AGRICULTURE STATUS REPORT 2016

capital they need to operate and grow their enterprises.
Africa, especially SSA, lags behind other regions of the
world in supplying financial services to the agricultural
sector. This is despite the fact that the sector is a source
of livelihood for many Africans, especially those based in
rural areas.
This chapter has examined some of the new ways of
financing agriculture in Africa. With the enormous financing
needs in the sector, in recent years efforts have been made
to explore and develop new ways of financing the sector.
The objective is to mobilize additional resources and to
address market and institutional failures that inhibit access
to capital, especially by farmers and by small- and mediumscale
agro-enterprises. The chapter has also reviewed
current needs and sources of agriculture finance in Africa
and the instruments available to address these needs.
Moreover, it examined the role of different actors including
government and the private sector.
Several innovations have been introduced in Africa aimed
at channeling new resources for agriculture and catalyzing
finance to the sector. By so doing, these innovations will
complement the traditional sources such as government
investment, ODA and FDI. Innovations, in terms of new
products, delivery channels, and partnerships along with
greater attention to savings, provide fresh optimism that the
financing deficit in the agricultural sector can be bridged.
Many of the innovative approaches have already become
widespread, such as the value chain approach to agriculture,
the use of insurance coupled with finance and the widespread
incorporation of mobile applications for micro and small
households. The tools that have been used range from
innovative credit tools and derivatives, to risk management
and impact financing. Some of these innovations such as
the risk sharing system in Nigeria, NIRSAL and the weather
based index insurance are potentially transformative. These
will require careful expansion, fine-tuning and replication
in the continent. More than ever before, greater attention
is being paid to the need to manage and mitigate risks,
including those associated with climate change.
Some of the innovative ideas are still in the early stages
of design and implementation. Their potential impact and
limitations are therefore not obvious at this stage. Also,
some of the existing innovations have not been evaluated,
or the evaluations lack the requisite rigor. There is thus
need to evaluate the new ways of financing agriculture to
draw critical lessons and experiences. More importantly,
many of these innovative tools face the critical challenge
of scale. For example, some of the funds such as AATIF
and AgDevCo will need further investments at scale, if they
are to have significant impact in the continent. A larger pool
of private investors and more easily replicated instruments
will be essential going forward. Furthermore, there is
need to ensure that the interventions in the sector are well
coordinated, given that these are coming from a large and
growing number of institutions and agencies across the
continent. In addition, there is clearly need for a “repository”
of innovative ideas in financing African agriculture. On a
more positive note, many of these tools such as impact
investment and crowdfunding have attracted new investors
to the agriculture sector in Africa. The challenge is to nurture
and encourage them.
Generally, innovative ways of serving agriculture and rural
areas, along with the promise of technology, have provided
incentives to formal and informal financial institutions
to increase their presence in rural areas, to serve the
agricultural sector’s needs. Digital financial services (DFS)
have the potential to address financial access and payment
issues that farmers face today, especially those living in
rural and remote areas. Although it is too early to draw
conclusions from the positive effects of DFS, initial evidence
from various parts of the world suggests that DFS present
a real opportunity to address financial access challenges in
agriculture. Efforts to complement existing DFS with new
innovations that are designed to meet the needs of farmers,
especially smallholders, and agricultural enterprises are
necessary.
Innovative approaches to financing African agriculture
should not be limited to financial institutions. Other actors,
namely government, the private sector, donors and
philanthropic organizations have important roles to play. The
government can play a proactive role in developing policies
and a regulatory environment conducive to growth of the
private sector investments in the agriculture sector. Laws
and regulations to ensure that existing and new instruments
thrive are critical. For example, to attract remittances to
the sector, governments need to ensure that appropriate
rules and regulations are in place. Regulations need some
elements of flexibility as well, so as not to stifle innovation.
In addition, governments have an important role to ensure
that the infrastructure gaps in the continent, some of which
have been identified in this chapter, are addressed. The
private sector will be instrumental in bringing new capital
into the sector directly or through co-investment with the
government through PPP arrangements, and to bring rigor
in return on investment expectations and management of
funds. Donors, including philanthropies, can help support
new models of agricultural financing by taking the higher risk
and lower return parts of the financing structures to leverage
private sector investment in agriculture.
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