Using data and performance to solve the access to finance challenge for agri-SMEs

Read how data and performance was used to develop bankability metrics. The new bankability metrics incorporates robust sector data and research deepens the sector’s understanding of how to close the estimated $65 billion annual financing gap for agri-SMEs in Sub-Saharan Africa.

Photo: AGRA

A persistent disconnect

Every day in emerging markets, farmers struggle to access the inputs and markets they need to increase their yields and incomes to improve their livelihoods. Though there are innovative financial products and approaches to financing the agricultural sector, medium and small agribusinesses that deliver the essential services to farmers still lack access to funding, which is essential to help them grow. On the other hand, lenders have faced challenges in obtaining the right kind of information in lengthy and expensive due diligence processes from these businesses, making them shy away from lending to agri-SMEs. Unfortunately, agri-SMEs may not operate to the norms, standards, and expectations of lenders. Although there is an increasing number of examples that form outliers in this reality, generally speaking, there are still two different worlds that struggle to understand one another: lender and agri-SME.

Cracking the problem

Last year, SCOPE insight and the Centre for Financial Inclusion (CFI), with support from Alliance for a Green Revolution in Africa (AGRA), embarked on creating a bridge between agri-SMEs and financiers. The team researched over 90 lenders and industry actors and analyzed SCOPEinsight and the Council on Smallholder Agricultural Finance (CSAF) data to understand some of the driving factors behind the significant financing gap.

The research revealed the following:

  • Lenders currently require a large amount of information and spend enormous time and resources to source and assess agribusinesses’ bankability. Not only does this result in high transaction costs, but the inefficiency results in fewer businesses being screened and leads to larger ticket sizes.

  • Within the eight dimensions of professionalism[1], three key drivers influence the likelihood of an agri-SME receiving a loan[2]. These are internal management, market performance, and management.

Standard measurement tools are effective

The research demonstrated that the following root problems must be addressed if access to finance becomes a reality for agri-SMEs. Among these are:

  1. A professionalization process for agri-SMEs needs to be in place, so agri-SMEs have a roadmap to become more professional (and thereby meet market requirements). By more “professional,” we mean that the agri-SMEs is using systems and processes that are accessible, auditable and understandable by outsiders like lenders. The prohibitive collateral requirements that many financiers have stemmed from Central Bank regulations and requirements and the lack of any other reliable proof that the SME can deploy and repay external funds.

  2. A common language (i.e., the Bankability Metrics) makes the interaction between SME and banks easier because there is agreement on professionalism defined in indicators/measures. The metrics also offer an alternative risk assessment instead of collateral requirements.

Image: AGRA

From this research, we propose two solutions: 1. Agri-SMEs follow a roadmap to help them professionalize, and 2. Use a common language (e.g., Bankability Metrics).

Solution #1: A Standardized, data-led professionalization process for agri-SMEs