Transforming Access to Finance in Agriculture

For many countries across the Middle East and Africa (MEA), agriculture serves as an economic and social linchpin.

Nine out of 10 countries with the highest proportion of GDP generated by agriculture (up to 56%) are from MEA. Around 500 million people in the region -roughly 28% of the population -are employed in agriculture.1 In Sub-Saharan Africa (SSA), 60% of the population are smallholder farmers and although the continent is home to 25% of the arable land on earth, it only contributes 10% of the world’s agricultural output and imports 85% of the food consumed domestically.2 3

The discrepancy can be attributed to several factors, from infrastructural limitations to a heavily intermediated access to the market. A leading one, however, is that farmers are among the region’s (and the world’s) poorest and most underbanked, translating to a lack of access to the necessary financing to operate, upgrade or scale their farms.

With almost half of the world’s farmers being unbanked, the issue is a global one. But, the trend is far more prevalent in emerging markets.4 An ISF Agri SME Report estimates demand for financing at $160 billion from 220,000 agri-SMEs across SSA andSoutheast Asia – a sum being supplied by $54 billion annually, mostly by commercial banks.5

Many small-scale farmers in MEA do not have access to the most basic financial services, such as savings accounts, credit and insurance. In Ghana (and in many other parts of Africa), only 3.4% of tractor owners financed their vehicle through a bank loan, with the rest depending on their savings to purchase machinery. Beyond farmers, agribusinesses, those that provide inputs and services to small-scale farmers and connect them to broader markets, mostly transact in cash. Reports show that in Ghana’s cocoa market, making payments to farmers in cash costs licensed buying companies and agents nearly 3.6% and 15% of their revenues respectively.6

Financial exclusion among food producers is a multi-faceted challenge. Farmers are considered high risk by banks and lending institutions, who do not have the risk appetite to lend to them in an efficient manner. These same institutions do not offer customized financial products that cater to the sector's unique requirements, and their credit offerings often come with prohibitive interest rates.

There is also a lack of data and infrastructure, physical and financial, with 27% of people in SSA citing simply the distance to the nearest financial institution as the main obstacle to having an account.7 This is especially pronounced for farmers who are typically located in more remote rural areas. Farmers themselves find themselves operating outside the formal economy, and don’t possess the collateral to secure loans or financial support, leading them to opt for informal financing mechanisms, or none at all.

The fragmentation of farmers, resulting in a lack of cumulative bargaining power, is another issue. In these markets, the agriculture supply chain is dominated by middlemen who are often the sole off-takers for small farms. These intermediaries don’t give farmers price or market visibility, delay payments and drive down margins for producers. This not only limits their ability to participate in local markets, but in cross-border trade as well. Larger farmers control a disproportionate 70% of the industry, while small to medium-sized farmers, representing 90% of global agribusinesses, only manage 30% of cross-border trade. In the world of international agriculture exports, SME’s engagement is low due to the complexity of legal frameworks and limited access to banking capital and lines of credit. The Middle East and North Africa (MENA) is home to the world’s lowest SME lending to total bank lending ratio, at 7%.8 In regions like the Gulf, where 85% of food is imported, strengthening food security through the digitization of distributed supply chains and the financial inclusion of food producers is a billion-dollar opportunity.9    

The need for financing solutions is clear, and technology will be instrumental in filling the gaps. When we consider that about 235million unbanked adults worldwide receive cash payments for the sale of agricultural products, but 59% of them have a mobile phone, it becomes evident that technology can play a central role in unlocking the vast potential of agricultural finance.10

From novel credit-scoring systems to blockchain-based mobile wallets, fintechs are already filling the gaps of traditional banks, providing value-add services at reduced costs, and increasing access to credit.

India’s DeHaat, valued at $700 million, uses artificial intelligence to support 1.5million farmers source raw materials, find advisory and credit services and sell crops. CropIn, a Bangalore-based agri-insurtech, pulls farm-level data on everything from pest infestation and disease to localized weather reporting to solve a host of pain points for insurers, from claim verification and risk variability to manual disbursals and premium determinations. Brazil’s Agrolend leverages the farming community’s high WhatsApp penetration rate to formalize loans. Nigeria’s FarmDrive combines farm-level data and farmers revenues and expenses (collected from a mobile app) to generate a credit score that financial institutions can use to lend to farmers.

While these solutions are producer-oriented, tech-enabled financial services can extend to other stakeholders in the value chain, including commodity traders, buyers, insurers, input suppliers, seed companies or food processors – each of which have unique financial requirements.

Agri-fintech is gaining momentum. In fact, this vertical is among the most funded in the overall agri-tech sector. And while funding in the agri-fintech space actually fell by 5% in 2022, this represents a relative success compared to the drops in the fintech and agritech spaces of 47% and 38%respectively.11

This has been partly driven by a global focus on climate, and the role that climate-smart finance can play in helping producers mitigate risk, adapt to change and provide a safety net for crop disasters. Another key tailwind is the growing amounts of available agri-data– which moulds financial services, drives decision-making processes, and helps price risk. The rise of mobile payments, especially in Africa, is powering the agricultural industry, as showcased by the successes of DigiFarm in Kenya, an integrated platform that offers farmers access to markets, information and financial services all from a 2G enabled mobile phone.

Across emerging markets, fintech is coming of age. African fintechs, for example, have average penetration levels between 3 and 5% - figures that are in line with global market leaders and represent only a sliver of fintech’s potential on the continent.12 In the Middle East, North Africa and Pakistan, fintech’s share of financial services revenue is projected to reach 2.5% by 2025, from less than 1% today.13 At the current stage of its development, fintech has made significant inroads, especially in wallets, payments, and distribution, which has laid the infrastructural foundation from which other industries, such as agriculture, can develop tailored financial solutions. As fintech expands across emerging economies, so too will the range, scope and scale of financial applications across industries.  

What is clear is that technology is driving new possibilities in agricultural financing. While an inclusive financial system is essential for every economy, we are still some way off that ideal, but technological solutions are helping close the financial inclusion gap and reaching traditionally underserved groups across the region. There is still considerable scope for growth and development, with a vast market yet to be tapped.

Farming, and especially farmers themselves, are central to the growth and functioning of regional economies and communities. Agri-fintech solutions can and must bridge the gaps and provide them with the necessary financial tools to help them grow. The opportunities for technology to play its part are vast, and now is the time to leverage the many technological strides we are making every day to bring agricultural financing closer to the future.