Transforming access to finance in agriculture

Published on Wamda

In the Middle East and Africa (MEA), agriculture is a social and economic linchpin. Nine of the world’s top ten countries with the highest agriculture-generated GDP (up to 56 per cent) are in MEA.  

Around 500 million people – 28 per cent of the regional population – are employed in agriculture. In Sub-Saharan Africa (SSA), 60 per cent are smallholder farmers and while the continent is home to 25 per cent of global arable land, it contributes only 10 per cent of agricultural output and imports 85 per cent of food.

Although the discrepancy can be attributed to several factors, a leading problem is farmers are among the region’s and world’s poorest and most underbanked, causing limited access to necessary finance to operate, upgrade or scale their farms.

With almost half the world’s farmers unbanked, the issue is global, but the trend is most prevalent in emerging markets. An ISF report estimated demand for financing from 220,000 agri-SMEs across SSA and Southeast Asia at $160 billion annually – with only $54 billion actually supplied, mostly by commercial banks.

Many small-scale farmers in MEA do not have access to basic services, such as savings accounts, credit and insurance. In Ghana, only 3.4 per cent of tractor owners financed their vehicle through a bank loan, with the rest depending on savings to purchase machinery. Beyond farmers, most agribusinesses transact in cash, with reports from Ghana’s cocoa market showing cash purchases to farmers costing licensed buyers and agents up to 15 per cent of their revenues.

Typically, cautious banks and lending institutions consider farmers high risk and do not offer customised financial products, while credit offerings often have prohibitive interest rates.

There is also a lack of data and infrastructure, with 27 per cent of people in SSA citing distance to the nearest financial institution as the main obstacle to having an account. Without collateral to secure loans or financial support, farmers resort to informal financing mechanisms – or none at all.

Lacking collective bargaining power, the agriculture supply chain is fragmented, and dominated by middlemen who obscure farmers’ prices or market visibility, delaying payments and driving down margins. While small to medium-sized farmers represent 90 per cent of global agribusinesses, they only manage 30 per cent of cross-border trade, due to the complexity of legal frameworks and limited access to banking capital or lines of credit.

At 7 per cent, the Middle East and North Africa (Mena) has the world’s lowest SME-to-total bank lending ratio. In regions such as the Gulf, where 85 per cent of food is imported, strengthening food security by digitising distributed supply chains, and the financial inclusion of food producers, is a billion-dollar opportunity.

When we consider that 235 million unbanked adults worldwide receive cash payments for the sale of agricultural products and 59 per cent of them have a mobile phone, it is clear the impact of technology in unlocking the vast potential of agriculture in emerging markets.

From novel credit-scoring systems to blockchain-based mobile wallets, agri-fintech is addressing the financial pain points of stakeholders across the agriculture value chain and attracting the lion’s share of venture funding for the sector as a whole.

Regional successes include India’s DeHaat, valued at $700 million, that uses AI to support 1.5 million farmers source raw materials, find credit services and sell crops.

CropIn, a Bangalore-based agri-insurtech, pulls farm-level data on pest infestation and disease to solve problems for insurers, including claim verification, risk variability and premium determinations.

Turkey-based Tarfin, which uses big data analytics to reduce the cost of farm inputs while providing competitive credit terms.

Brazil’s Agrolend leverages farmers’ high WhatsApp penetration to formalise loans, while Nigeria’s FarmDrive combines farm-level data with revenues and expenses to generate credit scores – helping institutions lend to farmers.

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 having unique financial requirements.

African fintechs are coming of age, with average penetration at 3-5 per cent – figures in line with global market leaders – yet only a sliver of fintech’s potential on the continent. Across Mena and Pakistan, fintech’s share of financial services revenue is projected to reach 2.5 per cent by 2025, from under 1 per cent today.  Development  in wallets, payments, and distribution has laid infrastructural foundations for other sectors like agriculture to develop tailored financial solutions.

While a fully inclusive financial system is some way off, technology is closing the gaps by reaching traditionally underserved groups across the region, including farmers and agribusinesses.

With climate change set to further threaten yield and land productivity, especially in emerging markets, a focus on farmers and their needs is central to the growth of regional economies – and agri-fintech solutions can provide them with the necessary financial tools to mitigate climate-related risks as well as scale their farming operations.

Now is the time to bring agricultural financing closer to the future.