Unlocking Agricultural Finance at Scale - Research Project Gates Foundation

Agriculture is crucial for sustainable global development, providing food, labour and capital, and serving as a market for industrial commodities. It is key to ending extreme poverty and boosting shared prosperity, especially in developing regions like Sub-Saharan Africa (SSA) and South Asia. Yet, food insecurity remains a significant challenge, with many rural populations subsisting on low-productivity agricultural systems. To further maximise the potential of the agricultural sector, access to finance is crucial to stimulate growth in the sector and boost the overall economy, leading to better living standards and reduced poverty.

Globally, many initiatives aim to spur access to financial services for agriculture. Various have proven to be successful, but often a sustained, structural impact is still lacking. That is why we (Rabo Partnerships, RP) conducted research. This research combines worldwide insights and lessons learned into a set of recommendations, aimed to answer the question “how to unlock agricultural finance at scale in SSA and South Asia?”.

To answer the research question, this report follows both qualitative and quantitative methods. The first were gathered through desktop research, interviews, and stakeholder roundtables in Brazil, India, Ethiopia, and the Netherlands. We gathered quantitative data and indicators to develop a combined index consisting of a) the impact index, showing in relative terms in which country the recommendations can have the highest impact, b) the implementation index, showing in which countries the implementation of our recommendations would be most conducive, and c) the adoption index, showing in which countries the probability of adoption of recommendations would be highest.

While the importance of agricultural finance is generally accepted and understood, data from e.g. India confirm that output elasticity of farm credit is significant and positive: roughly every 1% increase in agricultural credit produces 0.29% increase in agricultural GDP. However, a number of binding constraints cause the current shortfall of it, especially in SSA and South Asia. These limit the ability of financiers to lend to farmers and Small-Medium Enterprises (SMEs), and include, being closely interrelated:

1. An inadequate enabling environment, with a lack of effective policies and regulations for agricultural finance discouraging lending and creating additional barriers to the flow of liquidity to agriculture.

2. Lenders perceiving agriculture as a high-risk sector, mainly because of production risk, marketing risk and price risk.

3. High transaction costs due to the remoteness of farmers and agricultural SMEs, requiring many financiers to make substantial investments in expanding branch networks, recruiting and training staff, and building systems to promote, process, supervise and collect loans.

To overcome these risks, it is a matter of understanding agriculture from financial-, operational- and environmental perspective in order to make a credit assessment, and subsequently mitigate risks outside of the risk appetite. For the latter, collateral can be used and pledged to the borrower, and liquidated in order to repay the credit exposure in case of default. However, in most emerging and developing economies, the lack of acceptable collateral is often cited as a key constraint on the provision of credit to agriculture before the stage of harvested crops.

As such, we have been assessing worldwide lessons learned on ways to provide forward crops as legal scrutiny. It shows that any legal instrument would need to be rooted in local legislation with the judicial environment able to judge on it in the right way. Then still, the exposure has an inherent performance risk. Given the size and remoteness of many farms, it will be challenging and cost-inefficient to perform crop monitoring via agronomists in the field. This would need to be data-driven, with use of remote sensing tools. The data, around the crop via remote sensing tools and on the farmers via credit scoring tools, will need to be integrated to provide a holistic view on all risks. Before data analytics and converting data into relevant risk insights, general access to these data at low costs can be enabled through Digital Public Infrastructure (DPI). This refers to the foundational digital systems and services, all connected and supporting the efficient functioning of a society. Additionally, agricultural financing policies from the government and Development Finance Institutions (DFIs) play a crucial role in increasing the flow of agricultural finance.

In short, our recommendations consist of five key building blocks, including 1) Collateralisation via forward crops, 2) Contract integrity, 3) Digital Public Infrastructure, 4) Integrated data-driven risk management, and 5) Financing policy.

To truly achieve agricultural finance at scale, we suggest (building block 6) to combine all elements as described above into the Farmer Lending Interface (FLI), as visualised below. This FLI can only become a success in the appropriate enabling environment, with digital transformation, established rule of law, and rural financing policies contributing to implementation.

To implement these recommendations in a potential follow-up program, the impact, implementation, and adoption indices suggest a number of potential pilot countries, which we complement by countries with qualitative requirements in place.

To read the full summary of the research, click here.