How flawed promise of returns trapped Nigerian agri-business investors’ funds
While a combination of unpredictable weather conditions, COVID-19 pandemic, and dwindling demand due to a recessive economy may be top on the list of excuses proffered by owners of agri- investment platforms for their failure to meet repayment timelines, experts say there is a deeper reason.
The interest rates the owners pledged were based on flawed premises from the beginning.
Thrive Agric, Agropark , Farmzhi, Payfarmer, and H O Corn are among the agro-investment platforms currently with growing backlogs of investors’ funds. Prior to becoming a trauma experience for many investors, the platforms were considered viable investment options in the midst of declining treasury bill rates, bond yields, and bank deposit rates.
The attraction of the platforms is often because they offer more rates than can be matched by many alternative investment instruments. H O Corn, for instance, wooed investors with a 50 percent return on investment while Farmzhi told investors it would pay 10 percent every month.
“The sponsors of the agric schemes were seeking to finance startups with debt and not equity,” Kalu Aja, CEO of Afriswiss Capital Assets Management, told Businessday. “They accepted deposits from investors to grow their farms but they offered a fixed return essentially a bond. As cost rose, they could not meet interest payments.”
The agricultural sector contributed 30.77 percent to the overall Gross Domestic Product (GDP) of Nigeria in the third quarter of 2020 making it the largest contributor to the economy with between $50 to $100 billion valuation.
The GDP, however, according to experts is because much of the sectors also declined in the period. The NBS said in its report that in the third quarter of 2020, the agricultural sector grew by 1.39 percent (year-on-year) in real terms, with a drop of 0.89 percent points from the corresponding period of 2019, and a decrease of -0.19 percent points from the preceding quarter.
Although the government has over time made efforts to plug the gaps in the sector, experts say funding remains one of the biggest challenges for players in agriculture. There are three financing models that operators in the sector have relied upon to address the funding gap in the industry.
To identify the three models, Businessday spoke to Bolaji Akinboro a co- founder and former CEO of Cellulant the parent company of Agrikore, a platform that leverages blockchain to provide smart contracts, payments, and marketplace systems that ensures that every stakeholder benefits.
Since resigning his position in September, Bolaji Akinboro has floated a new business- tobusiness venture known as Voriancorelli, which launched on October 12, 2020. The company is seeking to capture a sizable portion of the agric sector in Nigeria.
According to Akinboro the first model is equity from investors in which operators put up money to get the enterprise going and wait for returns over time in the form of individuals or exits when the value of the company goes up. The second model requires borrowing the money from a bank and paying an annual interest. The final model is crowdfunding also known as people’s money. Here agribusiness operators are essentially borrowing from individuals and offering returns higher than what the banks will offer.
Given the nature of the agric sector in that a lot of things cannot be predicted, the best funding model is likely to have a long-term view. Kalu Aja calls this “patient long term capital.” He argues that while raising finance in the sector, a practical approach will avoid making guarantees because farmers cannot predict much of what the outcome of the farm produce will be.
For the agribusiness platforms, he said, “They are trying to raise finance but once you start to guarantee, you are running a bond, not a farm. A bond is not a sinking fund. None of those farms have one. A farm needs equity partners, patient capital. It should be profit and loss, not interest and guarantee,” Aja said.
For Akinboro, while the sector requires a long term approach to financing, players have to find a sustainable way to get investors to buy into it. A long-term view has not always worked for most Nigerian investors including institutions like banks and credit firms.
“We developed a blockchain for value chains that we call the TORO, in Yoruba. The essential idea is that when you invest in the crypto, the money does not disappear into the pockets of the owners of the blockchain network, it actually goes into the reserve, and market participants at the various levels of
agriculture that I have described can tap into the funding. This really means we are using crypto to deliver equity, it’s like buying shares,” Akinboro said.
The beauty of leveraging this model is that when investors who hold the crypto want to divest, they can get out by selling to someone else.
“This means we have brought into agriculture the power of capital markets through a framework that is not complicated. In our view this is the use case that enables financing to reach agriculture through blockchains,” he said.
While blockchain is an interesting alternative, it will require a great amount of trust to convince investors largely due to a lack of regulatory oversight of the space. But a platform like Farmcrowdy which recently celebrated its four years of pioneering agri-investment in Nigeria and within that time is yet to owe any investor, are some of the bright spots in the space. In a recent interview with Techpoint Africa, Onyeka Akumah, Founder and CEO of Farmcrowdy said the success of the platform was not focusing only on crowdfunding to fund its farm investments.
“Rather than crowdfunding, we created a Structured Finance model where crowdfunding is one way to raise money for the farmers, but you also have banks that are willing to do large amounts of loans to the farmers. You have development finance institutions (DFIS) that make large investments in farmers too,” Akumah said.
In the long run, it will take the enforcement of regulations for investors to really feel confident. Without implementing regulation, operators are likely to carry on like it is business as usual and investors will continue to be at the receiving end, said Aja.