Agriculture funding in Africa is ripe for innovation

How does the bank that funds the largest number of agriculture sector transactions in SA use its skills and knowledge to improve food security and become a force for good across the African continent?

This is a key question we ask ourselves as we look at the rapidly evolving primary and secondary agriculture landscape in Africa and the impact it has on the continent.

This discussion is important, as while there has been progress the African continent still lags other areas in terms of productivity and yield efficiency.

The demographic dividend offered by a young, growing population is counterbalanced by high degrees of inequality, accentuated by recent global events such as the Covid-19 pandemic and growing geopolitical tensions. This has translated into volatility in food prices, making food security a priority in countries across the region.

While SA has a worldclass agriculture sector at a primary and secondary level, the rest of Africa is characterised by many smallscale and subsistence farmers, which leads to a far more fragmented environment for funding.

VOLATILE

This is further compounded by price volatility and currency fluctuations as well as underdeveloped supply chains. Financing of transactions can thus be a high-risk endeavour for inexperienced teams.

For example, 2022 was an incredibly volatile year in the agriculture sector, with many people being caught out with margin call exposure. In some cases these were more than R1bn, highlighting just how volatile the sector is. Due to the volatility a number of bank lending partners have faced challenges, decreasing their appetite for funding.

Trade on the African continent is also complicated by issues about euro and dollar liquidity, a factor that has become a major challenge for new capital projects in an environment of rising borrowing costs.

Agriculture is a fundingintense business and as we look at the fragmented nature of the sector on the continent the role of funders is key to creating value outside traditional investment banking models.

It is key that we don’t look at projects in isolation, but view the ecosystem as a whole. Strategically, we have a focus on the funding of the import and export value chains as this is where we have the ability to do deals of sufficient size and impact.

In Kenya, Absa has a robust value proposition anchored on approaches of access to relevant, actionable information; coaching and mentorship; markets; and sustainable finance.

This seeks to empower various stages in the agriculture value chains for clients’ unique needs — debt and non-debt — while looking at the whole ecosystem.

The Central Bank of Kenya reports that only 4% of gross commercial banking debt flows to the sector, which reflects the risk profile attached to it. Agriculture is the bedrock of the Kenyan economy, contributing a quarter of its GDP and providing nearly 70% of rural employment. This is characterised by fragmented land ownership, smallholder farming models, low adoption of climate-smart agriculture and exposure to unpredictable weather conditions.

TRACTOR SERVICES

Financing the sector requires unique, holistic solutions. Absa continues to empower agribusinesses by working closely with partners and regulators to advance the flow of sustainable finance. A recent reference is our agreement with Hello Tractor to enhance the adoption of mechanisation, in which the smallholder farmers pay per use to access tractor services rather than having to incur upfront acquisition costs.

Absa also provides working capital to the Kenyan Tea Development Agency that is used to purchase inputs and other working capital. Previously, many growers relied on microfinance with high interest rates, but now with cheaper access to finance there is more liquidity to allow their businesses to grow.

Our structural financial impact is apparent in Mozambique, where we have helped establish import lines of $60m-$70m over the past few months to import wheat, maize, and crude vegetable oils to be processed into edibles.

In the Ivory Coast, Absa has funded a cashew processing facility that is now one of the world’s largest such facilities. In Tanzania it has invested $45m for a sugar production facility with a combination of capital expenditure, as well as working capital.

Absa has identified agriculture on the African continent as one of its key growth sectors. Due to our expertise in and long-term commitment to Africa’s agricultural sector we can collaborate with government, private companies and funders to work together to unlock the opportunities our diverse continent has to offer.