How can African agric economies balance opportunities, risks?
RISK has been part of life since time immemorial. Even before the dawn of modern banking, risk could not be separated from human survival opportunities such as hunting and gathering food. African forests teemed with dangerous animals, rendering hunting a risky adventure.
One would spend a whole day or an entire week without catching game meat and that meant loss of time which could have been used in alternative ways such as fishing. Risks and opportunities are always competing just as success and failure compete in business.
Today, risks are associated with unforeseen factors and uncertainties such as climate change that are outside human control. However, human beings continue to build their capacity to reduce or mitigate some of the risks through reliable experiences and information.
Balancing risks and opportunities in the agriculture
sector
Like any other business, farming is a risky business characterised by the good and the bad. The main reason farmers and other value chain actors continue with agriculture is because the bad is often outweighed by the good.
To the extent that the weather, climate and markets are not always predictable, farmers and traders get into agribusiness fully aware that possibilities of success and failure are unknown. Should they stop investing in agribusiness because of unknown risks?
In most African countries, when farmers and traders decide to get into agriculture as a business, they will have cushioned themselves against bigger portions of the risk. Investing years into learning the tricks of agriculture is a key part of absorbing risk.
How can African agricultural economies balance opportunities
and-risks
Some farmers and traders invest all their pension and remittances in pursuit of agriculture in order to identify wealth creation opportunities. At an individual level, a farmer makes a conscious decision to put all his life savings into the agricultural experience.
On the basis of such investment and experience, the farmer will become confident of approaching a bank for a loan. Farmers and traders who approach banks for loans will have gained valuable experience and can clearly see opportunities with high probability of success.
Who is competent to assess
agricultural risk? Somebody who has spent more than 10 years in a particular agricultural enterprise or someone with two years office experience in assessing risks through reading proposals that come to his/her desk?
How much business experience, intuitions and nuances can be fully expressed through business proposals which are currently used by risk assessors to either accept or reject a business case? To what extent is the person who assesses risks in a bank an all-rounder in terms of expertise?
There may be more than 30 business proposals from diverse fields like engineering, trading, exporting and agriculture. How reliable is one template in assessing risk? The combined experience of those applying for bank loans could be more than 100 years.
By rejecting most of these applications on the basis of the same risk assessment blue prints, most African financial institutions are killing a lot of business ideas and potential solutions that could contribute to national economic development. Foreign Direct Investment (FDI) may not bring better solutions in the form of reliable and sustainable business ideas that are abundant in local people.
Need for dynamic risk assessment
tool-kits
New hybrid African economies characterised by a growing informal sector alongside a stagnant formal sector, compel financial institutions to continuously revisit their risk assessment tool- kits.bwe.Forinstance,whileaformalcompany may produce export receipts, most Through informal markets, finanSMEs may not be able to bring documencial institutions can be able to reach tary proof of their more than 12-year more smallholder farmers who constibusiness enterprise. tute more than 70 percent of a potential
A trader in the informal sector can clientele base. Robust evidence should save more than 100 customers a day be part of every risk assessment tooland generate more sales than a formal box from individual value chain actor, company but lack documentary proof sector and policy levels. of all those transactions. Is that enough It is the market that gives you the rate basis to consider that trader high risk? of investment.
Rather than assess the risk profile of Without identifying and analysing an individual trader, financial institumarket evidence, it is difficult to see tions should assess and determine the an investment opportunity. The rate risk profile of an entire industry such of investment comes from looking at as Agriculture, Clothing, Mining, etc. price trends, actors, demand & supply
Such a holistic assessment will enable trends, standards and specifications, crafting of specific business models that consumption patterns, seasonality and minimize risk for the entire industry or whole market dynamics. sector. Such assessments presuppose Minimising fragmented financial institutions have robust data socio-economic perspectives and evidence on the industry or sector. Due to the current mismatch between In most African countries such data formal risk assessment tools and ecoand evidence is missing. nomic realities in the hybrid economy,
In the agriculture sector, financial most African countries have an inforinstitutions should know the performal economy that is fully aware of its mance of agricultural commodities opportunities and potential on one side in informal markets which currently and outsiders such as financial instituabsorb more than 70 percent of diverse tions who think this sector is too risky commodities, for instance in Zimba- on the other side. — BH24.co.zw.