Developing the Small-to-Medium Sized Agribusiness Sector in Africa

Small and medium-sized agrifood enterprises play a critical role in achieving food security in Africa. A healthy SME sector can ensure that the continent’s smallholders – who make up the vast majority of Africa’s farmers – are in a better position to secure inputs, produce what the market demands, and find offtakers for their products. These market linkages are crucial.

But while many policymakers agree on the importance of developing agricultural value chains, actual support for the SME agrifood sector in Africa remains patchy. Issues of land tenure, access to finance, and regulatory burdens still loom large.

Speaking at a panel discussion on “Developing the domestic African agribusiness sector” at the Grow Africa Investment Forum on June 2, Bernard Odero, managing director of Western Fresh Industries in Kenya, stated the problem bluntly.

“The cost of doing business for SMEs is still very high,” he said. “Agricultural produce is either highly perishable or bulky, so there’s the cost of transport and energy. And then sometimes they have to employ an individual to deal with all the bureaucratic requirements too. SMEs just can’t afford it.”

Improving access to finance

One of the biggest problems is access to finance – and this, in turn is related to land tenure. Around the world, farmers routinely use their land as collateral when accessing finance, but insecure land tenure can make it difficult for small-scale farmers to move beyond subsistence farming. Can crops themselves be used as collateral? Possibly, but the prospect of crop failure makes this risky for both the farmer and the bank.

“Financial institutions are not willing to take the risk of lending to SMEs in this sector,” said Odero. “They don’t see it as a good venture. And the products that financial institutions offer aren’t favourable to agriculture. Crops have a life cycle, but institutions will lend and expect you to start paying tomorrow.”

Benefits of smallholder farmer aggregation

For individual farmers trying to enter a value chain, this is difficult to get around. That’s why forming cooperatives is a potential solution, suggested Clement Kumbemba, chief executive officer of Malawi Investment Trade.

 

“We need to bring some order to the SME sector,” he said. “Small agribusinesses need to be aggregated, and where we do see that, we see a big difference. They have a voice and you can address their needs.”

But while it’s broadly true that banks are wary of agricultural SMEs, there are also examples which show that it is in fact possible to provide financing to these customers.

The Central Bank of Nigeria (CBN), for instance, has a long-established Agricultural Credit Guarantee Scheme Fund (ACGSF) which helps farmers without collateral to get loans from commercial banks.

The Alliance for a Green Revolution in Africa (AGRA) has also partnered with CBN and commercial banks to develop the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL), which launched in 2012 to help banks become more confident in making agricultural loans, by underwriting the risk and providing technical assistance and training to the lenders. The aim is to increase the percentage of bank lending to farmers and agricultural enterprises from 1.4% to 7% over 10 years.

In fact, the overall climate for agribusiness in Nigeria has changed remarkably in the past few years, and this shows the importance of political will, said Olatunji Ayoola Owoeye, chief executive officer of Elephant Group Africa.

“Prior to four years ago, agribusiness was at a low level in Nigeria, but policies have changed and the government is very passionate about driving them,” he said.

“If you’d told me then that we would attract investment for plantations and processing, I’d have wondered what you were talking about. But today, we’ve been able to raise the capital. A lot of companies are investing in agribusiness now. So we have to look at government policy across Africa, and at where policy is favourable to scaling up.”

Scaling up through value-added processing

How exactly can the smallest producers start to establish themselves in value chains? Many could benefit from being able to add value to their primary crops even before the farm gate. Cassava is a good example: for years, this has been a classic household food security crop, one that farmers can leave in the ground and harvest when needed. Value was rarely added.

But recently, there’s been much more focus on cassava’s potential as a cash crop, with projects helping farmers to process it into HQCF (high-quality cassava flour) or chips and pellets. More of this kind of thinking is needed if we are to stimulate the SME agribusiness sector, said James Mwangi, group managing director and chief executive officer of Equity Bank, Kenya.

“So little value is currently added at the primary production level,” he said. “Capital flows towards processing because that is where the money is being shared, so can’t we organise agriculture in such a way that more farmers are involved in value addition?”

This already aligns with the policies promoted by agencies including the FAO, which sees smallholder inclusion in value chains as crucial, and value-adding activities as one of the ways of achieving it. Essentially it comes down to how we think of smallholders in Africa, said Mwangi. Are they indeed even seen in an entrepreneurial light?

“Agriculture is in the hands of small-scale farmers, many of them women,” he said.

“We need to build their capacity, and make them better farmers. And to do that, governments also need to stop treating this as a social development sector. We do need to appreciate that agriculture is unique, and develop mechanisms for dealing with the risks farmers face. But if possible, we need to treat this sector like any other business.”

Attracting youth into farming

A younger generation of farmers may help achieve this. Agriculture has long suffered from an image problem – perhaps because young people do see it as a social development sector, rather than one of business opportunity. Owoeye called for more mentors to help inspire a younger generation currently drawn more to cities than to farms.

“There are programmes where mentors go to schools and talk to young people about agriculture,” he said. “We need more of this. We need to show young people that agriculture is as important as law and medicine – and that they can be successful in it.”