Around 60% of the world’s arable land is in Africa, ensuring huge potential for agricultural output. Yet, the continent has faced lower agricultural productivity compared with its peers, and farmers, especially smallholders, have little to no access to the technologies, markets, or financing needed to increase yields and generate positive economic returns. However, a move to change this has already started and has been incorporated by the banks that play an important role in financing the sector.
Financial institutions predict agricultural expansion in Africa over the next few years. This expansion is led by a fast growing population and an urgency to improve food security as the region imports a significant volume of agricultural products. In the 2020-2021 season, Africa imported an estimated 98.4 million tonnes of cereals and is expected to import 99.2 million tonnes in 2021-2022. 211.7 million tonnes of cereals were produced in Africa in 2021, according to the Food and Agriculture Organization of the United Nations (FAO). Sub-Saharan Africa’s average food import bill reaches USD 44 billion per year, according to the World Bank.
Agriculture: what this market represents for Standard Bank, ABSA
In 2021, Africa’s largest banking group by assets, the Standard Bank Group, reported exposure to the agricultural sector at about 3.6%. This may not sound that high but we cover many sectors at the bank”, including corporate investment banking, business, and commercial banking, among others, says Linda Manda, Standard Bank Group’s head of Agribusiness in Corporate & Investment Banking.
With operations in 22 countries, the bank covers the entire value chain, from “seeds to the box” (when the product is ready for the consumer) and various crops, from cocoa in west Africa, tea and coffee in eastern Africa, sugar and tobacco in southern Africa, to fruits in South Africa.
In value most value lending goes to commercial farmers and agribusiness companies. However, a loan to a large sugar company, for example, could extend across the entire supply chain, allowing support for farmers, employees, the distribution network, and final consumers, Manda highlights.
In business banking, a big part of the lending is channelled to primary production. In corporate and investment banking, the lending now goes to processing, value addition, and distribution. Considering the value based on proposition, lending is directed slightly more to the post-harvest segment.
For the group, Southern Africa is the biggest market for agricultural lending due to the bank’s history, but it also has a strong presence in eastern and west Africa. West Africa has a big opportunity to grow. The Covid-19 pandemic highlighted food insecurity stemming from countries highly dependent on imports. This situation prompted many African countries to start a drive for self-sustainability, according to Manda.
Another conductor for potential growth in agriculture, and consequently, in lending activities for the banks, is the African Continental Free Trade Area (AfCFTA) agreement, which could also help improve productivity and efficiency through the facilitation of trade between African countries as Africa usually trades outside the continent, Manda believes. The AfCFTA also aims to boost the continent’s trading position in the global markets. As of February 2021, 36 countries have ratified the AfCFTA agreement, according to the bloc’s website.
According to the Head of AgriBusiness, Relationship Banking, Absa Retail and Business Bank Abrie Rautenbach, ABSA’s commercial asset finance department for the agricultural sector represents 20% of the bank’s book,. South African based banking group, ABSA, is agriculture’s the biggest lender in South Africa, Rautenbach says.
“The sector value chain can be very well defined and used to reduce risk for banks in financing agriculture”. There are also some instruments that can reduce collateral issues. “You have to be open to agriculture, which has an important role to play in South Africa and across the continent. In Africa, around 30% of GDP comes from agriculture, which employs around 60% of the African population,” Rautenbach says.
ABSA is open to business with small and large players, considering the value, with the cooperation of agricultural bankers, agricultural credit officers, and specialists (agricultural economists), who could help the bank understand better agriculture and serve this sector efficiently, the executive points out.
Rautenbach reckons that agricultural financing has changed quite dramatically over time. Nowadays, there is a range of specific product categories, including commodity asset finance and stock finance, among others, that did not exist a couple of years ago. The bank consistently examines the needs of clients and can adjust or design a new product for a specific demand, he adds.
The bank did not disclose data from its operations in agricultural financing.
Initiatives and support for agriculture
Commercial lenders expect to grow their presence in agriculture and are betting on technologies and digital solutions to unlock growth.
One way Standard Bank could support the sector and help it boost production is by improving its efficiency through infrastructure development and support relating to the entire chain, including buildings, storage, loss-reducing processes, and digital infrastructure, Manda explains.
The bank holds a “value chain” approach, looking at the inputs, processing, and how the goods arrive at the final consumer. This requires full visibility as the value chain on the continent is very fragmented, with limited access to market, credit, information and insurance, she says. “We believe that through agriculture we can positively impact the economic wellbeing and growth of our continent”.
Digital platforms to understand the farmers’ need
Standard Bank is looking to use the platform model as its new approach to the sector, enabling a connection between farmers and agricultural services and providers. The marketplace was established in Uganda in 2020, supporting farmers, input providers and off-takers. Through a platform like that, the bank can capture farmers’ behaviour, data from the market that helps the bank make decisions on financing. In this case, Standard Bank provides financial support and resources for the platform.
An example of these digital platforms is OneFarm Share, a partnership between Standard Bank and HelloChoice. The platform connects excess fresh agricultural products from farmers to food needs from charity organizations. The bank purchases seeds, fertilizers, and pesticides on the farmers’ behalf, while farmers repay the bank when they deliver their maize to the aggregator.
ABSA also bets on digital platforms for its agricultural area. The bank is looking for new financing projects, new areas linked to agriculture, sustainability, with a focus on renewables under its commercial asset finance area. Besides, the bank is in the process of providing financing related to climate-related programs, weighing, for example, a particular type of irrigation through a specific category under its commercial asset finance arm.
Can banks increase lending for agriculture?
“I think the biggest moves come from partnerships”, says Manda, from Standard Bank. This is related to the whole concept of platforms where it is possible to create an efficient exchange and obtain enough scale. Improvements in agritechs, communications, mobile technology, all these can help the sector. Mobile technology has grown, allowing access to a population that was previously quite inaccessible. Connectivity through mobile phones would not only link rural communities to other communities, but allow them to access more formal marketplaces and information. This also gives off-takers information about traceability, enabling more inclusion for the farmers.
Platforms, innovations around water management, access to agronomical practices, artificial intelligence, and data analytics could assist, and make farmers “more sustainable”.
The digital journey is also in ABSA’s agenda through platforms. Data can turn around applications. Platforms can coordinate the value chain, quickly providing data and bringing better information about the weather, for example, Rautenbach explains.
Absa Group is looking for other areas in the value-added sector and Africa offers great opportunities for the bank to diversify its products.
Growth perspectives in agriculture
Current tensions brought by the conflict between Russia and Ukraine is impacting the price of crude oil, other commodities and fertilizers, This creates uncertainty in the agricultural sector. Rautenbach, from ABSA, emphasizes that the price of fertilizers increased by more than 100% year-to-year, as Russia and Ukraine are global providers of fertilizers, products essential for the development of the crops.
South African agriculture has benefited from good weather conditions over the last three years. Agricultural GDP in the nation increased by 8% in 2021. Despite current challenges caused by higher fertilizer and diesel prices, Rautenbach expects that some money will be spent on efficiencies on an individual level in some potential areas. “Big farmers will keep on growing”.
Linda Manda, from Standard Bank, estimates that African players can be seen as growing beyond the traditional geographic areas. There is also an unmistakable demand from international players. Sometimes, companies start as import distributors, and after better understanding the market, invest in the continent and become more “vertically” integrated. “This will continue for a while”.
Smallholders farmers limited access for financing
A report from FAO pointed out that less than 10% of Africa’s 50 million smallholder farmers have their economic needs met by the financial sector, citing 2019 data from start-up FarmDrive The lack of collateral continues to impede access to financing for these farmers. Non-collateral, cash flow-based lending is limited due to the lack of agricultural sector expertise from financial institutions and the scarcity of tools to properly gauge the creditworthiness of farmers and cooperatives, the report says. The limited access to financing narrows farmers’ investments in technologies and inputs necessary to improve yields and generate income, which would contribute to reducing hunger and poverty, FAO says.Read More
Sub-Saharan small-scale farmers usually finance inputs with cash from non-farm activities and crop sales, according to a World Bank study. Many African farmers do not have titles to the land they operate and often there is no active land market for lenders to liquidate land seized as collateral, Manda, from Standard Bank, adds. The Council on Smallholder Agricultural Finance (CSAF), a forum for lenders to share learning, revealed in a report that the risk of lending to agricultural small-and-medium enterprises (SMEs) is twice as high compared with other sectors in east Africa, while returns are 4% to 5% lower. The numbers are based on data analysis from 31 lenders on 9,000 loans totalling US$ 3.7bn. Loan disbursements from CSAF members in sub-Saharan Africa dropped 23% to US$ 182m in 2020 compared with 2019, reflecting the Covid-19 pandemic-related challenges in the market. Aceli Africa, a market incentive facility focused on agricultural SMEs in East Africa, aims to mobilize more than 2,000 loans and US$ 600m in private capital lending using a combination of financial incentives for lenders and technical assistance, according to CSAF report.