How Can We Help Agricultural SMEs Respond to the Food Crisis?
The world currently faces a food crisis, triggered in part by the war in Ukraine, the COVID-19 pandemic and climate change.These enterprises perform a variety of key functions: supplying inputs to farmers, aggregating, transporting and processing farmers’ yields, and selling agricultural products to consumers.
Increased risks and challenges for agri-SMEs
Climate change is compromising agricultural productivity growth, which will have a negative impact on small producers and agri-SMEs over the coming years. The global pandemic amplified the business continuity risk of agri-SMEs, bringing disruptions in productivity and transportation, difficulty in accessing consistent technical assistance, unstable buyer demand and risk aversion from lending institutions.
The war in Ukraine has presented new challenges to agri-SMEs, particularly those in production, logistics and input distribution, or dependent on imports from the zone of conflict. Simultaneous price rises of food, fertilizer and fuel have forced some businesses to scale back their operations or reduce costs to stay within cash flow constraints.
One woman-owned agribusiness we spoke to in Nigeria, for example, has reduced the sizes of its baking tins to maintain margins on its bread. SMEs that provide advisory services and access to markets to small-scale farmers have also been hard hit. Another SME in Kenya reported that demand for their soil testing service has dropped since the onset of war in Ukraine, despite the increasing need to identify fertilizer quantities more precisely.
Some agricultural entrepreneurs – or agri-preneurs - are seizing business opportunities in this crisis, which could lead to positive social and environmental benefits. For instance, with the prices of imports rising, some SMEs are sourcing locally produced alternatives or pivoting towards the use of domestic, nutrient-rich crops.
But while there are some new opportunities to grow and pivot, the business environment is increasingly risky overall. As agri-SMEs face these increased challenges, their ability to access appropriate and timely finance is of particular concern. The responses of financial service providers (FSPs) at this key moment can play an important role in ensuring the growth and sustainability of these businesses.
How has the financial sector responded so far?
Historically, the SME market segment has been viewed as high cost and low return by many FSPs. Agri-SMEs, in particular, face the added perception of higher risk given the seasonal and long-term nature of the agriculture sector. According to experts in a recent learning event, disruptions to capital flows resulting from the COVID-19 pandemic have resulted in banks and other financial institutions holding excess liquidity. However, current economic volatility is increasing risk perception, causing capital to pull back, particularly for longer-term lending.
Some FSPs are finding ways to mitigate risks and sustain lending to agri-SMEs and small farmers. For instance, in addition to direct financing and introducing sustainable practices to small farmers, one commercial bank in Kenya is lending to agri-SMEs, primarily in manufacturing, to ensure a stable market for their client farmers. In Egypt, an innovative fintech was launched in response to growing liquidity during the COVID-19 pandemic to connect small farmers to financing for seeds and inputs through digital contracts.
Initial evidence reflects a mixed scenario, with some local FSPs based in countries that rely heavily on key imports tightening credit in a “wait and see” approach, while others proceed with business as usual. There is no evidence yet of major retractions in the delivery of finance to agri-SMEs, but there are concerns of an increased focus on financing production, which may drive attention away from building climate resilience or other opportunities along agricultural value chains. Nevertheless, financial sector responses may evolve depending on local regulations and policies in response to the crisis.
How can the financial inclusion community help agri-SMEs access the financing they need?
FSPs can thoughtfully expand their portfolios of agri-SME financing by offering both liquidity and de-risking tools in ways that increase the flow of capital to value chains over the short and long term. They should also explore investment opportunities alongside those in production, such as in processing, transport, storage and retail.
There are limits to the risk mitigation that FSPs can achieve alone, however. Governments and the development community should support them to de-risk the sector with a thoughtful use of concessional funds and by nurturing a pipeline of investment-ready SMEs.
Development agencies should better coordinate with governments and FSPs to scale up proven interventions that de-risk and reprioritize finance for SMEs. They should also offer a smart combination of financial services and technical assistance to support a long-term transformation toward more resilient and sustainable operations.