A financially-empowered farmer is a productive farmer. Credit, together with insurance, is critical to agricultural financing. However, lack of innovation by financial institutions has limited smallholder farmers’ access to finance.
Financial Matters with Tinashe Kaduwo
Zimbabwe is among the countries with the lowest score on Agricultural Transformation in Africa and emerged among the four Sadc countries that are not on track in implementing the seven commitments of the African Union (AU)’s June 2014 Malabo Declaration.
The country scored 3,3 out of 10 when the 3,94 benchmark was set as the minimum score for a country to be on track to achieving the Malabo targets by 2025. The Malabo Commitments were translated into seven thematic areas of performance such as enhancing investment finance in agriculture; ending hunger in Africa by 2025; halving poverty by 2025 and upholding the Comprehensive Africa Agricultural Development Programme (CAADP).
Enhancing investment finance in agriculture is one of the thematic areas of performance Zimbabwe failed. The country had a zero score on enhancing access to finance when 3,33 is the benchmark. This shows serious weaknesses in Zimbabwe’s agriculture financing models.
Farmers face seasonal income, long maturation periods and are exposed to considerable risks. Seasonality requires specifically tailored financial services and conditions, such as longer repayment and grace periods, less frequent repayments, or leasing products. The Zimbabwean market seems to lack innovative products to bridge the financing gap in the agricultural sector especially for small-scale communal farmers. Credit is critical to agricultural finance, whether to purchase inputs (seed, fertiliser), tools, or to cover ongoing operational costs prior to harvest time. For smallholders, credit is rarely drawn from financial institutions. The cost of assessment of the client risks and transaction costs of providing loans by conventional means is too high for most financial institutions.
In Kenya and Uganda, for instance, an innovative platform, Agrilife, illustrates how financial institutions can use digital means to collect data, enabling the lender to assess the farmer and determine whether to extend a loan without requiring an in-person visit by a lending officer. Agrilife is a cloud-based technology platform that interacts with mobile phones and web platforms. By analysing data of thousands of smallholders through their mobile money transactions, a credit appraiser in partnership with Agrilife identifies whether smallholder farmers are “credit-worthy”. A partner bank then lends to individual Agrilife farmers via farmer cooperatives and other aggregators, from whom it obtains a loan guarantee. This type of innovation is lacking in the agriculture value chain in Zimbabwe.
There are also considerable risks in the agriculture business. Agricultural risks to be considered include price fluctuations for inputs and products or crop failure due to pests and diseases, temperature or variable rainfall. There are several types of agriculture-related insurance, including weather index insurance (for example, drought, excessive rain), area yield, livestock mortality, and price insurance. The operational costs of making and receiving payments for insurance, issuing pay-outs and verification often make the costs prohibitive for smallholders and as such has been an impediment.
Kenya’s Acre Africa, a micro-insurance product designer/insurance intermediary, offers an example of innovative digital access to insurance. It offers a digitally accessed index weather insurance product. The farmer for instance purchases a bag of a participating supplier’s seed; each bag of seed has a unique identification number (which is on a card in the bag) that the farmer sends by SMS to register. No claim is necessary and that is the power of innovation.
Security of land tenure has been the major excuse by local financial institutions on agricultural financing. Although necessary, limited innovation is the major missing link in agricultural financing.
Kaduwo is an economist at Econometer Global Capital. — firstname.lastname@example.org or email@example.com