Lending grows by over 70% since 2013, yet agriculturalSMEs face ongoing challenges and risks
Nairobi, Kenya – Members of the Council on Smallholder Agricultural Finance (CSAF) today announced in their Year in Review report that they provided $597 million in loans to 672 small and medium-sized enterprises (SMEs) during 2015. This financing helped to fuel an estimated $3.7 billion in combined annual revenue among these businesses, which connect more than 2.1 million smallholder farmers—over one-third of whom are women—to domestic and international markets.
CSAF is an alliance of nine leading impact-focused lenders that serve the financing needs of agricultural businesses trapped in the “missing middle”—too large for microfinance but considered too small and too risky by most commercial banks. These businesses typically require loans ranging from $100,000 to $3 million. By targeting high-impact businesses that source agricultural products from smallholder farmers and create jobs in rural communities, CSAF members seek to improve farmer livelihoods, transform agricultural economies, and promote farming practices that sustain the environment.
From coffee cooperatives in Peru exporting to global markets to grain processors in Kenya selling nutrient-fortified flours to local consumers, CSAF members continue to support the growth and development of a diverse finance market for agricultural SMEs in 66 countries.
CSAF lending in 2015 represented a 5% increase compared to the $566 million in credit disbursed to 651 businesses during 2014, but a significant slowdown relative to the 64% growth in 2014 from a base of $354 million in 2013, the first year in which CSAF data was collected. This deceleration occurred as fewer new businesses requested loans and many existing borrowers had difficulty repaying their loans.
Lenders noted that a range of production, price, and market challenges are constraining the sector. Specifically, 2015 was marked by a decline in the prices of several agricultural commodities as well as a steep depreciation of emerging-market currencies. Lenders also cited crop losses due to disease and extreme weather events among the top factors adversely affecting the growth and quality of their portfolios. These external shocks and stresses inhibit the growth and profitability of agricultural businesses, and can quickly push already vulnerable farming communities deeper into poverty.
Because the global coffee sector accounted for approximately one-half of total lending, it had a significant influence on overall CSAF performance. In 2015—despite strong growth in major coffee-producing countries like Colombia, Indonesia, and Uganda—lending to the coffee sector overall contracted by 12%. Leading factors included low prices and residual effects of the 2013/2014 outbreak of coffee leaf rust disease in Latin America.
However, this decline in coffee lending was offset by 27% growth in other crops, as lenders continue to expand into new value chains. Lenders reported a 14% increase in lending to businesses in the cocoa sector, and grains, nuts, quinoa, and rice were among the fastest-growing commodities. These and other growth and risk trends by crop and geography are explored in more detail in the new CSAF report.
“Efficient markets rely on information, but agricultural data is often messy and contradictory, if it exists at all,” said Blaine Stephens, chief operating officer of MIX, which provides data and analytics to promote financial inclusion worldwide and serves as the data partner for CSAF. “This information gap translates into uncertainty for investors and ultimately limits the efficient flow of capital.”
Formally launched in 2014, CSAF provides a forum for agricultural lenders to convene on a pre-competitive basis and exchange learning, identify best practices, and develop industry standards around responsible lending practices. Members and affiliates include: Alterfin, Global Partnerships, Incofin Investment Management, Oikocredit, Rabobank, responsAbility Investments AG, Root Capital, Shared Interest Society, and Triodos Investment Management.
“CSAF members have impressively expanded their reach in the last several years,” commented Dan Zook, director of investments at the Initiative for Smallholder Finance (ISF). “But lending trends in 2015 also highlight the challenges of working in agriculture, where market and climactic forces can have significant impact on smallholder farmers and SMEs that are vulnerable to begin with.”
Recent research conducted by ISF found that the world’s smallholder farmers require over $200 billion in financing – against current supply of $60 billion – to grow their businesses and improve their livelihoods. However, based on its projections that smallholder finance will grow at a modest 7% annually, ISF noted that the industry will be unable to close this gap without an increase in smart subsidies and progressive partnerships. In its report, CSAF builds on this framework and proposes specific ways in which investors, donors, financial service providers, and others can support the continued growth, development, and stability of the sector.
To learn more about the opportunities and challenges associated with smallholder agricultural finance, visit www.csaf.net to download the full 2015 Year in Review report along with a related webinar discussion.
(July 11, 2016)