Revolutionising finance for agricultural value chains

Originally written on Tuesday 22 April 2014

Lamon Rutten and Benjamin Addom discuss the far-reaching changes that are needed to revolutionise finance for agri-value chains.

The Oxford English Dictionary’s first definition of ‘revolution’ is ‘a Unking farmers forcible overthrow of a government or social order, in favour of a new system’.

When discussing how to change agricultural finance, it sometimes feels that is how established hankers look at the whole issue – as a threat, and from a historical perspective as an experiment that is destined to fail. However, a revolution in finance for agri-value chains is more likely to correspond to another definition in the Oxford English Dictionary: ‘a dramatic and wide-reaching change in conditions, attitudes, or operation’. These are changes that will have a positive impact if well-conceived and properly implemented – changes that offer banks valuable new opportunities.

A few simple facts. Agricultural production has to increase by 50% by 2050 to feed the world population, which according to the United Nations Department of Economic and Social Affairs, will reach 9.7 billion people that year. This increase will require massive investments: in developing countries, some US$83 billion per year, an increase of 50% over current levels.

About 90% of the investments today are made by farmers themselves. In fact, it is highly unlikely that they will manage to scale up their investments to such a huge extent. So the lion’s share of this increase will have to come from external funding, such as hanks and investors. The value of Africa’s food market is likely to triple to US$1 trillion by 2030 -but processors and traders are already constrained in their capacity to finance trade flows and stocks. These challenges are an opportunity for those banks that manage to change their product portfolios to offer farmers and others operating in value chains new ways to finance production and trade.

At first sight, the revolution in payment systems, enabled by the rapid spread of mobile phones, seems to provide a sound basis for change in agricultural finance. After all, mobile phones now reach large numbers of the unbanked and have given many of them access to financial services. However, regulatory constraints in most countries mean that in order to move from mobile payment services to credit, banks need to get closely involved.

Some are, but they are mostly using the mobile phone as a delivery vehicle – or to put it differently, conditions may have changed, but banks’ attitudes have not, and they are sticking to their old business model. This is not good enough – it means bankers continue to see agriculture as a risky venture and continue to offer the same products that are often not well adapted to the realities of farmers.

A much more far-reaching change is needed, one that incorporates mobile technology into new financing models. For example, crowdsourcing data from mobile phones can help banks to better model and manage risks, and offer new risk management and financing products to farmers and traders.

Electronic platforms can link the various parts of value chains (and their service providers), permitting banks to provide finance in line with the actual flow of goods and services.

For financiers to truly grasp what ICT developers have to offer them, the two groups should spend more time thinking together – which goes beyond bankers using mobile technology, or developers selling their apps to banks. From 14-18 July, CTA is hosting the Fin4Ag conference in Nairobi, Kenya together with the African Rural and Agricultural Credit Association, the Central Bank of Kenya and the Kenya School of Monetary Studies. CTA is not only bringing together ICT developers and bank representatives, but also other stakeholders from the agri-value chain, in the hope of designing a blueprint that revolutionises finance for agri-value chains.

As a prelude to the conference on finance in agriculture, this issue of ICT Update explores various ICT initiatives on the ground – mainly using mobile applications – that are helping smallholder farmers improve their businesses. The various authors explore how these mobile apps are helping small and medium enterprises through numerous stages in the life cycle of their businesses, how agricultural market information services in Africa are helping to link farmers to markets so they can make better business choices and improve their bargaining power and how these apps are impacting communities in rural areas in ACP countries.

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