Brussels Development Briefing n.35 Revolutionising finance for agri-value chains 5 March 2014 http://brusselsbriefings.net Linking Rural Entrepreneurs to Financial Services. Hans BALYAMUJURA, ZED (Pty) Limited.
Linking Rural Entrepreneurs to Financial Services Hans Balyamujura Brussels Policy Briefing No. 35 March 2014
Table of Contents 1. The challenge faced by the African agricultural Entrepreneur. 2. Why Link Rural Entrepreneurs to Financial Services 3. Typical Farming Arrangement 4. New Generation Smallholder Agribusiness Model 5. Challenges 2
The challenge faced by the African Agricultural Entrepreneur On average globally upstream and down stream farming activities account for 78% of the value added in all agricultural value chains. Figure 1: African Agribusiness Pyramid Source: World Bank 2012 3
Why Link Rural Entrepreneurs to Financial Services Corporates Small and Medium Enterprises Commercial Small Scale Farmers Commercial Agricultural lending is estimated at between 1 and 3 % of commercial debt. Agriculture contributes 35% of GDP. Employs more than 65% of labour force Scale and profitability Limited collateral Very poor data Limited quantification of risks High cost of debt Subsistence Small Scale Farmers Figure 2: African Agribusiness Pyramid 4
Typical Farming Arrangement Input Supplies Agricultural Production Harvest Food & Energy Smallholders farmers Farmers have separate individual transactions with each segment. All risk between the farmer and financier. Middleman/Trader Farm produce Financial Services This is repeated for each segment of the value chain 5
New Generation Smallholder Agribusiness Model Figure 3: Key Aggregation Activities for Smallholder Value Chains Input supplies Agricultural Production Harvest Processing Food and energy Smallholder perform individual production decisions farmers Eco System Rural Entrepreneur Entrepreneur aggregates individual decisions Integrated Value Chain Link to parallel and fully integrated value chain Input finance Production finance Postharvest and trade finance Food & Input Supplies Agricultural Production Harvest Energy Input Risk Production Risk Postharvest and Market Risk Technical Support Technical Support Technical Support 6
Example Several rural entrepreneurs moving in this direction with the active participation of key input suppliers. Not many farmer organisations Quality Food Products (Tanzania) Limited is a good example of an entrepreneur - working to created a fully integrated value chain. Distribution of inputs Advisory services with support of input suppliers Mechanisation services Markets Aggregation of services such as finance and insurance The Southern African Confederation of Agricultural Unions (SACAU) is playing a leading role to ensure farmer centric models of operation. 7
Challenges Corporates not open to entrepreneurial risk. All risks identified and possible mitigation put in place. Unresolved risks are shared by all the key actors (Farmers, Entrepreneurs, Input suppliers, offtake and financial service provider) Goal is to limit the value at risk to each segment actor s profits within the ecosystem. Most of the key actors (corporates) have to account for this risk. Slow process for all the necessary approves. Limits the potential for scale. Identification of like minded value chain actors. 8
Challenges The Rural entrepreneur does not have the financial capacity to the lead the creation of an integrated value chain. The initial basket of services in the ecosystem is small due to scale. Insurance (crop insurance or weather based index insurance). Cost should drop with expanded use. Transportation and storage. Mechanisation services. Trading volume. 9
Thank You Email: hans@zedgroupza.com Phone: +27 83 346 1655 10