What Policies Make Finance Work for Africa’s Smallholder Farmers?

More than half a billion Africans depend on small or micro-scale farming as primary source of livelihood. In some countries as much as 80% of the population is employed in the agricultural sector. Even so, Africa still depends largely on food imports to feed its population. It needs significant increases in productivity and production to turn the tide and ensure food security on the continent. Access to appropriate financial services can help unleash Africa’s agricultural potential.

This picture reflects the diversity of microfinance, its important role in the economy, and its capacity to reduce poverty

So, what policies can support innovative finance that reaches smallholder farmers?

This is certainly a question that keeps African policymakers busy and many of us with them. I found the recently published policy brief on agricultural finance in Africa enlightening in that context. The brief published by Making Finance Work for Africa, the African Union, GIZ and BMZ, builds on the Kampala Principles and gives specific guidance for policymakers on how to implement them. It includes practical do’s and don’ts and interesting examples of innovations. Two policy recommendations particularly jumped out for me, first on the support for product innovation and a second one on reform or even creation of new state –owned agricultural development banks. 

The policy brief rightly emphasizes policies that favor small holder farmers - the backbone of African agriculture and food security. It does not do so in the same way as they were targeted in the past with counterproductive measures driven by political interference, for example through compulsory lending targets, interference in lending decisions or loan collection or financing ineffective schemes for cooperatives, that led to many failures. Instead the focus is on introducing an appropriate risk based regulatory framework and smart subsidies that spur innovation and avoid market distortion.

Innovation with a wider range of financial products adapted to the agricultural context is starting to happen. Kilimo Salama (Safe Agriculture) is an insurance that protects 11,000 small corn farmers against drought and excess rain in Kenya.  In Ghana the e-switch money transfer system serves small scale financial institutions allowing customers in rural areas to use biometric cards for payment operations. These are just two examples, but there are many other interesting pilots with innovative products and delivery channels targeted to the rural poor. Governments can support such innovation by investing in public goods and financial infrastructure, such as payment systems, and introduce regulations to set standards for some newer products, for example, warehouse receipt systems.

I am glad to see the policy guidance does not shy away from the topic of the role of state-owned banks which in some countries, however troubled they may be, have the largest presence in rural areas. Many of them have been created over the years to address the market gap and failure by other financial institutions to establish a sustainable presence and outreach in those areas. The policy brief highlights some successful examples of reform of state owned agricultural development banks, such as the Banque Nationale de Developpement Agricole in Mali. Lessons from past failures confirm that the key to better performance and success of state- owned agricultural development banks lies – as in all financial intermediaries - in sound governance and professional management. I believe that with the right standards in place, market discipline and proper risk management techniques, strong prudential regulation and supervision, these institutions can be valuable partners in the value chain trying to reach the underserved with the appropriate agricultural finance products and services adapted to their needs.

While pushing the frontiers on agricultural finance is particularly pressing in Sub Saharan Africa for reasons I mentioned earlier, I think the guidance and recommendations described in the policy brief could also be applicable to other regions.

It would be very helpful for more knowledge exchanges across regions, where lessons and innovations from Africa can be shared with other parts of the world that are also making good progress towards sustainable agriculture and innovative finance that supports small farmers.

------ Antonique Koning leads CGAP's Africa team