Building up the rural asset base
New report discusses how collaboration can create an effective ecosystem for asset finance, and how blended finance models are already showing success.
A critical part of agricultural and rural development is that farmers and agribusinesses get access to more and better capital assets. Indeed, the ability of farmers in developed countries to organize themselves into cooperatives and jointly buy capital-intensive equipment played an important role in the sector’s growth in the late 19th and early 20th century. In developing countries, only a majority of farmers have organized in strong cooperatives. Fortunately, there are other ways to finance the acquisition of new assets. These are discussed in a new report (September 2016) by Enterprise Project Ventures, the Shell Foundation and the Small Foundation (Jack Luft and Tim Chambers, Moving the Needle: Critical Success Factors for Scaling Innovation in Asset Finance for Small and Growing Agribusinesses.)
With case studies from Kenya, Guatemala and India. The report notes that there is a massive financing gap for small and growing businesses, including those active in agriculture; “the root of the problem is that lenders tend to offer only a limited menu of products, mainly with heavy collateral requirements.” It highlights three critical success factors: it must be possible for the asset itself to act as collateral (which has to be enabled by markets and regulations); financiers should focus on the cash flows generated by the assets; and there should be stable and secure markets for the products produced with the assets (which implies, among other things, more secure contracts and greater use of value chain arrangements). At the same time, there must be an ecosystem through which technology companies, financiers and value chain actors can collaborate. The report notes that “overcoming the structural challenges that limit the supply of asset finance to agribusiness cannot be done by individual actors working in isolation of one another; it will require coordination and collective efforts by key actors throughout this ecosystem.” The report describes a series of innovative arrangements in the three countries – mostly examples of blended finance – that have shown to be successful and argues that the time is ripe to scale up such models.
Technical Centre for Agricultural and Rural Cooperation (CTA)