Boosting agriculture through innovative public-private lending partnerships
Wageningen, 06 October 2016
The growth of small-scale agriculture in developing countries is being held back by critical underfunding. Seeking to address this challenge, an international conference will explore an innovative approach for agricultural finance – the blending of private, philanthropic and public funding to leverage greater capital flows into smallholder value chains. Organised by the Technical Centre for Agricultural and Rural Cooperation (CTA), together with the global finance platform Convergence and the Organisation for Economic Co-operation and Development (OECD), the Blending4Ag event will be held in Brussels on November 7-8. The conference is expected to lead to improved practices in mobilising agricultural finance, as well as to help forge new partnerships for mitigating and sharing risks in smallholder funding.
At present, less than one-quarter of the financing needs of smallholder farmers in developing countries are met, leaving an annual financing gap of more than US$150 billion (€133.4 billion). Most of this unfulfilled demand for financing, which amounts to $84 billion (€74.7 billion), comes from 88 million smallholder farmers engaged in loose value chains – farmers who regularly produce surpluses and sell them in the market. The bulk of financing requirements is in local markets that trade in crops such as wheat, maize and cassava.
If current trends persist, this financing gap will continue to stifle smallholder value chain development in the coming decades. Behind the funding gap is the reluctance of private financiers to lend to smallholder farmers, based on a perception of unacceptably high risks.
More efficient use of public finance, which is currently the main source of bank lending to smallholders, offers significant opportunities for accelerating the growth of agricultural finance, especially as a means of leveraging private sector funding. Known as blended finance, public-private lending partnerships have already proven to be effective in a range of sectors including energy and infrastructure.
The Blending4Ag conference will examine the largely untapped potential for using blending tools to leverage finance for agriculture, and particularly to unlock more private funding to develop agribusiness in the smallholder sector.
“For the formal lending sector, agricultural finance is still perceived as a high risk business, and this is inhibiting transformation of smallholder agricultural production and value addition, in turn negatively impacting on economic growth and job creation in developing countries,” said CTA Director Michael Hailu. “Blended finance is a promising formula to unlock private capital flows using public finance as leverage.”
Focusing on practical aspects of blending finance for agriculture, the conference will seek to contribute to the knowledge base on how this can best be done. The event, which will bring together key stakeholders from agriculture, finance, public and private sectors, will investigate various blending schemes that are currently in operation and assess some of the principle challenges to developing this approach to galvanise better funding of small-scale agriculture in the future.
“Smallholder finance is more complicated than the financing of infrastructure or power plants, for which blending techniques have so far been mostly used,” said Lamon Rutten, Manager of Policies, Markets and ICTs at CTA. “Special efforts are needed to cross the last mile, and also, to ensure that as a result of the financing, smallholders benefit from higher and more sustainable revenues. The conference will bring together the different groups who, through innovative types of collaboration, can deliver blended structures that effectively reach smallholders.”
Specific topics will include how to achieve leverage in unlocking private funding for smallholder agriculture through public resources, scope for developing local currency financing, partnerships for effective financing of climate change adaptation and resilience, and risk management and other support structures.
A case study that will be presented during the conference will examine the design of a fledgling financing facility aimed at increasing lending to smallholder farmers in Ghana, so as to improve productivity and promote climate smart agriculture in the cocoa sector. The plan involves offering a guarantee mechanism to some of the country’s local financial institutions as an incentive for them to lend to smallholder cocoa farmers and farmers’ associations. The session will share the progress made so far, including constraints, lessons learned and ideas for future schemes.
Stéphane Gambier, Senior Programme Coordinator, Communications (CTA)
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