SOLUTIONS TO AGRICULTURAL FINANCING IN AGRICULTURE
Agricultural financing, in recent times, has become a serious concern in most developing countries.
This is as a result of the significance of the agricultural sector in the economies of most developing countries.
The economies of many African countries are growing fast with agriculture accounting for a third of Africa’s GDP. According to The World Bank, poverty is down by 33% in Ethiopia since 2000, with agricultural growth being the main driver.
Also in Rwanda, 45% of Rwanda’s rapid poverty reduction was partly due to growth of the agriculture sector. It is no news that millions of people around the world rely on farming, livestock, aquaculture and other agricultural work to put food on their plates and make a living.
Many of these farmers reside in rural areas and barely produce enough to feed their family for many reasons, one of which is financial constraints.
Consequently, thousands of farmers have quit farming, weakening our supply base and leaving us more dependent on importation of food when we can produce ourselves.
Due to the rising world population, which is projected to reach 9 billion by 2050, all hands must be on deck in the fight against hunger in order to boost food security.
But many farmers are handicapped due to the cost of agricultural inputs which has increased drastically, resulting in an increased demand for alternative financing in agriculture.
Across Africa, growth and opportunity in the agriculture sector is constrained by limited access to capital. Farmers and agro-enterprises need capital to thrive.
They need capital for short-term tasks such as the purchase of seeds and farm inputs on a seasonal basis, medium term tasks such as financing of farm or agro-processing equipment, as well as long-term investments in capital equipment and land.
Yet, despite the important contribution of agriculture to the GDP of the poorest developing countries, the supply of financial services to farmers is still limited.
Farmers complain that they do not have enough fund to carry on with their activities.
Banks and other financial institutions have not helped farmers as their terms and conditions for accessing loans are not conducive for small-scale farmers.
These includes collateral-related challenges, high interest rates and mistrust between banks and farmers.
All these bring us to one last option – Innovative financing in agriculture.
MECHANISM FOR INNOVATIVE FINANCING
1. Green bonds: These are standard bonds created to fund projects that have positive environmental or climate benefits.
Green bonds can be used as an effective instrument to channel capital into the sustainable agriculture and forestry space, due to its exposure to climate change and contribution to global greenhouse gas emissions.
Fibria Celulose S.A., a Brazilian forest products company and the world’s largest eucalyptus pulp producer, issued its first-ever green bond in January 2017 in the international market, which raised US$700 million.
2. Grants: Grants are given to provide farmers with support and resources to start farming or transit to more sustainable farming practice.
3. Performace based contracts: The concept of performance-based contracting means that products are no longer sold to the customer but instead the supplier provides and operates them while the customer only has to pay for performance.
For example, a customer buys purified water instead of wastewater systems. Performance based contracts provides more opportunities to win new customers by helping manufacturers sell their unique competitive advantage.
4. Development Impact Bonds: This is a partnership where one or more investor(s) provide upfront capital for public projects that deliver social and environmental outcomes.
If the project succeeds, the investors are repaid by the Government or the appropriate agency. If the project fails, the interest and part of the capital is lost.
5. Awards and Prizes: An example is this is “The Anzisha Prize”, a partnership between African Leadership Academy and The MasterCard Foundation, which empowers promising youth entrepreneurs financially. Winners of the prize can invest them to grow their business.
6. Voluntary contributions: This could be applied by consumers, firms, employees and industries.
7. Cryptocurrency: Blockchain agriculture can be used to provide funding to small enterprises. Here’s the idea: customers buy a farm share and then the farmer delivers produce directly to them throughout the farming season.
The farmers receive funding at the beginning of the season, allowing them to invest in the farm and stabilize their finances throughout the year.
A good example of this is an ICO called MilkCoin which was released by a Russian-based agricultural company, Khokholskaya Agricultural Company.
The funds received through the ICO will be used to fund their dairy farm, and in the same vein, helping the customers’ demand for foodstuffs.
Iyanuoluwa Olamide Aliu
Roberto Vitón (2017) Green bonds: a new financing tool to foster a more sustainable agriculture: Global Ag Investing 2017.
Darryn Pollock (2017). Agriculture Getting an ICO Upgrade to Boost Production in Russia: Cointelegraph, 2017
Hypko P, Tilebein M, Gleich R (2010). Benefits and uncertainties of performance-based contracting in manufacturing industries: An agency theory perspective. Journal of Service Management Vol. 21 No. 4, 2010 pp. 460-489