After years of neglect, banks, private equity funds and microfinance
institutions are bringing capital to African agriculture.
Africa’s agriculture sector has
struggled to access the financing it needs for sustained growth. In part, a
perceived combination of high risk and modest returns – as well as the costs of
extending traditional banking infrastructures in rural areas – has deterred
many banks and financial institutions.
“There can be failures in critical
infrastructure such as inadequate cold storage facilities, unexpected
disruptions in commodities trading, lack of adequate feeder roads to production
areas, inadequate dry storage facilities, and congested ports prohibiting the
export or import of products on time,” says Chomba Sindazi, director of
Standard Chartered’s solutions structuring team for Africa. “And there can also
be delays in the supply of critical inputs such as fertilisers, seed and fuel
because of difficulties in getting goods to market. This is a particular
problem in landlocked countries where it can sometimes take as long as four
months to get the inputs to the required areas.”
Without tackling these constraints,
and their knock-on effect on lending, talk of Africa’s green revolution is
premature. But solutions are emerging at last, as banks, NGOs, micro-lenders,
governments and investment funds make inroads into the continent, bringing
much-needed capital to bear.
For large banks, Africa’s rural sector
was long seen as a problem. Just 10 percent of Africans with only primary-level
education – which is the majority of those in rural agriculture – have a bank
account, rising to 55 percent for those with a post-secondary qualification.
But rather than writing off this population, forward-thinking banks have sought
to find new vocabularies to speak to them. Togo-based Ecobank has proven
popular for its simplified language and procedures, which are more accessible
to a wider range of customers than global banks.
Standard Bank, which has operations in
nearly 70 countries worldwide, has also reviewed processes to suit the kinds of
financial information more commonly found in the informal and small-scale
sector. It has also broadened its range of services to include technical
expertise for lendees. The combination of lending and advisory services is critical,
helping the bank protect its portfolio, and helping customers gain credit and
repayment track records.
Standard Chartered shows the same
trend. Instead of looking to traditional collateral, Standard Chartered uses
the value of the commodity being financed as collateral for input financing –
as opposed to conventional mechanisms where collateral is secured through
physical assets and balance sheets. According to Mr Chomba: “Risks associated
with the cultivation of a range of soft commodities are mitigated through a
customised multi-peril insurance policy, and operational issues are addressed
through physical inspection and regular reporting by a team of independent
specialised contract managers and insurance companies.”
The arrival of major banks bodes well
for the efficiency of the sector overall. “Banks are interested in investing in
businesses and entrepreneurs that are going to make money and are going to pay
them back – either interest or return on some form of an equity. As businesses
that are profitable come into the agricultural value chains, that is going to
bring in the financing that will support those businesses,” says Gary
Toenniessen, managing director at The Rockefeller Foundation.
Taking equity
Equity financing provides an
interesting – and fast-growing – source of capital. According to the Emerging
Markets Private Equity Association, total private equity capital raised for
sub-Saharan Africa in 2012 was $1.4bn. Agribusiness is proving one of the
primary draws. The Carlyle Group, one of the world’s largest private equity
firms, made its first Africa play late last year, as part of a consortium that
included Pembani Remgro Infrastructure Fund and Standard Chartered Private
Equity.
The fund invested $210m in the Export
Trading Group (ETG), a Tanzanian agribusiness with interests in 29 African
countries. ETG, which manages both intra-African and global supply chains and
has more than 7,000 employees, says the investment will enhance its ability to
connect African smallholder farmers with consumers around the world. The
capital will expand the company’s geographical reach while adding to the
quantity and variety of products – which currently includes commodities ranging
from sesame seeds and cashews, to rice and fertiliser.
Private equity can bring broader
structural changes too. A part of the Carlyle consortium investment will go
towards building infrastructure to allow processing to take place in east
Africa. “Typically the margins in processing are much greater than they are in
pure acquisition and distribution, so part of the capital will be used to put
up processing facilities around the continent,” says Marlon Chigwende, managing
director and co-head of the sub-Saharan Africa buyout advisory team at Carlyle
Africa.
Other PE funds and investment actors
are also showing a strong interest in African agribusiness. Phatisa’s African
Agriculture Fund, which focuses on small and medium-sized enterprises, signed
its first deal in 2012, backing Cameroon’s West End Farms. The same year,
Morgan Stanley Alternative Investment Partners and Capitalworks bought out
South Africa’s Rhodes Food Group.
But growing the base of PE capital
available to the region will take time, according to Mr Chigwende. “FDI remains
a very important component of the LP structure base in a lot of the funds, they
are the majority of the capital. And so I think as an industry what we need to
do is attract more non-DFI international capital to the region,” he says. “I
think that is a process of education. There are a lot of LPs that are increasingly
looking at the region.”
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