Financing Potential of the Seed Sector in Kenya, Uganda, Malawi, Tanzania and Niger
The Feed the Future Global Supporting Seed Systems for Development activity (S34D) conducted inventory scans of the financing potential of the seed sector in East Africa and Niger. In East Africa, these reviews provide country-level assessments for Malawi, Uganda, Kenya, and Tanzania (the “trade corridor”). The assessments address supply-side financing gaps and opportunities within the agricultural financial services sector, specifically on expanding access to financing for the seed sector.
Lessons from East Africa
The East Africa inventory scan of financial service providers operating in the agricultural and seed financing sector highlights the state of the market, the best-placed potential partners for S34D activities, and key recommendations for S34D and other USAID implementing partners’ financing-related engagements. Findings from the assessments reveal the common interconnected bottlenecks shared among financial service providers that impede access to finance. Financing entire value chains is a challenge for local financial service providers. The demand for capital from smallholder farmers, larger farmers and agribusiness subject matter experts can exceed a single institution’s agricultural portfolio capacity. Further, agricultural financing requires in-depth knowledge of the local agricultural markets, stakeholders and crop types to anticipate market pricing, availability of value-added services and overall repayment capacity of agricultural clients.
Recommendations for expanding financial access
Effectively expanding access to agricultural financial services within the seed sector will require dynamic partnerships and strategies that tackle the main bottlenecks within each country. Several key East Africa corridor-wide S34D strategic recommendations include:
- Engage diverse partners to facilitate access to finance for whole value chains.
- Leverage existing risk-mitigation and digital tools to reduce costs and mitigate risks.
- Partner with organizations having robust data to design new loan products for the seed sector.
Most financial service providers are allocating only a small fraction (less than 10 percent) of their total portfolios to agricultural loans within each market. If all the surveyed institutions allocated between 10 and 20 percent of their existing portfolios (typical lending caps mandated by regulators and bank boards), they would deploy an additional $1.5 to $3 billion to the agricultural sector in the corridor.
Despite existing gaps in the agricultural financial services market, regulated financial service providers are motivated to expand their operations to serve more agricultural clients. To mobilize the full potential of capital for the seed sector, financial service providers require a combination of support services, including technical assistance in loan product design, digitization, gender and age awareness and improvement of operational efficiencies. Risk-reduction mechanisms such as loan guarantees or innovative monitoring tools are also vital.
View the full East Africa report, which includes S34D’s country-specific strategic recommendations.
Niger: working in a challenging environment
The Niger inventory scan examines how financial service providers can increase tailored financial services for actors throughout the seed value chain, from producers and traders to farmers.
Finance for the seed sector in these contexts is hugely important for adequate growth. For example, agriculture accounts for 44 percent of Niger’s gross domestic product, with 87 percent of the population engaged in small-scale farming. Financial service providers, government actors, private investors, and nongovernmental organizations all have a role to play in addressing the needs of small-holder farmers.
Niger’s financial sector is less mature and reliable than other nations in the region. Overall, Niger is a high-risk country with a complex operational environment. Challenges related to infrastructure, climate, violence and rapid population growth slow Niger’s social and economic growth. These factors also contribute to poor operating conditions for farmers, seed sector actors and financial service providers.
However, despite the challenging macroeconomic environment, the potential demand for finance from seed sector actors in Niger is estimated to be $6.5 million for seeds and directly related activities and about $60 million for broader agricultural finance. Recommendations for addressing this demand include:
- Development of long-term (five years or more) intervention plans to allow for adequate growth and development of the seed sector and technical capacity of financial service providers.
- Provision of technical assistance to financial service providers, especially in improving their market understanding, risk-assessment tools and capabilities, loan product design and staff capabilities.
- Provision of risk-mitigation tools for financial service providers to protect their operational sustainability while lending to new seed sector client segments.
- Training and assistance for farmers and input traders to support financial sustainability throughout the value chain, ensuring that loans can be repaid.
Currently, financial service providers most often offer loans for 12 months or less — for seed producers, this means repayment is required before cash comes in from the financed activity, representing asymmetries between the supply of available financial products and the demand for finance from producers. Additionally, the upfront investment needed is sizable to produce large enough volumes of seed to achieve profitability. Therefore, most seed (80 percent) used by farmers is a cheaper, unimproved seed, resulting in low-yielding crops.
Collaboration key to the way forward
The challenges, though extensive, are not insurmountable. Actionable recommendations include addressing both the policy level and field level of the seed sector. Opportunities also await for the financial sector to improve their expertise and capacity to develop and manage agricultural loan products. With collaboration to combine resources and approaches that address the systemic issues facing farmers and seed sector actors, Niger’s farmers can enjoy significant development gains. Read the full Niger report.
Taken together, both these inventory scans of providers operating in the agricultural and seed-financing sector highlight the state of the market, the best-placed potential partners for S34D and other implementing partners' activities and key recommendations for financing-related engagements. Findings from the assessments reveal the common interconnected bottlenecks shared among financial service providers that impede access to finance. Financing entire value chains is a challenge for local financial service providers. The demand for capital from smallholder farmers, larger farmers, and agribusiness subject matter experts can exceed a single institution’s agricultural portfolio capacity. Further, agricultural financing requires in-depth knowledge of the local agricultural markets, stakeholders, and crop types to anticipate market pricing, availability of value-added services and overall repayment capacity of agricultural clients.