Getting “Smarter” on Subsidies to Enable More Financing for Agricultural Small- And Medium-Sized Enterprises
The last decade has seen increasing recognition by policymakers, capital providers and finance practitioners of the vital role played by agricultural small- and medium-sized enterprises (agri-SMEs), as well as their limited access to finance. As a result, new funding structures and specialized financial intermediaries have emerged, complementing a financing landscape previously dominated by local banks and government-backed lending programs.
However, of the $160 billion in demand for agri-SME financing in sub-Saharan Africa and Southeast Asia, only $54 billion (34%) is currently being met — leaving an annual financing gap of $106 billion unaddressed. To address the economics of agri-SME lending and bridge the supply-demand gap, subsidies are widely used by all financial service provider (FSP) channels. But little transparency exists on the different tiers within this subcommercial market of agri-SME lending, the efficiency of subsidies and how well they address the different market bottlenecks.
In our research, we have observed seven key ways in which blended finance is structured to address pain points in the market. For instance, local commercial banks will primarily make use of risk share, incentive payments and, at times, investment facilitation or technical assistance. Social lenders and impact-oriented funds will typically leverage a broader set of those approaches — in particular, raising catalytic capital, attaching a technical assistance facility (externally funded and operated) to their investments and using investment facilitation and business development services (BDS) support in their value chain(s) of activity.
In our forthcoming report with the Commercial Agriculture for Smallholders and Agribusinesses (CASA), we build on and refine this initial typology with the goal of improving the investor’s understanding of the state of agri-SME finance globally.
Our new blog post gives an early look at this research by exploring the subcommercial part of the market and evaluating the current state of blended finance, including gaps and opportunities to facilitate more financing transactions and agri-SME adaptation to climate change.