Bridging the Agri-Finance Gap in East Africa
Interview with Peter van der Krogt, Financial Access
As the world’s population continues growing, so is the demand for food worldwide. Within the coming few decades, the world’s population will reach over 9 billion people, meaning that the current rates of food production will need to be doubled in order to feed the future population. According to Peter van der Krogt, co-founder of the financial sector advisory firm Financial Access, the African agricultural sector must play a key role in contributing to food security, but will need to become much more efficient, professional and sustainable in order to truly reach its potential. In an interview, Van der Krogt discusses the issues that the African agricultural sector is facing- with a special focus on the East African region-, and explains the important work that is being done in order to bridge this gap.
Can you briefly describe the agricultural sector in East Africa, and explain the issues that the sector is facing?
Agriculture plays a very important role in several East African economies. In Kenya, for example, primary agriculture contributes to 25% of the country’s GDP and employs 50% of the national labor force. Similarly, in Uganda, more than 70% of the country’s exports, with an estimated 70% of Ugandan households depending on agriculture as their main source of income and employment. However, productivity in many of these countries remains worryingly low, and figures demonstrate that the rates of yield improvement have only been diminishing. Considering that the population in both countries has been rapidly increasing and is expected to continue growing, this makes it all the more urgent to improve and invest in the agricultural sector in these countries.
The East African agricultural sector offers a vast, untapped market with a high investing and business potential. However, despite the importance and the potential of agriculture for the region’s economies, we see that the sector is facing difficulties accessing finance, due to the reluctance of financial institutions throughout the region to engage in the agricultural sector. This has formed a gap between agriculture and finance, an Agri-Finance gap, which hampers any initiative to move towards a more efficient and professional farming. Interestingly enough, this reluctance to invest in the agricultural sector does not stem from a lack of knowledge on the sector, but from the fact that financial institutions are much too aware of the risks involved in investing in the agricultural sector. The solution, therefore, lies in finding ways to overcome or minimize the risks, and making sure that the financial sector is willing to work with these proposed solutions.
Can you explain what Financial Access is doing to contribute to a more efficient, professional and sustainable agricultural sector in East Africa?
In order to address the Agri-Finance gap, Financial Access has teamed up with ScopeInsight in Kenya, in a partnership known as the Finance for Agriculture (F4A) programmme. In Uganda Financial Access has joined hands with partner SNV in a partnership known as the Agri-Financing Uganda programme. These partnerships are working in Kenya and Uganda respectively, with the aim of increasing the agricultural lending in the region, by introducing Risk Management technology solutions that banks and microfinance institutions are willing to work with. This is the most important aspect of the programme, because as long as financial institutions are skeptic or remain unconvinced of the proposed solutions, they will not be willing to engage in the agricultural sector- especially when we look at the long term.
Thereby, the F4A and Agri-Financing programme focuses on overcoming the inherent distrust that financial institutions have towards the agricultural sector by showing specific ways in which to minimize the operational and systemic risks. Proposed solutions include the use of insurances that cover certain risks, as well as minimizing risks by introducing risk-management tools and by offering capacity building, offered through the programme to financial institutions as well as farmer organisations.
What is great about this partnership is that Financial Access can offer high quality capacity building to the financial institutions, thereby making the financial sector more open and prepared towards financing de agricultural sector. Our partners Scopeinsight and SNV, on the other hand, have excellent ties with the local agricultural sector, and play a crucial role in selecting farmer organisation that are eligible or near-eligible for commercial banking. Once this selection has been made, the programme offers capacity building at the agricultural level, in order to increase the professionalism of agricultural practices.
Within this programme, which lasts three years in both Kenya and Uganda, we aim to create success stories that will inspire more financial institutions to engage in the region’s agricultural sector. In Kenya, where the F4A programme started at the beginning of 2014, several financial institutions have already been identified, a technology platform for supply-chain financing has been established, and several Risk Management tools have been developed and introduced. In Uganda, on the other hand, the programme only commenced at the end of 2014, but it is already heading in the right direction
What do you expect of the East African agricultural sector in the coming years?
The agricultural sector in East Africa needs to improve drastically in order to meet the needs at the national level as well as the regional level. In order to ensure food security, increasing the access to finance is an important barrier that must be overcome. So far the results of both programmes are promising, and are helping build an engaged, knowledgeable and committed financial sector that views the East African agricultural sector as commercially attractive. I think that governments too will realize the importance of upscaling and commercializing the sector, and might even start enforcing the financing of the agricultural sector, which would further help the agricultural sector reach its potential.
About Peter van der Krogt
Peter van der Krogt is a co-founder of Financial Access focused on the firm’s Banking Advisory and SME Finance activities, particularly in East Africa. He has over 30 years of experience working with private and public financial institutions, including the Dutch Ministry of Finance and the World Bank/IFC in Washington, DC.
For further information, please visit:
Financial Access: www.financialxs.com
SNV Uganda: http://www.snvworld.org/en/countries/uganda
Finance for Agriculture Kenya: http://www.f4a.co.ke/landing/