STRENGTHENING THE FIRST MILE

Enabling small and medium agribusinesses to unlock development in Tanzania, Uganda and Kenya FARM AFRICA has been working in East Africa since 1985.

We aim to reduce poverty permanently by unleashing smallholder farmers’ ability to grow their incomes and manage their natural resources sustainably through: • increased production of quality cash/nutritious crops • sustainable management of livestock and fisheries • establishment of market linkages • development of agro-enterprises • integration with value chains • improvement of natural resource management • climate resilience

Farm Africa is committed to supporting men and women as well as youth to play an equal role in agriculture and natural resource management. Cover photo © Farm Africa / Mwangi Kirubi / Mwangi Africa © Farm photo Cover

Disclaimer: The views expressed in this publication are the sole responsibility of Farm Africa and do not necessarily reflect the views of our donors.

Strengthening the first mile is the synthesis of a report that was researched and prepared for Farm Africa by OGIVES Ltd.

Report edited by Gideon Burrows of ngo.media. EXECUTIVE SUMMARY 1 Farm Africa

It is now widely accepted in the development It also finds that financial institutions are sector that assisting smallholders and failing to finance agricultural SMEs. Financial subsistence farmers alone is not enough to bring institutions regard SMEs as: about widespread development in Africa. • too risky and unprofitable to lend to Strengthening the first mile • poorly managed, inexperienced and For more than 30 years, Farm Africa has been lacking sound business plans providing assistance to smallholder farmers as a • undercapitalised and without sufficient key to the development of their regions, countries assets such as land against which to lend and the continent. We now recognise that support is needed not only for small-scale farmers, but The research concludes that there is a also for the rural agriculture small and medium- ‘missing middle’ of financial products that are sized enterprises (SMEs) that buy produce from suitable for agricultural SMEs and that this is small-scale farmers, and supply goods to them. holding back their growth.

Cover photo © Farm Africa / Mwangi Kirubi / Mwangi Africa © Farm photo Cover We call these ‘first mile’ businesses. Agricultural SMEs tend to be too big for very small-scale loans offered by NGOs and The ‘first mile’ connects small-scale farming others, but too small to be able to borrow to wider markets. For example, first mile money from commercial lenders affordably businesses amalgamate crops from a number of and viably. There is a need for an innovative farmers and sell their produce together to larger platform to bring tailor-made loan products to food manufacturers. They provide goods and agricultural SMEs. services such as milling, cleaning, packaging, fuel, transport and equipment to small-scale Farm Africa’s Maendeleo Agricultural farmers. Enterprise Fund (MAEF) is a ‘non-returnable investment’ mechanism that can be directed This report maps the various financial at these first mile SMEs. instruments that should be provided for agricultural SMEs’ needs, enabling them to Alongside providing short- and longer-term grow. It has uncovered a major gap in provision finance to agricultural SMEs, the MAEF model for this particular size and type of SME. They has at its heart the provision of training and are not getting the finance they need to invest, capacity building for the businesses it works professionalise or develop. with. This intensive training will make the SMEs more robust, better managed, better The ‘first mile’ market is failing. prepared for growth and, vitally, a safer prospect for commercial lending in the future. Without a healthy and vibrant sector of services that connect small-scale farming to wider markets, smallholders cannot upscale their businesses and their development is stifled.

This research finds that SMEs are not applying for the finance that might help them to grow. Among the reasons for this are: • SMEs do not know about the range of products available to them, nor how they work • They find lending from banks and other financial institutions too expensive to use profitably • They do not have the experience, managerial capacity or business planning skills to apply for loans successfully The ‘missing middle’ of financial products

‘First mile’ agricultural SMEs are not getting the finance they need to invest, professionalise or develop

Microbusinesses SMEs Large businesses

Financial products available: Financial products available:

$ $ $ Small-scale grants Commercial loans $ from NGOs $ $

$ $ Bank overdrafts $ $ $ Loan guarantees $ from NGOs THE $ $ Asset leasing and $ $ finance $ Loans from micro- MISSING $ finance institutions $ $ Venture capital, equity finance and $ $ MIDDLE growth capital

$ Business angel $ $ $ financing $ $ Trade finance Number of firms

Size of business Farm Africa Strengthening the first mile 3 © Farm Africa / Mwangi Kirubi / Mwangi Africa © Farm the finance they need, and proposes an need, and proposes they the finance filling for model tested Africa Farm innovative facing. gap SMEs are the finance In order to explore support for smallholders smallholders support for explore to In order commissioned Africa Farm Africa, in eastern in the market mile’ the ‘first into research Tanzania, in the region, countries biggest three finance. to and their access Uganda and Kenya, of the a review on draws The analysis Surveys Bank Enterprise and World literature with by consultations supplemented data, with financial interviews informants, key questionnaires and structured players, sector SMEs. selected to administered the the size of explore aimed to The research SMEs agricultural and what constraints sector on their growth. facing were of the findings the key outlines This report some conclusions draws mapping exercises, not getting SMEs are agricultural about why

80% of the population in East Africa depend on agriculture. depend Africa 80% of the population in East INTRODUCTION production and wider markets. and production scale farmers also requires support for these support for also requires farmers scale both be on has to SMEs. The focus agricultural that between and the linkages production, farm profitably sell the goods they produce. the goods they sell profitably that supporting the smallest clear It has become Without a healthy ‘first mile’ those small-scale those small-scale mile’ ‘first Without a healthy they nor can efficiently, operate cannot farmers businesses that provide the link between their between the link that provide businesses national and regional, and larger gate front own markets. international even These farms are dependent on a sector of ‘first of ‘first a sector dependent on are These farms and medium-sized small agricultural mile’ With other NGOs we have come to understand understand to come have we With other NGOs subsistence and smallholders that supporting not enough. is alone farmers small-scale farming in East Africa for more more for Africa in East farming small-scale than 30 years. Farm Africa has been working to support support to has been working Africa Farm Commercial loans Commercial Bank overdrafts from a number of small-scale farmers a number of small-scale from providers transport pasteurisers bottlers, milk processors, equipment, fuel of farming suppliers and resources commercial millers and other millers commercial processors foodstuff national and for of produce packagers markets international produce aggregating wholesalers, • • • First mile businesses mile First of the a sample is just The following and that SMEs provide types of services connection a vital are they how illustrates and wider farming small-scale between markets. • • • SECTION 1 1 SECTION THE FIRST MILE: MILE: FIRST THE ECONOMIC EMPOWERMENT OF DRIVERS export industry, where farmers with less with less farmers where industry, export to vegetables of land supply than one acre mile via first supermarkets, leading Europe’s aggregators. They provide the “push” in terms of productive of productive the “push” in terms provide They meet needed to and technologies services buyers level by the first provided the “pull” successful A highly products. of smallholder horticulture of this is the Kenyan example sized enterprises for example, may act as may example, for sized enterprises as crops, smallholders’ for wholesalers as providers markets, to of transport providers farmers, to of equipment, seeds and resources and of farmers groups between and as brokers buyers. larger the small farm’s front gate with larger markets markets with larger gate front the small farm’s and that supplies that buy their produce, with the equipment and resources farmers need. meet market need to they medium- small and Such agricultural majority of farmers, producing more than 70% more producing majority of farmers, of food. this grow, and to efficiently operate to However, depends on a sector sector major smallholder that connect services mile’ ‘first of so-called Kenya, Tanzania and Uganda. More than 80% and Uganda. More Tanzania Kenya, activities engaged in agricultural of farmers hectares than two with less smallholders are at work land. Many smallholders of productive the constitute and women levels, subsistence their crops and livestock farming for their for farming and livestock their crops livelihoods. on Some 80% of the population depends approximately for which accounts agriculture, in Product Domestic Gross 30% of regional The economy in East Africa is very heavily heavily is very Africa in East The economy rural and mostly private on small-scale, reliant the majority of employment far By agriculture. with scale, at a family and earning is done depending on and smallholders farmers

Strengthening the first mile / Section 1 – Drivers of economic empowerment

Farm Africa 4 As such, agricultural SMEs are one of the most access credit and agronomic support. Social important players in the development of the impact investors in project areas gain a better 5

agricultural economy. Without agricultural entry-point for action – such as, for instance, to Farm Africa SMEs, the small-scale farming economy in East address youth unemployment. Africa cannot grow, which means that economic THE FIRST MILE: development in those countries is restricted. It The financial sector has around 100 is clear that the rural economy will not develop commercial banks (Kenya – 43, Tanzania –

DRIVERS OF ECONOMIC EMPOWERMENT without a strong agribusiness sector. 34, Uganda – 23) and financial institutions Strengthening the first mile / are aggressively courting private business. When agribusinesses are strengthened in the All banks interviewed expressed a strong region, there are also a number of additional commitment to serve the SME sector. Most of positive impacts for small scale farmers and the banks have SME departments with varying underserved communities, as well as for the degrees of understanding of what constitutes SMEs themselves and for the wider economy. an SME, whether by annual turnover, number of employees, or financing needs. A number Enabling local growth of banks are also trying to formalise their relationships with SMEs through ‘Business When agriculture is able to grow at a local level, Clubs’ for SME managers and overseas trips to farmers are able to earn more capital that can market trade finance products.

be reinvested locally, enhancing capacity and Section 1 – Drivers of economic empowerment efficiency, and growing returns. Families are In Farm Africa’s work with smallholders over the able to move from subsistence farming into last 30 years in this region, and in the experience more profitable farming businesses. According of other NGOs, it has become clear that this vital to other research1 (GIZ 2011), when a major SME sector is in fact failing to grow and develop agribusiness gets involved in a supply chain, for as needed. As a result, development of the small example as processors, large traders, exporters, farmers sector is restricted. or financial service providers, that supply chain is strengthened. It is clear that financial institutions are not lending to agricultural SMEs (the ‘supply’ side). Access to a large, untapped, underserved And SME agribusinesses are not applying for market finance (the ‘demand’ side).

By building the capacity of SMEs they become This research aimed to examine the state of the capable of increasing investment and profit, and agricultural SME sector in rural East Africa, become bankable enterprises, thus enabling as well as the finance available to them, to financial institutions to expand their loan understand why the market is failing. business.

Increased brand value engagement with communities and policymakers The research aims to draw Successful SMEs will have an impact on rural conclusions about: communities with whom they will develop strong partnerships, become pioneers in agricultural • why financial institutions are not venture philanthropy, and build long-lasting lending to SMEs legacies. • why SMEs are not accessing the finance that should be available to them Increased social impact • what barriers are restricting the Women farmers’ access to better markets financial market for SMEs facilitates greater spending on family welfare, • how those barriers can be nutrition, and girls’ education. A strong overcome gender-sensitised SME sector enables women smallholder farmers to sell their produce and

1 German International Development Agency, 2011 relate to their small size, and very localised localised very their small size, and to relate margins and that their profit operations), and depended on low unpredictable low, were to relate to (also likely of production volumes nature). their small size, and localised An important finding is that rural agricultural agricultural rural finding is that An important than smaller far generally are businesses financial and other the mean SME, so be to likely small size are due to pressures SMEs. agricultural among exacerbated poor of a pattern revealed This research of the because specifically finance to access of and informality youth small size, relative SME sector. the agricultural agricultural considered lenders example, For be and to lack professionalism SMEs to be to is likely (which structured poorly as as well immaturity, their relative to down weak, were they that ownership), their sole to (which is likely and unstable vulnerable Net assets below US$100,000 below Net assets between Financial requirements US$5,000 and US$500,000 Number of employees: five to 150 to five Number of employees: US$5 million below Turnover © Farm Africa / Mwangi Kirubi / Mwangi Africa © Farm KEY FINDINGS OF THE RESEARCH THE OF FINDINGS KEY from development agencies. But they are are But they agencies. development from access small and/or risky to too considered terms. on decent finance commercial GrowFin, a specialist development financier development a specialist GrowFin, that the has suggested Africa, across be based on what instead definition should are do: they to unable currently SMEs are small- very access to large too considered loans such as personal micro-finance scale • • widely that SMEs vary be noted But it should these definitions. within even For the purpose of this report, four main main four of this report, the purpose For define an been applied to have criteria SME: agricultural • • recognise themselves as formal businesses, businesses, as formal themselves recognise ‘red formal avoid wish to they or because do not know they because or simply tape’, which they with requirements about legal comply. to expected are entity. more be far to estimated are But there not formally SMEs that are agricultural under the official operating registered, do not their owners either because radar Lack of data means the exact number means the exact Lack of data is agribusinesses, of SMEs, especially and flexible a very is also There unknown. wide definition of SMEs in sometimes very consensus The only sector. the agribusiness registered be a formally is that an SME must What is an agricultural SME? What is an agricultural SECTION 2 2 SECTION

Strengthening the first mile / Section 2 – Key findings of the research

Farm Africa 6 7 Farm Africa Strengthening the first mile / Section 2 – Key findings of the research

22% large SMEs large 36% medium SMEs Various reports, surveys and surveys reports, Various revealed have data government of a number of characteristics in as a whole the SME sector Africa. East 43% small SMEs $

primary problem, rather the inability of agribusinesses the inability of agribusinesses rather primary problem, cumbersome terms, of stringent it because access to by financial institutions lending conservative procedures, and high costs. approval procedures and higher costs. procedures approval high among relatively is this type of finance Demand for the regional higher than these SMEs, and significantly supply. for loans medium- and long-term SMEs required Most 71% in (90% in Tanzania, growth business their latest get to able a minority were 68% in Uganda) but only Kenya, in Uganda). 17% 39% in Kenya, (20% in Tanzania, the loans or unfavourable too were rates interest reported They complex. too processes application rejection expectations, agribusinesses’ to In contrast with countries, in all loans for low very actually were rates the applications and incomplete co-signers unacceptable rejection. for reasons leading with their banks relationships SMEs with ongoing personal a and support for lending get favourable to likely more were application. loan identified that financial have surveys Financial development and SMEs in general, to lend unwilling to are institutions be risky, to tend they because in particular, agribusinesses risk. mitigate they how show and cannot uninsured is not the finance of medium- and long-term Availability The supply of affordable short-term finance is generally is generally finance short-term of affordable The supply fill the gap. lenders money insufficient, and expensive due of finance of this form advantage don’t take SMEs often among risk aversion and terms unfavourable ignorance, to financial institutions. with profit high compared relatively are rates Interest SMEs – making borrowing by agricultural achieved margins growth. of pursuing way an unprofitable be used that can products of financial is a shortage There forced are Businesses capital. working short-term for lengthy which entail loans traditional opt for to instead Barriers to SMEs to Barriers • • • • • • • • • • Financial instruments available to SMEs to available Financial instruments Financial instruments Table 1: Table Medium and long-term loans loans Medium and long-term medium- require Agribusinesses investment for loans and long-term enable to in their businesses, growth. credit, access to short-term capital capital short-term to access credit, bridge the gap between to is vital and getting paid suppliers paying by customers. Working capital allows SMEs allows capital Working and meet suppliers pay to expenses. ongoing operational on which rely In agribusinesses, and supplier orders anticipated Short-term loans, bank loans, Short-term and lines of credit overdrafts finance to SMEs, and whether SMEs were taking up these finance instruments. up these finance taking were and whether SMEs SMEs, to finance below. outlined in the table The findings are Financial instruments and barriers to SMEs to barriers and instruments Financial agricultural to available vehicles finance the various assess to was part of this research The major extending were lenders at whether looked Africa Farm Specifically, Africa. East rural SMEs in

Strengthening the first mile / Section 2 – Key findings of the research

Farm Africa 8 Farm Africa Strengthening the first mile / Section 2 – Key findings of the research 9

use them. as not encouraged, are financial institutions Partner long-term for lend schemes, to guarantee part of loan working short-term for lend to (preferring growth capital in have can the impact guarantees This restricts capital). in the long-term. sector the agribusiness transforming curtailed, meaning agribusinesses are not finding grants not finding grants are meaning agribusinesses curtailed, their growth. for further finance unlocking government- structured, well have and Tanzania Kenya one at least have schemes. Most guarantee credit backed, of the reluctance behind them. Given provider international guarantees credit for SMEs, the potential to lend to banks is immense. in this sector of the existence either unaware SMEs are However, which financial schemes or do not know of guarantee managing them. are institutions schemes is opaque and guarantee of credit Operation beneficiaries do not meaning the target secretive, appears Most asset leasing products require 20-30% of the cost of of the cost 20-30% require products leasing asset Most of outlay This is a large the equipment as downpayment. upfront. commit to capital is a lack of robust there is immature, the sector Because This leasing. asset for framework and legal governance those companies to leasing financial institutes restricts record. with a good track but most schemes exist, grant Both national and regional and with banks in isolation without collaboration operate is therefore Their financial leverage financial institutions. acquire the equipment, land or buildings they need. they land or buildings the equipment, acquire is trend though the infancy, in its still is leasing Asset increasing. alternative, as a favourable regarded is leasing Asset There SMEs. agricultural among known but it is not well by move than demand. The recent supply more is far but it profile, its has raised adopt leasing to governments gain popularity. time to will take the due to areas absent in rural Leasing is virtually and in management, monitoring involved high costs find it therefore, Agribusinesses, of assets. repossession the services. access difficult to with countries, in all three is available financing Asset asset of an of the value 80% to up obtain to able borrowers 60 months. to six over for problem a key remains finance asset of Affordability them to for way an expensive considered these SMEs. It is • • • • • • • • • • •

elsewhere, levering more potential potential more levering elsewhere, investment. for other way. This type of finance This type of finance other way. agribusinesses allow would additional finance access to repayable grants to agribusinesses, agribusinesses, to grants repayable loans for act as guarantors or to any not be secured that would A number of national and organisations, international non- provide including NGOs, Grants and guarantees Grants asset leasing is also available, and available, is also leasing asset the region. in it is growing by complete purchase, or by purchase, by complete the purchase make to borrowing option of financing). But the (asset operate. Most businesses prefer prefer businesses Most operate. either outright: buy assets to Agricultural SMEs require assets assets require SMEs Agricultural to and vehicles buildings such as and asset finance Asset leasing

vehicles in the region, such as mezzanine financing and in the region, vehicles limited. about them is very but information capital, buyout loans can be expensive. This is the biggest barrier to SMEs barrier to This is the biggest be expensive. can loans use unprofitable. making its finance, trade accessing is loans finance trade cover to At the same time, insurance export in risks of political because or restrictive expensive countries. of this form SMEs accessing to restriction The biggest skill technical is their lack of management capacity, finance find structuring banks Most of the market. and awareness SMEs arduous. with finance trade framework and regulatory legal is an immature There systems Dysfunctional in this region. finance trade for for repayment and enforcing monitoring registering, for the SME to lending to obstacle goods is a key financed sector. accredited an out through be carried must All transactions of making this form duty is applicable, and stamp lawyer, many SMEs. for expensive too finance Africa. in East sector This is an under-researched investment angel business of most nature The confidential about the use and conclusions draw it difficult to makes of financing. of this form restrictions financial is a number of other similar innovative There According to infoDev there were 21 national and regional and regional 21 national were there infoDev to According with in 2013, Africa in East funds operating investment $170 million. to $1 million from funds ranging of finance, form in this considerably feature Agribusinesses $500,000. of over investments for only but usually deals, of funds do not engage in smaller Two-thirds established for of finance this form to access restricting in or investment growth modest for looking businesses or early-stage start-ups New machinery or products. new are investments) $25,000-$200,000 (requiring ventures for. catered poorly the size beyond size is generally The minimum investment the region. SMEs in agricultural of most and capacity they because of finance this form not accessing SME are to reluctant are they about it, but also because do not know of their businesses. control cede with the majority of region, in the sector This is a developed banks Moreover, finance. trade offering banks commercial trade financing SMEs through to a commitment expressed is on though, that their concentration It is clear, finance. corporations. larger meaning is low, sector finance Competition in the trade • • • • • • • • • • • • • • letters of credit, trade insurance, insurance, trade of credit, letters and currency, of foreign advances more. Trade finance Trade This includes import and export It is composed mainly of social of social mainly It is composed and quasi- government investors funds their that obtain investors sources. external from Investors provide funding in the funding in provide Investors in and/or equity loans of form in, and control a stake for exchange this In the region, a business. of, infancy. is in its finance of form Venture capital, equity finance equity finance capital, Venture capital and growth This is informal financing, through financing, through This is informal and friends, philanthropic family clubs. and investment investment Business angel (investment Business angel (investment club) financing

Strengthening the first mile / Section 2 – Key findings of the research

Farm Africa 10 © Farm Africa / Mwangi Kirubi

SMEs struggle to find finance for vital assets such as buildings.

production and purchase produce. and purchase production products therefore remain outside the formal the formal outside remain therefore products regulatory, legal, Due to systems. market the majority of barriers, and socio-cultural not belong do SME owners the agricultural or any other associations any business to It air their views. can they where platform independently, means these SMEs operate under- to limiting opportunities and leading sector. in the formal representation to capital lack working Small producers volumes low to leading production, finance output, poor quality). Agribusinesses (low small collect to distances long travel sparsely quantities from uneconomical the cost which increases producers located small producers Moreover, of aggregation. arrangements, payment spot cash prefer allocate SMEs to agricultural which forces support to of capital outlays significant Inadequate quantitative data about the data quantitative Inadequate it makes or SMEs market agribusiness needs, market assess to banks difficult for it is is available data size, and risk. Where would-be and not accurate; incomplete often significant encounter financiers commercial resources difficulties and spend substantial decisions. approval in loan without years for operate enterprises Most and certification with regulatory complying and Their operations requirements. licensing Low output Low Limited market data market Limited Isolation

apply for credit, and why banks decline credit decline credit banks and why credit, for apply applications. High financial and business illiteracy among illiteracy High financial and business prepare an inability to have SMEs means they plans. This is the single business and present SMEs do not why reason important most their own finances or access to finance from from finance to or access finances their own SMEs agricultural most make sources formal and dependent on informal undercapitalised liquidity. short-term for lenders generate and inability to by buyers payment Late handle unpredictable and devastating events. events. and devastating unpredictable handle to interventions government Unpredictable such events, minimise the impact of catastrophic agricultural write-off to decrees as the common financial to burdens shift unreasonable loans, institutions. and chaotic in unpredictable operate They and a weaker present hence environments, are chain. Financial institutions supply unstable to capacity limited and have to averse highly planning and management systems. A majority A majority planning and management systems. skills, and most limited have of their employees of senior or relatives members family are often officials. Agricultural SMEs are managed by semi- managed SMEs are Agricultural from on grants rely who people professional angels. and business organisations international competent difficulties employing have They salaries. of unaffordable because professionals strategic for lack the capacity generally They Lack of professional staff Lack of professional Weak business plans Weak Cashflow Uncertainty SME growth. Other finance-related restrictions on SME growth growth on SME restrictions finance-related Other also Africa SMEs, Farm agricultural to products of financial availability as the limited As well back holding that are sectors and financing in the agribusiness other weaknesses identified

Farm Africa Strengthening the first mile / Section 2 – Key findings of the research 12 Table 2: Kenya Tanzania Uganda Characteristics of SMEs Small Medium Small Medium Small Medium

Age of the establishment (years) 16.8 21.7 13.0 14.9 9.9 11.1

Privately held Limited Liability 11.4 14.4 2.9 9.3 3.6 8.5 Company (%)

Sole proprietorships (%) 42.5 23.1 79.5 66.0 72.8 38.8 Firms with female participation in 50.9 47.7 23.5 28.6 26.8 26.0 ownership (%)

Firms with a female top manager (%) 18.5 8.0 13.2 18.3 16.8 10.5 Permanent full-time workers that 30.7 27.1 46.0 39.6 40.6 41.4 are female (%) Firms having their own website (%) 32.5 63.0 16.4 36.6 13.5 42.7 Firms using e-mail to interact with 61.1 87.8 22.2 49.2 34.7 56.5 clients /suppliers (%)

Firms with audited annual financial 74.2 93.2 35.0 52.3 48.0 73.8 statement (%)

Capacity utilisation (%) 69.4 72.0 80.9 79.8 69.3 76.8

Annual employment growth, 1.5 3.4 10.7 9.9 0.6 8.0 2009-2012 (%) Firms exporting at least 1% of sales 25.5 39.6 11.0 18.2 10.6 30.5 (%)

Firms exporting directly at least 1% 12.0 32.4 3.5 10.6 3.3 11.9 of sales (%) Total sales that are domestic sales 81.4 80.0 94.4 92.0 96.0 86.6 (%)

Firms offering formal training (%) 35.2 40.3 27.4 40.0 29.8 60.6

Workers offered formal training (%) 45.4 49.9 48.3 52.9 36.2 55.3

Number of permanent full-time 8.3 37.5 7.7 31.9 8.0 24.3 workers

Number of temporary workers 2.9 12.7 2.9 8.7 2.4 9.7

Firms reporting inadequately 33.7 20.7 38.8 47.2 13.9 9.2 educated workforce as a major constraint (%)

Source: WBES Online 14 SECTION 3 Farm Africa CONCLUSIONS

Strengthening the first mile / After looking at the financial instruments in Financial institutions are East Africa and the reasons why agricultural not supplying the financial SMEs are not accessing the finance that should 2. products that SMEs need. be available to them, Farm Africa draws the following key conclusions. • The research identified a supply side problem to access to finance for agricultural SMEs. Agricultural SMEs are not Lenders were not providing the financial demanding the lending they products that SMEs need, at rates that SMEs 1. need to grow. can afford, or with conditions that SMEs were able to accept.

Section 3 - Conclusions • This research shows the financial sector • The financial sector in the region is not yet in the region may be immature, but it sufficiently developed to support the financing does offer a diverse and growing array of needs of the SME sector. Although the range instruments suitable for SMEs. However, of financial instruments varies from country SMEs are not accessing these financial to country, the system is not diversified, instruments. lacking various specialised institutions such as leasing companies, factoring and forfeiting • Many agricultural SMEs do not know institutions, and risk insurers. Only a few about the financial products available to capital investment funds have emerged to them, nor who the lenders are, or how the promote longer-term financing. products work. • Lenders are generally disinterested in SME • Agricultural SMEs are risk-averse, lending, and very few banks are lending particularly when it comes to high-capital to new businesses or to businesses with investment. They do not see borrowing as a which they don’t already have a relationship. viable way to invest in buildings, production Serving SME bank clients presents inherent equipment and other capital assets, because challenges of low revenue per client and a they fear that level of investment might be too high risk of credit losses. risky. Most borrowing is short-term to ease cashflow, rather than for long-term growth. • Financial institutions see agricultural SMEs as risky because of the reasons already • Most enterprises do not have the capacity, stated: they are low profit, under-capitalised, management expertise or experience to make poorly managed and lacking in capacity. As a the most of any finance they might access. result, many finance products are either not SMEs do not regard borrowing as a way to available to SMEs, or their interest rates are grow their businesses because they do not set too high for SMEs to use them profitably. have the knowledge or experience of making it happen. For the same reason, lenders see • SMEs are considered too small for lending to SMEs as unduly risky. investment. Several investment funds currently operate (or are about to start • Many enterprises are not ‘investment ready’. operating) in at least one of the three They have low profitability, little capital of countries, with funds ranging from $1 million their own to invest, and few or no assets to $170 million. But most funds focus on to borrow against. They have inadequate investments requiring at least $500,000, and technical skills, poor market information, and only one-third focus on smaller deals poor infrastructure. (below $200,000) and even fewer actively consider early-stage ventures. © Farm Africa / Mwangi Kirubi

CONCLUSIONS

Table 4: Table 3: Selected reasons cited by SMEs not Top three obstacles of SME operations applying for a loan/line of credit

Constraint Kenya Uganda Reason Kenya Uganda

Access to finance (%) 37.2 41.9 Unfavourable 41 50 interest rates (%) Access to land (%) 30.4 29.1 Complex application Business 32.4 29.1 15 7 license/permits (%) procedures (%)

Collateral requirements 13 16 too high (%) There is a ‘missing middle’ 3. of financial services for SMEs. Insufficient loan amount and 7 3 tenure (%) • SMEs are a size where there are few financial products available to them. They are considered Did not think too big to access the very small-scale loans made it would be 4 9 by NGOs and others to small family and micro- approved (%) businesses. But they are too small to access investment or loans provided by commercial lenders, either because loans are unaffordable or Source for both: because their minimum lending thresholds are World Bank Enterprise Surveys 2013 far too large for SMEs to meet.

• There appears to be a ‘missing middle’ of financial products to serve agricultural SMEs, and this is stifling growth in the sector. The knock-on effect is that growth among small-scale rural farmers is hindered also. 16 SECTION 4 Farm Africa CREATING FINANCE IN THE MISSING MIDDLE Strengthening the first mile / This market analysis reveals that there is a Alongside the financial instruments at its need for an innovative platform to bring tailor- core, the MAEF includes a component for made financial products to agricultural SMEs. systematic business training of SME owners, In particular need are those SMEs that do not based on existing knowledge and experience receive assistance from development actors and in the region. are also not able to access loans from banks and other financial institutions – the missing middle. It works in partnership with other organisations such as banks, business By supporting these SMEs to enhance their service providers and accounting firms access to finance, such schemes would enable to outsource training where specialist SMEs to engage better with smallholder expertise is needed. Examples of external

Section 4 – Creating finance in the missing middle farmers to improve their production systems support include: new product development, and increase incomes. That would further the standards certification, financial planning, development goals for rural areas in particular business plan preparation, bookkeeping in these East African nations. and accounting, and specialised studies and analyses.

The MAEF Model It is clear such training and knowledge sharing not only improves the growth The Maendeleo Agricultural Enterprise potential of the agricultural SMEs Fund (MAEF) is modelled along the ‘venture themselves, but also tackles some of the philanthropy’ approach. It is a ‘non-returnable issues of poor management and technical investment’ mechanism directed at smallholder ability that are currently restricting lending farmers via SMEs. to them by commercial financial institutions.

Giving money or time to improve the welfare of others + Financial capital provided to early-stage, high-potential, growth startup companies = Building stronger social purpose organisations by providing them with both financial and non- financial support to increase their societal impact

© Farm Africa / Mwangi Kirubi © Farm Africa / Mwangi Kirubi Mwangi / Africa Farm ©

Farm Africa Strengthening the first mile / Section 4 – How targeted finance will solve the problem 17 Agricultural small and medium-sized enterprises often act as wholesalers for smallholders’ crops. smallholders’ for act as wholesalers often enterprises small and medium-sized Agricultural The Challenge

Micro businesses Small to Medium SMEs Large businesses Supported by NGOs The ‘missing middle’ Supported by commercial loans

How MAEF helps

Capital Agronomy Business Marketing

The results

Market

SMEs grow They become part of a functioning market that smallholder farmers can engage with

Smallholders increase their productivity and profitability The objective of MAEF is to support agribusiness The initial structure of MAEF in SMEs to develop the capacity to serve farmers in East Africa 19 a competitive market. It works on three pillars: Farm Africa

We anticipate that average ‘investment’ will Pillar 1: Strengthening capacity. range from $120,000 to $200,000. These figures are around the size of loans that SME

To improve access to finance, agricultural agribusinesses have found it hard to obtain in Strengthening the first mile / SME capacity needs strengthening, especially the commercial sector. their managerial and financial control. MAEF funds activities to provide technical support We envisage initial allocation as follows: and training to SMEs to improve their internal • 40-45% agronomic and marketing support organisational capabilities. (farmer and SME capacity) - in the form of a grant Pillar 2: Financing the bridge to growth. • 15-20% revolving fund and/or bank guarantee • 35-40% capacity building, management and While undergoing capacity building, the other support to the SME SMEs must continue serving farmers. MAEF

structures non-recoverable grants that will In all cases, the principle will be to provide Section 4 – Creating finance in the missing middle enable SMEs to continue to provide services sufficient technical and development assistance for farmers. It is also developing plans to in other forms to build the capacity of the SMEs provide recoverable finance to SMEs to provide to access commercial finance over the long- operational capital. To qualify, SME grantees will term. We will support farmers to engage in have to cede some degree of managerial and commercial marketing relationships, without supervisory control to MAEF managers. creating dependency.

Pillar 3: Unlocking further financial Table 5: services. Calculation of return on investment on a

typical agricultural product We find in this report that financial institutions consider agricultural SMEs high-risk and unviable businesses that are not worth lending Average investment in the $120,000 to. The MAEF proposes to work with financial form of a grant to the SME institutions to correct this perception. It also plans to provide guarantees to financial Number of farmers engaged 2,000 institutions on behalf of SMEs, to increase the availability of financial resources available Product volume 2MT/farmer1 to them and lower the risk of lending for the financial institutions. Farm gate price 33 cents/kg2

In the long term we hope MAEF will create a Total sales $1.32 million sustainable marketing relationship between farmers and SMEs, enhancing farmers’ capacity Net income for farmers (25%3) $330,000 to interact with market players directly. In many cases, operations are also partly self- financed from the outset by the partner SMEs or Income per farmer $165 /annum beneficiaries. Income generated per $ $2.75 invested Experience from Farm Africa projects tells us that we can estimate that for every $1 invested, 1 on average, nearly $3 of income will be generated, This will vary depending on the crop/product and it is calculated per annum. not including what the SME makes. 2Based on average farm-gate prices and Farm Africa knowledge and experience. 3Calculated based on average gains from total sales, minus production costs, by farmers. Although most smallholder farmers use family labour on farm, the percentage used in this calculation assumes hired labour. Under most circumstances, the gross margin, and therefore household returns will be significantly higher. © Jonathan Banks

Strengthening ‘first mile’ rural agriculture businesses in turn enables smallholder farmers to lift themselves out of poverty. © Jonathan Banks UK registered charityno.326901 smallholders to liftthemselves outofpoverty. support inagronomy, business andmarketing to rural enterprises thatinturnenable African managed byFarm Africa thatsupports thefirst mile market byproviding working capital and Maendeleo Agricultural Enterprise Fund (MAEF)isaventure philanthropy programme affordably andviably. by NGOs andothers, buttoo smallto beable to borrow money from commercial lenders small andmedium-sizedenterprises, whotend to betoo bigfor small-scale loans offered The first mile market isfailing dueto alackofappropriate financialproducts for agricultural supplying goodsto them. businesses thatconnect small-scale farming to widermarkets bybuyingtheirproduce or development inrural eastern Africa. Supportisalsoneededfor the‘first mile’ rural agriculture Assisting smallholders andsubsistence farmers isnotenoughto bringaboutwidespread STRENGTHENING THE FIRST MILE T (UK): T (Kenya): Kenya

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