Hans van de Veen

22 oktober 2020


Smallholder farmers and small agrifood enterprises are key for sustainable food systems in Africa. They need access to capital, but banks consider it tedious, costly and too much of a risk to invest in them. Initiatives like the IDH Farmfit Fund and crowdfunding platform PlusPlus have been set up to try to break this deadlock. Can these new funds assist smallholder farmers and companies to become a commercially interesting opportunity for financial institutions?

‘My dream is that ten years from now the best performing bonds on the New York stock exchange will be linked to smallholder farmers, and the IDH Farmfit Fund will be the basis for making this happen.’ Berry Marttin, member of the Rabobank executive board, does not shy away from grandiose vistas. He unfolded his vision of the future at the launch of the Farmfit Fund during the World Economic Forum meeting in Davos, January 2020. ‘The fund is the start of a new way of thinking on how to reach smallholder farmers. This should form the basis for considering them as a new asset class.’

Big words, that go hand in hand with great aspirations. The 100 million-euro IDH Farmfit Fund aims to become the world’s biggest ever public-private impact fund for smallholder farmers. To achieve this, a broad coalition has been built and includes commercial banks like Rabobank, the US and Dutch governments, as well as companies like Unilever, Mondelez and Jacobs DE. If a financial institution wants to invest in the target group, the Farmfit Fund guarantees this investment in case it goes wrong. USAID complements this guarantee up to a total of 250 million dollars. Taken together, this package should pave the way for investors – including banks, companies and institutional asset managers – to take calculated risks on smallholder farmers.

The IDH Farmfit Fund has a term of fifteen years, explains CEO Roel Messie. ‘Our own fund and USAID’s second loss guarantee are mutually reinforcing. Our expectation is that this will enable us to build a portfolio that will be well in excess of one billion dollars. That is unprecedented in this sector.’ As impressive as the size of the fund is its goal: to provide funding to three million farmers, leading to a 50 percent improvement in their income. ‘Ambitious, but achievable,’ says Messie. ‘We are already looking into several project proposals that target huge numbers of smallholders.’

‘A natural progression of learnings’

‘I really believe in the power of guarantee systems,’ comments Lisette van Benthum, financial strategy manager at AgriProFocus. ‘They reduce the risk for banks, enabling them to take that extra step. After one or two cycles, during which the entrepreneur has proven him or herself, trust is built up. And then they can continue independently.’ AgriProfocus recently merged with the Food & Business Knowledge Platform to form the Netherlands Food Partnership. Smallholders’ lack of access to finance is a theme the Partnership will take into consideration, paying particular attention to young people and women. ‘Both have an extra weak position due to their lack of collateral. Young people because they have not yet been able to build up capital, women because they are often disadvantaged by the traditional hereditary systems.’

Keval Bid

‘It’s a much-needed initiative,’ adds Keval Bid, senior investment officer at the new African office of FMO, the Dutch development bank, in Nairobi. From his years of experience as a commercial banker (before joining FMO he worked at Standard Charter, as an investment officer for the East African region) Bid sees the Farmfit Fund as ‘a natural progression of the learnings over the years around smallholder farmers’. The main learning being that it is almost impossible for smallholder farmers to get the loans they need. And even if they succeed, the costs are very high. ‘In most African markets interest rates will be double digits, upper teens or more. Much too costly for this target group. A guarantee product can bring down the costs of financing significantly.’ Even more important: ‘Guarantee programs are very low cost and efficient ways of enabling high risk taking corporates to engage with SMEs or smallholder farmers.’

For FMO, as a development bank, the ideal size of investments in African agriculture is around 10 million dollars. ‘We can go down lower as long as the impact is very high,’ says Bid. At the other end of the market are microfinance funds, which focus on small investments (a few thousand dollars maximum). In between is the so-called ‘missing middle’, the ‘sweet spot’, as Bid calls it, where needs are highest. FMO cannot address that market directly, but works with intermediaries like local commercial banks, microfinance institutions and agro-processors who deal with smallholder farmers.

Financing smallholders directly becomes more possible and efficient when they are organised in large cooperatives or groups. Like the Kenya Tea Development Agency (KTDA), a service provider to over 600,000 small tea farmers. FMO invested 17.5 million dollars in the past years in Greenland Fedha, KTDA’s microfinance institution. This money is used to further expand on-lending to the smallholder farmers. Keval Bid: ‘These are loans that farmers need, not only to buy farm inputs but also to pay school fees or medical costs between crop cycles.’

African smallholders face a multitude of challenges: plots of land getting divided up as they are passed on to the next generation, being dependent on rainfed agriculture, poor soil health, lack of access to markets. Financing is never the one and only solution, Bid emphasises. ‘You have to address the wider ecosystem to a certain degree to make a meaningful difference. Having finance on top of that greatly enhances sustainable and successful outcomes.’

Which is a good description of the philosophy behind the new crowdfunding platform PlusPlus.

Investing in the missing middle

PlusPlus was launched on the Dutch market in August this year. Behind it are development NGOs Solidaridad and ICCO Cooperation, ‘business booster’ Truvalu and crowdfunding platform Lendahand. PlusPlus is a place where individuals can invest directly in the plans of African agri-food entrepreneurs, says Heske Verburg, director of Solidaridad. ‘Ambitious small-scale entrepreneurs, that currently fall in the gap between microfinance and larger bankable business. We invite people to invest in this so-called missing middle. Loans without interest for the investor, but with high impact. It’s a rotating fund. As soon as the loan has been paid back, the investor can decide to invest their money in another entrepreneur.’

It’s not only private individuals that are invited to participate. PlusPlus is open to non-profits and charities too. Achmea Foundation, a longstanding strategic partner of Solidaridad, will probably be the first one, with an investment in 6,000 smallholder dairy farmers in Tanzania.

Mobile payment of smallholder farmer (photo IDH)

PlusPlus is currently crowdfunding a loan of 20,000 euros to Apollo Agriculture in Kenya. With it, the company can provide 172 small-scale maize farmers with seed, fertiliser and agricultural advice. The first two loans completed went to Pod Chocolate in Indonesia, and Sereni Fries in Kenya. All of these companies have longstanding relations with Solidaridad. ‘We know them, work with them in many ways to help them improve their business. But so far we haven’t had the opportunity to support them in their financial needs. Through PlusPlus this is possible now.’ These first beneficiaries do not belong to the lower part of the market, admits Verburg. ‘As a newly created platform, we cannot take too much risk in the beginning. So we start with some more robust companies, with a proven track record.’

So is this merely a sympathetic initiative, aiming for a niche in the market? It’s much more than that, says Verburg, who believes the initiative will become a game changer. ‘We think that this way it is possible to get round financial institutions, with their expensive infrastructure. This crowdfunding model of placing entrepreneurs in a window on the internet, and offering people worldwide the opportunity to invest in them, is scalable. Compare it with microcredit. When the Grameen bank started doing that, thirty years ago, they were laughed at. Lending money to poor people could never be profitable. History has proved otherwise. Now it’s now time to do the same for the missing middle. The difference with microfinancing is that this involves larger amounts of money over longer periods.’

Investing in the middle market normally requires substantial amounts of money for training and coaching. Impact investors often only have very limited budgets available for technical assistance: none before the investment and no more than 5 or 10 percent afterwards. ‘From the investor’s point of view that makes sense. But for this target group of farmers with no credit experience, it is completely inadequate,’ says Verburg. ‘There is a big need for funds that accept that you need at least 30 percent technical assistance or grants to cover 70 percent of your investment. At the moment, most donors and investors provide either grants or loans. We would like to see more options there.’

The IDH Farmfit approach

In an indirect way the Farmfit Fund answers that need, as it is part of the broader Farmfit approach. Another part is Farmfit Business Support, which provides technical assistance to farmers, via companies and banks. The aim is to develop farmer-centric sustainable business models – helping companies to provide services to smallholder farmers in their supply base, in a way that it is beneficial to the farmer. And also to the company. At IDH they call this service delivery modelling. So far, over 80 Service Delivery Models have been developed with different companies and in different regions.

The third leg of the Farmfit approach is the Farmfit Intelligence Centre, where data are collected, and lessons learned are disseminated to the market.

So how many deals the fund has closed so far? ‘At the time of the launch we already had an interesting number of projects in the pipeline,’ says Messie. ‘Four projects have now actually been completed. Slightly less than we had hoped. Due to Covid-19 we cannot travel to visit projects. That makes it difficult to finalise deals.’ The first loans will go to an aquaculture project in Mozambique, a new tech platform for loans to small-scale farmers, a poultry project in Tanzania, and palm oil plantations in Ghana. All four are from IDH’s existing partner network. According to Messie, the diversity of these first projects also reflects the fund’s broad approach. With partners such as Unilever and Jacobs DE (Douwe Egberts), one might assume the focus would be on export-oriented cash-crop sectors such as coffee and tea, palm oil and cocoa. Messie elaborates: ‘These are indeed important sectors for the fund, but investing in local food supply and local value chains, and thus creating jobs, is just as important. These are the sectors where we probably can achieve the largest impact.’

Farmer with mobile money and real money in hand (photo IDH)

The main challenge for the nearby future will be to create sufficient deals of a substantial size, says Messie. ‘Next year we really have to realise a number of iconic deals. Deals development banks such as IFC or FMO cannot make because of the higher risks.’ Iconic meaning here the transformative character of the projects. ‘Ultimately, it is all about contributing to a structural change in the system, by making farmer-related finance an asset class.’

Petty capital, instead of development aid

We end this article with the opinion of an African farmer. Not an average smallholder, but a slightly more powerful one. For the past three years South African Theo de Jager has been President of the World Farmers’ Organisation. He sees two main reasons for the reluctance of banks to finance smallholders. The first is their small size. De Jager is a firm believer in farmer cooperatives. ‘That’s the magic bullet. Everything a smallholder cannot do because he is too small, he can do when doing it together: being bankable, being insurable, buying equipment like a tractor.’ The second reason is the lack of a supportive government in many countries. ‘We need policies in Africa that make it easier for smallholder farmers to grow competitively. Not to mention the problems of corruption, and broken systems.’

The farmers leader, who was also present at the IDH Farmfit Fund launch at the World Economic Forum in Davos,  challenged the fund partners in two ways: ‘First: say No to businesses which do not operate in a clean way in the African environment. You owe that to every smallholder. Second: thank you for setting up this initiative. But it’s not enough. We need many more funds like this. We need petty capital, instead of development aid. We need loans that are available over a longer period, with softer conditions. But if we succeed in empowering smallholders through proper financing systems, the huge African agrarian potential will unfold within a couple of years.’

In the autumn of 2020, Vice Versa publishes a series of articles on transforming African food systems to provide sufficient and healthy food to the growing population, while at the same time generating income and employment for the increasing number of young people. Our aim is to generate debate on this important topic within the Dutch international cooperation sector, running up to the parliamentary elections in March 2021.
The series is an initiative of Vice Versa in cooperation with Solidaridad, IDH Sustainable trade, Wageningen University & Research and the Food & Business Knowledge Platform and AgriProFocus, merging into the Netherlands Food Partnership this year

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