Expensive loans pushing agribusinesses to friends, family for financing

• Expensive loans remain a major issue across populations engaged in agriculture in Nigeria, Tanzania and Zambia.
• Report by Alliance for Green Revolution in Africa (AGRA) says capital injection is a major strategy that agribusinesses use to survive.
• What’s more, agribusinesses are facing high operational costs driven by fuel prices and low profit margins driven by currency devaluations.

The lack of agriculture friendly financial systems saw agribusinesses turn down expensive loans options in the market, with only 15 per cent taking on commercial capital in 2023 and the rest sourcing capital from friends, family and their business savings.

The incentives by government channeled towards agriculture failed to adequately cushion Agribusinesses from economic shocks, a new report by Alliance for Green Revolution in Africa (AGRA) has revealed.

The survey titled Africa Agribusiness Outlook is conducted annually to gain insights into sector’s top priorities, how they are addressing challenges, and what SMEs see as opportunities.

A reflection from the agribusinesses performance demonstrated that the most effective actions taken by governments in sub-Saharan Africa were in reducing the cost of doing business through tax reductions and tax incentives.

However, agribusinesses are still facing high operation costs driven by fuel prices and low profit margins driven by currency devaluations.

For instance, in the review period six per cent of the agribusiness SMEs re-negotiated supplier contracts and payment terms, 10 per cent moved premises to a cheaper option.

A further 24 per cent reduced on operational costs, 32 per cent reduced on staff to cut costs, 35 and 47 per cent of businesses Injected more capital in the business and Adopted a new strategy respectively.

Industry players now say the sector would benefit from improvements in the areas of the less formal nontariff barriers that increased the cost of business and in strengthening cross-border regulation and facilitation to allow for export trade.

“So far there has been progress made in improving access to finance through several blended facilities and capacity building of businesses to improve the bankability of agribusinesses,” said AGRA Head of Partnerships Jennifer Baarn.

The strongest call from agribusiness across the polled markets continues to be finance, in particular the cost of the finance.

Expensive loans

Agribusinesses opted not to access the finance due to its high cost unless there are incentives discounting the strategic minimum reserve requirements of commercial banks that are lending to the sector to drive higher uptake, an example from Tanzania.

Capital injection was seen as a major strategy that agribusinesses used to survive and it continues to be core to business operation with less than 15 per cent taking on commercial credit finance over the last three years due to the cost of credit.

“CEO’s adopted pivotal strategies to remain resilient, these included injecting additional capital into their businesses, reorganization, and redeployment of human capital and in some cases relocation of their businesses. What this critical middle need is concerted effort by the ecosystem to build resilience not just of the businesses but the entire supply chain,” the report says

AGRA says that as opportunities continue to emerge for expansion of trade markets through the Africa Continental Free Trade Area and Export Processing Zones, agribusinesses require stronger market visibility systems.

Some of the CEO’s suggestions included establishment of more digital marketplaces for market expansion, end to end supply chain digital platforms for visibility, e-Finance as a way to reduce cost of transactions, digital extension to improve farmer productivity amongst others.

Policy reforms in agriculture financing 

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Agribusiness CEOs prioritized an enabling business environment with better policies, reduced regulatory costs and bureaucracies and government support/ protection against globally driven constraints – fuel costs and currency devaluations.

The report majorly focused on Nigeria, Tanzania and Zambia. Says  that in Nigeria, The Economic Stimulus Bill 2020 provided 50 per cent tax rebates to registered businesses

In Tanzania, imports and exports freed which helped reduce the local market slump at the beginning of Covid-19, where the price of maize and rice dropped significantly (Nyange & Kongola, 2020).

“Specialized financial products developed by the government of Tanzania resulted in an interest rate drop from around 20 per cent to 9 per cent,” reads the report in Part.

In Zambia, the government directed all chain stores such a Shoprite and Pick N Pay to prioritize local agricultural produce.

AGRA notes that the provision of market information to highlight market shortages and gluts and the reduction of government intermediation on price subsidies that distort market dynamics is vital for mitigating risks for losses and driving better profitability for SMEs.