Tuesday, 12 December 2017

Financing agriculture in Ghana: a nightmare

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Adnan Adams Mohammed

Much has been said and attempts made by several local and international organisations towards addressing one of the major challenges to the underperforming Ghanaian agricultural sector, that is, making funds available and accessible to farmers and actors in the agric sector. But, the situation is still unaddressed.

The Bank of Ghana (BoG) which is also much concerned with the current situation has attempted to provide solutions.

Agriculture has great impact on the economy of the country. Insufficient local production of food results in huge import which involves using foreign currencies but this puts pressure on the local currency and this also causes inflation to rise. A major headache for the BoG past years is how to tackle the high exchange rate and inflation in the country.

Past Governors of the BoG have expressed worry about the situation of the Ghanaian agricultural sector and have in one way or the other provided some solutions.

Following the trend, the current Governor of the Bank of Ghana, Dr Ernest Kwamina Yedu Addison has also expressed unhappiness about the low credit facility extended to small and medium-scale enterprises (SMEs) and the agricultural sector by banks and urged financial institutions to develop innovative products for the two sectors.

He noted that, the agriculture sector as at September this year,attracted a paltry 3.7 percent of the GHC38.70 billion credit advanced in the financial market, adding that, the SMEs and the agricultural sector were seriously underserved, considering their relative importance to job creation and economic growth.

However, notwithstanding the high risk in these sectors, he wants banks to be innovative by developing credit products that were suitable for them.

As part of same effort of helping grow the agric sector, the BoG, last year under the leadership of Dr. Abdul-Nashiru Issahaku ,launched a value chain financing model to help address challenges to agricultural credit.

Dubbed: ‘The Ghana Incentive Based Risk Sharing System for Agricultural Lending (GIRSAL)’, it aimed to reduce the overall risks in agricultural financing to boost production, productivity and export.
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This was expected to increase foreign exchange earnings, support import substitution and promote economic growth and development.

The risk sharing system was BoG’s initiative with collaborators such as the Ministry of Food and Agriculture and the Alliance for a Green Revolution in Africa to encourage banks’ lending to the agricultural sector.

The model, which has six pillars, sought to reduce both the potential and real risks associated with lending to agriculture and agribusiness.

Funds would be allocated to the various pillars, including Risk-Sharing Fund, Technical Assistance Fund; Insurance Facility for potential borrowers; Bank Rating System; Rewarding Systems for banks; and Digital Platform to facilitate quicker and cheaper credit delivery services.

The BoG pledged an initial GHC100 million as seed capital.

Speaking at the launch, Dr. Issahaku, the then Governor of BoG, said with technical guidance and support from partners, GIRSAL was initiated as a vehicle to leverage lending for agriculture and agribusiness through a risk-sharing scheme.

“Our technical partner, AGRA, designed this innovative model of financing, which has been successfully implemented by the Central Bank of Nigeria; and which other countries such as Kenya, Uganda and Liberia have begun to show interest,” he said.

The then Governor said Ghana’s agricultural sector accounted for about 22 per cent of the Gross Domestic Product (GDP); however, the sector received an average of 4.0 percent of bank lending.

“If we are to succeed in transforming agriculture and promoting agribusiness in Ghana, then we must scale up financing to the sector,” he said. “Yet, the perception of lending risk is too high to motivate this kind of financing by the private financial sector. This is why the central bank wants to facilitate the process of private financial sector financing of the full agricultural value chain.”
The strategy, Dr. Issahaku said, was one of the ways to diversify the economy away from over reliance on oil and to avoid the ‘resource curse’.

“Expanding agricultural production is one sure way of doing this, but it crucially depends on the availability of more financing. It is in this regard that using the value chain approach to financing agriculture constitutes an important innovation, especially in this modern era.”

He said the BoG and its collaborators would continue to build on the efforts made so far.
He said the administrative and operational modalities of GIRSAL would be completed soon and deployed immediately to qualified beneficiaries.

Meanwhile, other international organisations have also been making efforts to help local farmers with access to funds. Among these organisations is the USAID which is implementing the FinGAP.

USAID-FinGAP is an agribusiness financial facilitation project that helps agribusinesses in the maize, rice and soy value chains in the north of Ghana to access the financing they need for their agribusinesses to grow.

USAID-FinGAP works with three key actors to facilitate financing: agribusiness Small, Medium, including Large Enterprises (SMiLEs) in the maize, rice and soy value chains; financial Institutions, and Business Advisory Service (BAS) Providers.

The Agribusiness SMiLEs project supports SMiLEs to access financing at relatively lower cost using a variety of existing financial products while at the same time utilizing risk mitigation tools such as crop or weather insurance, partial credit guarantees, etc. to further incentivize financial institutions to offer financing to agribusinesses.

With the Financial Institutions, USAID provides incentives to these financial institutions to help them to better serve agribusinesses in the targeted value chains. These incentives include support to establish agribusiness finance desks, and capacity building to financial institutions for agribusiness financing. USAID-FinGAP strives to facilitate the reduction of risks for financial institutions while reducing the cost of financing for agribusinesses.

With the BAS Providers, USAID-FinGAP recruits, train and contract a core network of BAS providers to support agribusinesses in financial facilitation.

Also, among the organisations is the World Bank Group.

The World Bank Group works on government policies and institutions to improve financial services for agriculture. It focuses on two objectives: increase financial inclusion in the agricultural/rural sector by bringing more rural people into the formal financial system and provide funding to increase investments in agriculture to raise productivity, improve quality of agricultural products, and lead to better post harvest practices, which ultimately will increase smallholders’ incomes and promote rural entrepreneurship for small agribusinesses.

Their instruments to support agricultural finance often involve: Lines of credit through both public and private financial institutions; appropriately structured partial credit guarantees; agricultural insurance for crop losses; development of leasing for agricultural equipment; setting up financial infrastructure (credit bureaus and collateral registries attending also to clients in the rural areas).

The others are: capacity building and technical assistance to both private and public banks and other financial institutions; support of agricultural cooperatives; set up the right legal and regulatory environment to promote finance to the agricultural sector; assist in the development of innovative financing schemes such as warehouse receipt finance and value chain finance; and assist in the development of commodity exchanges as a means in reducing market related risks.

Since agricultural finance is a public-private partnership in most of the world, including in developed countries, the World Bank’s aim is to create an environment where the public sector crowds in the private sector to promote the delivery of financial services to agriculture.

Agriculture finance empowers poor farmers to increase their wealth and food production to be able to feed nine billion people by 2050.

The need for investing in agriculture is increasing due to a rising global population and changing dietary preferences of the growing middle class in emerging markets toward higher value foods (e.g. dairy, meats, fish, fruits, vegetables, etc.).

According to global estimates, demand for food will increase by 70% by 2050, and at least US$80 billion annually in investments will be needed to meet this demand, most of which is expected to come from the private sector.

The World Bank has established that, banking sectors in developing countries lend a much smaller share of their loan portfolios to agriculture compared to agriculture’s share of GDP. This limits investment in agriculture by both farmers and agro-enterprises. It also demonstrates that the barrier to lending isn’t due to a lack of liquidity in the banking sector, but rather a lack of willingness to expand lending to agriculture. 

Even when available, much of the agriculture funding tends to be informal and short-term, precluding longer-term investments. This informal funding only partially covers the financial needs of farmers and small agribusinesses, and usually at a high cost.

The challenges financial institutions face when offering financial products to agriculture are threefold: the transaction costs of reaching remote rural populations; higher perceptions of non-repayment due to sector-specific risks, such as production, price and market risks as financial institutions’ lack of knowledge in how to manage transaction costs, agriculture-specific risks and how to market financial services to an agricultural clients.

Also, government policies often prove to be ineffective and could in fact create impediments to offering financial services to the agricultural sector.  Policies like concessional lending practices, interest rate caps, and loan forgiveness programs create disincentives for private sector lending while creating problems for government lending to agriculture.

Agricultural finance needs to focus on the following four areas: segment the smallholder farmers and identify their financial needs.  Smallholder farmers are heterogeneous and have different needs.  It is important to identify various smallholder sub-segments and assess their needs and constraints before designing solutions and products.  Also, smallholder farmers don't just need credit for agricultural activities but they also need credit for other household needs/activities, savings, payment systems and insurance.

Find ways to de-risk agricultural finance by addressing both idiosyncratic (or individual) risks as well as important systemic risks.  Individual risks are often linked to credit risk assessment, and information and systems to help.  Information can assist financial institutions in credit risk assessment by promoting credit bureaus and linkages with value chain companies, etc.  Finding a good collateral, for example, moveable collateral, and not just rely on titled land, could also help.  On the systemic risk, agricultural insurance, catastrophic risk programs, price hedging through commodity exchanges or value chains, can also provide some solutions.

Identify appropriate institutions and delivery channels that would reduce the costs of serving agricultural clients.  A variety of institutions can provide agricultural finance, depending on the types of clients they serve.  MFIs and cooperatives can serve sub-segments of small holder farmers through their local presence and expertise.  Commercial banks can also provide solutions through value chains and for better organized groups of smallholders.  New technologies and advancements in mobile banking solutions as well as increasing integration of farmers into better organized value chains can promote solutions and delivery channels that reduce the cost of serving disperse populations in rural areas.

Address issues in the enabling environment and specific government policies that limit the flow of financial services to small holders.  Government policies can restrict lending but also can crowd in private sector.

Future needs in agriculture finance include: Longer-term agricultural financing is needed for longer-term investments such as better storage facilities, food/commodity processing facilities and equipment/mechanization.

Financing agriculture-related infrastructure, such as rural roads, port facilities, loading terminals, etc., is needed in most of the poorest countries.  Currently, transportation costs are often too high, particularly for landlocked areas where moving food in and out becomes almost impossible because of poor logistics and high costs.

Climate change poses the biggest risk for agriculture and food security.  We need to invest in agriculture (such as irrigation, drought-resistant technologies, controlling floods, etc.) to be able to adapt to climate change. We also need to use insurance and other mechanisms to mitigate the effects when climate events cause losses in agricultural production and assets.

Focus on youth and women.  We need to make agriculture more attractive to young people and empower women so they can contribute more.  The average age of farmers around the world is rising as agriculture isn’t appealing to young people. Women in agriculture don’t have the same access to technology, finance and extension as men do, which results in lower yields and income.

Advancements in technology could also lead to lowering the cost of financial services to agricultural clients.  Solutions involving information and communication technologies (ICT) could provide a key in reducing the costs of frequent small transactions by disperse populations in rural areas.  The use of mobile phones, electronic payment platforms, mobile agents, etc. hold quite a promise and we are seeing an increase in such applications.