
The last decade has seen increasing recognition by policymakers, capital providers, and finance practitioners of the vital role played by agricultural small- and medium-sized enterprises (agri-SMEs), as well as their limited access to finance. As a result, new funding structures and specialised financial intermediaries have emerged, complementing a financing landscape previously dominated by local banks and government-backed lending programs.
However, of the USD 160 billion in demand for agri-SME financing in sub-Saharan Africa and Southeast Asia, only USD 54 billion (34%) is currently being met—leaving an annual financing gap of USD 106 billion unaddressed. To address the economics of agri-SME lending and bridge the supply-demand gap, subsidies are widely used by all financial service providers (FSP) channels. But little transparency exists on the different tiers within this sub-commercial market of agri-SME lending, the efficiency of subsidies, and how well they address the different market bottlenecks.
In a forthcoming report with Commercial Agriculture for Smallholders and Agribusinesses (CASA), we seek to improve the investor’s understanding of the state of agri-SME finance globally. In this blog, we explore further the sub-commercial part of the market and evaluate the current state of blended finance, including gaps and opportunities to facilitate more financing transactions and agri-SME adaptation to climate change.
A complex market that struggles to clear
Agri-SMEs have three primary goals that require finance:
- Sustaining current growth
- Accelerating growth-to-market potential
- Adapting to changing circumstances, particularly climate change
In sub-Saharan Africa and Southeast Asia, there is an estimated USD 160 billion in demand for agri-SME financing to achieve these goals. However, only USD 54 billion (34%) is currently being met through formal finance channels—leaving an annual financing gap of USD 106 billion.
Challenges on both the demand and supply sides prevent the agri-SME finance market from clearing in full, thereby contributing to this gap. To start, agri-SMEs are a much more difficult investment asset class, operating in an industry with higher exposure to exogenous risks—such as yield, climate, and price variability. Secondly, their articulated demand often doesn’t correspond to an investment-ready demand aligned with the expectations of financial service providers and investment profiles of agri-SMEs. Similarly, on the supply side, financing is influenced by access to different sources of capital and the products and investment strategy deployed by financial service providers—which may not always be appropriate for agri-SMEs.
Blended finance as the linchpin of the agri-SME finance market
As with many nascent markets, Capital Providers and Financial Service Providers (FSPs) deploy subsidies to mitigate these real and perceived risks and reduce the high—transaction and opportunity—costs to serve agri-SMEs. These subsidies are used to mobilise private capital in so-called blended finance structures which are applied across all channels of agri-SME financing (e.g., commercial banks, non-banking financial institutions, or impact-oriented funds) with different tiers of sub-commercial capital.
At one end of the spectrum, commercial banks may leverage Development Finance Institutions’ (DFI) capital with commercial pricing but a higher risk appetite and more flexible terms to lend to more mature agri-SMEs with the collateral requirements and product requirements (e.g., receivables finance) to make lending possible. At the other end of the spectrum, specialised funds or state banks will use high levels of subsidy to support their pipeline development, directly support their agri-SMEs with complementary technical assistance (TA), and reduce their costs of capital with guarantees or grants.
However, fully unpacking the approaches and tiers between these two extremes is more difficult. Moreover, for an appropriate comparison, the amount of subsidy deployed by different sub-commercial, blended finance approaches needs also to consider the anticipated impact associated with the agri-SMEs being supported, or, said differently, “the impact case for going downmarket with more subsidized finance.” Structures such as Aceli Africa seek to link the amount of subsidy to this impact case in an adaptive way, where subsidies are applied on a loan-by-loan basis. Other funds and financial institutions make this case for subsidy in the initial design and targeting of the product with reporting over time.
We believe that for the sector to truly start to make substantive progress in the more efficient and effective use of subsidy to facilitate sub-commercial lending, a more sophisticated way of comparing the subsidy to impact tradeoffs—inherent in different approaches and models—is imperative. While our forthcoming report will not fully establish this comparison model, it will offer a first step in laying out the different blended finance approaches and examples that can be observed in the market, as well as the current ways in which capital is allocated by some of the leading public sources.
A more sophisticated landscape of approaches
In recent years, the landscape of these blended finance approaches has become more sophisticated. Capital providers are more nimble in trying to match the different investment profiles of agri-SMEs, in terms of growth ambition, profitability, value chain, risk exposure, and investment readiness.
In our research, we have observed seven key ways in which blended finance is structured to address pain points in the market (see Figure 1). For instance, local commercial banks will primarily make use of risk share, incentive payments, and, at times, investment facilitation or technical assistance. Social lenders and impact-oriented funds will typically leverage a broader set of those approaches—in particular, raising catalytic capital, attaching a technical assistance facility (externally-funded and operated) to their investments, and using investment facilitation and business development services (BDS) support in their value chain(s) of activity.
Figure 1 - Addressing the finance market pain points through blended finance

Example 1
Aceli Africa is an innovative approach to bridging supply and demand for agri-SME finance. First, it incentivises lenders to serve market segments that are higher risk but generate substantial impact by 1) depositing 2%-8% of the loan value into a reserve account that can cover first losses across the lender’s portfolio of qualifying loans; 2) providing additional financial incentives for loans that meet criteria related to gender inclusion, food security and nutrition, and/or climate resilience; and 3) offering origination incentives that compensate lenders for the lower revenues and higher operating costs on loans ranging from USD 25K-500K. Second, Aceli works on expanding the investment-ready demand by facilitating technical assistance for agri-SMEs at both pre- and post-investment stages. From September 2020 to October 2021, Aceli has facilitated more than USD 28 million in loans, with an average ticket size of USD 124K.
Example 2
IDH Farmfit brings together three sets of solutions aimed at comprehensively addressing both supply- and demand-side bottlenecks. IDH Farmfit Business Support helps companies and banks develop cost-efficient, smallholder-inclusive business models by providing them with 1) data and insights on the cost efficiency and sustainability of their service delivery models; 2) technical assistance to trial new service delivery models; and 3) blended finance to scale these models. IDH Farmfit Intelligence shares key insights on how to make smallholder value chains more efficient, effective, and impactful. And finally, the IDH Farmfit Fund is a EUR 100 million facility that takes the highest-risk positions in an investment, including first-loss coverage, and is supported by a second-loss guarantee facility from USAID (up to USD 250 million).
In our forthcoming report with CASA, we build on and refine this initial typology to link the supply of financing support to the needs of agri-SMEs based on their growth pathways. Through linking supply and demand, we can start uncovering potential gaps, mismatches and opportunities.
Developing specialised funds as a channels
While 80% of current funding is supplied by local commercial banks, many capital providers are increasing the range and volume of agri-SME finance by supporting the development of specialised funds (e.g., impact-oriented or VC) as a channel. In doing so, they are pursuing specific impact themes such as gender inclusion or climate adaption.
Since 2017, when ISF developed its typology of five categories of specialised funds, a number of new examples have emerged (see Figure 2). Some are specifically focused on increasing the climate resilience of agri-SMEs by investing in climate change mitigation, adaptation, and nature-based solutions. The last four years have also seen increased attention to, and investment in, AgTech across sub-Saharan Africa and Southeast Asia—driven by early-stage venture funds.
Figure 2 - Landscape of specialised funds

Three key trends are particularly worth drawing the attention of the readers to:
EARLY STAGE VENTURE FUNDS: Recent years have seen the emergence of more high-risk “impact venture” funds and other accelerators (e.g., Small Foundation partnership with Founders Factory, The Nature Conservancy Venture Fund, Mercy Corps Ventures, Ankur Capital or Omnivore in Asia) dedicated to supporting what we would categorise as “Niche” or “High-Growth” ventures. The emergence of these more commercially-oriented venture funds to invest in the promise of agri-Tech is heavily concentrated in a small subset of countries including Kenya, Nigeria, South Africa, India and Singapore and comes against the backdrop of 8-10 years of heavy grant-based investment by donors such as the Mastercard Foundation, Gates Foundation and USAID. While many of these early donors established a groundswell of new digital-agriculture startups with over 700 catalogued by GSMA in 2020, many of these initial start-ups have struggled to transition from primarily grant funding and establish a more commercial mindset and model.
Past ISF research into digital agricultural Platforms, insurance, and data has identified a growing funding valley of death at the seed and series A investment stages for many of these agri-tech companies while at the same time a number of new impact investors and commercial funds are beginning to invest in those agri-tech companies that are successfully moving to series B and beyond. As this landscape of providers continues to evolve, and more climate-smart solutions come to market, we believe this is a critical part of the finance market that can continue to be served through specialised funds.
LOCAL OR REGIONAL FUNDS: In the current landscape, very few funds are set up and managed by local or regional teams. While many of these local fund managers lack the required track record and network to access international funding, they are often set up to operate with lower cost structures, can provide deeper local insights and knowledge, as well as offering stronger links for local investor participation. For instance, Investisseurs & Partenaires pioneered a fund-of-fund approach in West Africa for first-time managers—with two funds raised to date—providing seed capital, technical assistance, and fundraising support. Part of those local funds’ capital has been provided by local or regional investors. Over time, growing this local fund management capacity, or establishing more locally embedded fund-management teams will be an important step in refining the efficiency and effectiveness of this channel.
LACK OF CLIMATE RESILIENCE-FOCUSED FUNDS: Despite the strong push for climate finance, very few funds focus specifically on agri-SME climate resilience. Those that do often retrofit their investments into one of the climate-focused categories. For example, Acumen ARAF’s investment in Tomato Jos claims that the increase in smallholder farmers’ productivity translates into higher and more diversified incomes, which in turn improves their livelihoods and increases resilience to climate change. However, this does not mean that the financing actually goes toward investing in tools, technologies, or practices that will help these farmers adapt to climate change.
Reflecting on the role and positioning of public capital providers
Traditionally, blended finance structures are seeded by public or private concessional sources of capital with the stated objective of mobilising private, commercially-priced capital. According to Convergence, in 2019 International Finance Institutions (IFIs) and Development Finance Institutions (DFIs) deployed about USD 1.9 billion in concessional capital and mobilised another USD 5.1 billion of their own financing at commercial terms, across sectors. However, these sources of funding have failed to mobilise private capital en masse—with ratios of USD 1.1 in private capital and USD 2.9 of IFI/DFI/Multilateral Development Bank (MDB) commercially priced capital mobilised for every one dollar of concessional capital. While there is always the goal to leverage capital from private capital markets, this global picture of blended finance puts into context the disproportionate importance of development-oriented funding sources in supplying the capital that currently flows to agri-SMEs in the sub-commercial market.
We interviewed multiple IFI/DFIs and Official Development Assistance (ODA) providers to understand their approach to blended finance, level of concessional vs. commercial capital, use of blended finance structures, and key priorities. These interviews highlighted three interesting takeaways for the reader:
- DFIs are the primary source of commercial capital and operate within stringent mandates, not unlike private investors (return, sector exposure, risk management). Interviewed fund managers, investors and other stakeholders reported DFIs as being slightly less flexible and require longer to assess investments owing to their strict mandates. In addition, their ticket sizes are high, often in excess of US 10 million and the targeted rate of returns are at commercial levels (high single digits when reported by DFIs). This is driven by their shareholders, most often their national government and at times private investors (e.g. FMO private placement on public markets). Expectations for DFIs to bend their risk-taking and rate of return rules to mobilise private capital are therefore misplaced, unless and until their prime backers adjust their mandates.
- ODA donors or philanthropic investors often provide the first tranche of catalytic capital to mobilise DFI funding or are the first to fund innovative blended finance structures. Funding from the same governments is channelled through their foreign affairs departments in support of a similar development agenda but with larger latitude for innovation and concessionality. For example, the Dutch Ministry of Foreign Affairs (MinBuZa) invests in blended finance structures directly – e.g. such as Aceli Africa – with mostly impact objectives and capital preservation as conditionality. In other instances, philanthropic investors provide at times the first loss tranche necessary to de-risk DFIs.
- When IFI and DFIs innovate or take a more lenient approach to blended finance, they usually do so off their balance sheet. For instance, IFC’s Global Agriculture and Food Security Program (GAFSP) is a facility managed on behalf of six donor countries. For every investment its Private Sector Window executes, there is an expectation of IFC co-investment (operated through its standard credit process) that GAFSP de-risks; and the objective is to achieve at minimum capital preservation. Another example is the Kinetic facility currently piloted by CDC and funded by the FCDO. The facility is off CDC balance sheet and aims to invest in innovative business models in nascent markets to promote inclusive and sustainable livelihoods.
Interviews with capital managers across ODA providers, major philanthropies and DFIs/IFIs revealed some clear dynamics that influence how “smart” these capital allocations are towards agri-SME investments. Three key themes were consistently repeated by a number of stakeholders:
- Lack of transparency on multiple levels. There is no common language or taxonomy of the different structures and approaches used to deploy subsidies in the agri-SME market. Capital providers don’t disclose their financial terms. And the evidence base for the efficiency of blended finance structures and channels is limited. As a result, capital providers cannot easily collaborate and private investors find it difficult to appropriately assess risks and potential returns.
- Limited coordination of investments. DFIs and ODA donors source capital from their national governments. Yet there is limited coordination of investment strategies and funding allocations at a national level. In addition, each DFI is recognised for its sector specialization and/or different products, risk appetite, or level of concessionality. The sector could benefit from increased collaboration and, where complementarity exists, coordinated co-investments. At a country level this coordination likely requires more intentional strategy and inter-governmental dialogue about how different funding institutions can collaborate. However, there is also the opportunity for coordination across national Governments that are interested in the same agenda which typically require specialised and impartial forums (e.g. G20 initiatives, WEF, AFRF etc.) to facilitate.
- Large, repeated, and unchallenged allocation of grants to traditional development/technical assistance programs with limited tracking of efficiency in the use of funds. The impact and sustainability of grant-funded Technical Assistance Facilities (TAF) and value chain development channels are difficult to measure. Yet some ODA donors interviewed are advocating for a large reallocation of funds by ODA providers to direct investments into funds, with the aim of accelerating the mobilisation of private capital for climate resilience and food systems transformation. First-loss funding (e.g., provided by KfW) is often critical to crowd in more investors, particularly DFIs.
This landscape paints the picture of a blended finance landscape where more innovative approaches have been tried over the past decade – from innovative incentive structures, to more sequenced application of blended tools, to an evolving high-growth venture-finance landscape. At the same time, there is the impression that many of the traditional approaches (such as TA facilities and commercial bank guarantees) are stuck on a repeating cycle without the accompanying learning and sophistication in understanding the comparative efficacy of approaches to drive smarter capital allocation decisions over time. Finally, a lack of transparency, coordination and genuine private sector participation are significant issues in the capital markets funding the sub-commercial part of the agri-SME market. As described at the beginning of this section, the authors of this report believe that the imperative for the sector to develop more sophisticated ways of comparing the subsidy to impact tradeoffs inherent in different blended finance approaches and models.
What’s next
In our forthcoming Agri-SME Finance State of the Sector report with CASA, we investigate deeper the needs and investment profiles of agri-SMEs and map the existing funding flows by channel. Our proposed segmentation of the agri-SMEs by growth potential and ambition provides for a more nuanced understanding of their needs and potential; whereas our mapping reveals the current areas of strengths and key gaps of the finance market. Of particular interest is the identification of concrete interventions for capital providers, financial service providers, and other intermediaries to collaborate in holistically addressing the demand and supply pain points and bridge the USD 110 billion financing gap.
To this effect, we propose four “leverage points” in the report that are critical to moving the agri-SME finance market forward, which concrete opportunities for each of them:
- Use agri-SME growth pathways to get clear on needs and impact tradeoffs.
- Focus on specific financing channel/product gaps and innovate to push the frontier.
- Mobilise more capital, more efficiently.
- Create the fundamentals for agri-SME climate finance.
While much more work is needed to fully understand and address the pain points and bottlenecks in the agri-SME finance market, we hope this will generate a conversation that further unearths existing gaps, spurs new ideas and models, and fosters more effective collaboration.
At the core of this lies the question of how to get ‘smarter’ on subsidies; as in how can capital providers and donors apply both an impact and a financial-sustainability lens to their investment–for example by incorporating a pathway to profitability in subsidy disbursement considerations; how can they ensure the additionality of their grant investments in mobilising private capital to fund financially sustainable agri-SMEs and support the transformation of food systems?
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