Agricultural small- and medium-sized enterprises (agri-SMEs) play a vital role in rural communities, providing employment, livelihoods, markets, and food for local households. Like smallholder farmers, agri-SMEs have historically been thought of as a static, relatively homogenous group. At the most basic level, they are profit-oriented enterprises and cooperatives that are central to global food systems. 

However, this static definition fails to capture the different types and sizes, as well as the dynamic nature of agri-SMEs. As a result of operating within food systems and the unique dynamics of developing economies, agri-SMEs are exposed to multiple challenges, including climate change. Their role changes as markets move through different stages of development, and this has implications for what services they require at any given moment.

In our latest State of the Sector report, we analyze the current state of the agri-SME finance sector, focusing on sub-Saharan Africa and Southeast Asia. Part Two of the report presents a new characterization of agri-SMEs based on their growth pathways and their role in food systems. With this characterization, policymakers and practitioners can better define agri-SMEs and characterize their finance needs.

Six different growth pathways for agri-SMEs

As shown in the figure below, we can sort agri-SMEs into six different categories according to their growth ambitions and potential:

  1. High-growth ventures are highly innovative business models serving large, addressable markets with high margins and experiencing a rapid growth trajectory. 
  2. Niche ventures are business models that are creating innovative products and services that target niche markets or customer segments.
  3. Diversifying enterprises are small, family-run enterprises that have seen minimal growth, but are run by an entrepreneur with a desire to grow, likely through diversification.
  4. Dynamic ventures are enterprises in stable “bread and butter” industries that experience moderate, sustained growth by deploying established business models for producing goods and services.
  5. Livelihood-sustaining enterprises are small, family-run enterprises that are opportunity-driven and on the path to formalization, though growing incrementally. 
  6. Static enterprises are small, family enterprises with no ambition to grow beyond their current status.

To achieve their potential and move along these growth pathways, agri-SMEs need support across five areas: 1) access to finance; 2) access to talent; 3) an ecosystem of support; 4) access to knowledge; and 5) access to markets. Given the persistent financing gap for agri-SMEs—which we estimate to be USD 106 billion in sub-Saharan Africa and Southeast Asia—our analysis focuses on the first area: access to finance.

Understanding different agri-SME investment profiles

The six growth pathways above can help financial service providers better understand the potential investment profiles of different agri-SMEs, including both need for and ability to access finance. 

For example, high-growth ventures and niche ventures develop innovative business models, products, and services. This means that, while they may be riskier and less profitable in their early stages, they can offer more upside as they mature. On the other end of the spectrum, livelihood-sustaining and static enterprises have a narrow path to profitability and high-risk profiles; their financing needs are also smaller in scale. Somewhere in the middle, diversifying enterprises and dynamic ventures have moderate growth potential and risk exposure, with semi-formal structures and governance that may be more attractive to financiers (though some subsidy is likely still required). 

How does this help define the financing needs of different agri-SMEs? While variations in the types of agri-SMEs and opportunities for growth in different markets and value chains exist, we can still use the growth pathways to systematically analyze demand across geographies—and in so doing, establish a new way of linking agri-SME goals with their articulated demand for finance.

What agri-SME goals & pathways tell us about their financing needs

In making the link between individual agri-SME goals and financing needs, it is important to distinguish the specific uses for finance under each goal. Agri-SMEs looking to:

  1. Sustain current growth require finance to support day-to-day operations and cash flow cycles in the form of short-term working capital and trade finance.
  2. Accelerate the growth to market potential require medium- to long-term investment capital to finance either productivity and cost efficiency investments OR expansion investments.
  3. Adapt to changing environment require medium- to long-term investment capital to finance new product/service development AND/OR efforts to build resilience.

With these goals and types of finance defined, we can clearly see in the figures below how agri-SMEs on different growth pathways typically have different needs and ability to afford types of finance. 

The first figure illustrates the foundational link between the types of businesses, their growth goals, and the uses and types of finance needed to realize those goals. However, the types of financing typically change as companies move through early stages of growth through to maturity. Looking at the growth pathways in terms of their orientation to the types of capital in the market and their stage of development (early-stage, growth, maturing) clearly shows where different forms of capital are typically used. 

 

The second figure shows a more granular, conceptual understanding of agri-SME investment profiles and needs, as well as the types of financial service providers most equipped to meet those needs. With this in mind, we can map current funding flows to see where the market clears and where gaps still remain.

What’s next?

Having established both a sizing and a new way of thinking about the demand for agri-SME finance, our report delves deeper into current efforts to meet this demand. In the next blog post, we’ll look at an overview of the agri-SME finance market, map current agri-SME funding via different channels, and present new insights for how to bridge the persistent agri-SME finance gap.

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Over the last several years, the agricultural financing landscape has become increasingly sophisticated, involving a wider variety of actors delivering a more complex menu of services. ISF Advisors has analyzed this evolution through a range of lenses—from the landmark Pathways to Prosperity report on smallholder farmer finance to deep dives into the state of smallholder agri-insurance and the rise of digital platforms.

These reports provide a snapshot of the rural and agricultural finance market, with a focus on smallholder farmers. In Pathways to Prosperity, we estimated the funding gap for smallholder farmers in Latin America, sub-Saharan Africa, and South & Southeast Asia at USD 170 billion. That report also referenced the lending market to agricultural small- and medium-sized enterprises (agri-SMEs), while acknowledging that—at the time—a comprehensive sizing of the demand and supply for agri-SME finance did not exist.

In our latest State of the Sector report, we analyze the current state of the agri-SME finance sector, focusing on sub-Saharan Africa and Southeast Asia. In these emerging markets, new funding structures and specialized financial intermediaries have emerged in recent decades, complementing a financing landscape previously dominated by local banks and government-backed lending programs. This evolution has been guided, in part, by increasingly sophisticated thinking about the use of subsidy, segmentation of agri-SMEs, and holistic investment approaches. But in order to continue evolving, we must develop a clear view of where this finance is and is not flowing.

A USD 106 billion financing gap

More policymakers and practitioners are recognizing the crucial role that agri-SMEs can play in transforming global food systems, reducing poverty, and contributing to smallholder farmers’ climate resilience. However, our analysis shows that agri-SMEs’ access to finance remains severely limited—with huge implications for these development goals. 

We have determined that an estimated 220,000 agri-SMEs in sub-Saharan Africa and Southeast Asia (excluding India) have a total financing need of USD 160 billion. With limited data available, these estimates have been created from the latest self-reported agri-SME surveys and thus represent “articulated demand”—of which only a subset is addressable and met by a source of financing.

Of the total USD 160 billion in demand for agri-SME financing, we estimate that only USD 54 billion (34%) is currently being met through formal finance channels leaving an annual formal financing gap of USD 106 billion. 

 

Diving deeper into existing agri-SME financing

In our research, we undertook a comparative analysis of the channels through which the existing USD 54 billion in agri-SME finance is flowing. This revealed a complex picture of the market, in which the vast majority of funding—about USD 40 billion—is supplied by local commercial banks. In line with their risk appetite, these banks typically invest in more mature agri-SMEs, primarily in the form of short- to medium-term debt with strong collateral and covenant requirements and relatively high interest rates. While commercial banks use deposits and raise institutional debt to onlend, they also often use risk guarantees from public donors, particularly to lend to agri-SMEs. 

Another USD 6 billion comes from non-bank financial institutions (NBFIs), such as leasing or factoring service providers. This financing typically takes the form of specific products collateralized against tangible assets. NBFIs serve a wider range of agri-SMEs than commercial banks, which has led more donors to recognize their importance in serving underpenetrated markets and to provide them with guarantees and concessional capital.

The next largest tranche of financing is USD 4 billion disbursed by public development banks, which are state-owned financial intermediaries specializing in long-term credit to promote the economic development of different countries or regions. These financial products range from subsidies to concessional and commercial debt, often linked to a state-sponsored development agenda. 

Despite being at the forefront of agri-SME finance innovation, social impact lenders and impact-oriented funds only disburse USD 3 billion per year. These lenders are funded by concessional capital providers and typically pursue a combination of profit and impact returns. Most finance agri-SMEs in export-oriented cash crops (e.g., coffee and cocoa) in the form of working capital or trade finance.

Finally, despite the need for equity to fund the higher-risk growth ambitions of agri-SMEs, private equity and venture capital funds provide only USD 1 billion in (quasi) equity funding per year. Fund partners’ expectations around risk-adjusted returns, ticket size, and investment horizon often do not match up with the investment readiness, scale, and capital strategies of agri-SMEs.

A complex market that struggles to clear

For most practitioners involved in agricultural finance, the USD 106 billion formal financing gap will likely not be surprising. Relative to other sectors, agricultural markets are volatile—with high transaction costs, high risks, and low margins for many of the smaller value chain players. To fully understand the agri-SME financing gap, we looked at the role of subsidy and informal finance in how the market clears. 

As depicted in the figure below, within the estimated USD 54 billion of current agri-SME finance, a small proportion is offered on fully commercial terms (free of any subsidy). Unsurprisingly, it goes to the most profitable agri-SMEs. 

Most agri-SMEs, however, have less revenue and higher risk profiles. Financing these enterprises requires some subsidy to offset costs, hedge against risks, and support capacity building to make them more investment-ready. In this sub-commercial segment, a range of financiers—including commercial banks, NBFIs, social lenders, impact funds, and public development banks—utilize blended finance solutions.

As the graphic shows, this leaves a much bigger segment of the least commercially attractive agri-SMEs. Some of these have access to capital through informal finance channels, including informal lenders and family members. However, the vast majority of this segment remain unserved.

This model demonstrates a complex financing market that struggles to clear. Thus, the large financing gap can be simply understood as a function of three factors:

  1. Investment readiness: The fact that many agri-SMEs describe an investment need but do not meet the minimum requirements of investors; 
  2. Product availability: Even when agri-SMEs are investment ready, there are not financing products in that market that meet their needs and investment profile; and
  3. The volume of capital: Even when agri-SMEs are investment ready and there are matching financial products, there is not enough capital of the right profile to meet demand.

What’s next?

Having established the scale of the financing challenge, we believe there is an urgent need to build on past research and develop more sophisticated and consistent ways of understanding this financing gap. In the full State of the Sector report and in subsequent blog posts, we will present:

  1. A new characterization of agri-SME demand for funding to achieve their business growth and adaptation goals;
  2. A sizing and characterization of current finance by different types of service providers; and
  3. A more sophisticated landscape of approaches to catalyze sub-commercial finance.

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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) in agriculture and food systems in developing countries, as well as their key challenge of limited access to finance.

In sub-Saharan Africa and Southeast Asia, there is an estimated USD 160 billion demand for financing by ~220,000 agri-SMEs. However, we estimate that only USD 54 billion (~34%) is currently being met through formal finance channels—leaving an annual financing gap of USD 106 billion.

These headline estimates are large, but reflect in numbers what most practitioners have experienced through working with agri-SMEs. Digging beyond numbers, our new State of the Sector report with CASA introduces a more specific view of where the market for agri-SME finance is (and isn’t) clearing.

To add new perspective, this report breaks down the market in a more comprehensive and holistic way to show where finance is specifically flowing, via specific types of products from specific types of funders to specific types of agri-SMEs. The report also presents four long-term change priorities that we see as crucial to systematically closing the USD 106 billion agri-SME financing gap over time.

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In 2018, ISF Advisors, in partnership with the Syngenta Foundation, published Protecting Growing Prosperity: Agricultural Insurance in the Developing World. Alongside the release of that report, more than 100 industry stakeholders convened to consider solutions for maximizing the uptake and impact of insurance for smallholder farming households. However, since that time, the climate crisis has rapidly escalated and the disruptive effects of the COVID-19 pandemic have shifted market dynamics for smallholder farmers. These trends called for a new convening and reflection process for the sector. 

To that end, this 2022 State of the Sector update was commissioned by a new partnership of donors—including the Bill and Melinda Gates Foundation, Syngenta Foundation, FSD Africa, and Swiss Re Foundation—and written by ISF Advisors with support from the Microinsurance Network. The findings of this report were shared and debated in a virtual industry convening of over 130 stakeholders in January 2022. Key ideas and reactions from these discussions have been captured in this report, which sets out to: 

  • Take stock of the current state of agri-insurance for smallholder households, distilling what has changed in the sector since 2018; 
  • Introduce new ways of thinking about the sector in the form of four deep dives; and 
  • Propose a set of priority areas to guide work over the next 5 years. 

We hope that this research will continue to support the insights, partnerships and investments needed to respond to the climate crisis, with smallholder farmers at the center of the action agenda. 

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A summary of our new characterization of agri-SMEs based on their growth pathways and their role in food systems. With this understanding, policymakers and practitioners can better define agri-SMEs and their finance needs.

Read More
The Current State of the Agri-SME Finance Sector

A summary of important new insights shared in our latest State of the Sector report, including new market sizing estimates across regions and a comparative analysis of existing agri-SME financing channels.

Read More
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Read More

Want to learn more?

Contact us or sign up for our newsletter.

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:

  1. Sustaining current growth
  2. Accelerating growth-to-market potential
  3. 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:

  1. 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.
  2. 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.
  3. 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:

  1. Use agri-SME growth pathways to get clear on needs and impact tradeoffs.
  2. Focus on specific financing channel/product gaps and innovate to push the frontier.
  3. Mobilise more capital, more efficiently.
  4. 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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Agricultural small- and medium-sized enterprises (agri-SMEs) are critical to the development of more inclusive and sustainable food systems. These businesses are responsible for much of the sale of inputs, food production, collection and distribution, and processing and retail of food products. However, the absence of a widely shared definition and comprehensive taxonomy of agri-SMEs stymies our view of their role in food systems. With a shared framework and language, we could more comprehensively consider the role of different types of agri-SMEs in food systems, as well as the specific types of support that would unlock their growth potential.

SAFIN commissioned ISF Advisors to develop a framework for more comprehensively considering agri-SMEs, with the goal of creating a common language that:

  1. Fosters a shared understanding among actors concerned with agri-SMEs (including, but not limited to, financial service providers) about the shared features of different types of enterprises that fall under this label.
  2. Proposes a new taxonomy and language to establish agri-SME segments—drawing on existing case studies and literature to illustrate how these might apply in different markets.
  3. Provides a solid grounding for the assessment of different financial needs of agri-SMEs, which can inform SAFIN’s work, as well as that of other relevant actors in the agri-SME finance space.

ISF Advisors conducted a literature review of more than 80 publications, as well as consultations with key experts, including SAFIN members. This research highlights the importance of agri-SMEs in the food system, building off of current classifications of agri-SMEs to create a more comprehensive taxonomy based on key profiling dimensions. It also shows the applicability of the taxonomy across value chains and various food systems priority areas. Finally, this research presents a growth profile classification to link the agri-SME taxonomy to investability criteria and needs, allowing for a more nuanced understanding of how best to support specific segments of agri-SMEs.

Download the full learning brief here, or keep reading for key takeaways.

A comprehensive agri-SME taxonomy

Over the last several years, significant work has been done to further understand agri-SMEs; yet this work has largely been limited to smallholder farmer, input and offtake, or service agri-SMEs. To create a more comprehensive taxonomy, this work has combined the existing, extensive segmentation within each of these agri-SME types and mapped them based on their role along the value chain. While this taxonomy will benefit from continued iteration and refinement as new business models and actors emerge, it is a useful foundation for analyzing the needs of agri-SMEs across previously siloed categories.

Figure 3: Comprehensive Agri-SME taxonomy

As can be referenced in the full learning brief, there are a number of explanatory notes that accompany this taxonomy which clarify the distinctions that have been made. Drawing from these, we highlight four key insights about the landscape that are made more transparent through this taxonomy:

  1. Micro-enterprises support many of the same functions in agricultural value chains, but at a much smaller and more informal level. Considering these differences and viable pathways for micro-enterprises to “transition” to the level of an agri-SME is an important part of how many agricultural markets will continue to develop, and should be an area of continued research and support.
  2. Many smallholder farmers are currently operating at a level that is comparable to many other agri-SMEs with an investability profile that largely depends on the type of operation they are running. Building on the important segmentation and pathways work that has been done over the past few years is an important way of continuing to “crack the nut” on how to support the growth of these primary producers.
  3. In this taxonomy, Services agri-SMEs have been separated from Input and Offtake market agri-SMEs. The authors acknowledge that there are other ways of considering these distinctions, and that considering the market in this way is more of a reflection of how these different types have been considered in the past. While not true in all cases, for the most part Services agri-SMEs tend to operate across value chains with more of a tech focus in service delivery than Input and Output agri-SMEs. Acknowledging these distinctions can be useful in connecting funder communities that have historically been quite separate in where they have focused.
  4. While agri-SMEs in this taxonomy are categorized through functional distinctions, in reality many of these agri-SMEs will run enterprises that combine different functions into a single business. Considering typical vertical and horizontal integrations of different business models is another important lens to put across this taxonomy.

The Question of Definition

Overall, there is broad agreement that there are fundamental differences between micro, small, medium, and large enterprises—and that these differences have a direct bearing on the support needs of each segment, as well as their role in the food system. However, it is difficult to establish a globally applicable set of thresholds for each segment, given company and national differences. Despite these limitations, however, to be able to consistently consider the needs and roles of different segments of agri-SMEs, we need a more global definition.

Having considered the range of options available, this research recommends a definition that includes both business and investment metric thresholds. The proposed definition would distinguish four key segments: micro, transitioning micro, SME, and large. While we anticipate that SAFIN—and others in the sector—will continue to refine the definition and thresholds, an initial structure for this definition is presented in the learning brief.

Applications of a Comprehensive Taxonomy

Value-chain blueprints

There are a number of benefits to having a comprehensive taxonomy of agri-SMEs, but it is important to account for the ways in which the applicability of this taxonomy may differ across value chains and markets.

For example, in the case of rice in the Philippines: As with most staple cereal crops, the rice sector has many farmers and traders, but few processors. Given the large number of consumers, there are also many millers and retailers in the sector, though most are on the smaller end. Despite being a large producer of rice, the Philippines is also a net importer due to high demand—this is also typical of staple cereals writ large, which makes importers an important actor in these value chains. Finally, service providers in the Philippines’ rice sector are limited and focused on market linkages, again due to the large number of consumer transactions. The graphic below illustrates this case example.

Figure 4: Agri-SME landscape example - rice in the Philippines

The way in which this agri-SME market landscape differs from other types of value chains (such as cash tree crops, fruits and vegetables or dairy) reveals a type of market “blueprint”. This type of SME blueprint can help actors trying to transform food systems better understand the types of agri-SMEs that exist in different markets, as well as their unique needs.

Supporting different food system outcomes

Looking beyond specific value chains, the taxonomy can also be applied to specific market development objectives to understand the different roles that agri-SMEs can play in advancing those objectives. For example, the graphic below illustrates how the taxonomy can apply to the UN Food System Summit’s Action Track 4: Equitable Livelihoods. This creates a clear way to map agri-SMEs with the greatest potential to support this action track. The map can also be shared with partners who may not be familiar with the agri-SME space, enabling them to see the linkages and potential interventions that might be needed.

Figure 5: UN Food Systems Summit Action Track 4 Agri-SME mapping

The Question of Growth

Many financial services and business development providers have a much more practical ambition when it comes to agri-SMEs: to support growth. Considering the role and position of agri-SMEs in the market can help providers make some inferences about the business models and growth prospects of potential investees. However, an alternative framework is required to consider the different growth trajectories of agri-SMEs and what that means for support. This work also developed a “Growth Profile” framework to separate agri-SMEs into six segments based on their growth ambition and growth potential. Through considering key differences between these segments, this work created a new way of considering how finance and other support needs map to different types of agri-SMEs. While theoretical, this framework further attempts to build a language around key differences that can be refined by the range of practitioners, donors and investors who support agri-SME growth. To find out more about the Growth Profile framework please refer to the learning brief.

Conclusion

This learning brief continues the critical work of considering agri-SMEs as a distinct and definable set of enterprises, with implications for global agendas related to both SME growth and food systems transformation. We acknowledge that this is only the beginning of creating a shared definition and useful taxonomies in a sector loaded with complexity. We hope this brief forms a basis for further work and conversation related to:

  • comprehensive taxonomy of agri-SMEs, including how to continue refining the segments and sub-segments, and how to think about integrated business models.
  • Defining agri-SMEs, including the global importance of an aligned language, as well as the complexities of developing thresholds and ways of considering national variation.
  • The different growth profiles of agri-SMEs, including whether the six segments adequately cover the range of agri-SMEs in the market, and how such a tool could better align support—both with agri-SMEs and between collaborating organizations.
  • How to better align with different food systems summit outcomes and use a shared understanding of agri-SMEs to consider the value of big intervention ideas, including around women and youth.

More Information

For more information about this work or to continue the conversation, please contact Matt Shakhovskoy, Senior Advisor at ISF Advisors, at matt.shakhovskoy@isfadvisors.org

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