Irrigation can play a key role in developing the agricultural sector in Sub-Saharan Africa by addressing barriers, gaps, and risks at the production stage of food systems, especially for small-scale producers (SSP). Despite this promise, just ~3-6% of total cropland in the region is irrigated, lagging far behind the global average of ~20%. The potential to expand irrigation in places with sufficient water availability could amount to an additional 19 million hectares of irrigated croplands (~7% of total), impacting an estimated 20-30 million SSP households across the region. Limited existing adoption is due to barriers in knowledge, technology, finance, and policy/legal dimensions.

Fortunately, innovative business models and technologies are emerging that address some of these constraints in an effort to scale irrigation for small-scale producers across the region.

ISF Advisors and Hystra are pleased to announce a new report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. The research articulates the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector. Key goals of the work also included:

  1. Summarize the impacts of access to irrigation for small-scale producers and overall market potential in Sub-Saharan Africa
  2. Identify barriers at the customer, company, and country levels that are preventing irrigation potential from being realized
  3. Unpack emerging private sector solutions that could scale irrigation usage
  4. Explore potential for future collaboration between key actors in the space

This report presents our findings from an extensive desk review of existing research, interviews with 70+ key stakeholders in the sector, and in-depth case studies of 6 private sector solution providers. The intended audience is the broader agricultural development community, including donors, private sector actors, investors, government stakeholders, researchers, and recipients.

This research was made possible by funding from the Bill & Melinda Gates Foundation. The opinions and findings expressed herein are those of the author(s) and do not necessarily reflect the views, strategy, or funding priorities of the Foundation.

Read the report summary and watch the webinar recording.

Related Research

Climate Capital: Financing Adaptation Pathways for Smallholder Farmers

A first-of-its-kind report shedding light on the pressing need and opportunities for private investment in climate adaptation within the agriculture sectors of emerging markets, focusing on the pivotal role of smallholder farmers.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

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) 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.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report
Agricultural “Platforms” in a Digital Era: Defining the Landscape

We define the current landscape of agricultural Platforms, their risk and impact potential, and the path forward for supporting their growth.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
Agricultural “Platforms” in a Digital Era: Defining the Landscape

We define the current landscape of agricultural Platforms, their risk and impact potential, and the path forward for supporting their growth.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

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. 

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

In our 2021 Agricultural Platforms in a Digital Era report, ISF presented a definition of “platforms” defined by two distinguishing factors: 1) they are built upon network effects, enabling multiple users on both sides of an exchange to interact, and 2) unlike traditional “pipeline businesses” they do not produce goods or services, but rather link users together to access goods and services. Since the publication of that report, there has been broad endorsement of our definition of “platforms” and of the need to coalesce around more specific descriptions of AgTech models. 

In this update, we look at marketplace platform models, which connect users with products or integrated products and services. This growing subset of Digital Platforms are well positioned to help smallholder farmers and agricultural small- and medium-sized enterprises (agri-SMEs) overcome many of the market barriers inherent in the sector.

Types of marketplace models

Our 2021 report revealed a wide range of marketplace platform models operating in the agricultural sector. Broadly, we can divide them into three models:

  1. Product marketplace: connects smallholder farmers to physical markets both to and from the farm, including farm inputs suppliers and various kinds of off-takers (processors, trader, retailers, consumers)
  2. Integrated product and services marketplace: facilitates access to a holistic, bundled offer to farmers. Similar to a product marketplace, but offering broader range of services to farmers
  3. Services marketplace: shared economy platform that links farmers to equipment and/or other service providers.

We outlined eight sub-categories under these models, which continue to be the prevailing types in the market as shown in this graphic:

However, recent landscaping of the sub-Saharan Africa market revealed some updates to how these sub-categories of platform models are emerging.  

  • Many/most digital platforms are not truly open marketplaces with a large range of product and service providers engaged. Rather, many involve small numbers of curated partners with single offerings in each category (e.g. Digifarm)  
  • Many digital platforms are having to invest heavily in enabling infrastructure (e.g. transport, logistics, warehousing, field forces) to make they models work for smallholder-anchored markets (e.g. AFEX’s sourcing network, Twiga’s upstream investment in primary production) 
  • Many digital platforms are also running more traditional pipeline business offerings alongside their digital platforms (e.g. Coamana; AFEX)  
  • Many digital platforms are starting as agriculturally-focused and then moving to multi-product category marketplaces to include a range of consumer goods (e.g. DeHatt; Pinduoduo)

Platform design & scaling

Compared to pipeline business models, the unique characteristics of platforms should make achieving scale easier, at least after the initial start-up costs. But platforms will still struggle to reach profitability given the difficulty of generating additional value for users—and the highly localized nature of the agriculture sector makes scaling profitability even more complex. In our 2021 report, we outlined five key design decisions that platform providers must consider:

  1. Who: target customer and problem solved
  2. Where: value chain and geographies
  3. What: service offering
  4. How to Engage: customer engagement model
  5. How to Monetize: revenue model

Recent analysis shows that most platforms are still struggling to make their economics work. This is leading many to run more direct B2B pipeline business offerings alongside their platform, while some are also still reliant on donor funding. Many platforms recognize that integrated credit is key (giving rise to the term AgFinTech), but they are struggling to raise and structure the right capital to support these offerings. In the sub-Saharan Africa market, successful platforms remain heavily reliant on agent networks to scale, even after achieving a product-market fit.

Finance offerings within platforms

Most marketplaces integrate payments as a form of financial services, and some—as mentioned above—are expanding their model to include provision of financial services. In our recent landscaping, we identified four specific forms of financing being offered within marketplace models:

  • Vendor financing provides financing for products and services sold on the platform
  • Input financing provides credit to smallholder farmers in the form of in-kind inputs (or cash for labor) at the beginning of the season, generally to be repaid at harvest
  • Asset financing focuses on productive assets often financed through innovative business models such as PAYGO
  • Insurance offers bundled insurance for products or services offered on the platform

The graphic below illustrates examples of in-platform financing within the sub-Saharan Africa agricultural market.

Geographic differences

The maturity of platform models varies greatly by region. The majority of large ag-focused platforms are headquartered in India and China and are operated by tech companies. Many of these models have already reached significant scale, including DeHatt, Gramophone, Pinduoduo, Tanihub, and Rural Taobao. These models have grown rapidly on the back of densely populated markets, with strong enabling market infrastructure and consumers who are used to e-commerce in other sectors. Of particular note is Pinduoduo, which launched in 2017 as an ag-focused marketplace and now has over 880 million active users.  

At this time, most marketplaces in Africa remain small in size. Kenya is a hub for marketplaces, including Digifarm and Copia who both have over 1M users, fueled by the prevalence of mobile money and the relatively flexible nature of regulators. Other players, such as Hello Tractor and WeFarm (social connectivity platform), are currently capitalizing on their achievements as true platform models to now offer diversified offerings. Altogether, Kenya and Nigeria are the top markets in the region, receiving 96% of AgTech venture funding.

In Latin America, AgTechs are primarily concentrated in Brazil (51%) and Argentina (23%), as shown in this IBD mapping from 2019. Marketplace growth in the region has largely been fueled by mature farming systems, relatively tight value chains, urban wealth, and relatively better logistics. A select few product marketplaces, such as Smattcom and Frubana, have expanded into multiple markets.

Overall, these regional differences reveal some interesting dynamics. In particular, the relative scale of platform models in China and India are due to three key enablers that hold lessons for other markets looking to scale: 1) density and formalization; 2) maturity of enabling systems; and 3) progressive regulatory environment.

Persistent challenges

Despite their growth, platforms still face large barriers in the agricultural market. The localized nature of the sector limits network effects and increases customer acquisition costs. To successfully scale, platforms need the correct monetization strategy. 

One of the most prevalent challenges of marketplaces is the physical capital associated with the exchange of value between users. Successful e-commerce platforms, such as Amazon, have employed backwards integration to bring their shipping and packaging logistics in-house. In the agricultural sector, this challenge is amplified by the weak infrastructure in rural communities and developing economies writ large. Platforms may have no choice but to build the infrastructure themselves—as was the case with AFEX in Nigeria, which built a network of physical storage and logistics throughout the country, including 113 warehouses.

The path forward

One way we can continue to improve outcomes for ag-focused digital platforms in emerging markets is to leverage lessons from more mature sectors and markets. For example, in the US, venture capital is largely flowing into companies that have a downstream link to consumers (e.g., GrubHub, DoorDash). The same holds true for the agricultural sector, in which some of the most successful models are product marketplaces with a direct consumer link, whether it be an end consumer or a restaurant/aggregator. Plant AG, for instance, is developing a “farm to plate” platform and plans to grow their own food to sell to consumers. They raised $800M in their early stage VC round in 2021.

In Europe, similarly, the biggest deals of 2021 centered around direct-to-consumer platform models, such as Gorilla ($1B), Fink Food ($750M), and Wolt ($530M). Investments in the overall food tech space tripled to $10B in 2021, while AgTech investments grew only slightly to $900M. Investments in Europe tend to be on a smaller scale than in the US, but with significant opportunity for growth.

These adjacent markets reveal some cross-cutting learnings for platforms in smallholder agricultural markets, including:

  1. The emergence of integrated credit is a widespread platform trend. Companies in the United States (FBN) and other sectors (SafeBoda) have introduced financing opportunities for both customers and workers, similar to what we observed in the shift to “AgFinTechs.”
  2. There is a strong focus on the end consumer. This can be seen in the successful capital raises of start-ups with direct consumer links. Furthermore, the introduction of financial services specifically for platform workers demonstrates that platform providers are treating their own workers as customers as well.

Overall, platforms continue to offer a major pathway to overcoming the scaling challenge in smallholder agricultural markets. More research and further clarification of definitions and models will help digital platforms unleash their full potential.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

Donors deploy subsidies to catalyze private sector investment in many nascent and imperfect markets, including agri-SME finance. This type of blended finance can mitigate the rural and perceived risk of agri-SME lending, reduce the high costs of serving rural areas, and address other bottlenecks to clearing market transactions.

However, fully unpacking the different approaches to subsidy in agri-SME finance is difficult, as is understanding and linking it to the impact case. In order for the sector to more efficiently and effectively deploy subsidies, we need a more sophisticated way of comparing the subsidy-to-impact tradeoffs of different models. In our latest State of the Sector report (and summarized in this blog post), we present some examples that can currently be observed in the market as a first step in more fully interrogating blended finance approaches.

The current landscape of blended finance

In recent years, the landscape of blended finance approaches in the agri-SME sector has become more sophisticated. Capital providers have become better at matching the diverse investment profiles of agri-SMEs, in terms of growth ambition, profitability, value chain, risk exposure, and investment readiness. 

In the figure below, we lay out seven key ways in which blended finance is structured in the agri-SME market, and the particular pain points addressed by each approach.

Addressing finance market pain points through blended finance

Local commercial banks, for example, often make use of risk share, incentive payments, and technical assistance; social lenders, on the other hand, leverage a broader set of approaches. In general, capital providers tend to use more than one of the blended finance channels to achieve their objectives.

The bottom line: More approaches are being tried today than ever before, and combinations of different approaches are starting to address constraints in more sophisticated ways. But comparison between approaches is still very difficult—more research and learning is required.

Specialized funds as a blended finance channel

Since 2017, when ISF developed a typology of specialized funds, a number of new examples have emerged, often focused on impact themes such as climate resilience or gender inclusion. 

In particular, recent years have seen the emergence of more high-risk “impact venture” funds and other accelerators dedicated to supporting niche and high-growth ventures. These more commercially oriented funds are heavily investing in agtech in a small subset of countries, including Kenya, Nigeria, South Africa, India, and Singapore. Earlier grant-based investment by donors such as Mastercard Foundation, Gates Foundation, and USAID laid the groundwork; however, early-stage venture funds represent an opportunity to transition agtech and digital agriculture start-ups from grant funding to a more commercial model.

It’s also worth noting that, in the current landscape, very few funds are set up and managed by local or regional teams. Local fund managers can provide deep local insight, operate with lower cost structures, and offer stronger links for local investor participation. Yet they often lack the track record and network required to access international funding. Growing local fund management capacity will be an important step in refining this specialized fund channel.

Landscape of specialized funds

Interestingly, despite the strong push for climate finance, very few funds focus specifically on agri-SME climate resilience. Those that do often retrofit their existing investments into a climate-focused category; but this doesn’t mean that the financing is truly helping farmers adapt to climate change.

The role of public capital providers

Blended finance structures have traditionally been seeded by public or private donor capital providers. According to Convergence, in 2019 international and development finance institutions deployed USD 1.9 billion in concessional capital and mobilized another USD 5.1 billion of their own financing at commercial terms, across sectors. But this financing has failed to catalyze significant private capital—with ratios of USD 1.1 in private capital mobilized for every dollar of concessional capital.

Our analysis confirms that DFIs are the primary source of blended capital, but they operate within stringent mandates. DFI ticket sizes are usually in excess of USD 10 million and the targeted rate of return is often at commercial levels. Thus, the expectation that DFIs might bend their risk-taking rules in order to mobilize more private capital is misplaced. On the other hand, overseas development assistance and philanthropic investors, are often first to fund innovative blended finance structures. Their development and impact agendas often give larger latitude for innovation and concessionality.

Interviews with various capital providers revealed a few clear dynamics that influence the use of subsidy in agri-SME finance, namely:

  • A lack of transparency. There is no common language or taxonomy of the different blended finance structures and approaches in the market. Capital providers don’t disclose their financial terms. And the evidence base for the efficiency of blended finance structures is limited. This overall lack of transparency makes collaboration and evaluation of impact difficult.
  • Limited coordination of investments. Even among DFIs and ODA donors, there is limited coordination of investment strategies at a national level. In addition, each DFI is recognized for its different sector specialization, products, risk appetite, or level of concessionality. Collaboration and—where possible—co-investment would be beneficial to the sector, but this requires more intentional strategy and intergovernmental dialogue. 
  • Large, repeated, and unchallenged allocation of grants to technical assistance programs with limited tracking of efficiency. The impact and sustainability of technical assistance efforts are difficult to measure. Some interviewees are advocating for a reallocation of funds with the aim of accelerating the mobilization of private capital for climate resilience and food systems transformation.

What's next?

We’ve painted a picture of the blended finance landscape where, while innovation has increased over the last decade, traditional approaches seem stuck in a repeat cycle. A lack of transparency, coordination, comparative learning, and genuine private sector participation leave significant room for improvement. In order to realize the promise of blended capital approaches to agri-SME finance, the sector must develop more sophisticated ways of comparing the subsidy-to-impact tradeoffs inherent in these models.

For more recommendations, read the full report.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

As practitioners and policymakers increasingly recognize the role of agricultural small- and medium-sized enterprises (agri-SMEs) in developing economies—and seek to finance their growth—they require a sophisticated view of the agri-SME financing landscape. Previous research has identified a persistent smallholder financing gap, while giving a partial accounting of supply and demand of financing for agri-SMEs. But the analysis was incomplete.

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 our most recent blog post, we presented a new characterization of agri-SMEs and their finance needs. Part Three of this series looks at how different types of capital and financial service providers are currently striving to meet demand in this market.

An overview of the agri-SME finance market

The agri-SME finance market involves funding flows between three types of actors: capital providers, financial service providers, and agri-SMEs. When a real, articulated demand from an investment-ready SME aligns with an available financial product or capital offering, the market clears. 

As illustrated in the figure below, there are several different kinds of players in this financial market structure. Capital providers, who typically raise capital from the market or public/private donors, fall into five main categories in the agri-SME finance market:

  • Overseas development assistance (ODA) and other public/taxpayer-funded institutions
  • Philanthropies
  • International/development finance institutions, often financed by government or multilateral institutions
  • Multilateral development banks chartered by two or more countries
  • Other capital providers, including pension and sovereign wealth funds

Financial service providers source funds from capital providers and distribute them to agri-SMEs in the form of different financial products. While capital providers hold power in the form of funding, they rely on financial service providers to achieve their objectives and to understand the local market.

In parallel to these actors are others who play a role in fostering an enabling environment for agri-SME finance, including policymakers, market platforms, and technical assistance providers.

Finance market structure

To understand the financing flows in the current market, we look at how capital providers and financial service providers collaborate, deploying subsidies and blended financing to address the challenges of the agri-SME market.

Mapping agri-SME finance flows by channel

Our analysis shows that the current annual supply of finance to the 220,000 agri-SMEs in sub-Saharan Africa and Southeast Asia is estimated at USD 54 billion. With the understanding that estimated amounts probably overlap to a certain extent, we mapped the size of this funding per different channels, as seen in the figure below and described in Part One of this blog series. 

FSP alignment with agri-SME segments and needs

Surprisingly, despite the emergence of numerous social lenders and impact-oriented funds, the bulk of current funding—about USD 40 billion—is supplied by local commercial banks. This is particularly true in Southeast Asia, where banks are supported by a strong enabling environment and policies to lend to creditworthy agri-SME borrowers. 

Key insights about the agri-SME finance gap

The demand and supply mapping in our report reveals a complex market with many different segments of SMEs and types of capital and financial service providers. Here are five key insights from this analysis that should shape strategies to bridge the financing gap:

  1. The small “top of the market” is disproportionately served. About 85% of currently available funding is supplied by local commercial banks and impact-oriented funds, which both tend to serve more mature and creditworthy agri-SMEs OR those active in export-oriented value chains. While no global data exists, anecdotally these larger, more mature agri-SMEs represent a very small fraction (<5%) of the market, leaving a huge funding gap.
  2. The large “bottom of the market” continues to struggle to become investment ready. Many enterprises won’t develop rapidly enough to raise commercial debt or equity. Often, they do not even have an ambition to do so. The high costs of financing such enterprises requires both capital subsidy and technical assistance—raising questions of sustainability.
  3. Where is the equity for the promising “middle of the market”? Many practitioners noted the need for higher equity capitalization of agri-SMEs to help them invest in growth and withstand market shocks. There is, however, a fundamental mismatch between the demand and supply of such funding. 
  4. Growth financing is increasing for more disruptive agri-SMEs, but still tough going. In particular, agtech promises disruptive innovation and the potential to address some of the sector’s pain points at scale. Several international funders are now deploying growth financing solutions, hoping to follow the example of successful agtech models such as Rural Taobao in China, and DeHatt and AgroStar in India; but many startups in sub-Saharan Africa are struggling to raise funds.
  5. Despite the urgency of climate change, climate finance for agri-SMEs has yet to strongly emerge. Of the USD 580 billion in climate financing in 2020, only 3% went to the agriculture, forestry, and land use sectors (and 4% of that to value chain actors in non-OECD countries). This funding is almost exclusively provided by the public sector, focused on big-ticket initiatives, and disbursed as grants and concessional debt—leaving many missed opportunities that may have dire consequences.

What's next?

In the face of a persistent financing gap in the agri-SME market, we must double down on our approaches to subsidy and blended finance. In the next blog post, we’ll look at how the sector can deploy these approaches to catalyze more private capital investment in the agri-SME market.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.

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.

Related Research

Scaling Irrigation for Small-Scale Producers: The Role of Private Sector Solutions

A report exploring the current state and future potential of the small-scale irrigation market in Sub-Saharan Africa. We articulate the investment and activities needed to help scale irrigation technology for small-scale producers and identifies opportunities for donors and investors to catalyze further investment in this sector.

Read More
State of the Sector: Agri-SME Finance

A new perspective on the agri-SME finance market: sizing and segmenting the market in new ways, reflecting on the rapidly accelerating imperative around climate, and identifying new priorities for action.

Read More
State of the Sector: Pathways to Prosperity

This State of the Sector report identifies agenda-defining priorities that the sector must address to bridge the finance gap for smallholder households and agricultural SMEs, and introduces new models for navigating an increasingly sophisticated agricultural finance market.

View Report

Want to learn more?

Contact us or sign up for our newsletter.