Introducing the Primer on Catalyzing Agricultural Finance
This blog is written by Aly-Khan Jamal, Dalberg, Shyam Sundaram, Dalberg, and Simon Allan, Dalberg
Agricultural finance is essential for achieving development objectives. Expanding access to agricultural finance provides agricultural producers and small and medium-sized enterprises (SMEs) with the capital needed to increase productivity, output, and, ultimately, income. According to the World Bank, growth in the agriculture sector, which depends upon financing, is two to three times more effective at reducing poverty than equivalent growth in other sectors. Expanding access to agricultural finance and supporting the development of well-functioning agricultural finance systems is essential for helping partner countries to cultivate their own food systems, from production to processing to trade.
Yet, agriculture remains largely under-financed. Despite the growth of domestic and foreign private flows in developing countries, areas of under-investment persist. The annual financing gap for agriculture is estimated at ~$115B in the 12 Feed the Future countries*. This gap exists for actors across the agricultural value chain and includes a lack of finance for infrastructure, inputs, working capital, and assets. A variety of barriers drive this gap, including perceived or real risks of lending to agricultural actors, high costs to serve rural actors, financial providers with limited capacity and agriculture-specific knowledge, finance seekers with limited financial awareness and capacity, lack of mutual trust, and unsupportive regulations and financial infrastructure.
Going forward, many local and global trends are likely to widen this financing gap. These trends will amplify the need for more agricultural financing, better financing approaches, and more effective use of finance. For example, population growth, rising incomes, and changing diets will require a significant increase in production and processing capacity. Climate change will increase the financing required for new adapted seed varieties, irrigation systems, insurance products, and resilient infrastructure, as well as other input and production technologies.
USAID can increase global agricultural financing by building partnerships and catalyzing capital from a variety of sources. As the lead implementing agency of the U.S. Government’s Global Hunger and Food Security Initiative, and a major donor in agriculture, USAID is well-positioned to advance the agricultural finance agenda, support structural reforms to agricultural finance markets, and catalyze more private and public funds to improve the ability of partner countries to achieve self-reliance. Engaging with the private sector can help USAID to shape the investment landscape to achieve greater scale, sustainability, and effectiveness of agricultural outcomes.
The Primer on Catalyzing Agricultural Finance introduces agricultural finance and outlines the tools that USAID can use to address agricultural finance gaps. USAID staff can use grants, technical assistance, policy advocacy, and stakeholder convenings to address barriers to agricultural finance. This primer outlines how to use these existing tools in new ways to tackle market failures and mobilize private sector finance for agricultural interventions. For example, these tools can be used to de-risk third-party investments, build the capacity of finance providers (e.g. banks) and finance seekers (e.g. agricultural SMEs), connect finance seekers with providers, and support the development of an enabling investment environment for agriculture. In addition, USAID can use the tools of other U.S. Government agencies to help close the agricultural financing gap. These tools include loan guarantees and debt investments from the Overseas Private Investment Corporation (OPIC)** and feasibility study grants from the U.S. Trade and Development Agency (USTDA), among others.
This primer provides practical guidance on how to use these tools to design effective agricultural finance interventions. Designing interventions requires an understanding of local agricultural, financial, and market systems (i.e. finance providers and seekers, finance infrastructure, and enabling environment), and the identification of specific market barriers to agricultural finance. The guidance in this document will allow USAID staff to select the appropriate tools, partner with the right organizations, and ensure sustainability of results.
*Feed the Future countries: Bangladesh, Ethiopia, Ghana, Guatemala, Honduras, Kenya, Mali, Nepal, Niger, Nigeria, Senegal, and Uganda
**From October 2019, OPIC will transition to the U.S. International Development Finance Corporation (USDFC)