Agricultural small- and medium- enterprises (SMEs) play an important role in their communities, bridging the gap between smallholder farmers and buyers and consumers, yet they face a severe financing gap. Aceli Africa uses an incentive model to bridge that gap, encouraging lending to “missing middle” agricultural businesses in East Africa. With USAID INVEST support, Aceli was able to explore opportunities to adapt the model to a new geography, Mexico. While Aceli initially envisioned replicating the model, the organization eventually pivoted to an advisory partnership with local social enterprise Nuup, implementing a blended finance model tailored to the Mexican context.
By Natalie Alm, INVEST Communications Advisor
Institutions like the U.S. Agency for International Development (USAID) and its partners are always looking to scale solutions to improve the lives of more people. If an initiative to reduce poverty, improve livelihoods, build climate resilience, or increase gender equality is seeing success in one place, our first instinct is to cut and paste that solution in another country.
Yet one of the cardinal rules in international development is that context matters. What works to achieve development objectives in one location may not work in another, due to geographic, historical, political, cultural, or other societal differences.
The challenge becomes, then, learning from the experience. How do we break the intervention down into its elements, so we can determine which aspects were unique to this situation, and which might translate to a different context?
Let’s take, for example, a program to increase financing for small agri-businesses, so they can contribute to their communities and help address the impacts of climate change. If this model is proving effective in East Africa, what are the key elements of the model that might be replicated in another geography, even as far away as Latin America?
Agri-SMEs in East Africa
Agricultural small- and medium- enterprises (SMEs) play an important role in their communities, bridging the gap between smallholder farmers and buyers and consumers. They have significant opportunity for impact: they can create jobs, especially for women and youth; encourage climate resilient and smart agricultural practices from the farmers they source from; and contribute to food security and economic stability.
The breadth and depth of this impact has enormous potential for scale — if the SMEs can get adequate and appropriate financing. Yet three in four agri-SMEs in Africa lack that access to finance, primarily because they are perceived as too risky for investment, or too costly to serve.
Aceli Africa’s mission is to bridge that gap between supply of capital from lenders and the demand for financing from agricultural SMEs. Aceli targets the “missing middle” of agricultural finance — that is, businesses too large for microfinance yet too small for commercial banking, with loans from $15,000 to $1.75 million. It operates under a market incentive model to make agricultural SMEs more attractive to lenders, encouraging lending to the least served and most impactful segments of the agricultural market. To achieve this, Aceli uses donor capital to offer financial incentives and portfolio first-loss guarantees to lenders, and it provides technical assistance to both agri-SMEs and financial institutions.
Aceli launched in four East African countries — Kenya, Rwanda, Uganda, and Tanzania — in September 2020. In its first three years, it has supported 1,383 loans for a total of $140 million in capital mobilized to agri-SMEs in the region. Thirty-five leading commercial banks, non-banking financial institutions (NBFIs), and impact investors are engaged, and Aceli has secured over $65 million in funding from USAID and other leading donors.
It’s clear Aceli’s model is generating impact in East Africa: 61% of loans issued are to first-time borrowers, and the supported agricultural SMEs collectively purchase crops from 840k smallholder farmers and employ over 25,000 full-time workers. Would a similar approach work in another region? With support from USAID through the INVEST initiative, Aceli set out to find out.
Agri-SMEs in Mexico
In Latin America, agriculture employs more than a fifth of the population, but receives just a tiny portion of financing, at less than 5% of total bank lending. As with Aceli Africa, Aceli Americas is intended to catalyze more competitive and financially sustainable capital markets for agri-SMEs, while generating learning that can inform future incentive and policy design.
Aceli, with help from Dalberg Advisors, conducted an initial market assessment in Mexico, Honduras, and Guatemala. The assessment spotlighted a nascent group of impact-driven NBFIs in Mexico, a clear underserved capital demand by agri-SMEs across southeastern Mexico, and a promising enabling environment for agricultural finance.
Despite a number of policies that the Mexican government has implemented to support the agriculture sector, current agricultural capital flows in Mexico are tend to be directed towards big agribusinesses, while a small but increasing stream of microcredit targets smallholder farmers. This leaves a similar “missing middle” of agri-SMEs as in East Africa — businesses which lack adequate financing streams but have significant potential to drive inclusive economic impact. As Hans Muzoora from USAID’s Bureau for Resilience and Food Security notes, “A lot of agricultural financing in Latin America is channeled towards larger agri-businesses, with financing needs over $500,000, but we thought there was a missed opportunity to work with smaller ticket sizes that would help us achieve significant financial inclusion.”
Aceli recognized the potential of impact-aligned, local institutions to apply a blended finance model like Aceli’s, some of which had already established strong relationships with financial institutions. This gave Aceli the opportunity to pivot from its planned replication to a local development approach, piloting an advisory model in alliance with a local partner.
Partnering for impact
That local partner was Nuup, a social enterprise committed to enabling and accelerating the transition to more sustainable and inclusive food systems. Nuup was uniquely positioned to work with Aceli: they have a deep understanding of agricultural value chains in Mexico and have established relationships with a cohort of first-mover funders. They had also already secured flexible donor funding to design and launch their own incentive model. Most importantly, Nuup was well aligned with Aceli’s values and vision to bridge capital supply and demand in Southeast Mexico. Andrea Zinn of Aceli says that “overall, it was an exciting opportunity to share learning and support Nuup’s model, which is not a copy-paste of Aceli’s, but rather a blended finance model that’s tailored to the Mexican market.”
Over the course of fifteen months, Aceli provided Nuup with advisory support to design origination incentives, a guarantee fund, technical assistance for agri-SMEs, and capacity-building for financial institutions. Aceli also shared its own policies and systems to accelerate operational set-up and shared learning on best practices and governance. Collaboration began in May 2022, and a pilot of incentives started that September.
The Coa initiative was officially launched in July 2023. Coa is initially focused on southeastern Mexico, where there is a high concentration of SMEs and particularly low levels of access to finance, but Nuup is committed to expand the model to other regions.
“This collaboration really helped us fast-track a process that would usually take us a much longer time, without all the support and advisory,” says Nuup’s Patrizia Baffioni. The six-month pilot already generated significant results, with 41 loans and $4.4 million in capital mobilized, impacting 2,352 farmers. Five lenders have been accredited to participate so far, and Nuup is on track to reach ten by the end of the year.
Regarding its future plans, Coa is actively fundraising to reach its 2026 goals, aiming to secure $6.7 million to catalyze $60 million for over 600 loans, and it plans to scale up to more than fifteen financial institutions.
Aceli and USAID made significant adaptations to translate the market incentive facility model from East Africa to Latin America. What did the partners learn in the process?
Above all else, local context matters.
As Muzoora of USAID comments, “We should avoid trying to copy/paste a model, but really look at the key factors or criteria for a particular model to work in a particular area.” In Mexico, Aceli pivoted to work in an advisory capacity, putting local partner Nuup front and center in recognition of its expertise and reputation. The incentive model also introduced new features appropriate to the local market.
For example, Coa’s guarantee facility will deploy liquid one-to-one guarantees, as many agri-SMEs lack the adequate cash collateral required to access certain financial products. Another distinct characteristic of Coa is incorporating “consolidated loans” to ensure inclusion of less aggregated farmers. Simply put, lenders can ‘bundle’ several small loans of the same characteristics (size, terms, tenure) as if it was a group loan in order to claim the origination incentives. Coa also introduces impact bonuses for inclusion of indigenous farmers and workers, and awards bonuses for loans made in particularly vulnerable municipalities — two impact lenses particularly relevant in Southeast Mexico.
2. Incentive models work when there is a critical mass of capital providers and borrowers.
As Carla Legros of Aceli notes, “typically there’s a misalignment between these two groups. Capital is not flowing in the right direction, or at the right scale, and there’s lots of impact and opportunity left on the table.” However, an incentive model can work with the right ingredients. First, there must be sufficient capital supply; incentives help accelerate capital mobilization, but a critical mass of capital providers must be there in the first place. Second, addressable demand is necessary — enough SMEs that are bankable and ready to access commercial lending, so technical assistance and business development services can help build a pipeline. Finally, there must be an enabling environment, which includes political stability, basic security, and appropriate policies or government intervention in capital markets.
3. Building trust takes time.
It can be difficult to gain the trust of financial institutions. In Mexico, lenders are skeptical of providing a lot of detailed information during the application process before they can begin to receive incentive payments. It was important for Nuup to map out the ecosystem of lenders interested in working in agriculture, and grow its reputation and network. “Even though we’ve been working in Mexico for years,” Nuup’s Patrizia Baffioni says, “financial institutions aren’t always familiar with us or trust the program will be maintained over the years. It was important for us to establish and build up Coa as an independent initiative so we can grow and scale it.” Getting through the initial process helps cement the trust with lenders, converting them to the model and encouraging other lenders to follow their lead.
4. Efficiency is fueled by learning.
“This collaboration really helped us fast-track a process that would usually take us a much longer time, without all the support and advisory,” Nuup’s Baffioni reflects. Aceli provided Nuup with product design guidance and recommendations for operational best practices; by leveraging its learning throughout the process, Nuup was able to rapidly bring Coa to market.
“There’s been a real attitude towards partnership, impact, and learning along the way,” says Aceli’s Zinn, “and it’s been rewarding for everyone. When questions have come up in Mexico, I go back to our Aceli Africa team and sometimes we find we had the same question a year ago and share how we reacted to it, or how we faced that challenge. It’s exciting to see that the learning can be shared so quickly among the teams.”
Nuup co-founder Maria Luisa Luque added, “A great example of the ‘informal’ advisory is the invitation Aceli extended to Nuup’s co-founders to attend their Annual Meeting with all their partners in November 2022 in Kenya. It allowed us to understand directly from the lenders what they value from the incentive model and to exchange with the Aceli team which challenges we should be preparing for. We saw what Coa could become and that vision has stuck with us to this day.”
5. Adapting a model requires flexibility and autonomy.
Aceli shared its policies, time, ideas, and even system infrastructure in the spirit of collaboration and shared commitment to impact — without being prescriptive to how Nuup should apply the resources to its own model. Empowered by the freedom to apply what made sense — but not the requirement to force what may not fit — ensured that Coa would be relevant, autonomous, and set-up for long-term success.
From the USAID perspective, having a flexible and adaptive management approach, and facilitating feedback mechanisms among partners allowed Aceli and USAID to pivot towards a localized development approach without losing sight of overall project goals.
“I’m glad we were not very prescriptive,” reflects Muzoora of USAID. “Being able to listen to the partners, have constant engagement, and be flexible through the process was crucial. That can mean shifting timelines, shifting budget items, or whatever makes sense to be able to achieve our ultimate development objectives.”
Support from USAID allowed Aceli to explore where and how incentive models can work effectively. It’s clear from the experiences in East Africa and Mexico that the approach, tailored to local markets, can mobilize capital to meet the needs of the “missing middle” in agriculture.
Nuup has its work cut out for itself in Mexico, with goals to mobilize more capital while maintaining a focus on learning and adapting. Aceli is expanding its direct implementation model to Zambia and beginning to explore advisory partnerships similar to Nuup in other regions with impact-aligned partners. Aceli already has plans to expand in Sub-Saharan Africa to Zambia this year, but also sees opportunity for further advisory in Latin America, such as in Colombia or Peru.
Legros says, “Aceli has always been a demonstration model. Our intent is to create a model that’s scalable and replicable. We see a future as an organization where we might do some replication ourselves, but also one where we support other organizations in adopting and adapting the model to their own realities, whether that’s new geographies or even new sectors outside of agriculture.”
Find more detail from USAID, Aceli, and Nuup on expanding incentive models for agri-SMEs in this webinar recording.
This article was originally published by: MEDIUM