How financial incentives are reshaping agricultural lending in East Africa

The ‘S’ in ‘SME’ represents a market segment that financiers in the agriculture sector find too costly and risky to serve...

On 08 May 2024, three financial institutions from East Africa shared their experiences using financial incentives for agri-SME lending in an event organized by the Smallholder and Agri-SME Finance and Investment Network (SAFIN), Aceli Africa and the Marketlinks initiative of the U. S. Agency for International Development (USAID). The event was the final session of the ‘Backing the Middle’ webinar series.  

Financial institutions are often reluctant to lend to agricultural businesses, despite their positive impact on farmer incomes, job creation and economic growth. Enter financial incentives, an approach to improve the risk-return profiles of agribusiness lending for commercial banks, microfinance institutions and other local lenders. In this session, three banks receiving such incentives from Aceli Africa – Family Bank Limited Kenya, Centenary Bank Uganda and Tanzania Commercial Bank (TCB) – described their challenges and successes, focusing on long-term behavioural change in their institutions.

Key insights from the rich discussion include:

     1. Reorienting banks towards agriculture

Local lenders face many internal challenges that cause selective lending, particularly in risky sectors like agriculture. As Centenary Bank attempted to grow its agriculture loan book, it also juggled foreign exchange risks, digital transformation challenges and the high cost of capital from wholesale lenders. Training and building the capacity of bank staff across various departments on the seasonal nature of agriculture and the related financial needs of agribusinesses has been critical to reorienting both Centenary Bank and Family Bank towards the sector. For Tanzania Commercial Bank, this translated into the development of a secondary reporting system to accurately reflect agri-lending activities. Better understanding within banks influences management buy-in, and in turn the volume of capital allocated to agriculture.

     2. Growing agri-lending portfolios

Financial incentives provided by Aceli Africa, such as the origination incentive – in the form of cash payments – and the first-loss guarantee, helped lenders at the event increase the number and volume of their agricultural loans. Since 2021, Family Bank has doubled its agriculture loan book to reach Ksh 5 billion (USD 38million) in 2024 and diversified its loans from a concentration on the tea value chain to other agricultural value chains. The origination incentive has helped Centenary Bank triple its appetite to lend to agricultural enterprises, counter budget and strategy concerns, and broaden its reach to underprivileged clients such as smallholder farmers, youth and women. TCB also grew its agriculture loans from 1.9% to 4% of its total lending portfolio in 3 years, including an investment in women’s groups in Kibondo district that would otherwise be too far and too costly to serve.

     3. Engaging around broader sector challenges

On the demand and supply side of agricultural lending, enterprises and bankers face a myriad of challenges that require creative solutions. The lenders at the event cited limited financial literacy, poor cashflow management and business continuity planning among agripreneurs as key roadblocks to the growth of agri-finance in East Africa. Targeted technical assistance for agribusinesses such as the Growth and Investment Training Programme by Aceli Africa and TechnoServe are critical complements to lending activities. National and international policies and regulations directly impact bank engagement in agricultural finance. For example, recent changes in International Financial Reporting Standards require financial institutions to project and address financial risks prior to lending, which may make lenders inclined to turn away from agriculture towards other sectors perceived as lower risk. Strategic partnerships between public and private financiers for advocacy and policy engagement were highlighted as an important approach to overcoming these issues.

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