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February 07, 2011

Many banks still see African agriculture as “high risk”

Interview with Jacques Taylor, Standard Bank’s director for agricultural banking, about the Bank’s strategy for servicing the continent’s agriculture sector:

How competitive is Africa’s agricultural finance space?

There are a number of local and international banks as well as micro financial institutions active in financing African agriculture. Standard Bank sees a strong focus from various financial institutions to enhance their offerings to the agricultural sector. The level of foreign direct investment (FDI) and international interest in African agriculture create a strong pull from the market for banks to ensure they have a competitive and professional offering.

For which reasons are banks and other financial institutions reluctant to lend to the agriculture sector?

It is important to note that not all banks focus on agricultural finance. Agricultural banking requires a specialist skill which may not be the core competency of some banks and financial institutions. In addition, agriculture is perceived to be a high risk sector especially with African agriculture dominated by smallholder farmers who quite often are not in a position to offer traditional securities. Lack of useable collateral, together with production, climate and price risk result in agricultural finance falling outside of the traditional balance sheet lending approach.

Many say that financing agriculture in Africa requires out-of-the-box thinking. Give us some examples of how Standard Bank has done this?

Standard Bank follows a value chain approach when looking at financing the agricultural sector. The Bank believes that understanding the interdependencies of business along the value chain is just as important as understanding the sector itself. The Bank’s offering focuses on the value chain: from input suppliers through to primary processors and secondary agriculture. As an example, the Bank developed a Smallholder Guarantee Fund scheme working with a number of donors to support smallholder agriculture across Africa.

How important is assistance from non-governmental organisations (NGOs) for banks in Africa as they try to offer better financing solutions for the agriculture sector?

One of the challenges faced by the agricultural sector in Africa is to co-ordinate the efforts by various stakeholders on the continent. The Bank has found significant synergy in working with NGOs, especially where NGOs are better placed to manage projects on the ground. NGOs also assist with risk management by providing technical support and training to farmer groups.

Would you say that Africa’s agriculture sector is changing for the better?

The Bank believes that the shift away from food aid toward food security, together with the stronger global demand for physical commodities offer a significant incentive to develop Africa’s agricultural sector. Africa has the surplus land and natural resources to allow increased production. Also, when comparing land values, land in Africa is cheap when compared to developed countries. Provided we get efficiencies right, Africa has the opportunity to become a lower cost producer of commodities.

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