2023 Financial Benchmarking Report

Published 22 March 2023

Policymakers increasingly recognize food systems as critical for advancing a range of development agendas. Beyond agricultural growth, productivity, and food security, food systems can promote inclusivity, social protection, resilience, environmental sustainability, nutrition, and health outcomes. How do governments build agri-finance systems that can advance these ambitious goals?

Our latest research with ISF Advisors presents evidence from countries at varying stages of development to identify three universal principles for a strong agri-finance market that fuels a robust food system: distinct, pluralistic, and market-based. 

The briefing note shares recommendations for how governments can play a more effective role in developing a competitive agri-finance market that supports a thriving agricultural economy.


Read the full Role of Government Briefing Note and Summary for Policymakers


 


Read the report


Our latest financial benchmarking on the economics of agri-SME lending draws on 32k loans totaling $2B from 41 Aceli lending partners across Kenya, Rwanda, Tanzania, Uganda, and Zambia. Conducted in partnership with Dalberg, the key findings include:

  • Market growth. Agri-SME loan volume grew 83% from $295M in 2020 to $541M in 2023 while the total number of loans more than doubled.
  • Banks driving volume. Banks comprise 63% of the 41 lenders in the dataset and account for 94% of the loans (note: value chain credit is an important source of finance for agri-SMEs and smallholder farmers but is not captured in this data).
  • Shift downmarket. The average loan size fell by 20% largely driven by Tanzanian lenders that ramped up activity for underserved market segments in response to favorable enabling policies from the Tanzanian government.
  • Risk remains elevated but is declining. Higher volume lenders are improving their risk management but non-performing loans (NPLs) for agri-SME lending remains 40% above NPLs for bank lending overall; with most agri-SMEs in the region still struggling to access finance from formal sources, we believe the systemic risk of agri-SME lending is even higher than this data on outstanding loans indicates.
  • Profitability is gradually improving. Banks generated a 3.5% return on their agri-SME lending overall but profitability varies by loan size from a healthy 8.4% margin on loans $500k-$2M compared to just 1.6% on loans $25-50k and -2.2% on loans $10-25k.
  • Opportunity cost. However, there is a significant opportunity cost for agri-SME lending, particularly smaller loans, relative to the 16.2% average yield on government bonds across the five countries and the 28.3% overall profitability for commercial banks.
  • Aceli’s incentives improve loan economics. Aceli’s portfolio first loss cover and origination incentives improve agri-SME loan profitability by ~3%; while this is not enough to bridge the full opportunity cost, it is a meaningful nudge that reinforces lenders’ growing interest in serving this market.
  • Shift in lender outlook and behavior. Lenders report an increase in outreach to new borrowers segments and improved loan terms. See the full report for more detail on these trends.

This learning brief builds upon initial findings published in 2022 highlighting Aceli’s approach to partnering with a marketplace of 40 financial institutions to promote economic opportunities for women by increasing lending for small- and medium-enterprises (SMEs) in the agriculture sector in East Africa.

The brief presents:

  • Data & learning on trends across 2,306 Aceli-supported loans totaling $204M (up from 467 loans totaling $62M in the 2022 brief)
  • Insights from capacity building for financial institutions on economic opportunities for women and pre-investment technical assistance for women-owned agri-SMEs
  • Learning questions that are guiding the design and iterations of Aceli’s offering
  • The partnerships & enabling policies required to advance women’s economic opportunities across the agri-SME market and beyond

Read it here

By John Robert Okware

 

I grew up near the slopes of Mount Elgon in Eastern Uganda. The fertile soils there are favorable for agriculture and our family earned a precarious living from farming. Right from the age of five, I was oriented into agriculture as a source of not only food but also school fees for my education. Every season presented challenges. 

I remember vividly one season when we had a bad harvest because of drought, we got only four bags of cotton out of the projected 20 bags. Worse still, the school term was due to begin, so we needed to sell off the cotton to raise fees. When I delivered the cotton to our cooperative society store, the price had dropped to less than $10 per bag and the money was to be paid to us after two weeks – most likely because the cooperative had liquidity challenges. With this being the only income source at that time, and there being no one to borrow from, we had to wait. So I reported to school two weeks late. This might sound familiar to some of you reading this. 

Later, while at high school and even when I went to university, I grew maize to pay for my tuition. The experience was no different; each year was a struggle with lots of uncertainty depending on the weather and the prices. These experiences inspired me to pursue studies in economics where I could contribute towards making the agricultural sector more efficient and rewarding, especially to smallholder farmers and small and medium enterprises (SMEs).

I began my career as a loan officer with Centenary Bank in the Luwero Triangle where agriculture was the core economic activity. I used to ride a motorcycle 50-100km several times a week to appraise livestock, coffee, and pineapple farmers for financing. I developed a close connection with the farmers and the economics of their farms, and this enabled me to assess the risks and grow a quality loan portfolio. As I progressed in different roles, I started to see how building the capacity of the foot soldiers, providing the right incentives, and putting the right support structures in place was critical for growing a quality agriculture portfolio.

When I later joined Opportunity Bank and moved into more senior management roles, I realized that the bank could not build a healthy portfolio in agri-SME lending alone. The agriculture loan portfolio was significantly loss-making, largely because the bank had a high ratio of non-performing agri loans and the cost of originating these loans was high since most of the SMEs were involved in the production node of the value chains and were located in far and hard-to-reach areas. There was also a high turnover of loan officers going to other banks that paid a bit more, which affected the loan portfolio management and required continuous capacity building. The bank needed partners to give a hand to change the situation and make the portfolio profitable through capacity building at different levels, risk-sharing instruments, digitization of operations, and especially in providing grants for expanding the footprint to the rural and hard-to-reach areas. 

I know that the private sector does not always speak the same language as governments, donors, or NGOs, but I have also seen what is possible when these actors work together. At Opportunity Bank, partnerships with the likes of USAID Development Credit Authority (DCA), the Agricultural Credit Facility (ACF) of the Ugandan government, and other risk-sharing guarantees enabled us to grow a quality agriculture loan book from 15% to 28% of the total loan portfolio. 

When this position with Aceli opened up a few years ago, I saw an opportunity to apply all of my experience and learning – as a farmer, loan officer, branch manager, and in senior management at a commercial bank – to the entire market system. In Aceli’s partnership with the Uganda Bankers Association and dialogue with the Bank of Uganda, I see an opportunity to strengthen the regulatory environment for lenders across the country. When I go to meet with banks, I see how they are using Aceli’s incentives to enter new regions and value chains. When I visit branches in Mbale and Lira and accompany loan officers visiting their SME clients who are getting a first-time loan, and their farmer suppliers who are now getting paid on time, I see real change in action. And when I visit SMEs that have graduated from our technical assistance program, I see them better understanding their businesses and being able to attract more capital. Looking at all of these changes across the sector, I see a brighter future for SMEs in agriculture.

I am energized to see Aceli’s partners working together to build a stronger and more inclusive agriculture sector that creates opportunities for families like my own. My heart is full. 

John Robert Okware is the Aceli Country Director for Uganda, leading engagements with a range of stakeholders from commercial banks and other lenders serving agricultural SMEs, to technical assistance providers, data and learning partners, government officials, and donors.

In March, more than 200 attendees came together in Entebbe, Uganda for Aceli’s stakeholder convening on agri-SME finance. Participants included senior leaders, agribusiness managers, and frontline loan officers from 50 lenders as well as technical assistance providers, industry associations, donors, and policymakers from across the region. 

Designed as a dialogue in the spirit of “coming together to do hard and important things,” the goals of the convening were to share learning and orient to solutions across three areas:

 1)  Translating strategic commitments by lenders into operational practices to increase agri-SME lending;

2)  Expanding reach to underserved populations and deepening impact related to women and youth, food security and nutrition, and climate and environment; and

3)  Facilitating collaboration between actors working to unlock the growth and impact of agri-SMEs across capital supply, capital demand, and enabling environment.


Read a summary of key discussions & takeaways from the convening


The Aceli team at the March 2024 Aceli Africa Stakeholder Convening in Uganda.

Global Affairs Canada (GAC) and Norway are Aceli Africa’s newest funding partners, bringing total donor commitments to $93M. They join IKEA Foundation, the Ministry of Foreign Affairs of the Netherlands, the Swiss Agency for Development and Cooperation, UK International Development, and USAID’s Feed the Future initiative as anchor funders.

Launched in September 2020, Aceli Africa is a market incentive facility working to mobilize $1.5 billion in private sector lending to small and medium enterprises (SMEs) in the East African agriculture sector by 2030. As of March 2024, 38 leading commercial banks and impact investors have signed on to Aceli Africa’s financial incentives program, which mitigates the risk and improves the returns of lending to high-impact agricultural SMEs.

In its first three and a half years of operations, Aceli supported its lending partners in issuing 1,867 loans totaling $173M. Nearly two-thirds of loans have been made to first-time borrowers, and SMEs receiving Aceli-supported loans have created market access for 990,000 smallholder farmers and employed 33,000 full-time workers. Aceli’s financial incentives are tiered to reward loans to businesses that create economic opportunities for women and youth, contribute to food security and nutrition in Africa, and promote practices that sustain the environment and improve climate resiliency.

“Small and medium agricultural businesses are the backbone of local communities and have the potential to drive inclusive economic growth,” said Ahmed Hussen, Canada’s Minister of International Development. “Canada’s support will help Aceli to scale-up its operations in Eastern Africa and on-board new lenders to its innovative program, further boosting local businesses, particularly those led by women and youth.”

“Financing plays such a big part in unlocking the potential of local production and distribution of food,” said Anne Beathe Tvinnereim, Norway’s Minister of International Development. “It is of crucial importance for a small business in the food sector to have access to capital to expand the business and help increase local food security. Norway is committed to using public funds to reduce risks and make banks more keen to invest in agri-SMEs.”

More information on Aceli Africa’s approach and progress to date can be found in its Year 3 Learning Report.

 

 

 

Our Year 3 Learning Report shares data and case studies drawn from 1,567 agriculture loans totaling $152M, more than double the volume captured in our Y2 report. We present high-level metrics from Aceli’s financial incentives program, data trends in agri-SME lending across East Africa, and ingredients for sustained lender behavior change. We also explore emerging data on the additionality and impact of loans across different size segments.

The Year 3 Learning Report centers on three themes:

  1. Loan size: Our pre-launch projections anticipated that most of the addressable market would be in the $200k-$1M range, but our latest data is showing far greater unmet but still addressable demand down-market. Aceli has pivoted to meet the market where it is by lowering our loan size minimum to $15k for certain high-impact market segments, increasing access to finance for unserved SMEs, particularly those owned by women and youth.
  2. Lender behavior: Data from Aceli-supported loans and feedback from lenders indicate a material shift in lenders’ collective reach to new geographic areas, value chains, and enterprise profiles, particularly women- and youth-owned SMEs, since joining the incentives program. 
  3. Evidence-based policies: At each decreasing loan size segment within Aceli’s range ($15k-$1.75M), there is a correspondingly higher volume of SMEs that are either completely unserved or significantly underserved by the financial markets. Our data points to an emerging case for African governments and international donors to boost inclusive economic growth by strengthening enabling environments for agri-SMEs, particularly those requiring finance under $200k. 

View the report


 

The 2024 Financial Benchmarking Report presents an analysis of key Agri-SME lending trends in East Africa, drawing insights from a dataset of 20k agriculture loans valued at $1.2B disbursed between 2019 and 2022. This data was sourced from 35 lenders, including commercial banks, non-banking financial institutions (NBFIs), and multi-country social lenders operating across Kenya, Rwanda, Tanzania, and Uganda.

Key takeaways:

  • Agri-SME lending by these lenders has experienced remarkable growth, with the value of the loan book tripling between 2019 and 2022 from $154M to $497M.
  • Notably, Tanzania leads this growth trajectory, propelled by supportive central bank policies initiated in 2021.
  • Commercial banks make up 90% of the loans in the dataset and their lending is increasing at an impressive compounded annual growth rate of 50% from 2019 to 2022.
  • The vast majority of the growth is concentrated at smaller ticket sizes below $200k, with the $10k-25k segment substantially outpacing growth in the other loan size segments.
  • 20-35% of loans are consistently allocated to new borrowers across most countries and lender types, signaling steady and sustainable growth.
  • Bank lending to agriculture has more than tripled in volume and doubled as a total share of their loan portfolios (from 2.0% in 2019 to 4.1% in 2022); but Agri-SME lending still constitutes a modest proportion of their overall lending.
  • Lenders continue to highlight high risks and origination costs as primary impediments to Agri-SME lending.

View the report


 

Aceli began its partnership with 60 Decibels (60dB) in 2021 to understand the impact of the loans it supports on small and medium enterprises (SMEs), farmers, and employees. Aceli believes that access to finance at the SME level will support improved operations that generate benefits for both farmers and workers.

This October 2023 Aggregate Impact Snapshot presents insights from surveys conducted by 60dB with 63 SME representatives working with 6 financial institutions in Kenya and Tanzania. Key insights include:

  • With support from Aceli’s incentives, lenders are serving SMEs that had not borrowed from financial institutions before, or that lack access to alternative financing of a similar caliber
  • SME representatives are overall satisfied with their loan and likely to recommend it to other SMEs
  • Financing is helping SMEs improve operations, increase revenue, better serve more farmers, and improve their range of services offered

The next publication (to be released mid-2024) will explore Aceli’s impact in greater detail. It will share findings from farmer and employee experience surveys conducted pre-financing (baseline) and post-financing levels.


Read the aggregate impact snapshot


 

Aceli’s 2023 Financial Benchmarking Report covers data gathered for an additional 13.2k loans totaling $749M issued by 31 lenders to agri-SMEs in East Africa during the period 2019-2021.

Key takeaways:

  • Aceli’s partner lenders increased their lending (largely independent of our incentives, which took effect towards the end of this period) despite the challenging macro environment.
  • Nevertheless, recent growth in agri-SME lending is from a low base and still represents <5% of the overall portfolios for commercial banks in the region.
  • Lending data and interview responses underscore the need to address the top two barriers identified by lenders: i) high risk and ii) high transaction costs of agri-SME lending.
  • Aceli’s incentives reduce the return gap of agri-SME lending relative to other sectors and are beginning to shift lender practices in promising directions: smaller ticket sizes, new value chains (see impact profile of loans to cassava SMEs in Tanzania), more remote geographies, and businesses that meet Aceli’s impact criteria, particularly for women and the environment. 

Read our Year 2 Learning Report for reflections on Aceli’s engagement with lenders in support of loans to agri-SMEs across Kenya, Rwanda, Tanzania, and Uganda.


View the Report