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Beyond Risk: How Addressing Transaction Costs Can Boost Lending to Agricultural SMEs in Africa

Published 20 May 2021

African agriculture has long been neglected by the capital markets – and understandably so: agriculture is much riskier and costlier to serve than other sectors. While agriculture employs the majority of the population in East Africa and is a leading contributor to GDP, lenders have historically gravitated to easier alternatives, including the stable returns of government bonds without the hard work of navigating dusty roads in remote regions. However, increasing competition is pushing East African lenders into underserved markets. Many have opened branches in rural areas and are now graduating from collecting deposits to lending to customers. Agricultural small and medium enterprises (SMEs) are a large if not well-understood market.

Aceli is a market incentive facility that aims to unlock financing for high-impact agri-SMEs (see more background on Aceli’s approach). Aceli’s financial incentives aim to bring two things into alignment:

Improve the risk-return profile of agricultural SME lending in East Africa; and
Incentivize lenders to seek out and serve the highest-impact agri-SMEs.

Aceli’s multi-year data collection on loan-level and portfolio-level economics across the region formed the basis for addressing the first objective. Our task around impact was more challenging given the inherent challenges of objectively quantifying impact and the multiple layers of impact we seek to generate: increased incomes for smallholder farmers and enterprise employees, particularly women and youth; higher production of nutritious food at the regional level; and a more sustainable and climate-friendly food system.

Aceli’s recent learning report noted that capital mobilization (i.e., the total loan volume supported by Aceli’s incentives) is a relevant but limited measure of whether our incentives have been successful. At least as important are:

capital additionality (i.e., whether Aceli’s incentives have shifted lender behavior and agri-SMEs are gaining improved access to finance);
the impact profile of the SMEs being served (i.e., whether the businesses gaining improved access are aligned with Aceli’s livelihoods and environmental objectives); and
whether capital that is both additional and directed to high-impact agri-SMEs contributes to increased impact (e.g., by enabling improved market access for farmers, creating more jobs, or allowing the business to manage through market downturns).

This post summarizes Aceli’s approach to incentivizing lending that is (1) additional and (2) targeted to high-impact SMEs. Follow-on posts will go into more depth on Aceli’s incentive design and initial learning related to improved farmer and worker livelihoods and our four thematic impact areas: gender inclusion, food security & nutrition, climate & environment, and youth inclusion. To learn more, please see Aceli’s Environmental, Social & Governance (ESG) and Impact Policy.

In Q4 2022, our annual learning report will share results from Aceli’s upcoming round of data collection from lenders and two years of implementing the incentives program. We will also delve into how Aceli is working with our data and learning partners – Dalberg Advisors, International Growth Centre, and 60 Decibels – to evaluate (3) the effectiveness of Aceli’s incentives and complementary technical assistance in advancing our impact objectives.

Capital additionality

Aceli defines capital additionality as:

Loans to “new” borrowers (defined as a business receiving its first loan of $25k or more from any source in the past three years)
- To date, 49% of the loans supported by Aceli’s incentives programs go to new borrowers (compared to a target of 35%).
Improved access to finance for returning borrowers based on loan amount, financial product, and terms such as collateral requirements and pricing
- One promising indicator, albeit with a small sample size, is that for the 17 SMEs that are entering the second round of loans supported by Aceli, there has been an average increase in loan size of 37% from Y1 to Y2 (and a corresponding increase in enterprise revenue of 62%). Aceli’s targets for average increase in loan size and revenue are 10%.
- Several lenders have indicated anecdotally that they are reducing their collateral requirements, lowering their interest rates, and/or more proactively searching for new agri-SME customers that are woman-owned. We will be tracking these changes systematically through structured interviews with lenders during Q2-Q3 and through annual reviews of lenders’ portfolio composition and credit terms.

Approach to impact

Aceli aims to meet market participants – both lenders and SMEs – where they are and shift them towards increased impact over time. We pursue three interrelated strategies to do so:

1. Require “Good” Practices. Aceli has set minimum criteria for every lender, loan, and SME that we support.

Lender-level: Aceli requires that each of our lending partners has a formal Impact / ESG policy, that staff are trained in the policy, and the policy is integrated into loan-level and portfolio-level management. Several lenders seeking to work with Aceli have not met this requirement when applying to participate in our financial incentives. Rather than rejecting these lenders, our approach has been to allow a six-month grace period and support the lender in designing or improving its ESG policy and integrating the policy into its loan due diligence and monitoring processes.

Loan-level: To be eligible for Aceli’s incentives, a loan must meet Aceli’s ESG standard, which includes both negative screens (aligned with the IFC exclusion list – see Appendix in Impact Policy) and additional positive social impact criteria (i.e., the SME must either source from at least 25 smallholder farmers or employ at least five full-time workers).

The agribusiness manager for one East African bank reflected on the internal process it has undergone over the past year following Aceli’s support in developing its ESG policy:

“The bank has embedded the ESG policy into our lending process… All AgriSME loans are subject to ESG covenants like gender inclusiveness, environmental protection and social transformation among others. The bank has also scaled up its appetite for green enterprises financing. Exclusions were integrated in our credit analysis due diligence tools and general credit procedure standards. The bank now has an ESG checklist in place and [we have] conducted an online Training of Trainers to all Branch Relationship Officers, Assistant Managers, Branch Managers and the Head Office Credit and Agfin team to skill them up on ESG aspects.

Areas of improvement include continuous awareness raising to staff and SMEs on the importance of ESG compliance for sustainable business and climate proof banking. There is also a need to build an ESG credit score to supplement the usual bank eligibility criteria and underwriting.”

2. Incentivize “Better” Practices. Aceli’s incentives for lenders are tiered: on top of the baseline incentives for loans to businesses that clear the “Good” bar outlined above and increased incentives for loans to new borrowers, we offer impact bonuses to reward lenders for seeking out and serving higher impact agri-SMEs.

Aceli’s baseline incentives comprised 40% of the total eligible incentive for each loan. An additional 30% is added for loans to new borrowers and 30% on top of that if the loan qualifies for all three of Aceli’s impact bonuses.

Initially, Aceli offered these bonuses for impact in three different categories: i) gender inclusion, ii) food security & nutrition, and iii) climate & environment. As of March 31, 2022, 68% of the 369 loans supported by Aceli’s incentives qualify for the gender inclusion impact bonus, 57% for food security & nutrition, and 23% for climate & environment. Overall, 150 loans qualified for an impact bonus in one category, 180 in two, and 8 in all three.

As of May 2022, Aceli is adjusting our impact policy and bonus areas based on learning to date and in line with our vision to shift the lending market towards increased impact.

First, we are adding a fourth impact bonus area for youth inclusion to promote lending to SMEs that create economic opportunities for youth as entrepreneurs, business managers, farmers, or employees. The impact rationale is clear: youth account for 45% of the population in East Africa; the majority live in rural areas but have limited employment opportunities. Translating this high-level objective into incentives that can tangibly increase economic opportunities for youth is more challenging. Unlike the gender inclusion criteria, where Aceli was able to adopt the international standard established by the 2X Collaborative, there was no pre-existing standard for youth inclusion – so Aceli has created our own. We will present this approach in more detail in an upcoming post and pilot this policy over the next year.
The second notable change in our impact policy is that we have sub-divided the criteria for gender inclusion, food security & nutrition, and climate & environment. In practical terms, this means offering higher incentives or a “double bonus” for loans to SMEs that meet multiple criteria for a given impact area. For example, the standard established by 2X considers an SME gender inclusive if it meets any single criterion across ownership, management, board, employees, or customers (note: Aceli added a category for farmer suppliers since this is a significant impact dimension in the agriculture sector). Aceli’s previous policy – aligned with the 2X definition – treated gender inclusion as binary: either an SME met the standard by fulfilling at least one criterion or it did not. Our revised policy divides the criteria into two sub-categories: 1) leadership (assessed based on ownership, management, and board composition); and 2) inclusion (based on farmer suppliers, employees, and customers). An SME can qualify for a single impact bonus under either gender leadership or gender inclusion OR it can qualify for a double bonus if it meets criteria in both sub-categories. Under the revised impact policy, we are applying a similar approach for food security & nutrition and climate & environment. These adjustments re-weight Aceli’s incentives to place additional emphasis on impact.

Aceli supplements self-reported data from lenders with field visits conducted by our verification partner, Africert, which specializes in ESG audits and certifications for agriculture and forestry in East Africa. Verification visits focus on practices related to Aceli’s climate & environment impact bonus and include assessments at both SME and farmer levels. We will share more detail about this process and learning in the upcoming post focused on climate & environment.

3. Continuous improvement. Practices related to impact at lender and SME levels are not static; nor should we accept the status quo in food systems that remain deeply inequitable and environmentally unsustainable. Aceli is committed to learning and continuous improvement across all of our work. In concrete terms, this includes:

1. - Improving the Impact / ESG policy that defines minimum criteria for Aceli’s support and the higher standards to qualify for impact bonuses. We embrace the changes incorporated into our revised policy even as we look ahead to further learning and enhancements in the coming years.
  - Promoting continuous improvement at lender-level. In 2021, the USAID INVEST program supported Aceli and advisory firm Value for Women (VfW) to offer a series of workshops on Gender Lens Investing to Aceli’s lending partners. Fifteen lenders participated in sessions on applying a gender lens to lending processes and strategies for identifying and serving women-led and gender-inclusive SMEs. Two lenders are now working with VfW to develop gender action plans to guide their portfolio management practices. In response to lender demand, Aceli may offer similar advisory to other lenders as well as capacity building related to climate finance.
  - SME-level. In 2021, Aceli collaborated with partners to run a pilot promoting reforestation practices with eight Agri-SMEs and more than 2,000 affiliated smallholder farmers in Rwanda and Uganda. Aceli and Value for Women are exploring an approach to support SMEs in improving their gender practices, particularly related to sourcing and employment. Later in this series, we will share learning from the reforestation pilot and how Aceli is approaching partnerships to promote continuous improvement in Impact / ESG at SME level specifically linked to financing needs (e.g., for off-grid renewable energy).

Forthcoming posts will delve into more detail on Aceli’s incentive design and initial learning related to gender inclusion, farmer and worker livelihoods, food security & nutrition, climate & environment, and youth inclusion.

By Eddah Nang’ole

In my role defining criteria for Aceli’s climate & environment impact bonus and supporting lenders to develop and implement ESG policies, I hold two competing realities in my head. There are the agro-ecological practices that I learned early in my career as a researcher studying how beneficial insects can control pests and in later roles in program management and evaluation for regenerative agriculture. And then there are the practices that I grew up with on our family farm in the North Rift region of Kenya – practices that produced high yields in the past but may no longer, at least in their current form, be viable.

My parents grew maize on a 30-acre plot. We were lucky in many ways because they also had full-time jobs so the farm supplemented our family’s income and paid for education and other basic needs. British settlers had brought mechanized practices to our region decades earlier, and our farm and those around us combined mechanized with manual farming. We applied synthetic manure and used hybrid seeds. Tilling and planting was mechanized while spraying herbicides, top dressing, weeding, and harvesting was done by casual workers, mostly women and youth.

While my siblings preferred non-farm activities like household chores, I was always interested in the farm and wanted to contribute. From the age of 12 years, I manually kept the farm records in a notebook, tracking our expenses, making sure the workers were paid on time, and helping my parents to balance the books at the end of the harvest. The production cycle followed a steady calendar rhythm: land preparation and planting in March-April, harvesting in October-November. Yields were consistently high – 40-50 bags per acre.

But the yields started to decline in the late 1990s to 30 bags; today, it’s rare for farmers in the region to harvest more than 15 bags per acre. The soils are depleted from intensive monocropping. The weather is changing too: heavy rains around the harvest increase post-harvest losses; fall army worms multiply with the warming temperatures and drive up costs of pest management. Farmers like my brother, who took over the family farm, must choose between doubling down on chemical fertilizers, pesticides, and mechanization or adopting regenerative practices that are more labor-intensive, like planting cover crops, mulching with organic compost, using beneficial insects, and preparing their fields with no-till or low-till techniques.

I’m convinced that regenerative agriculture will benefit farmers, the environment, and our food system in the long run, but the choice for any given farmer today isn’t as clear. Farmers are living on the front lines of climate change. They have limited information, technology, and access to finance. And most don’t have the luxury to experiment with new approaches that might not work.

In developing and administering Aceli’s impact policies, my task is to distinguish between practices that are detrimental to human health and the environment and should be excluded entirely, those that are acceptable or even “good,” and those that are better for both humans and the environment and should be positively rewarded. It has been gratifying to see some positive changes in the year and a half since we launched – four lenders now have ESG policies that didn’t before; many lenders are responding to Aceli’s incentives by proactively looking for businesses that are gender inclusive, youth inclusive, contribute to food security and nutrition, or promote regenerative and circular agricultural practices that qualify for our impact bonuses. Aceli is only one actor in an ecosystem of organizations trying to make African agriculture more prosperous and sustainable. I am happy to be playing a small part.

Eddah Nang’ole is the Impact & Learning Manager for Aceli Africa and responsible for designing and implementing the Impact / ESG policy and impact bonus criteria for Aceli’s financial incentives program.

Amid the ongoing challenges posed by COVID-19 and climate change—compounding the finance gap that pre-dated both—the need for investment in the African agriculture sector is more urgent than ever.

Aceli’s experience in Year 1 indicates that there is growing interest from private sector lenders to expand their agriculture portfolios. See here for a deeper data dive into Aceli-supported loans to date.

With new commitments from the Dutch and UK governments, Aceli has now secured $62M in funding through 2025 to scale up our activities.

Our latest report distills learning from our first year of implementation and highlights three key areas for learning in the years ahead:

How can public & philanthropic resources be targeted most effectively to attract private sector investment?
How can private investment be steered to optimize social & environmental impact, and what meaningful measures can we use to assess progress toward this goal?
How can the learning from Aceli’s model build an evidence base for blended finance that can spur adoption at the country level and replication in other sectors & geographies?

Download the Learning Report

At a sector convening in December 2017, lending practitioners discussed barriers to growing the finance market for agricultural SMEs: namely, the mismatch between the risk-return hurdle of capital providers and the addressable demand among businesses. Stakeholders in attendance pushed lenders to put hard evidence behind their anecdotal experiences.

This report synthesizes our journey over the past two and half years: first to distill the economics of agri-SME lending across a diverse set of lenders and then to design solutions to bridge the gap – estimated at $65 billion a year across Sub-Saharan Africa – between capital supply and demand for agri-SMEs.

In partnership with Dalberg Advisors and with funding from 12 donors, we reviewed data from 31 lenders on 9,104 transactions totaling $3.7 billion and also conducted in-depth interviews with lenders, technical assistance providers, and many other ecosystem actors.

This report shares our findings and presents Aceli Africa’s new data-driven, marketplace approach to align capital supply and demand and unlock increased financing for agri-SMEs.

Download the summary and full report below:

>> Summary Report

>> Full Report

The Dutch Ministry of Foreign Affairs and United Kingdom’s Foreign, Commonwealth & Development Office (FCDO) join IKEA Foundation, the Swiss Agency for Development and Cooperation, and USAID’s Feed the Future initiative as anchor funders to Aceli Africa. The new awards of $11.9M from the Dutch government and £13.5M from the British High Commissions in Dar es Salaam and Kampala bring total donor commitments to Aceli’s innovative market incentive facility to $62M.

Continuing disruptions from COVID-19 and a worsening climate crisis have amplified the longstanding need for investment in African agricultural value chains that are inclusive, resilient, and environmentally sustainable.

Launched in September 2020, Aceli Africa is a market incentive facility that aims to mobilize $600M in private sector lending to small- and medium-enterprises (SMEs) in the East African agriculture sector by 2025. As of November 2021, 26 leading commercial banks and impact investors have registered for Aceli Africa’s financial incentives program, which mitigates the risk and improves the returns of lending to high-impact agricultural SMEs.

In its first 15 months of operations, Aceli supported its lending partners in issuing 254 loans totaling $30M. Nearly half of loans have been made to first-time borrowers. SMEs receiving Aceli-supported loans have channeled $108M into rural economies as crop purchases from 246,000 smallholder farmers and salaries for 4,700 full-time workers. 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 practice climate-smart agriculture that sustains the environment.

“The Dutch Ministry of Foreign Affairs is committed to supporting Aceli Africa in its innovative approach to improve access to finance for agri-SMEs in East Africa. We expect Aceli Africa’s data-driven model will incentivize more lending for agri-SMEs and contribute to sustainable economic development in East Africa,” said Ms. Saskia Jongma, Deputy Director, Sustainable Economic Development Department, Dutch Ministry of Foreign Affairs.

‘’The British High Commission in Dar es Salaam is pleased to partner with Aceli Africa to support increased investment into Tanzania’s small and medium sized enterprises. Increasing access to growth capital will drive innovation, increase firm productivity, and create jobs for Tanzania’s rapidly growing workforce,’’ said Kemi Williams, Development Director, British High Commission in Dar es Salaam.

“The commitments by Aceli’s anchor funders are the catalyst for a more competitive lending market that will improve livelihoods for over 1 million farmers and workers and demonstrate a model that can be scaled in East Africa and replicated in other regions,” said Brian Milder, CEO of Aceli Africa.

More information on Aceli Africa’s approach and progress to date can be found in its Year 1 Learning Report.

The data in this document reflect the loans supported by Aceli’s financial incentives from September 2020 – October 2021.

Download the data.

We sat down with Andrew Ahiaku, Aceli’s Head of Financial Sector, to learn more about his forthcoming working paper on the effects of Central Banking regulations on lending to agricultural SMEs in East Africa. Here are some highlights from our conversation:

Andrew, you’ve spent a lot of time working on this report – why did you take on this project?

I didn’t set out to write this paper. I was looking into literature on how Central Bank regulations affect lending in African agriculture and particularly to agri-SMEs and kept hearing from stakeholders that this analysis was lacking. We know that the majority of the population in East Africa depends on agriculture for their livelihood, but only 5% of bank lending flows to the sector. The natural instinct is to say “the banks are lazy” or the “banks don’t care.” I spent 12 years in banking before joining Aceli and from my own experience I can say that’s often not true. In my opinion, a more accurate characterization is that banks are structurally limited in how much risk they can take by well-founded policies that have unintended consequences of stifling agricultural lending. So most banks take the easier path to earning a decent return- but I know from experience that many would choose differently if given the right incentives and support.

Tell us more about these policies that have unintended consequences?

Following the 2009 financial crisis, the Bank of International Settlements introduced the Basel III Accord aimed at checking overly aggressive bank lending and protecting customer deposits. Two specific policy changes are worth highlighting. The first is Capital Adequacy Ratio (CAR), or the levels of equity a bank must hold on its balance sheet relative to its lending. Basel III imposed more conservative requirements on CAR at a global level; what I find very interesting is that Central Banks in Aceli’s focus countries (Kenya, Rwanda, Tanzania, and Uganda) have adopted controls that are roughly 40% more conservative than the Basel III requirements. While some adjustment seems prudent given the emerging state of East African economies, it’s not clear how the CAR levels in the region compare to actual loan performance.

The second policy change under Basel III focuses on when and how much capital banks must set aside for credit losses. Pre-IFRS 9, banks would set aside funds to cushion against losses as they occurred. This turned out to be inadequate when losses piled up and many banks became insolvent. The new approach – which I support in principle – is that banks are required to provision for expected losses ex-ante when they book a loan. When combined with the more conservative CAR levels in East Africa, this approach creates a disincentive for banks to lend to riskier sectors like agriculture where they would be required to tie up their precious equity and forego more lucrative opportunities in other sectors.

This sounds like a conundrum: the international banking sector pre-2009 was fast and loose with risk and the public ended up footing the bill of huge bailouts, but you’re saying that the new rules are limiting the flow of credit to agriculture. What should be changed?

To be clear, I don’t think we should go back to the pre-2009 way of doing business. What I and my Aceli colleagues believe is that the mandate of Central Banks to steward the economy in a fiscally prudent way is applied in an overly narrow way in East Africa and may be counter-productive to the broader goal of developing a robust and inclusive national economy. We would like to see an approach where a realistic assessment of expected credit losses from a loan is considered alongside the expected development impact linked to that loan. These two considerations should then be merged to determine whether it is appropriate to incentivize an activity where the expected development impact exceeds the increased risk. Many countries from India to South Africa to the United States have some version of this approach in their policies for requiring or incentivizing the flow of credit to under-served populations. We hope to generate dialogue with Central Banks, policymakers, and other stakeholders in East Africa about how an approach that incorporates expected development impact can be implemented in each country.

Setting aside all these challenges for a moment, are there also reasons for optimism?

Yes, absolutely! For example; the Bank of Uganda has introduced an Agricultural Credit Facility that shares in the risk and lowers the cost of funds for on-lending to the sector and in recent years there’s been a substantial increase in bank lending to agriculture in Uganda.

In July, the Bank of Tanzania announced new measures to stimulate lending to agriculture in response to COVID-19. These include adjustments to the statutory minimum reserve for agricultural lending (which has a similar effect on lender risk appetite as the CAR) and a dedicated pool of low-cost capital totaling TZS 1 trillion (~USD 430 million) to provide liquidity for banks and other financial institutions to on-lend in the sector.

And Rwanda just announced that it plans to double the share of lending going to agriculture by 2024 – so it’s an exciting time to be working on agricultural finance in East Africa!

The Catalytic Capital Consortium (C3) announced awards to support 14 research projects that will analyze the uses of catalytic capital around the world and help build the evidence base to fuel additional risk-tolerant, flexible and patient investments that address critical global challenges.

Aceli Africa is one of the 14 awardees, including universities, nonprofits and collaborations spanning seven countries. Collectively, the cohort will use the funding to study catalytic capital across diverse geographies and sectors—assessing capital gaps for entrepreneurs in Africa, housing finance bottlenecks in Eastern Europe, economic inequality and barriers to accessing capital in Indigenous communities and communities of color in the United States, financing challenges for innovations in science and engineering that promise positive global impact, and more.

A total of 87 groups based in 17 countries applied for funding in response to the C3 Grantmaking program’s public call for proposals last fall. Awards for the 14 selected research and market development projects will total $2.2 million.

Established in 2019, C3 is an investment, learning, and market development initiative created and led by the John D. and Catherine T. MacArthur Foundation, The Rockefeller Foundation and the Omidyar Network. Together, these partners jointly fund the C3 Grantmaking program, which is housed at and administered the New Venture Fund (NVF). C3 aims to increase the flow and impact of catalytic capital to make social and environmental progress that would not otherwise be possible.

Learn more.

SME Impact Fund (SIF) is a non-bank financial institution based in Tanzania that targets agricultural SMEs with significant growth and impact potential. Given the high operating costs of serving agri-SMEs in remote parts of Tanzania, SIF had historically focused on loans ranging from TZS 100M – 1B (~USD 43k-430k). Since joining Aceli’s financial incentives program, SIF has made 12 loans to first-time borrowers, including four loans under TZS 100M (~USD 43k).

This preliminary case study focuses on five loans by SIF totaling $249k. Four of these five loans are to first-time borrowers, and three are under $43k. SIF’s leaders report that it is not likely that it would have made any of the three loans under $43k without Aceli’s incentives, and none of these SMEs had a prior history of borrowing $25k or more from any other lender. While these loans are smaller than the average loan supported by Aceli to date, they provide an unusual opportunity for longitudinal learning from a baseline lack of access to finance.

Follow-on assessments with these SMEs as well as with a larger sample of lenders, SMEs, farmers, and employees across a wider range of countries and crops will evaluate the effectiveness of Aceli’s incentives in:

Shifting lender behavior;
Mobilizing incremental lending to under-served SMEs; and
Generating impact on farmer and employee livelihoods relative to the cost of developing and implementing the program.

Background

Founded in 2013, SIF is a non-bank financial institution based in Tanzania that serves agricultural SMEs. Prior to partnering with Aceli, SIF had made loans ranging from TZS 100M-1B (~USD 43k-430k) with a focus on value-added processing in crops such as maize and rice. From September 2020, when SIF joined Aceli’s financial incentives program, thru June 2021, SIF made 21 loans with support of Aceli’s incentives. Twelve of these loans went to first-time borrowers and four loans were under $43k (i.e., below the level SIF had previously been serving).

This case study focuses on five loans by SIF totaling $249k. Four of the five loans are to first-time borrowers operating in the rice sector and three of the loans are under $43k. One of the five SMEs is 100% owned by a woman entrepreneur and another is 50% woman-owned. SIF’s leaders report that it is not likely that it would have made any of the three loans under $43k without Aceli’s incentives and none of these SMEs had a prior history of borrowing $25k or more from any other lender.[1 ] As noted above, we plan to track these and a much broader set of SMEs over time to assess if/how financial incentives affect: lender behavior (step 1 in the diagram below), the addressable market of SMEs that lenders serve (step 2), enterprise growth and resilience (step 3), and livelihoods for farmers (step 4a; e.g., better access to markets) and employees (step 4b; e.g. formal, salaried jobs).

This logic model is a simplified version of how Aceli’s financial incentives link to a set of outputs (in this case, loans made by SIF), outcomes (revenue growth and other benefits reported by the SMEs, farmers, and employees), and impact (to be evaluated at the level of SMEs farmers, and employees over time using both statistical and qualitative methods). Note: this simplified logic flow does not attempt to capture all of Aceli’s interventions (e.g., technical assistance for SMEs) or expected benefits (e.g., increased economic opportunities for women, more climate-smart and resilient agricultural practices by farmers); these will be assessed through complementary studies.

Simplified logic flow of Aceli’s financial incentives

Aceli offers financial incentives to lenders (step 1) and lenders make loans to SMEs with limited access to finance (step 2)

SIF’s objective (prior to signing up for Aceli’s financial incentives program) has been to identify high-potential agri-SMEs that are not being served by commercial banks and offer more flexible terms and a streamlined process. Prior to joining Aceli’s financial incentives program, SIF was reaching many SMEs that struggled to access financing from commercial banks. However, the high costs of serving agri-SMEs located in remote parts of Tanzania – a country almost as large as France and Germany combined – has meant that servicing loans below TZS 100M was not viable.

Allert Mentink, the CEO of SIF, recently noted how Aceli’s incentives have expanded the pool of SMEs that SIF is able to serve:

By covering a portion of our operating costs and sharing in the risk, Aceli’s financial incentives have helped us serve many new borrowers, including four loans under TZS 100M. These are the first formal loans for each of these businesses and we expect they’ll be able to increase their sourcing, employment, and supply of nutritious foods to the local market with access to finance.

*susceptible to bias since they were conducted by the lender. Interviews with farmers and employees of the SMEs were conducted by a third-party firm, 60 Decibels, that has extensive experience surveying this demographic in Tanzania. The sample sizes for these surveys (43 employees and 87 farmers in total across the five SMEs) are small so findings should be viewed as preliminary and providing insight into more extensive evaluations in the future.

The five entrepreneurs interviewed for this case have previously sought but struggled to access finance with detrimental effects on their businesses. One entrepreneur shared how the uncertainty in accessing finance in the past has undermined the SME’s ability to establish a reliable source of supply from farmers: “In some cases, you can promise farmers and aggregators that you will purchase from them, in expectation that you will receive a loan, and in the end, the loan might come very late or never at all. Hence, your plan and reputation at times is ruined.”

The minimal financing that the SMEs had been able to access was for very small amounts, interest rates and collateral requirements were prohibitively high, and application processes were long and non-transparent.

Four of the SMEs meet Aceli’s definition of a first-time borrower (i.e., the SME has not accessed a loan of $25k or more in the past three years). The sum of the largest loans received by the five SMEs prior to their loans from SIF was $135k compared to combined loan amounts of $249k from SIF. We used the difference between these amounts to calculate the capital additionality of SIF’s loans: $114k in absolute terms and an 84% increase relative to prior borrowing. Aceli is not aware of a standard for assigning value to capital additionality and we have yet to develop one but, in the context of agri-SME finance, we view any increase in financing in excess of 50% to be high capital additionality. Because the SMEs did not have alternative sources to access these larger loans and because SIF reports that it would not have made at least three of the loans without the incentives, we conclude that there is significant attribution of Aceli’s incentives in unlocking this additional capital.

SME growth

All the entrepreneurs mentioned the positive outcomes of access to finance on their businesses; recurring themes included expanding their market reach, purchasing stocks on time, and enhancing working capital available for the next season. One entrepreneur stated, “The purchases were easy since we paid in cash and smallholder farmers were motivated to sell their stock to us. Without finance, we were purchasing on credit and many smallholder farmers were not happy, and opted to sell to buyers who paid in cash.” One entrepreneur bought a semi-trailer truck to transport stock more efficiently. Another invested in a rice grading machine, a milling machine, and a packaging machine.

These benefits create a positive feedback loop with increasing sales generating higher margins that propel further growth and ambition. In the words of one entrepreneur:

Access to finance is crucial in affecting my plans for growth because the loan will help me widen and speed up my business operations. It also enables me to stock more during the harvesting period and process and sell more during peaks of scarcity, thereby improving our margins.

In the past, limited access to finance meant that the entrepreneurs were unable to plan for growth. Financing has shifted that mentality, as one entrepreneur reports: “We are planning to expand our business operations in many aspects including increasing our processing capacity, human resources, engaging more smallholder farmers and constructing a modern warehouse (storage) facility. All those plans depend on external finance.”

At the same time, access to finance is not a panacea in the context of a challenging market environment. As one entrepreneur notes: “We expect the funding from SIF Tanzania to have positive impact in our business operations, as all the sourcing, processing and distribution requires finances. However, this year has been challenging due to drop of prices, hence, we are stuck with a lot of stocks, as we hope for the prices to be favorable.” This perspective underscores the need to consider access to finance in the broader context of under-developed agricultural markets and, specifically in 2020-21, the extreme and unpredictable disruptions from COVID-19.

Improved livelihoods for smallholder farmers and workers

From the perspective of development impact, SME growth – often measured by revenues – is a positive indicator and often associated with increases in purchases from farmers and employing more workers. To ensure that our financial incentives are targeted to maximize development impact, Aceli is intent on learning more about what happens in practice: which types of loans to which types of SMEs create what kind and how much impact for farmers, employees, and along agricultural value chains?

We now have baseline metrics for the five SMEs in this case study: In the year prior to accessing financing from SIF, they collectively employed 38 full-time workers, paid $59.8k in salaries, and purchased $749k from a combined 788 smallholder farmers. We will return to these businesses on an annual basis to track how these metrics are changing over time. We expect to see growth but know it will not be even across the businesses or linear year-to-year.

To go beyond these employment and sourcing metrics, Aceli engaged a third-party firm, 60 Decibels, to conduct surveys with farmers supplying the five SMEs as well as employees. 60 Decibels interviewed 87 farmers and 43 employees across the SMEs and found:

Farmers. Of the smallholder suppliers interviewed (87), 74% report that they are accessing services like those provided by SIF-supported SMEs for the first time. Farmers also spoke about improvements along a variety of farm and household outcomes because of their engagement with SMEs, reinforcing our confidence in the choice of these SMEs as well as providing a baseline to measure progress against once the loan is disbursed:[2 ]

95% report an increase in household income
90% report an increase in monthly savings
Suppliers note they feel less stressed about providing for their families with 69% reporting that they are able to afford household goods and bills
Farmers also shared some complaints: 13% identified limited financing on the part of SMEs as a constraint (“They do not have enough money to give credits anymore. They charge higher prices for services”) and smaller numbers (under 5%) complained about long lines to sell their crop at harvest, in part because the SME pays fair prices so is an attractive buyer.
From a demographic perspective, it is notable that only 8% of the farmers interviewed are women. We believe that this percentage may not be reflective of women’s participation in these supply chains for two reasons: i) from a cultural perspective, women are less likely to participate in a telephone survey, especially if conducted by a man; and ii) women are often the primary farm laborers even when their male family members own the land or are registered with a buyer as the lead farmer. Note: across the 120 SMEs receiving loans by Aceli as of June 30, 2021, lenders report that 36% of the 158k farmer suppliers are women.
The suppliers rated the SMEs in aggregate a Net Promoter Score[3] of 81, which is an indication of high satisfaction among the workers.

Employees. Employees of the five SMEs largely report favorable working conditions and improvements in their livelihoods while some also noted areas where the SMEs can improve:

56% of the 43 workers interviewed[4 ] report that their job with the SMEs is their first formal employment
65% state their quality of life “very much improved” since being hired by the SME
95% report an increase in income relative to their previous source of income
23% offered suggestions for improvement with the most common critique focusing on poor equipment and inadequate safety measures (7% of total respondents concentrated in one SME) and one noting periodic delays in salary payments (“We are treated well and our salaries are fair… there are times when we do not get paid on time…”)
From a demographic perspective, only 16% of the employees interviewed are women (Note: across the 120 loans supported by Aceli as of June 30, 2021, 32% of the 2,339 employees are women).
Overall, the employees rated the SMEs in aggregate a Net Promoter Score of 89, which is an indication of high satisfaction among the workers.

Agri-SMEs with additional working capital also have the capacity to expand employment opportunities with many of these jobs go to women and youth. Entrepreneurs noted they plan to hire more seasonal and/or full-time employees. One SME plans to hire 40 seasonal female workers and 2 permanent staff for the upcoming harvest season and another has already hired an additional 11 seasonal and 9 full-time employees.

We reiterate that the sample sizes of lenders (1), SMEs (5), farmers (87), and employees (43) featured in this study are small relative to Aceli’s activities to date (14 lenders, 120 SMEs, 189k farmers, 2.2k workers) and our planned reach by year-end 2025 (30 lenders, 1,000 SMEs, 1.1M farmers, and 25k employees). Nor are the SMEs selected intended to be representative of all the SMEs receiving loans supported by Aceli incentives. Rather, these baseline assessments and follow-on reviews with these SMEs going forward are designed to generate insights about the challenges faced by SMEs with limited access to finance, how expanded access to finance affects their ability to navigate volatile markets, and how their growth trajectory in turn affects farmer and employee livelihoods.

The appendix includes further discussion on issues such as attribution, capital additionality, and cost-benefit analysis that will be incorporated into Aceli’s evaluations over time. It also provides further context on how the SMEs profiled in this case compare to others supported by Aceli’s incentives. Over the next few years, Aceli expects to build a trove of similar case studies with longitudinal tracking to allow for more robust and generalizable conclusions.

Appendix

As Aceli and our evaluation partners build the evidence base around the logic flow outlined in Diagram 1 (as well as the complementary activities such as technical assistance for SMEs and related impact objectives focused on gender inclusion, climate-smart & resilient agriculture, food security & nutrition, and opportunities for youth), we will consider the following issues, among others:

Attribution: would the lender have made a similar loan on similar terms to the SME without Aceli’s incentives? The SMEs examined in this case are particularly interesting because there is strong indication that SIF would not have made at least three of the five loans that fell into the $25-50k range. Over time, Aceli’s goal is for all lenders to expand their reach to borrowers they would not have otherwise served, in addition to increasing the financing amounts they offer and flexibilizing the terms of their loans. We expect many loans to be similar to the other two loans above $50k (i.e., in the size range that lenders were serving prior to Aceli) and will draw upon both qualitative measures (i.e., asking the lenders if the Aceli incentives affected their lending decision) and quantitative metrics (e.g., comparing loans made across the portfolio pre- and post-Aceli incentives) to estimate attribution.
Capital additionality: was the financing provided by the lender with support from Aceli’s incentives incremental to alternative sources of financing available to the SME? As noted above, four out of five loans went to SMEs that previously had not accessed financing of $25k or more and the combined financing from SIF to the five SME was 84% greater than their previous largest financing. Across the 120 loans supported by Aceli as of June 30, 2021, 60 loans (50%) were to new borrowers and combined financing of $16.9M was 76% greater than largest prior financing. We view both of these metrics as high, especially in the context of COVID-19 where we expect lenders to be risk averse, but do not have enough information to assign attribution to this full pool of loans supported by Aceli’s incentives to date.
Impact: to the extent that the capital was additional, did it measurably increase enterprise growth, improve livelihoods for farmers and workers, and/or generate other social and environmental benefits such as gender inclusion, food security & nutrition, climate-smart and resilient agriculture, and opportunities for youth? The farmer and employee surveys conducted by 60 Decibels for the five SMEs in TZ are the first such surveys linked to Aceli-supported loans so we cannot draw any comparisons of how these results compare to other loans. Going forward, we plan to continue surveying farmers and employees linked to a sampling of SMEs supported by Aceli loans so we can identify representative trends.
Cost-benefit: how does the value of any incremental impact associated with capital additionality that is attributable to Aceli compare to the cost of providing the financial incentives?[5 ] A meaningful cost-benefit analysis will require more comprehensive and quantitative assessment of the impact on livelihoods (i.e., the benefit portion of the ratio). This will only be possible with much more data gathered over the next few years. In the meantime, we can report on the capital leverage (i.e., total loan amounts supported by Aceli incentives divided by the cost of the financial incentives). The total cost of the financial incentives for the five loans was $42k, meaning that the capital leverage was 6x (relative to total capital mobilized of $249k). This leverage ratio is comparable to the capital leverage ratios identified by Convergence Finance in a recent industry study[6 ], but significantly lower than the overall capital leverage of 11x for the 120 loans supported by Aceli to date (note: the average size of these 120 loans is $132k). As the SMEs featured in this case grow and require larger loans, we expect that the leverage ratio will increase to similar levels within a few years. Overall, across our four focus countries in East Africa, Aceli expects leverage ratios of ~15x for average loan sizes of ~$250k. Aceli’s goal over the next five years is to build an evidence base demonstrating that the outcomes and impacts generated by loans supported with financial incentives far outweigh the costs of the incentives so that African governments will incorporate similar incentives, funded from their own budgets, into market-enabling policies.

Map of SMEs in Tanzania receiving loans or technical assistance supported by Aceli as of June 30, 2021

Footnotes

[1] Note on methodology: Aceli interviewed the CEO and Portfolio Manager of SIF to get their perspective on how Aceli’s incentives affected their lending activity. The SIF Portfolio Manager conducted interviews with six SMEs that received their first-loan of $25k+ from SIF with support from Aceli’s incentives. These interviews utilized a standard questionnaire but are susceptible to bias since they were conducted by the lender. Interviews with farmers and employees of the SMEs were conducted by a third-party firm, 60 Decibels, that has extensive experience surveying this demographic in Tanzania. The sample sizes for these surveys (43 employees and 87 farmers in total across the five SMEs) are small so findings should be viewed as preliminary and providing insight into more extensive evaluations in the future.

[2] 60 Decibels: Supplier Insights 2021

[3] Net Promoter Score is a gauge of worker satisfaction and loyalty. Scores range from -100 to 100 where 0 means overall indifference. Any score above 50 is considered very good.

[4] 60 Decibels: Worker Insights 2021

[5] Note: cost-benefit is different from “capital leverage,” which can be a useful metric for comparing capital mobilized to the underlying subsidy offered in a blended finance structure but does not capture either attribution or impact.

[6] Data Brief: Blend Finance & Agriculture authored by Convergence, May 2021. Note: most of the blended finance models in this Convergence report are mobilizing public money from development finance institutions as opposed to private capital (which is the case with SIF and most of the lenders participating in Aceli’s financial incentives program

When we asked lenders about the biggest barriers to serving agricultural SMEs, we weren’t surprised that higher risk was the top response. But a close and often-overlooked second was the higher operating costs of serving agri-SMEs. Our data on the economics of agri-SME lending suggests that higher transaction costs (e.g., the additional time for travel and risk analysis) may account for as much as half of the 4-5% return gap between agri-SME lending and lending to other sectors in East Africa.

In our latest article for NextBillion, we share perspectives from lenders in the region and discuss why we believe solving for high transaction costs in agri-SME lending is critical and under-addressed in most blended finance approaches to stimulate lending for SMEs.