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
