Credit Risk Prevents Growth of Small-Medium Scale Farming in Africa

October 17th 2020 by Acheampong Atta-Boateng

“This self-reinforcing mechanism makes it incredibly difficult for farmers to grow their business to a point where a bank would feel confident lending to them.”

Small and medium scale farms contribute to 80% of the food consumed in Africa, yet these farmers often face the most difficulty receiving financial support. Unable to obtain loans, smallholder farms struggle to adopt new technology that could increase future yield, or even obtain the credit necessary to purchase enough supplies for the planting season ahead. As a result, these farms face lower crop yield than otherwise possible, making farming business less profitable.

One of the main barriers to securing credit for smallholder farmers is perceived risk in lending to them. Risk, which generally refers to how financial institutions weigh the likelihood of repayment with the benefits of lending, is always a factor in securing loans. When lending to larger farms, banks can identify past credit history and suitable collateral for the loan to determine if the risk is appropriate for lending.

However, this process is not as easily applied to small and medium size farms, which are by nature less “corporate” and more difficult to assess via traditional risk metrics. Smallholder farms typically have less equity that could count as collateral, short or even nonexistent credit history, and limited access to resources to improve yield. Despite all these factors, a smallholder farm may be well situated to pay back a loan, yet lenders just do not have the proper information or ability to assess the risks. Faced with these risks, and a lack of a framework to assess them, banks and other lenders are less inclined to provide loans with reasonable interest rates (or even provide any loans at all) to smallholder farms.

Because of a gap in lending between larger and smaller farms, smaller scale farms are unable to acquire funding necessary for growth. Unable to obtain the capital up front to support a farming season, smallholder farms are not able to maximize their yields, and thus are not able to sell as much product to re-invest back into their own farms. This self-reinforcing mechanism makes it incredibly difficult for farmers to grow their business to a point where a bank would feel confident lending to them.

AgroFides’ goal is to directly combat this gap in lending by assisting small and medium scale farmers in acquiring credit and loans. By focusing solely on lending to small and medium scale farmers, AgroFides is able to understand how they can be better analyzed to assess risk and credit worthiness through the FIDES score. The FIDES score utilizes sophisticated models that holistically assess risk based on key factors that affect a successful farming operation. AgroFides' creditworthiness assessment can be used on farms regardless of size, farming style, or crop selection. Farmers who previously could not obtain credit or loans from banks (through previous metrics built for larger scale farms) can be properly assessed for risk, and have the opportunity to obtain the financial services that are crucial for growth. In addition to facilitating a better assessment for risk, AgroFides will actually help farmers to mitigate their risks by providing extension services and advising farmers on best practices to sustainably increase yield.

Although risk is just one factor that can prevent smallholder farms from receiving loans, it is a significant one. By both mitigating and properly assessing the risk in lending to smallholder farms, AgroFides is able to connect more lenders and farmers, and facilitate loans that have a positive impact on farmer’s ability to grow their businesses.

Learn more about AgroFides’ services and the impact our lenders are making.