We will present our study 'Critical Capital for African Agrifood SMEs’ at the international foodFIRST conference tomorrow. The study reveals the enormous difficulties African SMEs in the agrifood sector face in obtaining finance. The SMEs are too big to be eligible for microfinance, but too small for banks to invest in. So what steps can we take to solve this problem?
Before we look at solutions for African SMEs in the agrifood sector, let us first look at why it’s so important.
• Africa is the world's youngest continent: half of its population is under 25 and half a million more 15-year-olds join this group every year.
• Eighteen million new jobs are needed annually to provide work for this growing group of young people.
Opportunities in the agrifood sector
I believe that the agrifood sector offers opportunities for these young people. Africa’s agricultural sector represents an enormous untapped potential. As the continent’s urban middle class grows, demand for food is rising. According to the World Bank, Africa has more than enough virgin farmland and water resources to sustain the growth of the agricultural sector. Yet the continent imports a vast amount of food, while it is in theory capable of feeding itself. Imported food is not only unnecessarily expensive, it is also often more unhealthy than fresh, locally produced food. The average age of African farmers is 60. To ensure food security requires urgent investment in young farmers.
SMEs are crucial
SMEs play a vital role in modernizing farming and making it more attractive. They can provide technologically innovative products and services that increase production and profits. SMEs in the processing industry can offer small-scale farmers a more stable market, and income. And finally: flourishing SMEs mean more jobs.
From Farm to Fork
It’s clear that SMEs in the agrifood sector are immensely important for economic growth in Africa and for future food security. If SMEs in Africa can grow further, the local population will gain access to better and cheaper food. It’s literally a case of “from farm to fork”.
But why is it so difficult for these SMEs to obtain finance? ICCO Cooperation linked up with Rabobank Foundation, AgriProFocus and Food & Business Knowledge Platform to investigate the matter.
One of the conclusions of the study is that there is a mismatch between the packages that investment funds offer and the requirements of agrifood SMEs. Investment funds tend to be looking for big deals: companies with a track record that can upscale because they have high growth figures and high profit expectations. Most SMEs, however, are small businesses with modest financing requirements and low profit expectations. They are unable to live up to the high expectations, for example when it comes to management and governance standards, and reporting requirements.
Ensuring a wide range of services
The study recommends a ‘graduated strategy’, whereby SMEs are able to make use of a wide range of services and finance matched to their level of development. For example, subsidized funding such as start-up capital or subsidies, but also support in the form of business management optimization, and access to markets and networks. Once businesses fulfill the requirements, they can gradually start to set their sights on investment fund opportunities, for example venture capital.
foodFIRST: seeking solutions with expert help
During our session at the foodFIRST conference, we will talk with experts about how we can improve our support to African SMEs in the agrifood sector, in the form of financial and non-financial services. We’ll discuss the role of public funding for bridging the gap, talking with Dutch government representatives who manage funds for SMEs, such as the Dutch Good Growth Fund. We’ll also hear a success story from a Kenyan entrepreneur who makes camel ice cream. He’ll talk about how he obtained finance from Capital 4 Development and Rabobank Foundation.
I’m really looking forward to learning about other solutions to the dilemma facing African SMEs.