By Geoffrey Kamadi
Smallholder agricultural enterprises in Africa face numerous challenges when it comes to obtaining loans from financial institutions like banks. These institutions often have stringent requirements that these enterprises struggle to meet. The lack of investor confidence further complicates the situation, as the risks associated with this sector of the economy are considerable.
Climate change has also had a negative impact on these enterprises. Prolonged droughts and unpredictable rainfall patterns have made them less resilient. Additionally, small-scale farmers receive only a small percentage of climate finance, leaving them particularly vulnerable.
However, there are innovative financial solutions being implemented to address the unique needs of these farmers and tackle the climate change issue. Organizations like Root Capital are working with small-scale agricultural enterprises, providing them with a financial model that accommodates their needs and addresses climate change on the ground.
Root Capital, a nonprofit organization, supports agricultural enterprises that work directly with small-scale farmers. On the other hand, Mercy Corp, an international NGO, through its venture capital arm, supports entrepreneurs who are developing transformative technologies, innovative business models, and effective climate adaptation resilience solutions that are often tech-enabled.
These technologies are utilized in the 35 most climate vulnerable countries, according to Scott Onder, the chief investment officer at Mercy Corp. In Kenya, for example, the NGO has partnered with Safaricom, the largest mobile network operator in the country, through its DigiFarm product.
This product offers a range of solutions for smallholder farmers, helping them increase productivity, yield, and income.
Batian Nuts Ltd, an edible nuts processing enterprise based in Meru County in central Kenya, has experienced significant growth since partnering with Root Capital. The enterprise exports macadamia nuts internationally and also processes peanuts for the local market. They work with 8,000 small-scale farmers.
“We chose to work with Root Capital because their interest rates are lower than what we would get from the financial market, and their terms are favorable for a start-up like ours,” says James Gichanga, co-founder of Batian Nuts Ltd.
He explains that commercial banks require substantial collateral, such as land or other assets, which they don’t have. Root Capital, on the other hand, provides financing based on commitments from overseas buyers of their produce. A letter of intent from the buyer is sufficient for obtaining funding from Root Capital.
In other words, Root Capital signs an agreement with the buyer and the borrower (such as Batian Nuts Ltd) in which the buyer pays Root Capital directly when it’s time for payment. Root Capital then takes its principal interest and passes the rest of the payment to the borrower.
This type of financing has been around, but its application to smallholder agriculture is an innovative way to mitigate risk without requiring collateral from farmers.
In addition, Root Capital provides technical assistance to small and medium-sized agricultural enterprises through a program called “agronomic and climate reliance advisory.”
Since partnering with Root Capital, Batian Nuts Ltd has seen a significant increase in its operations, capacity, and workforce. Prior to the collaboration, the enterprise handled between 300-400 tonnes of produce per year. Since 2017, they have doubled their capacity to 1,000 tonnes and increased their permanent workforce from 26 to 55 employees. They have also engaged seasonal workers, increasing their workforce from a few dozen to 160 for seven months of the year.
Investing in small-scale farmers in sub-Saharan Africa has traditionally been avoided due to higher costs and risks, creating a significant financing gap for small businesses in the region. The impact of climate change further intensifies these risks for investors. However, Root Capital is making a difference by working with a network of businesses and farmers in Africa, Latin America, and Indonesia.
IPS UN Bureau Report