Agriculture remains an important sector of the South African economy, and the political leadership is taking steps to affirm this view, writes agricultural economist Meselane Molepo. He explains what is needed for the blended funding scheme to be successful.
Last month, the minister of the department of agriculture, land reform and rural development (DALRRD), Thoko Didiza, announced the relaunch of the blended finance scheme in partnership with the Land Bank. This is an important programme for supporting new entrant farmers into the sector.
But we need to get more details about its operational details. The intent is clear: to support the development, acquisition and production expansions of smallholder farmers.
The steps that South Africa is taking with this programme are consistent with the outcomes from the Africa Green Revolution Forum summit held in September. A key takeaway message from the summit, also emphasised in the 2022 African Agriculture Status Report, was that African states should mobilise investments to accelerate the agricultural transformation and achieve food and nutritional security.
As someone who has worked in agribusiness with smallholder farmers for over ten years, I know the importance of agricultural finance in developing farmers. Innovative financing models such as blended finance are therefore necessary to leapfrog black smallholder farmers into commercialisation. This is especially important in South Africa where there is a need for inclusive growth and transformation of the agricultural sector.
Steady progress
The South African government is making steady progress by providing inclusive financial mechanisms for the often-excluded smallholder farmer. The scheme will be implemented over a 10-year period with the department investing more than R3,2 billion over the period. This investment will be implemented as a 50% grant and a 50% loan.
Blended finance is a financing model that combines traditional development assistance with other private and public resources to leverage additional funds from other actors to service the previously excluded borrower. Its associated advantages are that it mitigates risk through different risk-sharing strategies, improves financial inclusion and encourages value chain integration linking farmers with the market.
Smallholder farmers contribute a third of food to the world yet they are the world’s poorest people. South Africa’s agricultural landscape is divided, with two million smallholder farmers (majority black) in comparison to the 35 000 commercial white farmers. Lack of finance is one of the main reasons why many black farmers have not been able to expand their productions to commercial levels.
Finance needed for growth
Agricultural finance is important for inclusive growth in South Africa. Smallholder farmers need finance to afford productivity-enhancing technologies such as improved seeds, fertilisers, agrochemicals, mechanisation and irrigation. Moreover, finance allows them to access processing and storage technologies to reduce postharvest losses and a link to lucrative markets. Climate finance is also necessary for smallholder food systems to be resilient and to adapt to the adverse impacts of climate change.
Unfortunately, smallholder finance is scarce and there has been little investment, particularly from the private sector. On the one hand, the private sector shies away from investing in smallholder farmers because of their high risk and lack of equity. On the other hand, government fiscus is limited and cannot support all of the two million smallholder farmers.
Government must be commended for de-risking the scheme by providing equity for the farmers. The department assumes initial loss of capital and converts 50% of the investments into grants. If the government were to guarantee the investment by repaying the loan in cases of default, the interest rate will be significantly reduced. Currently it is not clear if the government will guarantee the investment, which will de-risk the investment even further.
Learning from other African countries
For the relaunch to be successful, there are valuable lessons to be learnt from successfully implemented blended finance programmes from other African countries. The Government of Ghana (GoG) partnered with the African Development Fund (ADF) to establish the Ghana Incentive-Based Risk-Sharing for Agricultural Lending (GIRSAL) facility. Through the collaboration, GoG committed R868 million (77.6%) as a grant while ADF committed R260 million (22.4%) as a loan. The GIRSAL project provided de-risking instruments like credit guarantee schemes, technical assistance, insurance facilities and digital financial platforms. Ultimately, there was an improved farmers’ access to credit, increased leveraging effect (crowding), reduced interest rates, reduced loan processing times and improved loan terms.
The Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL Plc) is a financial institution established in 2013 through a collaboration between the Federal Ministry of Agriculture and the Central Bank of Nigeria. NIRSAL Plc’s mandate is to stimulate and attract financial investments to develop the agricultural sector across different commodity value chains. It uses risk-sharing strategies such as first-loss guarantees, credit risk guarantees, grants and interest drawbacks to attract private investments in agricultural production, agro-processing and mechanisation projects. By 2017, the collaboration has raised R8.9 billion worth of investments, financing 631 agribusinesses, creating over 360 000 direct jobs and impacting more than 1.8 million people.
South Africa has a lot to learn from other sub-Saharan African countries about financing smallholder agriculture where in many of these countries, smallholder farmers and SME comprise the bulk of agri-food systems. Overall, the relaunch is good news for the industry, especially for smallholder farmers.
- Meselane Molepo is an agricultural economist and a Hubert H. Humphrey Fellow in the Department of Global Development at Cornell University. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Food For Mzansi.
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