Agricultural lending remains a problem in need of a solution. There are over 30 million smallholder farmers in sub-Saharan Africa, accounting for 80% of all farms and providing around 70% of the region’s food, according to The International Fund for Agricultural Development. But they are still almost entirely absent from the loan book of traditional banks.
“Smallholder farmers are very fragmented,” says Benjamin Njenga, co-founder and CCO of Kenyan agtech firm Apollo Agriculture. “They don't keep farm records. They have no bank accounts. They have a productive asset - land. But they can’t get the money to invest in tools to succeed.”
Economies of scale
The foundation on which the agtech revolution is being built is mobile money, which enables fintechs like Apollo to transact with any client holding a mobile phone in any location that has mobile coverage. But this is not enough to make serving a single farmer with a one-acre plot commercially viable. What agtech also provides is scale, by weaving together many farming clients into one cost-effective portfolio.
Smallholder farmers are very fragmented. They don't keep farm records. They have no bank accounts. They have a productive asset - land. But they can’t get the money to invest in tools to succeed.
Remote sensing data allows agtech firms to see the type of house a farmer has and the assets on his land. Satellite data can also provide yield estimates and weather projections. “AI and machine learning technologies allow you to use alternative data sets to build customer profiles and make a lending decision remotely,” says Njenga. “It enables you to serve that smallholder farmer in a scalable and profitable way.” When communicating with farming clients, online voice tools are helping overcome the hurdles of financial and digital literacy.
The potential for agtech to truly transform rural agriculture also hinges on a more comprehensive approach to lending. Apollo’s financing comprises multiple different inputs in one package. “You get the seeds, you get the fertiliser, you get crop protection, you get agronomy training - everything bundled together,” says Njenga.
Global agtech firm Pula Advisors - which also started out in its home market of Kenya - is focused on insurance and devised a similar approach. The firm created a new tech-based system for assessing risk to develop an insurance product that is sold to farmers along with crop seeds. The strength of this packaged approach and the underlying infrastructure is such that global insurers are willing to provide reinsurance, says Efayomi Carr, principal at Flourish
Ventures - an early-stage investor in both Pula and Apollo. “Economies of scale have allowed them to deliver a product with attractive unit economics in a way that didn't exist even three years ago,” he says.
Bringing in the banks
It is no coincidence that the two largest and most successful firms - Apollo and Pula - started in Kenya. Deep mobile money penetration, a supportive regulator and a rural farming population open to technological adoption are all key ingredients present in Kenya. But there are other markets with similar promise. Apollo has already expanded into Zambia, and Njenga says Tanzania holds promise. Pula has insured over 20 million farmers and is active in multiple markets including Senegal, Mozambique and Ethiopia.
In addition to the right market conditions, agtech needs working capital. Apollo and Pula have a first mover advantage that has attracted early-stage investors like Flourish. More recently, Apollo has been in discussion with local banks,
Economies of scale have allowed them to deliver a product with attractive unit economics in a way that didn't exist even three years ago
who Njenga describes as “at least open to having conversations”. The sheer volume of capital that Apollo has managed to deploy already shows it is serious, and its agricultural loan book is already larger than that of many lenders in Kenya and Zambia. But Njenga still thinks it will require fundamental changes in terms of how commercial banks think about agriculture to get them comfortable with extending more funds for agtech.
The IFC is well aware of the potential and recently finished several cycles of pilot studies working with agtech firms and financial institutions. Aliou Maiga, the IFC's regional industry director, financial institutions group for Africa, says a pilot in Morocco resulted in 100% repayment and clear increases in farmers income and yield. Babban Gona, a Nigeria agtech firm that has partnered with the IFC, already services some 100,000 farmers and wants to reach millions in the coming years.
By servicing a portfolio of smallholder farmers and providing a detailed dashboard of that portfolio, agtech firms can - in theory - give banks the necessary visibility on risk to extend funding. Maiga agrees that enticing banks to fund agtech is a key challenge, but says the IFC can leverage its network of financial institutions to connect agtech firms and banks. The IFC could also play a vital role in building capacity within banks to manage agriculture lending. Even with an agtech firm servicing the portfolio, commercial lenders will need staff that can assess and understand the agricultural sector, says Maiga.
“The potential and pipeline that we have is actually massive because all banks are interested in this - as long as you can de-risk and service the portfolio for them,” he says. “I would anticipate you’ll see a really big pic-kup [in agtech] in the next one to three years.”