NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, August 16, 2019

Convergence has awarded a Design Funding grant to the Global Development Incubator (GDI), which is partnering with the Council of Smallholder Agricultural Finance (CSAF) to establish Aceli Africa.

Aceli Africa seeks to address the $65 billion financing gap for agricultural small- and medium-enterprises (SMEs) in Africa, through a financing facility that uses targeted incentives to increase lending from local financial institutions and international lenders to these SMEs.

According to the World Bank, agricultural growth in Africa is significantly more effective at reducing poverty than growth in other economic sectors. Agricultural SMEs, including farmer cooperatives and food processors, improve livelihoods by aggregating and linking smallholder farmers to markets and generating employment for low-skill workers, particularly women and youth. Yet they typically lack access to finance because they fall into the “missing middle” – too large for microfinance but considered too small and too risky by commercial banks. Currently, less than 5% of commercial lending in Africa goes to agriculture though the sector employs the majority of the population.

Aceli Africa will tackle this challenge by leveraging data to create a marketplace where lenders receive financial incentives when they provide loans to agricultural SMEs. To inform the design of these incentives, Aceli Africa captured lending data from 28 financial institutions, including local banks and global social lenders that are members of CSAF, on thousands of transactions totalling more than $3 billion in lending.

Based on this data, Aceli Africa will offer two instruments to financial institutions: 1) cash incentive payments to defray the high operating costs associated with underwriting loans to new borrowers; and 2) a risk-sharing mechanism to reduce lenders’ exposure when serving high-impact segments that are higher risk, such as SMEs working in less formal food crop value chains.

“Unlocking private capital for agricultural SMEs has the potential to create opportunities for millions of smallholder farmers and transform African economies and food systems. Newly available data will allow us to test, iterate, and optimize how blended finance can catalyze a more efficient and competitive marketplace,” said Brian Milder, CEO of Aceli Africa and Director of CSAF.

From bilateral and philanthropic donors, Aceli Africa aims to raise $40 million for financial incentives paired with $10 million for technical assistance for agricultural SMEs. These funds will mobilize an expected $700 million in private sector lending with each donor dollar generating at least three dollars of incremental income for farmers in addition to job creation, food security and nutrition, and economic growth. Aceli Africa will initially focus in Kenya, Rwanda, Tanzania, and Uganda with the possibility of expanding to other countries in a second phase.

“At Convergence, we believe that blended finance should be used to promote a vibrant and sustainable local financial ecosystem. That’s why we’re supporting Aceli Africa. They are taking a unique approach to incentivize local banks, as well as international lenders, to lend to segments that they don’t traditionally serve to grow the local agricultural sector.” says Joan Larrea, CEO of Convergence.

Convergence’s grant will support the team to finalize the design and structure of Aceli Africa as it prepares to launch in early 2020.

Photo courtesy of International Institute of Tropical Agriculture.