8 November 2023, Oshani Perera
Innovation in agri-food financing
The consultation draft of the Shamba Centre enquiry on sustainable finance is open for comment.
Unleashing the Catalytic Power of Donor Financing to Achieve SDG 2
The enquiry explored how donors can be bolder with their financing to increase development impacts while crowding-in development finance institutions and private investors. We are honoured to be partnering with the Global Donor Platform for Rural Development and to have engaged with over 70 stakeholders.
The findings break new ground on financing the missing middle (SMEs seeking financing between USD 50,000 and USD 2 million), blended financing and on increasing financing from development finance institutions and domestic lenders alike.
Key questions
Our first debate on the consultation draft took place during the Annual General Meetings of the Global Donor Platform for Rural Development at the end of October. Donors, develop finance institutions, commercial banks and private investors took the floor to welcome the draft and debate on questions that stemmed from it in a session moderated by the Shamba Centre’s Executive Director, Carin Smaller.
What is the cost of lending to agri-food SMEs? Does the development ‘additionality’ of these small loans outweigh the time, trouble and the costs required to provide them?
Is blended finance, quite simply, the buying of impact by donors and philanthropy?
Is there too much focus on the financial additionality of blended financing? Leverage ratios do not specify development outcomes and how essential the donor dollars were to launch the project/fund in the first instance.
Is it realistic to expect development finance institutions to maintain investment grade credit ratings but still participate in risky projects? Development and profits are, after all, not always compatible.
How can domestic lenders be encouraged to lend to agri-food SMEs when the yields from government bonds remain far more attractive?
Should sovereign wealth funds join donors and their shareholder governments in de-risking food and agriculture?
Why does the use of credit enhancement solutions such as guarantees, currency risk hedging, liquidity facilities and insurance remain at the margins?
Can donors be more innovative with first loss financing? For example, can results-based financing effectively de-risk projects and increase development impacts?
The business of farming is filled with uncertainties. Accelerated climate change, species loss and land degradation are making it even more uncertain. Additional complexities arise due to the playout of farming subsidies, inflation and the deep emotional ties that human societies have with the ownership of land. We are also only just understanding the ‘true cost’ of food: the retail price tag of food includes farming, processing, packaging, storing and retailing, but not the costs of food-related illnesses or how food value chains contribute to the ‘wicked’ environmental and social challenges of today. All this means that the costs of financing for agri-food SMEs is and will remain expensive. The irony is that these very same SMEs, when armed with the right technologies and practices, may indeed pave the way for more sustainable value chains in the years ahead.
Recommendations
The recommendations of the enquiry challenge donors to walk the tightrope in making their dollars stretch even further. It is certainly true that fiscal stress and dangerous geopolitics will cause overseas development assistance to dwindle and donor dollars, already a highly sought after resource, will become even more rare. But this is precisely why donors can be even bolder in asking for more impact, more thoughtful policies and much greater accountability from beneficiary governments, development agencies, development finance institutions and all development partners across the board. And bold donors must also lead by example and the recommendations of our enquiry chart out the preliminary steps.
Firstly, domestic banks and financial intermediaries in low-income economies must be crowded-in as the flow of finance cannot be improved without them. More often than not, credit lines and guarantees provided by donors lie dormant of the balance sheets of domestic banks and financing institutions who have little incentive to promote or develop markets for them. Despite decades of cooperation with development finance institutions, domestic banks remain conservative and fail to see themselves as market makers and builders of robust economies. Hence a new generation of results-based incentives which are accompanied by long-term knowledge development should be prioritised. It is time that domestic lenders become aware of the real and perceived risks of their country’s agri-food sector.
Secondly, blended financing must be less timid. Donors can reduce transaction costs and share risks by working together to collectively pool their expertise, capital and risk appetite. The latter is particularly important as bolder blending demands that donors begin to provide financing at commercial rates and re-inject the gains back into development finance. This could well be the game-changer that the development finance community has been seeking over the last 20 years.
Thirdly, development finance institutions must finance the transition towards the SDG. This requires fresh lenses on the use of the development finance arsenal that these institutions already have at their disposal. But, in addition, they should be provided with ring-fenced pools of money with which they can take calculated but unprecedented risks.
Fourthly, as one cannot manage what one cannot measure, donors and the entire development community will be well served with clean and comparable data on the performance of SME lending, within and across projects, programmes, funds and portfolios. Stakeholders argue that all lending that directly and indirectly stems from donor money should be accompanied by mandatory requirements on disclosure. Reducing information asymmetries is, after all, at the core of functioning markets.
We admit that there is rarely a win-win-win for all. Large cross-sections of farming communities remain poor and unempowered. They are far from being ready candidates for blended financing and perhaps, they never will be. As much as stakeholders may call for innovative finance, the reality is that there are few agri-food enterprises that can live up to expectations of blended and commercial financiers. Patient grant funding from donors therefore remains the critical baseline to maintain revenues from farming, increase off-the farm jobs and reduce poverty.
The development community also tends to overestimate the role of finance. Money is a current that flows through societies, igniting some, burning out others and accumulating where risk, return and appetite find common ground. It needs to be tempered and regulated to build just and fair societies. Moreover, it needs purpose-built conduits to direct its flow towards internalising the externalities embedded in the SDGs. While finance bring us the means to achieve our goals, it does not bring us the wisdom on how best to deploy it. Profit without purpose is not worthwhile.
We look forward to your views on the consultation draft. Email us - info@shambacentre.org