As the global population and its demand for more food, improved nutrition and increased employment opportunities surge, the need for increased financial investment in agriculture remains key world over. By the same token, Rwanda is no exemption.
The World Bank estimates that the demand for food will skyrocket by 70% in the next 33 years. This will call for an investment worth at least 80 billion US dollars on annual basis to meet the growing demand for food consumption. The most interesting part of the global conversation today is that this projected investment is expected to come from the private sector, which provides a great opportunity for sustainable agricultural growth.
The arrival of the private sector captains on the path to commercialised agriculture will certainly lead to a heavier footfall in the banking hall, which makes our conversation on agriculture financing particularly more relevant in this article.
That said, access to sufficient and appropriate financial products, especially in the developing countries, for agriculture development remains a challenge. A case in point is our country Rwanda whose financial sector only extends a paltry 6-7% share of its loan portfolio to agriculture, despite its significant contribution of 33% to the country’s GDP.
Undoubtedly, this is a substantial bottleneck for the sector to obtain the desired sustainable growth and increase its contribution toward the country’s GDP. Boosting agricultural finance would be a game changer in various aspects. A game changer in the sense that greater investment facilitated by financial institutions would yield into an enormous employment base. Why? Because the majority of our people depend on agriculture for their business creation and income generation. Aside from the direct beneficiaries, all of us live and breathe largely because of agriculture a fact that should draw our due attention to support the sector as stakeholders.
Why do banks shy away?
In Rwanda, most banks will remain at a distance when it comes to developing and offering financial products to agriculture. This is due to a wide range of factors. One, limited knowledge on the dynamics of agriculture in terms of its opportunities and challenges of which they could explore and address the former and later respectively. Two, perceptions of non-repayment due to sector-specific risks, such as production, price and market risks. Three, higher transaction costs of reaching remote rural populations, and lastly, limited knowledge on how to manage transaction costs and agriculture-specific risks.
When you flip the coin, the other good side of the coin will certainly show up and indicate an oasis of opportunities that agriculture can present to the banks and other forms of financial institutions. All we have to do is to sustainably address challenges. In Rwanda, key stakeholders have embarked on changing the face of the current situation through synergising and providing holistic solutions to promote agriculture financing. This is a step in the right direction.
Some of the interventions to de-risk agricultural finance are setting up agriculture lending departments within financial institutions, providing national agriculture insurance schemes, and credit guarantees among others, that will stimulate increased and appropriate financing for agriculture. These are interventions Access to Finance Rwanda (AFR) is working on in partnership with various private sector institutions and the Ministries of Finance and of Agriculture.
As a key market player, AFR has supported four financial institutions to set up agriculture lending departments. This support has focused on developing agriculture lending specific strategies and capacity building among other key interventions.
The development of the National Agriculture Insurance Scheme is also underway which will see smallholder farmers access insurance for their crops and livestock. In turn, financiers would find lending to the farmers a less risky segment.