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06 May 21

How can blended finance help fill the agriculture financing gap?

How can blended finance help fill the agriculture financing gap?

Investing in agriculture is central to achieving the UN Sustainable Development Goals (SDGs). Agriculture is a major component of national GDP in many developing countries; the vast majority of the world’s poor live in rural areas and increased productivity in agriculture has an outsized impact on reducing extreme poverty. However, high transaction cost/return ratios and information asymmetries are some of the challenges the sector faces in attracting financing. Blended finance can help de-risk agricultural transactions, reducing transaction costs and attracting private financing by improving the risk-return ratios of near-bankable transactions.

Convergence’s latest Data Brief explores how blended finance approaches have been deployed in agriculture to date, presenting insights from interviews conducted with key industry stakeholders. The Convergence database has recorded 146 blended finance transactions targeting the agriculture sector and/or SDG 2 (Zero Hunger). As Figure 1 shows, this represents aggregate committed financing of USD 13.4 billion. Agri-transactions most often target agricultural inputs / farm productivity (36% of agri-transactions) and agri-finance (35%), although our interview respondents noted the increasing importance of climate-resilient / sustainable agriculture (18%), with agribusinesses under increased pressure to ensure sustainability within their supply chains, down to the primary farmer.

Below are some key takeaways from the Brief.

Funds are the most common vehicle type in blending for agriculture: Funds account for 53% of agri-transactions (vs 39% of all blended finance transactions in our database), while projects are less prominent compared to the wider blended finance market (12% vs 24% of all). This is because standardized funds can better mobilise at scale, with our respondents also noting that funds can make their facilities available to local banks with retail distribution networks to better reach local farmers.

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Agriculture transactions are typically smaller in size compared to the rest of the blended finance market: Agri-transactions have a median size of USD 38 million (compared to USD 57.1 million for all transactions); a plurality of agri-transactions (26%) have been in the USD 10-25 million range, with over half (57%) being below USD 50 million in size, compared to 44% for all transactions.

Rural communities & smallholder farmers targeted as end beneficiaries: Rural communities and smallholder farmers appear more as end beneficiaries than as direct beneficiaries in blending for agriculture, constituting the intended end beneficiary of 86% of agri-transactions (versus 34% of the overall market). In contrast, rural / smallholder farmers were the direct beneficiary of only 7% of agri-transactions, with nearly half of agri-transactions targeting MSMEs (49%) as direct beneficiaries.

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With the agriculture space being highly intermediated and blending occurring mainly at the fund level, achieving scale will require investments in funds supporting innovative busines models in food and agriculture: Innovation in agricultural investment strategies must be balanced against finding what works and creating simple, replicable structures to achieve scale. Achieving scale will also be helped by investing in funds that support innovative business models in food and agriculture, especially by targeting key nodes within the sector or specific value chains that can de-risk the entire sector and signal possibilities for the wider market.

Become a member and read the full brief.

About the Author
Andrew Apampa, CFA

As a Senior Associate, Andrew is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate. While there, Andrew inaugurated the Special Report series, publishing in-depth studies on thematic issues within African private equity, such as political and currency risk in African PE, and the rise of the private credit industry in Africa. Prior to joining AVCA, Andrew worked at HSBC as an Emerging Markets Equity Strategist, where he published reports focused on investing in frontier equity markets. During his time at HSBC, he also worked on the European Equity Strategy team and the Global Research Marketing team. Prior to his time at HSBC, Andrew was at the University of Cambridge, where he completed his master’s thesis on protest and mobilization in Sub-Saharan Africa. He is a CFA charterholder.

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