Financing small agribusiness in Africa

Situation

The foundation’s Agricultural Development team is deeply committed to empowering farmers in sub-Saharan Africa and South Asia with assets and innovations that allow them to harness the power of commercial markets to obtain what every family seeks: a steady income, nutritious food, stable communities, and education for their children. Access to markets for agricultural products is important for translating increased farm productivity to increased incomes for the smallholder farmer. Without markets, farmers have little reason to invest in their farms. The coffee you buy is likely grown by a family farmer and then purchased by a local coffee cooperative which processes it and resells it to a multinational distributor/retailer. Many of these cooperatives are small, informal and have limited history of financial performance. These factors constrain these organizations’ access to capital which slows their growth, thereby limiting smallholder farmers’ access to markets and reducing families’ incomes.

Approach

In 2009, our colleagues on the Agricultural Development team identified Root Capital as a high-potential partner to provide loans to critical aggregating organizations (like cooperatives) in Africa. Root Capital was selected because it had a strong track record of financing the growth of coffee-producer cooperatives and other agribusinesses in Latin America. The non-profit lender was beginning to enter the Sub-Saharan Africa market, and the Strategic Investment Fund provided a $10 million loan commitment, disbursed over time, to be on-lent to high-impact agribusinesses that provided access to markets for low-income farmers. The loan was supplemented by a $4 million grant for operating and permanent lending capital and to offset any future write-offs in the portfolio (effectively, the “equity” on Root Capital’s non-profit balance sheet).

Results

Root Capital successfully repaid the loan from the foundation upon the note’s maturity in early 2016. During the seven-year term of the investment, Root Capital’s assets grew from $27 million to $115 million and the non-profit broadened its investor base to include commercial banks, government agencies, strategic partners and a broad swath of double-bottom-line investors. The team grew out its Africa lending infrastructure from one office to seven locations across the continent. Loans from its Sub-Saharan Africa portfolio grew from 10% to 30% of Root Capital’s total disbursements. Most importantly, the non-profit helped cooperatives and other agribusinesses to grow and reach more smallholder farmers. In Africa, Root Capital’s loan recipients purchased $105 million of agriculture commodities from 404,487 farmers in 2015, up from $11 million of purchases from 69,071 farmers in 2010.

Lessons Learned

Asking successful partners to grow aggressively and enter new markets or take on new problems comes with opportunities and challenges. The potential impact of these collaborations is significant and supporting the partner with the right mix of investments, grants (or other appropriately subsidised capital) and organisational support is critical to helping the partner achieve its potential.