MICROFINANCE PAPER WRAP-UP: AgriProFocus, ICCO Cooperation, Rabobank Foundation: “Critical Capital for African Agri-Food SMEs;” by Bert van Manen, Boubacar Diallo, Miraj Desaj, Paul Njenga

Following is a summary of a paper by Bert van Manen, Boubacar Diallo, Miraj Desaj and Paul Njenga; published by the Interchurch Organization for Development Cooperation (ICCO Cooperation); May 2018; 60 pages; available at: https://www.icco-cooperation.org/Portals/2/Files/Publications/Critical%20Capital%20Web.pdf

The authors of this paper conducted field studies of 15 small and medium-sized enterprises (SMEs) that are active in the agricultural sector in Kenya, Mali, Tanzania and Zambia to investigate how investment could help the SMEs grow. The authors explain that of the 200 investment funds active in Africa, about half invest in agricultural SMEs. Of these, 23 funds – with an aggregate volume of USD 252 million – invest exclusively in agricultural SMEs on the continent.

Most of the studied SMEs prefer debt investments over equity capital because loans tend to be more readily available and the owners prefer not to dilute their ownership stakes. Agricultural SMEs generally find it challenging to take on any type of external financing due to the agriculture sector’s typically low operating margins.

In addition to traditional debt and equity, the authors cite the following alternative financing mechanisms as worthy of consideration: (1) partially unsecured loans; (2) royalty-based loans, for which borrowers pay lower interest rates plus royalties based on the borrowers’ earnings and; (3) convertible loans, which the lender may convert into equity. The authors also discuss the idea of a “graduation strategy,” such as accepting mezzanine capital – financing that contains characteristics of both debt and equity – as a stepping stone to taking on private equity funding.

By Nicholas Galimberti, Research Associate

Sources and Additional Resources

“Critical Capital for African Agri-Food SMEs,” by Bert van Manen, Boubacar Diallo, Miraj Desaj, Paul Njenga
https://www.icco-cooperation.org/Portals/2/Files/Publications/Critical%20Capital%20Web.pdf

ICCO Cooperation background
https://www.icco-cooperation.org/en/About

AgriProFocus homepage
https://agriprofocus.com/

Rabobank Foundation background
https://www.rabobank.com/en/about-rabobank/profile/index.html

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