Expanding Financing to Sustainable Farmers in Africa

09 December 2021

Expanding Financing to Sustainable Farmers in Africa

Expanding Financing to Sustainable Farmers in Africa

  • Farmers wanting to make the transition to climate-smart agriculture often lack access to loans and financing needed to make the shift.
  • In November, the World Bank wrapped up an innovative five-week training course, working with African banks to create new financing products to help farmers develop and scale up sustainable agricultural practices.
  • The overall aim of the program is to enable farmers to adopt sustainable practices, which will in turn help to curb forest degradation and support emission reductions from land use.

Many of our most pressing environmental challenges – from wide-spread deforestation to biodiversity loss and rising CO2 emissions – can be linked to agricultural expansion. Agriculture is second only to the energy sector as the largest source of carbon emissions globally. In recent years, annual global emissions due to agriculture reached 9.3 billion ton of CO2 equivalent.

The adoption of sustainable agricultural practices is critical to managing climate change, but making the agricultural sector more sustainable remains complex. A major barrier to farmers adopting sustainable practices is a lack of access to affordable financing. This is due, in part, to the perceived risk banks and other lending institutions have ascribed to the agricultural sector. A lack of understanding of how the sector works, combined with high transaction costs with dispersed farmers, have created a reticence among financial institutions to innovate in this space.

“It's a sort of vicious cycle,” says Roy Parizat, Manager for the World Bank’s BioCarbon Fund Initiative for Sustainable Forest Landscapes (ISFL). “Banks are reluctant to invest time or effort in learning about better practices that could make the sector more lendable, so things never really improve.”

The increasingly widespread effects of climate change are only compounding this vicious cycle and banks’ perceived risks.

New financial solutions for farmers

In November, the World Bank’s Forest Carbon Partnership Facility (FCPF) and ISFL wrapped up an innovative Sustainable Agricultural Banking Program that worked with banks from seven African countries to scale up sustainable value-chain financing in the agricultural sector.

During this five-week online program, participants – including lending staff and senior bank managers – worked with leading financial experts and mentors with decades of experience in the agricultural banking sector. Under their guidance, participants conducted in-depth value-chain analyses and developed new types of financial products tailored to existing or potential agricultural clients.

“Before this course, we weren’t at all active in financing agricultural credit because we had no experience in this sector,” says Edson Zavala, Credit Analyst at Banco Mais in Mozambique. “Through this training, we learned how agricultural credit works, what are the stages, what are the challenges and opportunities. We now feel ready to innovate in this space,” Zavala adds.

Through interactive sessions and hands-on, practical assignments, the program’s four modules explored the principles of agricultural value-chain financing, product development, client assessment and credit policy for sustainable lending, as well as loan monitoring and administration for climate-smart agriculture.

“There was a really encouraging through line in all the participants’ final product presentations that I have never seen before in agricultural value-chain lending,” says Kilara Suit, World Bank Finance Specialist and program manager. “In their analysis, all of the banks looked at the sustainable features of the value chain and used this as a criterion to assess whether or not to lend to a firm. This is a major step forward, getting us to a place where sustainable operations really do equal good business,” she adds.

In the coming months, the FCPF and ISFL will continue to support program participants as they finalize their new agricultural value-chain lending processes and procedures and begin to lend to new clients who are sustainably engaged in agriculture.

“The potential and scalability of this banking program are incredibly exciting,” says Carlos Ortiz, Senior Associate at Centrec Consulting Group and program mentor. “Imagine, you have a set of banks that do a training course; undertake a new way of credit assessment that takes sustainability into account; design a new financial product; and then actually lend new money in ways that help to protect forest landscapes, improve pasture and soil management, and boost yields. This course could become a powerful way to set up banks as agents of change for more sustainable production models,” adds Ortiz.