Demystifying development finance
IFAD is an essential part of the development finance ecosystem. But how exactly does this system work? We answer your questions.
A perfect storm is brewing, threatening the survival of small and medium-sized enterprises (SMEs) the world over. The war in Ukraine, coupled with the effects of the pandemic and the climate crisis, has led to food shortages, rising fuel and input prices, declining productivity and increased hunger.
How is this impacting agricultural SMEs? Is the crisis affecting their ability to access finance? Are the institutions who finance agri-SMEs becoming more risk averse in this volatile global context?
The Smallholder and Agri-SME Finance and Investment Network (SAFIN)—in collaboration with IFAD, the Good Food Hub and the International Finance Corporation—is helping to answer these questions by showcasing the perspectives of agri-SMEs, development organizations, and finance institutions.
How are agri-SMEs affected by the current crisis?
Many agri-SMEs in the world’s poorest countries rely heavily on imported fertilizers—prices of which have skyrocketed in recent months. With little local alternatives available, farmers are struggling to plant and produce at the levels they did previously, while SMEs that rely on wheat imports are being forced to scale back their operations.
Agri-SMEs rely on finance to grow and be sustainable. This too is impacted by the current crisis. Initial evidence indicates a mixed scenario, with some financiers in import-dependent countries tightening credit in a “wait and see” approach, while others are proceeding with business as usual.
What’s more, expanding financial services for the rural poor is impeded by high transaction costs, inadequate services, and fragile social, economic and environmental contexts—creating yet another barrier for agri-SMEs to access finance.
What is IFAD doing to support agri-SMEs during this volatile time?
Through its Private Sector Financing Programme (PSFP), IFAD finances SMEs that are often neglected by investors due to perceived high risk, a lack of collateral and high costs.
For example, Babban Gona offers training, inputs, marketing and storage services to small-scale maize producers in Nigeria. Market conditions have forced the company to make larger cash investments to service land, with costs almost doubling compared to 2021. To help the company weather this turbulent period, IFAD is providing long-term financing with a generous grace period to alleviate pressure on its cash flows and to allow it to grow.
In Madagascar—a country already grappling with severe drought and food shortages—fuel prices have increased by 44% and grains are in short supply. A women-led distributor of grains and legumes, SOAFIARY, increased its network of small-scale food suppliers with support from the PSFP. SOAFIARY has also strengthened its partnerships with farmers’ organizations, UN agencies and NGOs to deliver produce to food insecure people during these turbulent times.
While the context continues to evolve, understanding the effects of the crisis on agri-SMEs is crucial to developing effective solutions. It is also important to not lose sight of longer term objectives as we respond to crises. For example, the current increased focus on financing production may distract from financing other needs, like building climate resilience. SAFIN will continue to support agri-SMEs, gathering evidence on how they are weathering the storm and to provide sustainable solutions for long-term prosperity.
Read the learning brief on Agri-SME Finance: Navigating volatility in the wake of the war in Ukraine
Find out more about SAFIN.
Learn more about IFAD’s Private Sector Financing Programme.