Welcome remarks by Michel Mordasini Vice President, IFAD at Conference Investing in inclusive rural transformation: innovative approaches to financing
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Ladies and gentlemen,
It is a great pleasure to welcome you to this conference and to thank our partners, the Ministry of Economy and Finance of the Republic of Italy, as well as the Brookings Institution and the University of Warwick.
On behalf of IFAD President, I would like especially to thank the Italian Government, which hosted the inaugural session yesterday. We were reminded of how globalization has increased growth but also inequality, particularly leaving behind those working in agriculture. Our speakers highlighted the critical role of cooperatives and involving smallholder farmers in the decision-making process in order to achieve inclusive rural transformation. There was indeed a stimulating discussion of issues on rural finance that we will probe in greater depth over the next two days.
The 2030 Agenda and the Sustainable Development Goals, the follow-up of the Finance for Food event at the Milan Expo, as well as the Addis Ababa Agenda for Action resulting from the Financing for Development Conference in 2015, all recognize that much greater investments in smallholder agriculture and rural transformation are required if we are to achieve the goals of eradicating hunger and poverty.
Indeed small farms account for 80% of world food production. And non-farm rural SMEs make up the bulk of the agrifood sector, not only in the number of operators but also of employment and value generation in many countries. Together they are crucial to world food security, and also to addressing global challenges such as climate change, land degradation and water scarcity.
Sustainable Development Goal 2 calls for doubling the agricultural productivity and incomes of small-scale food producers, including through secure and equal access to resources, knowledge, financial services, markets and opportunities for value addition and non-farm employment. The direction is clear. Now is the time to walk the talk !
On the positive side, several governments, international financial institutions, the private sector and other development partners have already committed to do more in support of agriculture and rural development. There is also increased awareness that linking smallholder farmers to value chains can have huge benefits for food security and poverty reduction.
Growing population, higher food prices and increased interest by market operators to expand and diversify their sources of products, create opportunities for smallholder farmers. The agri-food sector stands today at 5 trillion USD and is growing. It holds tremendous promises for producers in developing countries.
But can smallholder farmers and other rural small-scale business make the required investments to take advantage of these opportunities? Can they access finance to expand production, buy equipment, modernize, diversify, build storage to safeguard saleable surpluses and reduce food losses, or take advantage of insurance? As we know, the reality is one of a huge gap in retail finance and investment in rural areas.
To grow a farming enterprise you need finance just as you need water. Without it you cannot move forward. Today smallholder farming is faced with a massive drought of finance. In Africa, while the livelihood of 70% of the population depends on agriculture and agribusiness, this sector – which represents 40% of the continent's GDP - receives only 10% of total commercial bank lending. Investments in African SMEs are mostly funded internally, by the entrepreneurs themselves, with suppliers’ credit and bank loans representing respectively only 3% and 8%.
Yes, there are many successful and effective microfinance initiatives providing small loans that help farmers get by, usually from one harvest to the next. And mobile technology has also emerged as a powerful tool to bring financial services to rural people. IFAD itself is investing in such projects, which are breaking down barriers to access finance.
But these positive developments relate mainly to short-term loans. What about finance that allow smallholders, cooperatives, producers’ organizations and SMEs not just to operate, but actually to invest in and grow businesses? For that they need access to commercial lending, which implies a different kind of institution and a longer-term transaction and longer horizon for repayment. But such institutions most often view smallholders and rural entrepreneurs as too big a risk. As highlighted yesterday by Mr. Padoan, the Minister of Economy and Finance of Italy, the critical financing gap for investments in rural areas is the “missing middle”, between microfinance and the larger-scale operations of equity funds and commercial banks.
Obviously, this is not just a challenge about money: to better reach and serve the rural areas, formal finance needs to be coupled with an enabling policy environment, public infrastructure and provision of capacity building to SMEs and farmers. It requires programs that work directly with financial institutions and intermediaries to increase their capacity to work with small-scale rural producers, and to manage or mitigate risks related to agrifood finance.
IFAD is keenly aware of these needs, and it is addressing them in its portfolio. To date we have invested over 3 billion USD in rural finance initiatives. Other IFIs are also providing such support. But the sum of all these efforts – not to mention the involvement of the private sector – is neither large enough nor coordinated enough to make the kind of difference that is required. We need to scale up, speed up, and better align our activities and our partnerships if we are to achieve the ambitious goals of the 2030 Agenda.
Partnership is key, and that is one of the reasons why we are together here today. It is essential that we find ways to foster better alignment among existing efforts, as well as strengthening the positioning of smallholder finance on the global agenda. We can create tools for existing funds and initiatives to learn from one another, and to identify the key missing pieces to enable more effective provision of rural finance to the small farms and SMEs that will not progress without it.
In closing, let me point to the three concepts that are embedded in the title of this conference: investment, inclusiveness, and innovation. To reach rural people and achieve an economic and social transformation benefitting the poor you need all of these. IFAD partners with governments, the private sector, and with rural people and their organizations to achieve rural transformation. To take one example of where this is happening, in Nigeria in November 2016 the state of Anambra achieved its 210,000 metric ton rice self-sufficiency target through the IFAD-funded Value Chain Development Programme. This project has linked smallholder producers to large private sector market operators, and has raised productivity by 35 per cent for over 14,000 farmers.
In the Republic of Moldova, 19-year old Anastasia Gilca, a blackberry farmer, took out a loan through an IFAD-supported project that allowed her to install a drip irrigation system. She doubled her harvest, increased her income, and now employs six people. She has bought equipment, including a tractor and cultivator, and has plans for further expansion.
How do these successes happen? They happen when the various stakeholders come together and solve problems, unblock access, and build mutually beneficial relationships.
The Smallholder Agriculture Finance and Investment Network, or SAFIN, about which you will hear more tomorrow, aims at leveraging the convening power of IFAD and its four decades of experience working in the rural sector, to help take forward new approaches and deploy innovative instruments to improve access to rural finance for the smallholder farmer and the rural entrepreneur.
But before that, we have much work to do in unpacking some of the themes I have only been able to allude to here, in order not only to share knowledge, but hopefully build consensus around possible lines of action. I look forward to our discussions over the coming two days.