Over 122 million more people have been facing hunger in the world since 2019 due to the pandemic and repeated weather shocks and conflicts, including the war in Ukraine. With a global population of 7.9 billion people, it implies one in every 65 people is facing hunger. This poses a significant threat to achieving SDG 2 by 2030. 

Africa has the potential to be the world’s food basket. The continent’s Agricultural sector contributes approximately 18% of the continent’s Gross domestic Product  which is also expected to grow at a rate of 4.1% in 2023-24. This prospect is backed up by the abundant natural capital estimated at USD 6.2 trillion in 2018

Agriculture has a funding gap of approximately USD 180 Billion a year in sub-Saharan Africa. The sectors; technologies, production, value addition and distribution value chains are mostly underdeveloped lacking sufficient tailored financing from both public and private financing sources. Agricultural Small and Medium Size Enterprises (SMEs) often operate below capacity compared to the available natural resources. 

Climate change remains a major threat to the sector while the lack of clean technologies means that businesses in the sector cannot be competitive enough to meet the global demand for food. Public funding has played a critical role in closing the climate financing gap estimated at as much as $2.8 trillion over 2020-2030, or $250 billion annually according to the African Development Bank. However, this is limited to large agricultural farms and businesses that meet the set criteria. Small and Medium Sized enterprises in the sector sit outside the popular financing ticket size of USD 0.5M to USD 2M as offered by most funders and investors on the continent yet these have a large representation of women and youths. A survey across a pipeline of 220 agricultural SMEs in the Women in Agriculture Impact Investment (WAII) Facility pipeline, an intervention by Finding XY indicates that most female led Agri SMEs (80 %) need financing of USD 10,000 to USD 0.25M. 

The most popular financing tools in the sector are debt, equity and grants. East Africa has seen a growing use of approaches like convertible notes, asset backed financing, and debentures. Investor categories that have collaborated with the WAII facility include commercial banks, micro finance institutions, development financial Institutions, angel investors and impact funds. Eight of the investments supported by the WAII Facility over the last six months were financed by each one of these investor categories but only one being a straight up equity investment. Debt and convertible notes remain the most popular with an average interest range of 5% to 10% on the US dollar. Investors have shown different preferences for the types of agricultural production, value addition and value chain they will finance. This has both negative and positive impact on the agricultural ecosystem. 

The positive is that it encourages specialization, predictability, and growth in the sector. The negative is the exclusion of some agricultural value chains and limitations to mixed agriculture necessary for climate adaptation. The WAII facility provides an incentive structure to investors with a leverage ratio of 1:10 which is USD 1 used as derisking capital for every USD 10 of investment raised. A significant number of public and private institutions are offering commercial banks and micro finance institutions similar first lost incentives either at portfolio or transaction level. 

The Women in Agriculture Impact Investment Facility (WAII) is a fund providing tailored business development support, access to finance and de-risking capital used as first loss to reduce the cost of capital for female led Agri SMEs and the risk exposure of financial institutions and impact investors. The facility is designed to tackle domains that hinder female led Agri SMEs with the support from USAID Feed the Future Inclusive Agricultural Markets (FtF IAM) and partner investors including Igravity, Nordic Impact Funds and others. Since its launch in June 2022, the facility has recorded a pipeline of 220 Agri SMEs in Uganda and most recently in Kenya. The Facility leverages 3 components to achieve its objectives. These include business advisory and investment services, an Agricultural Apprentice Incubator to deepen value chains in refugee communities and the trade promotion component.  This has enabled the facility to target smaller deal sizes and unlock capital that investors and banks are hesitant to lend. 

The challenges facing agricultural financing can be summed up into real and perceived risk, investment criteria, social and economic conditions and trade barriers. 

• Agri-SMEs are perceived as unpredictable, less profitable, and risky for investors. This is attributed to climate change, price volatility, limited track record due to the size or age of the business and investor appetite for large ticket sizes. Investors and Financial Institutions take advantage of locally available incentives and first loss facilities in addition to working with local advisors to improve knowledge of the local context. 
• Most Agri-SMEs lack tangible assets that they can offer as collateral. There is limited use of other securitization tools like data and underwriting or guarantee facilities. This presents an opportunity for innovative financing structures that have been used in other sectors like asset backed lending while investors accumulate data on most viable Agri SMEs that show promising  growth trajectories and can attract larger ticket sizes. 
• There is a gap in supporting female and youth-led agri-business. The criterion for financing excludes them from investment opportunities. Financial institutions and Investors can emulate the WAII facility by intentionally using an equity gender lens financing approach to archive both investment and impact returns. 
• Agri SMEs lack quality trade development and promotion services. For most, they explore trade markets in Europe and the United state with limited trade among countries on the continent. With increasing adoption of the Africa Free Trade Continental Area, investors can anticipate increased regional trade and reduced cost of doing business. 

Africa has a variety of business development advisors, funds and financial institutions with experience, and capacity (significant AUM) that can be leveraged as intermediaries to reduce the cost of financing. Investors can directly invest through such local market facing intermediaries while still having the flexibility to have their funds domiciled in preferred locations. This will improve investors understanding of local markets and improve impact or investment returns. Most African governments are intentional on supporting foreign investments that build the capacity of institutions and labor. Africa’s young age demographic guarantees an agile work force and market for both producers and investors.