Early last year I wrote a 3-page concept note proposing “An International Credit Facility to Support Commercialization of African Smallholder Staple Crop Farmers” This would be a mechanism to tackle the “missing rural middle” of African farmer finance.
It would target staple crop farmers, rather than cash crop farmers, who typically have much greater access to capital, for many reasons. (It is also the same mechanism cited in a recent blog post for Rio+20.)
The basic idea is as follows:
A systematic financing mechanism is needed to address the “missing middle” of rural Africa, whereby smallholder farmers can coordinate to access “patient capital” loans of perhaps $25,000-$100,000 at a time. This mechanism should be focused on making capital available in the context of a broader ecosystem of business support and agricultural extension services that help farmers identify market opportunities based on agronomic comparative advantage, then develop business plans, introduce new farming techniques, and implement successful marketing programs. Importantly, the complementary services are not a substitute for the patient capital itself. The financing facility would focus on neither pure public subsidy nor pure private capital. Instead it would focus on covering the risk-adjustment component of private loans.
The cost would be roughly $5 billion per year of public finance to leverage roughly $25 billion per year of private capital.
I wrote this as an input to a working group that was chaired by Mthuli Ncube, chief economist of the African Development Bank, and which included people like Nancy Birdsall of CGD. Everyone in the group seemed to support the idea, but in the busy-ness of life we didn’t have a chance to spend more time on it. As a minimum step I thought it worth posting the note online here.