Need for Investment in Agriculture and Rural Areas Remains High

Although the need for investment and thus the demand for external financing in the agricultural sector is pressing, only about a quarter of financing needs are actually being met with supply, which critically constrains the modernization and professionalization of the agri-food sector.

“We face a stark contrast between the very high demand for finance — especially for loans — and the reality of financing actually provided to the agricultural sector in developing countries,” says Waqas Malik of the new SNRD subgroup on access to finance and food processing.

A recent report by the Initiative for Smallholder Finance estimates the total financing needs of smallholders to be around US$ 200 billion and a supply of only US$ 56 billion.

Formal financial institutions are thought to make up only 25% of the current supply, with the rest of financing provided by either value chain actors (approx. 30%) or informal, semi-informal or community-based financial institutions.

GIZ, on behalf of BMZ and with its agricultural finance project portfolio of over € 50 million is actively working to develop approaches and instruments to support partner countries in promoting access to finance and especially agricultural finance. Moreover, access to finance is one of the key cross-cutting themes for projects working in the field of agricultural and rural development and sustainable economic development and thus plays a central role in their implementation strategy.

Achieving SDGs through an improved access to agricultural finance

According to UN’s High-Level Political Forum on Sustainable Development, agriculture plays a key and direct role in achieving SDG2, which highlights the complexity of interlinkages between food security, nutrition, rural transformation and sustainable agriculture. Agriculture is also pivotal to achieving SDG1 on eradicating extreme poverty, and several targets, especially those related to health, water, biodiversity, sustainable cities, sustainable energy, and climate change.

Moreover, SDG Goal 8 target 10 explicitly aims to strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all. This goes hand in hand with an FAO estimate that an average net investment of US$ 83 billion annually is necessary to raise agricultural production by 60 percent to feed a global population of more than 9 billion expected by 2050.

This makes it very clear that improving access to agricultural finance is of paramount importance to achieve targets set forth by Sustainable Development Goals. At the same time, more efforts are needed to not only support financial institutions in developing countries to expand into rural areas with demand-driven financial products but also to empower target groups to use these financial services to undertake productivity and profitability enhancing investments.

Agricultural Finance

Keeping in mind the key role access to agricultural finance plays in a multitude of GIZ projects and to achieve the SDGs, the formation of the SNRD Africa subgroup on Access to Finance and Food Processing is part of the efforts to promote dialogue, mutual learning, sharing lessons learnt and increase overall efficiency and effectivity of the projects aiming to improve access to finance.