Increasing access to finance for agribusinesses

by Business Zone

Global population is projected to increase to 9.8billion by 2050 –approximately, a 30 percent increase from the current 7.6billion. Numerous research articles posit that to meet the demands of the growing population, global agricultural production will have to increase by 70 percent – which is enormous if you ask me. However, this is expected – food is an essential part of our livelihoods, hence the trend in the increasing demand for agricultural produce having a direct and positive relationship with population growth.

By 2050, it is estimated that food production will grow by 60 percent in Africa. However, currently, food production is woefully short of demand on the continent. Africa spends an estimated amount of $35 billion on food importation annually. Let us also not fail to take cognizance of the fact that, the agricultural sector, aside from being the source of food for consumption, contributes immensely to the economy.

Agriculture accounts for over 15 percent of Africa’s Gross Domestic Product as well as employing two-thirds of the population. Despite its low contribution and production, Africa is, ironically the repository of more than 60 percent of the world’s uncultivated arable land. The agriculture sector in Africa continues to be an opportunity that will yield great returns due to its untapped potential if the necessary investments are made. This requires taking significant and progressive measures to unlock this potential especially due to the number of challenges facing the sector.

Access to finance is a major limitation experienced by a lot of sectors globally, and obviously, the agriculture sector is no exception. Every Agri-business story – successful or failed, highlights this limitation as being the major cause of the state of their business. In recent times, stakeholders have put their best foot forward in addressing this issue. There has been a growing interest by mostly development partners, governments, financial institutions, individual and institutional investors, amongst others in solving the funding problem in the Agri-business space. However, these efforts are deficient, and the problem remains largely unsolved. The increasing and insatiable demand for funding compared to the aggregate capital deployed to support Agri-businesses continues to make the successes chalked thus far, of little significance. Hence, as we continue to implore stakeholders for their support to tackle this problem, the big question remains, “How can we position agribusinesses in Africa to tap into the pool of funds which is steadily trickling down the agriculture value chain?”

Investors analyze every opportunity for two main outcomes; expected returns and risks. Risk should be acceptable for the returns expected. Investors will assume a specific level of risk depending on the returns expected. The perceived risks and uncertainties of the investment greatly affect the investor’s appetite. If this is too great for the investor to bear, which is common in Agri-business in Africa, investors may reconsider the decision to invest. More so, any action that makes risk assessment uncertain or relatively increases the risk of the investment takes the wind out of an investor’s sail.

“Investors analyze every opportunity for two main outcomes – expected returns and risks. The risk should be acceptable for the returns expected and any action that makes risk assessment uncertain or relatively increases the risk takes the wind out of an investor’s sail”

Financial reporting and proper bookkeeping of Agri-businesses continue to be an issue prevalent in the region. The need to keep proper records as a business cannot be overemphasized. Poor records,

more likely than not, overstate the risk of an investment. Businesses with poor record-keeping habits provide different answers to similar questions during investor due diligence given the lack of supporting data. In instances where answers provided are right, investors may discount or completely ignore them because there is no documented proof to support the business owner’s claim. The need for businesses to keep proper books should never be underestimated and there is no better way than how William Deming puts it – “In God we trust, all others must bring data”. Addressing this problem is thus, an essential first step in the process of bridging the funding gap .

Beyond documenting, businesses need to establish a high level of trust in the records which have been kept. This is essential because it gives users the surety that information that is being provided has been vetted and proven credible. Investors, in this case, do not discredit it and can make decisions based on the information. To establish this, businesses need to invest in the services of credible independent professionals who provide an opinion and attest to the truth and fairness of their records. These professionals, as we all know, are called auditors. Businesses need to invest in the the conduct of credible audits of their financial statements. However, in Africa, specifically Ghana, SMEs often ask a very common question – “Why do we need an auditor?” Well, I bet you know the answer to that now.

A very common arrangement in several businesses today is to recruit an external accountant who doubles as an auditor. This is a futile arrangement in my opinion. To explain my stance, let us analogize this arrangement to participating in a quiz competition. Imagine you had to represent your school in a quiz competition where the stakes are high. The quiz questions are set by an independent body; and this same body is responsible for recruiting quizmasters to run the quiz. You manage to qualify to the final stage only to lose to your opponent. You later find out that the quizmaster doubles as the trainer for your opponent. Will you accept that the quiz was run fairly? My view might be same as yours – suspicion of foul play! Even though an independent body – which in our case is the International Federation of Accountants (IFAC) – sets the questions, you will still have some doubt concerning the fairness of the process and as a result, discount the efforts of the parties concerned. The story would have been different if the quizmaster – which in our case is the auditor – is proven to be a credible independent person.

This scenario is similar to what happens in the funding space. Investors would need to be able to trust the performance the business is projecting through its records by ascertaining whether these records are truthfully and fairly represented. The need to provide investors with this level of confidence underpins the need to secure an auditor – an independent one with strong credibility.

Once enough trust has been built, investors will need to confirm if the current results can be replicated and most importantly exceeded in the future. This is referred to as consistency. A typical investor will always opt for a business with relatively higher predictability. The more predictable a business is, the less the implied risk associated with the expected return. Also, the predictability of a business, hence its consistency, is determined a lot by its internal controls, systems, and processes. Therefore, to get the investor the consistency or predictability he seeks, a business needs to have the right working internal systems and processes in place. There needs to be a defined way of doing things that ensures everyone knows what to do in any situation. This way, a business can replicate peaks, reduce, and possibly avoid pits.

Well-thought-out systems and processes provide a systematic way that guides a business’ day-to-day operations. Examples of such systems and processes include Standard Operating Procedures (SOPs), Maintenance Program, Quality Control Processes, Sales and Marketing Policy, Credit Policy and Collection Procedures, Fixed Asset Policy, to name but a few. Michael E. Gerber, the acclaimed World’s

#1 Small Business Guru, states in his book, The E-Myth that “the system runs the business by integrating all the elements required to make the business work. It turns the business into an organism driven by the integrity of its parts all working in concert towards a realized objective”. Discretion is the enemy of order, standardization, and quality. Discretion is what internal systems and processes get rid of. As said by Brandon Sanderson, “It is not perfection we seek, for perfection is impossible. It is instead consistency”.

As said by Brandon Sanderson, “It is not perfection we seek, for perfection is impossible. It is instead consistency”.

To conclude, think through this, someone is willing to bet her hard-earned money on your future success. She probably has not met you before, probably does not know as much about the industry as you do, probably does not know how much work you have put in to get your business to its current heights and she definitely cannot perfectly predict the future. The best way to earn the trust of this person with conviction is by providing enough proof. Talking about it will not cut it. You need to be able to show it as much as you say it and the only way to get that far is to have credible data with proven systems and processes that make the future even more predictable.

Emmanuel Egyam is a private capital investment professional with several years of experience in commercial banking, private equity and private debt investments. He is currently the investment lead for direct debt investments in agribusinesses and cooperatives across anglophone Africa under the Agri-Business Capital Fund (ABC Fund). He can be reached via email on abcfund@injaroinvestments.com.

Kingsley Otchere is an Investment Analyst on the ABC Fund with focus on direct debt investments in agribusinesses and cooperatives across anglophone Africa. He has experience in microfinance lending and private debt investments.

Source: BusinessZone Online

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