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Financing Farmers: The Key to Advancing Africa’s Agriculture Industry

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Financing Farmers
Pexels Errol Dio

As Africa grapples with a myriad of challenges, the spotlight is increasingly falling on the urgent need to innovate and revamp financing mechanisms for the continent’s farmers.

This was a central theme at the recent 10th African Regional Forum on Sustainable Development (ARFSD), where experts emphasized the crucial role of enhanced funding in meeting both the Malabo Commitment to end hunger by 2025 and the Sustainable Development Goals (SDGs) by 2030. The call for action is clear: to overcome climate change, low productivity, and conflict, collaborative efforts and strategic partnerships must be forged, with significant engagement from the private sector.

The Backbone of Africa’s Economy

Agriculture is the economic backbone of Africa, supporting an estimated 33 million smallholder farms which contribute to 70% of the continent’s food supply. Africa’s diverse agricultural landscape includes rubber and cocoa in the tropics, soya and sorghum on the plateaus, and tea, coffee, and flowers in high-altitude regions. However, climate change poses severe threats to this vital sector. El Niño and increasing extreme weather events, such as tropical cyclones, floods, and droughts, are decimating crops and testing the resilience of the land.

Climate change also degrades soil quality, reducing its fertility and, consequently, crop yields. This land degradation, already a significant issue in Africa, exacerbates the struggles of farmers who lack the financial means to combat it. Dr. Agnes Kalibata, president of AGRA (the Alliance for a Green Revolution in Africa), estimates that land degradation costs farmers up to $1,400 per year. With 65% of Africa’s soil currently degraded, affecting 494 million hectares, the impact on livelihoods is profound, as 83% of sub-Saharan Africans depend on this land.

Investment and Innovation: The Path Forward

The pressing need for substantial investment in Africa’s agricultural sector is evident. However, the visible impacts of climate change have made investors cautious, deterred by the risks of defaults and political instability. To achieve the objectives of the African Union Agenda 2063, which include transforming agriculture and ensuring food security, it is essential to provide farmers with the financial resources necessary to address these challenges.

With global food insecurity heightened by the Russia-Ukraine war, which has disrupted production and exports from Ukraine, Africa has a significant opportunity. By improving yields and securing them against climate risks, African farmers can help fill the global food supply gap, unlocking immense economic growth potential. Access to finance would also enable farmers to cultivate the 60% of arable land in Africa that remains unused.

Government and Private Sector Roles

As part of the Comprehensive African Agricultural Development Programme (CAADP), African governments have pledged to allocate at least 10% of their national budgets to agriculture and rural development. Yet, this may still fall short of what is needed. Subsidizing climate insurance could provide additional support, helping farmers manage risks and encouraging investment in the sector.

Private sector involvement is crucial for driving investment, fostering innovation, and addressing industry challenges. The example of African Risk Capacity Limited (ARC Ltd.), a parametric insurer and financial affiliate of the ARC Group, illustrates the impact of addressing farmers’ specific needs through strategic partnerships.

Case Studies of Impact

ARC Ltd. offers micro and meso insurance products to small- and medium-scale farmers in Africa. Micro insurance protects farmers’ assets and income, while meso insurance covers banks against loan defaults due to severe weather events. This approach enables banks to extend more credit to farmers, enhancing their access to finance and allowing them to invest in productivity improvements.

In Côte d’Ivoire, ARC Ltd. collaborated with the Ministry of Environment and Sustainable Development and the United Nations Development Programme (UNDP) on a climate insurance pilot for agricultural value chains. This project, which began with rice producers, has expanded to include cocoa production and aims to cover other crops such as cotton and maize. The project recently issued its first payout of 16 million CFA francs to 3,594 rice and cocoa producers.

In Djibouti, ARC Ltd. signed a multi-year, multi-peril agreement with the government, providing five years of disaster risk management and insurance coverage against drought and excess precipitation. Additionally, ARC Ltd. has partnered with the US Government on an $11.7 million project to protect smallholder farmers and governments against climate risks, aiming to cover 19 states with parametric insurance.

The Road Ahead

Parametric insurance, which enables rapid claim payments, has significant potential to safeguard farmers’ livelihoods and drive development. ARC Ltd. plans to expand its micro and meso insurance offerings and include more beneficiaries, such as pastoralists and humanitarian organizations.

As climate risks escalate, innovative financing solutions like parametric insurance are vital. Increased awareness, investment, and policy reforms are essential to scale up climate risk management strategies and empower Africa’s farmers, ensuring a more resilient and prosperous agricultural sector.

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