In Sub-Saharan Africa and Asia an increasingly complex picture is emerging of SMEs in the agri-food sector that struggle to scale because they are unable to access market mechanisms of finance.
A CASA research brief The Underserved Middle: Defining excluded enterprises in agricultural value chains estimates of the shortfall in supply of both formal and informal finance range from USD 100 billion to USD 170 billion per annum.
These issues were explored in the CASA webinar Stronger, Greener and Fairer Recovery: Understanding the ‘Underserved Middle’ and are summarised into aOne-Pager (the key points from the webinar)
Formal finance remains expensive and difficult to obtain. Financing these enterprises is frequently unprofitable due to the cost, limited sectoral understanding and high default rates.
The informal finance sector is poorly understood and probably underestimated, but in many cases represent the main source of capital for SMEs.
Accessing finance is often not simply about the availability of funding. It is also influenced by market failures that challenge the ability of enterprises to generate profits and thus their ability to take on loans and investments.
The physical and legal infrastructure necessary to sustain an environment conducive to economic and business growth is often underdeveloped.
SMEs in the underserved middle are generally too small or lack effective industry-level representation to be able to influence the institutions that develop the policies which affect them. Resolving these challenges and releasing the potential of the private sector is not necessarily expensive, time-consuming or politically difficult. Investors should explore the broader business ecosystem, as much as the specific business, when seeking to invest.
Investors and other stakeholders should consider how changes to policy, regulation and infrastructure will unshackle excluded SMEs and release their ability to scale themselves.
For additional background and context also see the report
Africa Agriculture Status Report: The Hidden Middle: A Quiet Revolution in the Private Sector Driving Agricultural Transformation