CID recently had the opportunity to speak with Katia Goertz, Senior Project Manager, International Advisory Services, at the Frankfurt School of Finance & Management about her upcoming participation in the Agrique Africa Investment Summit. Read what she had to say about the Frankfurt School’s work advising local FIs, and the important role such institutions have in developing sustainable finance programs for agribusinesses.
What is the main message that you will be bringing to the conference?
Agriculture is a key contributor to GDP, employment, and other economic indicators in African countries. As such, the sector has a huge role to play in the social stability and economic growth of a country. However, most small agribusinesses don’t have access to finance since many institutions consider lending to the sector to be both costly and risky. The message I will be bringing to the conference is that we have found it is absolutely possible to lend to these companies on a sustainable basis, even to the point where many of our FI clients can make a profit and keep their portfolio risk under control. And we are not just talking about small working capital loans, but long-term loans as well. I will be sharing my experience seeing such lending programs work in several countries around the world.
Why should agribusiness SMEs consider loans from FIs as an option for financing their growth?
FI loans are one form of funding that can provide these businesses the right amount of capital at the right time of year. Agriculture is seasonal, so the latter point is critical. A farmer might need capital for a tractor during harvest season, for example. If they borrow informally or from a friend, they may not be able to get the right amount of capital in time. Financial institutions have a key role to play in solving these problems by providing short- and long-term loans.
What are the unique qualities of the EIB and other institutions that you advise when it comes to agribusiness finance?
Traditional financial institutions, such as private or public banks, have had bad experiences with lending to this sector and are understandably hesitant to do so. The EIB, however, has several advantages over other sources of financing including the ability to offer attractive interest rates, technical assistance, and loans in local currency.
What is your favorite example of a successful agribusiness finance project that you advised?
We advised a project in Turkey with the goal of increasing the availability of agribusiness finance across the country. When we began the project in 2010, there were only four banks in the country that were involved in agriculture finance. By the end of the project, we were able to raise this number to twelve. We not only had more financial institutions in agriculture, but we also lowered rates due to the competition that was created. The average interest rate dropped 27% in just four years. Within those years the volume of agriculture loans more than doubled. This project was a great success that showed that the fear of getting into agribusiness finance can be overcome with a properly structured program. In fact, during the course of this project, risk of default on agribusiness loans decreased by 32%.
Where does agribusiness finance often fall short?
Poor product design is something we see very often. A loan must be designed well enough to be attractive to the farmer and the agribusiness. Specifically, each program needs to take into account the seasonality of different crops. Large countries like Zambia or Turkey, for example, have different agricultural zones that harvest crops at different times of the year. Therefore, loan programs must be designed to offer loans to specific types of agribusinesses during the seasons that they need them the most.
How important is promoting sustainability and ESG when it comes to attracting loans?
Sustainability and ESG are important to all DFIs. They typically have very strict environmental and social criteria for any project or loan they participate in to ensure that sustainability is at the core of the businesses they are financing. Even in scenarios where DFIs are relying on local banks to facilitate the lending, the DFI still looks for local banks that have environmental and social guidelines. If the local bank does not, DFIs typically task consultants to develop them. But the bottom line is that sustainability and ESG are fundamentally important concerns for donors and financial institutions.
Why are you looking forward to the upcoming summit?
It was a pleasure to speak at the 2017 edition of this Summit and I am looking forward to doing so again this year. The event brings together interesting speakers and delegates that you will not find at many other events. Another great aspect of the Summit is that it is relatively small compared to other events that can bring together over 500 delegates. The advantage of a smaller conference is you can engage in much more comprehensive and meaningful networking.
Register for the Agrique Africa Investment Summit today!