Too big for microfinance, too small for banks

It is frustrating to make plans that will never see the light of day. This was Zidadu Waziri's experience. He is a farmer and rice trader in Central Tanzania. "Banks are not interested in investing in small enterprises like mine, so they don't give loans except at exorbitant rates of interest." Waziri belongs to what is referred in Africa as the 'missing middle': a category of enterprises and cooperatives in the agrifood sector that are too big to receive loans from microfinance companies and too small to be of interest to commercial banks.

"Small and medium enterprises (SMEs) are vital. They strengthen climate resilience, generate income and jobs, help smallholder women farmers and less qualified workers – especially women and young people – to emerge from poverty," explains Eddah Nang'ole, Impact and Learning manager at Aceli Africa. The initiative is supported by the SDC and relies on a mix of financial incentives such as guarantees, impact bonuses and technical assistance to get banks to unlock financing for this sector.

The target is to mobilise USD 600 million in private capital for agricultural SMEs and to improve living conditions for over a million smallholder farmers and poor people in the rural regions of Kenya, Rwanda, Tanzania and Uganda. "If an agri cooperative has money to buy products from 300 smallholder farmers, this has a direct impact on their livelihoods and improves food security, prices and access to markets," explains Nang'ole.

In East Africa, 65% of the population is engaged in agriculture. Although this sector contributes 25% to national GDP, it receives very little support from financial institutions. There are many reasons for this. For banks, the risk is doubled due to climate change and the price volatility of agricultural products, returns are 4–5% less on average and costs are higher because of the difficulties in servicing clients in remote regions.

Aceli Africa supported 281 loans amounting to a total of USD 34 million from September 2020 until the end of 2021. Lenders for agri SMEs also include the SME Impact Fund, a financial institution in Tanzania. "The financial incentives provided by Aceli Africa have enabled us to lend to new customers. Aceli Africa subsidises part of the operating costs and shares in the risks," says CEO Allert Mentink. The new customers belong to the 'missing middle', namely those SMEs that require loans between USD 25,000 – 50,000: just like Zidadu Waziri. "The loan allowed me to buy more rice from small producers," he says.

The Opportunity Bank also participated in Aceli Africa's programme and extended a loan to Ariho Elly. He raises cattle and grows bananas in southern Uganda. "With the loan I was able to buy more cattle and increase production in my plantations," says Elly. "The availability and access to loans at beneficial interest rates helped to raise my income and allowed me to employ more people, especially young people and women."

Omara Jummy is another loan recipient from the Opportunity Bank. His factory is located on the main arterial road to Kitgum in northern Uganda. Komar Ngetta African Millers produces oil and has 70 employees. With the loans, which were smoothly processed, he was able to buy sunflower seeds, soya beans and cotton at good prices. "I also invested in a refining plant, which has improved the quality of the oil," says Jummy.

The Aceli Africa programme will be phased out at the end of 2025, which is why a regional financial ecosystem needs to be built up. The target is to meet the credit needs of a key sector for achieving the goals of the 2030 Agenda. "Based on the success we have had, we want to convince governments and banks to adopt our idea of supporting agrifood enterprises," emphasises Nang'ole.

The objective is to drive systemic change – first in the four East African countries and then ultimately across the entire continent. It is thanks to Aceli Africa that Ariho Elly, the coffee and banana producer in Uganda, and Zidadu Waziri, rice trader in Tanzania, are already making plans for the future from which other smallholder farmers will also benefit. In the next five years, Elly intends to set up a distribution network covering large parts of the country. Waziri will buy a rice milling machine to improve his production.

Aceli Africa