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New Initiatives to Finance Ghana’s Agriculture

As government introduces a medium term investment plan for Ghana’s under-resourced agricultural sector, a new public and private sector initiatives covering debt financing, private equity and agricultural insurance could unlock some of the sector’s huge still untapped potential reports TOMA IMIRHE

The latest revision of Ghana’s real Gross Domestic Product (GDP) growth rate for 2010 has put agricultural sector growth at 5.3% up from 4.8% as originally estimated based on the one year up to September last year. According to the revised figures, the crops subsector thus was less than half of the 10.2% growth achieved in 2009. Conversely though, fishing, in value terms grew by 1.5% last year, reversing a 5.7% contraction suffered in the previous year. Forestry, logging and related activities rose by 10% while livestock grew by 4.1% in value terms.

The Mills administration has, since taking up the reins of government in January 2009, shown a strong commitment to using agriculture to propel overall economic growth, provide jobs and alleviate poverty in the hinterlands. Now it has come up with two new programmes to make the sector work better for the country.

The broader of the two is the New Food and Agriculture Sector Development Policy; known as FASDEP II. This sets out the national vision for the food and agriculture sector as a modernized agriculture culminating in a structurally transformed economy and evident in food security, employment opportunities and reduced poverty.

FASDEP II sets out six broad policy objectives. These are food security and emergency preparedness; improved growth in incomes; increased competitiveness and enhanced integration into domestic and international market; sustainable management of land and environment; science and technology applied in food and agricultural development; and improved institutional co-ordination.

To achieve these broad objectives, government has come up with a quantitative programme known as the Medium Term Agriculture Sector Investment Plan (METASIP) which covers the period 2011 to 2015. This plan aims to raise the agricultural growth rate, over the next four years, to between 6% and 8% per annum. The crops and livestock sub-sectors are expected to lead this growth with an average annual growth rate of 6%. Forestry and logging, and fisheries are expected to grow at 5% per annum during the period. Cocoa is expected to remain robust in support of the other sectors.

METASIP sets out to ensure the sustainability of growth through improvements in the productivity of all operators along the value chain. This is to be achieved by modernizing agricultural techniques and operations, producing raw materials for industries, and, by producing more with less people, freeing labour for use in other strongly growing sectors of the economy. This, in turn will increase employment opportunities, significantly reduce poverty, raise foreign exchange earnings and improve food security and incomes.

For all this to happen though, government will have the knotty problem of agricultural financing. Already, it has committed to putting up considerable money from its own kitty. In the 2011 budget, GH¢221.55 million was allocated to agriculture of which some GH¢17.37 million is supposed to come from donor funding.

However, a lot more financing will be needed, from the banking sector and from private equity investors. To be sure, lack of access to financing is a major constraint to the growth of the agriculture sector. Explains Dr. Henry Shirazu Alhassan, Policy Implementation Co-ordinator at the Agricultural Development Bank (ADB), which is the country’s leading indigenous financier of agriculture and agro-processing.

“The diverse operators in the sector, including input dealers and suppliers, primary producers, processors, transporters, storage and inventory warehousing operators and distributors have needs for financial services. However they suffer from limited access to medium to long-term agricultural loans and untimely delivery of whatever agricultural credit that they can get.

Both debt financiers and equity investors alike see agriculture as a very risky sector for good reason. Indeed there are a plethora of challenges to agriculture financing. One is agricultural commodity and food price volatility, which makes financial forecasting different.

Another is the seasonality and unreliability of rainfall and the related longer term worry of uncertainty of climate change. Add to these the unsustainability of current agricultural practices and weak infrastructure.

Then there are institutional problems, such as the lack of property rights and the unsecured land tenure system. Institutional lenders are constrained by the high level of defaults among agricultural loan beneficiaries in comparison to other sectors and the lack of appropriate collateral for agricultural financing. There is also the problem of high transaction cost of disbursement on agricultural loans to smallholders.

Globalization of financial markets and trade liberalization; have created their own problems for Ghana’s agricultural sector as well. One has led to dominance of the local banking industry by big foreign ones in less risky sectord; the other has created intense competition for Ghana’s food producers, from imports.

Dr. Alhassan recommends a host of strategies to improve the quantum and quality of financial services available to the agricultural sector. These include strengthening of capacity of operators in credit management and in loan monitoring; and streamlining of loan application procedures and intensification of education of farmers on loan procedures. Others include promotion of linkages between formal and informal financial services for delivery and recovery of loans and promotion of flexibility in types of collateral demanded by financial institutions as well as the strengthening of informal and micro-financial institutions in rural areas.



Financial institutions which lack huge resources should be targeted with group lending approaches as farmer based organizations have their capacities strengthened to facilitate delivery of financial services to their members. Similarly rural women’s access to financial services needs to be enhanced.

Government is looking to several sources to finance METASIP itself. Basic funding will come from government itself. This year, the first of METASIP’s time-frame, it plans to spend some GH¢221.55 million, including GH¢14.95 million from its own purse, GH¢117.37 million provided by donor agencies and GH¢5.89 million in internally generated funds by the Ministry of Food and Agriculture.

Another source is debt financing from financial institutions. Here, ADB, the traditional provider of finance to agriculture but now a full-fledged, full-services commercial bank, is still the most permanent lender. As at June 30, 2010; the bank had a gross outstanding agricultural sector loan portfolio of GH¢113.49 million. Instructively, however, only GH¢86.097 million or 75.86% was performing credit while the other GH¢27.396 million, or 24.14% was non-performing. This evidences the complaint by banks that the loan recovery rate on loans to agriculture is inordinately low, reflecting the relatively high risk involved in lending to the sector.

Nevertheless several other banks, notably Ghana Commercial Bank (GCB) and Stanbic Bank have also built significantly large agricultural credit portfolios.

Now ADB has developed an agricultural finance policy and an integrated agricultural financing framework which may serve as a model for banks to successfully lend to the agricultural sector. These aim to enhance the timeliness, efficiency and effectiveness of agricultural credit delivery and recovery; minimize the misapplication of agricultural credit by beneficiaries since they have little access to cash; reduce the transaction cost of credit administration; ensure timely provision, procurement and delivery of agricultural inputs and services; and ensure the synchronization of agricultural production with processing and marketing and importantly, integrate the bank’s efforts with current initiatives by government in the broader agricultural sector.

Indeed this last stated objective is the foundation on which ADB and MOFA have agreed on an extensive partnership. The collaboration aims at leveraging the expertise of both institutions for effective and efficient delivery of agricultural finance, jointly identifying priority areas of agricultural financing in accordance with government policy and assessing the feasibility and viability of agricultural projects requiring financing. It also will determine how to assess and mitigate the risks associated with agricultural lending; deepen institutional understanding of the dynamics of the agricultural sector and ultimately ensure the sustainability of various government agricultural initiatives.

Ghana’s agricultural sector is also about to get another boost in unusual by direly needed firm: private equity. African Agriculture Fund for Small and Medium sized enterprises (AAF-SME) has been launched for sub-Saharan Africa, the first phase of which has targeted raising US$30 million in private equity through a new Databank subsidiary called Agrifund Manager Ltd to be invested in primary agriculture, agro-processing and animal feeds as well as services and infrastructure such as storage, fertilizers and other inputs. Importantly, 25% of the fund through will be invested in primary agriculture.

The fund which is being raised in two phases – (by the end of the second phase some US$100 million as expected to have been raised) is part of a pan-African fund, promoted by Phatise, which is ultimately targeting a total of US$300 million for investment across west, east and southern Africa.

Apart from Ghana, in West Africa, Burkina Faso, Cote d’Ivoire, Nigeria and Senegal are also being targeted.

According to Databank Executive Chairman Ken Ofori-Atta, the private equity being raised will go into enterprise expansion, management buy-outs, acquisitions, public private partnerships, and investment into out-growers and smallholders. For SMEs deal sizes will range between US$150,000 and US$4 million, although the African Agricultural Fund will also consider bigger transactions, of up to US$20 million.

The entire initiative is being accompanied by a Technical Assistance Facility of 10 million Euros to assist SMEs, smallholders and out-growers.

While both new debt and new private equity injections, alongside increased public spending on agriculture will provide immeasurable relief to Ghana’s farmers, the financiers and farmers alike will still have to deal with the vagaries of the weather which present a clear and present alike.

But here too, there is a new initiative that has the potential to help ameliorate the credit and investment risk considerably. This is agricultural insurance, a risk management tool that helps to mitigates against major climate induced crop production and income losses for farmers.

So far agricultural insurance has not been used but this is about to change, thanks to a new Ghana Agricultural Insurance Programme. This public private partnership is collaboration between GTZ, the German international co-operation and development assistance agency, the National Insurance Commission (NIC) and the Ghana Insurers Association (GIA).

The programmes overall objective is to assist the insurance sector in Ghana to develop a sustainable agricultural insurance system and to introduce innovative and demand-oriented crop insurance products to protect farmers against financial risks caused by extreme weather events and other forms of climate change. The programme’s timeline spans December 2009 to June 2013 and is being funded by the German Federal Ministry of the Environment, Nature Consortium Nuclear Safety. It is being managed by a Steering Committee comprising 11 members drawn from both the public and private sectors and a Technical Management Unit supported by a Technical Committee on Agricultural Insurance.



The first product to be put on the market by the initiative is now ready. This is known as Drought Index Insurance and it will provide insurance for maize products against the ill-efforts of unfavourable weather and will be available to farmers across the three northern regions – Northern, Upper East and Upper West.

The innovative product will serve as a major step towards ameliorating risk in the country’s very important agricultural sector, which has found it hard to attract financing because of the high level of risk attributed to extreme weather conditions.

Insurance for the First Drought Index is to be provided by the Ghana Co-Insurance Pool, an agricultural insurance system, put together by a consortium of general insurance firms.

The product will provide insurance for financiers of maize production, providing cover initially for Agricultural Development Bank, Stanbic Bank, three rural banks based in northern Ghana and a Tamale-based non-governmental organization.

Ghana Re and Swiss Re will serve as re-insurers and the premium rates are currently being negotiated with the latter, although it has already been determined that there will be no premium subsidies.

All this provides new hope for the accelerated financing and consequent development of Ghana’s agricultural sector. “The challenges of the agricultural sector are difficult, however they are not surmountable” assures ADB’s Dr. Alhassan.

Indeed if the several new initiatives coming through are all executed properly, those difficulties can be surmounted.

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