Inequity in Funding: Africa’s Agripreneurs Pay a High Price for Start Up Finance
Africa has pinned its hopes on agriculture for the creation of jobs and the resulting reduction of poverty. But its role is being stymied by the high cost of financing.
Limited investment, high interest rates and restricted support means African businesses are losing out to foreign competitors.
If we want to transform the continent’s food security and fortunes, then African Governments must help create an economic environment conducive to local investment by, for example, amortizing loan rates and driving billion dollar investments into the sector.
And all stakeholders—including government, donors, and the private sector— must work towards a more equitable and inclusive approach to build local investment for sustainable agricultural growth.
Agriculture in Africa is the sector that offers the greatest potential for poverty reduction and job creation, particularly among vulnerable rural populations and urban dwellers with limited job opportunities.
Agriculture today accounts for 23% of GDP in Sub Saharan Africa, and growth generated by agriculture in sub-Saharan Africa is estimated to be 11 times more effective in reducing poverty than GDP growth in other sectors—a vital multiplier given that 65% of the continent’s labor force is engaged in agriculture.
While an absolute increase in investment is essential, Africa has been the land of opportunity for foreign investors. African entrepreneurs are facing some of the world’s most challenging business conditions. The resources necessary to grow a business—such as finance, human and social capital, and infrastructure are less accessible in Africa. Finance, in particular, is costlier in Africa than in other parts of the world.
The most obvious of all the challenges, most African-led start-ups have difficulties in raising capital. Entrepreneurs and small business owners cannot easily access finance to expand business. They are usually faced with problems of collateral, high interest rates, extra bank charges, inability to evaluate financial proposals, limited financial knowledge, making it difficult for small businesses to access finance.
On the other hand, American venture capital and private equity is dominating Africa, but it’s mostly funding other foreign founders as native entrepreneurs struggle to raise financing. Some attribute the funding inequity to a mix of issues, including lack of experience with and understanding of the African market, general mistrust, and the tendency to fund companies based in the West that are operating in Africa.
For example, in Ghana, foreign businesses who borrow from their home countries assess 3-5% loans to do business in Ghana whereas the locals have to borrow at 23% to compete with these companies. Even with continental free trade these foreign businesses have about 20% advantage over local companies and startups who borrow from within. Even with efforts from the government to compel prevailing commercial banks to reduce loan rates, Ghanaian businesses and startups are still losing out with the implementation of continental free trade agreement.
Even though some agro-processing businesses registered with the Ghana Free Zone Authority and Ghana Investment Promotion Centre are exempt from income tax for ten years from paying duty on the importation of equipment, lowering interest rates will go a long way to solidify some of these interventions for startups who must borrow money to start a business.
Tax incentives alone cannot account for other challenges for the lack of infrastructure and problems faced in Ghana’s investment environment. The government should also address land acquisition challenges with local and traditional authorities who own most of the land in Ghana.
By having inequity in funding, Africa’s start-up environment is missing out on a lot of talent and losing out on building many great companies to transform the continent’s food systems.
To build the continent’s next start-up giants, a few things are needed; setting up SME help desks and developing relevant products for the emerging African entrepreneurs; government agencies should engage to provide credit support to help de-risk bank lending, reducing the need for collateral as well as the cost of borrowing; banks across the continent need to work with entrepreneurs to help them prepare viable business proposals in accordance with their lending rules.
Public-private partnerships are a strong pillar and a good support system for agribusiness start-ups to leverage. For example, a high-yielding economic opportunity in the agri-food systems sector needs numerous components: capacity development adapted to local entrepreneurs’ needs and labor markets opportunities; facilitation and mentorship in adequately accessing land, credit, and markets; and enhancing the opportunities for agripreneurs inclusion in policy and strategic debates.
To be sure, there are exciting steps in the right direction. Organizations like Food Systems for the Future are offering capital and wraparound services tailored to Agtech, Foodtech, and Innovative, scalable market businesses with a potential for increased profitability and nutrition impact in Sub Saharan Africa. In addition, Norrsken Foundation is building East Africa’s largest hub for entrepreneurship and innovation in Kigali, Rwanda, for education, innovation, and entrepreneurship—forming an ecosystem that enables entrepreneurs to build strong companies that solve local and global challenges. Google, The Tony Elumelu Foundation, and Seedstars World (to name a few) are also playing an active role in providing funding for these green entrepreneurs.
However, this challenge is still very far from being resolved on the entire continent.
There is a need to enable African entrepreneurs in the food systems to develop or enhance their business ideas and create a high-quality business plan to support the launch or growth of their agri-business.
Until then, agriculture will fail to live up to its potential for economic growth in Africa.
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Dr. Cedric Habiyaremye is a Rwandan crop scientist, Research Associate at Washington State University, Research Lead at Food Systems for the Future Institute, and agricultural entrepreneur developing solutions for a zero-hunger and malnutrition-free world. He is a New Voices Senior Fellow at The Aspen Institute. www.CedricNotes.Com
Dr. Mavis Owureku-Asare is a Food Scientist based in Ghana. She is The Head of Senior Research Scientist at the Biotechnology and Nuclear AaAgriculture Research Institute where She is leading research and providing solar drying technologies to reduce postharvest losses in the Tomato value chain. She is a Food Safety Consultant and a 2020 Aspen New voices fellow.