All SMEs Are Not the Same: Agribusinesses Require Targeted Strategies for Service Delivery
In Malawi, agriculture is a key national priority. The sector represents over 25 percent of gross domestic product and employs 80 percent of the country’s population. However, agriculture is characterized by a litany of challenges, including low productivity, limited access to finance, small landholdings, and the increasing threat of climate change.
Smallholder farmers dominate agricultural production in Malawi, and public agricultural policy has predictably been oriented toward supporting increased productivity for subsistence. Commercial and large farmers, aggregators, traders, and small processors have limited financial and business service support to grow their businesses, resulting in “the missing middle.” The past several years have demonstrated that Malawian banks and microfinance institutions are neither willing nor able to address the financing needs of farmers and agricultural small and medium enterprises (ASMEs) operating along staple value chains. In the case of ASMEs, it may be that the financial and business service sectors and donors have not gone far enough to “read” the unique needs of these enterprises that are so pivotal to economic growth. Findings from the Leveraging Economic Opportunities (LEO) project assessment in Malawi show that more work is needed to assist these businesses, a lesson that has application across development programs.
Perhaps the most significant characteristic of Malawian ASMEs identified by the LEO assessment is the “portfolio” model in which owners control several businesses and the resources of those enterprises flow back and forth among the group. Owners have the ability to access cash, pulling from one operation to help another, and to manage a variety of risks within the business cluster, reducing the need to buy insurance. This operational style makes investments in value chains difficult for governments, financial institutions, and donors—the lines between businesses are blurred and may cross several value chains or even extend beyond agribusiness. And, because owners depend on their businesses for cash or borrowing arrangements with business “friends” (funds often available interest-free), they do not engage the financial sector beyond the bank accounts they use predominantly for managing transactions and cash storage.
On the supply side, Malawian financial institutions have been slow to tailor their products to the needs of ASMEs, opting instead to offer repackaged personal banking products. Despite all of the Malawian banks that have departments dedicated to small and medium enterprises (SME) lending, SME loans remain an insignificant proportion of their loan portfolios. Limited understanding of ASMEs, combined with poor record keeping and financial management skills, among other frustrations, has created animosity and reluctance on the part of the financial sector to reach out. Lending practices continue to rely on collateral (problematic due to the absence of land/property titles) instead of repayment capacity. Where collateral—land or other physical property—is offered by ASMEs in rural areas, banks heavily discount it, as the commercial value of that collateral is lower relative to urban areas.
Another important challenge impacting the growth of ASMEs is the limited attention to business development services that can improve planning, operation, and profits. This is a result, in part, of the limited availability of business development services in rural areas and the lack of appreciation by ASMEs of the value of the services. The high cost of assistance, unless there is significant subsidy to service providers, is another deterrent. Conversely, business service providers have not explored the offerings that would have the greatest value and interest to ASME clients or coordinated the provision of services within the sector.
Malawian ASMEs depend little on information and communication technologies (ICT) beyond cell phones, and the financial and business service sectors have not maximized the use of ICT to share information, offer products, or provide data that can translate into greater earnings on either side of the table.
For Malawian ASMEs, the way forward depends on tailored, common sense approaches that are key to increasing their competitiveness. Through Feed the Future, USAID/Malawi is making key investments to expand agricultural trade; increase production and consumption of groundnuts, soy, and orange-fleshed sweet potatoes; and engage the Government of Malawi to improve the policy environment. ASMEs are a neglected key off-taker for these value chain investments. Greater research and development to support low cost delivery of business and financial services that are based on the express needs of small and medium agribusinesses and integrated with value chain programs will increase interest and participation of ASMEs. Strengthening the capacity of business and financial services providers will go a long way toward closing this gap, as will training for ASMEs to improve business and management skills. Opportunities to further an enabling business environment will support this work and help ensure that ASMEs are prepared and able to participate in the growth and development of their nations.