Development Finance: How It Can Enable The Growth And Transformation Of Agriculture

This report was originally created by Gatsby Africa and looks at the role of finance in sector transformation. 

Gatsby is considering how investment can or should be used as a mechanism for driving growth and innovation within industries and how it can be used strategically to catalyze these industries. For example, in our aquaculture program, we have invested in a pioneer firm in East Africa, which is now East Africa’s largest fish farm. This, in turn, is catalyzing the rest of the industry — creating incentives for investment into local fish feed manufacturers and exposing the industry to new models of production and distribution. Our initial investment (risk capital) has crowded in four times as much investment from commercial investors. Our investment is critical to allowing the firm to demonstrate results and to give other investors confidence to move into the industry. 

This study:

• Looks at the role of finance in sector transformation.
• Explores five case studies in detail, including tea in Kenya, salmon in Chile, and mobile phones in Africa.
• Considers the availability of different types of finance, the gaps, and presents some initial ideas to increase the quality and quantity of the type of finance needed to support the transformation of the agricultural sector in developing countries.

Key findings:

• Historically, concessional finance (i.e. finance that doesn’t fully price for risk) played a key role in most of the studies identified, provided either by a national development bank, a development finance institution, or a parastatal.
• There is currently a considerable gap in the supply of concessional finance needed to support the transformation of high-potential sectors, particularly agriculture. While addressing this gap is critical, there is not a strong evidence base around the most effective options for providing concessional finance to agriculture.
• It is clear that finance alone cannot achieve sector transformation. More is needed to get the system working effectively, e.g. appropriate industrial policy, addressing sector level bottlenecks, and mechanisms to allow firms (especially MSMEs) to access skills and technology.