Food security, small business growth accelerated by innovative ITC financing approach
Innovative financing expands food supply and accelerates small business growth
Innovative new methods by the International Trade Centre and its country partners have achieved encouraging results in opening-up financing for small businesses to expand food supplies.
Some 90% of the world’s productive capacity is in the hands of micro, small and medium-sized enterprises (MSMEs). Rising input costs, disruptions to transport links and COVID-19 have led most of these enterprises to decrease production volume despite increasing demand. MSMEs need affordable and predictable financing to expand production, cut the current supply gaps and improve food security.
ITC and its country partners have taken a fresh look at small business lending to develop new financing options that combine ITC’s wealth of impartial enterprise information with innovative financing structures for short-term loans for farm operations and food businesses
ITC’s wealth of enterprise knowledge
ITC provides technical assistance and information to improve thousands of small businesses every year through its donor-funded development projects. ITC maps, profiles and analyses production chains, as well as the growth plans, behaviour and market dynamics of small businesses.
In 2020, ITC’s Access to Financing and Investment team undertook in-depth surveys of enterprises their financing and business development support providers across the world to examine their transactions practices and identify the root causes of their challenges in financing growth.
Respondents noted four priorities:
- Find cash quickly to pay for more inputs when sales expand;
- Reduce lenders regulatory collateral requirements for businesses with few assets to pledge;
- Get coaching in financial management and in applying for grants or financing;
- Find one place for impartial grants, financing and business development facilities information.
Some unexpected survey responses
To our surprise, more than 80% of ITC MSME respondents used low-cost digital accounts at national or regional banks for payments and receipts. Small farmers, artisans and food enterprises also use mobile or e-commerce payment systems linked to national or regional banks. This gives them a recorded transactions history.
Changes in legislation across East Africa during 2021 now allow banks to include these transaction histories in risk assessments and to base lending ceilings on recorded revenues. The banks told us that default rates for short-term financing during the pandemic remained low at around 3% - compared to 30% defaults on loans with repayments terms beyond 18 months.
Banks are encouraged to extend more loans to their expanding MSME client base, particularly to improve food production. But banks don’t have enough resources to identify good financing recipients, get accurate records and issue loans without reducing their own credit rankings and profitability.
Armed with this information, ITC and its country partners developed and tested new financing schemes and information platforms in East Africa and the Pacific. These combine ITC’s knowledge, coordination skills, insight and impartiality with the financing industry’s country experience.
Innovative financing approaches at work
Three examples demonstrate what can be achieved when knowledgeable local specialists partner with ITC technical development teams supported by buyers and communities:
- Small farmer output doubles in Fiji: Hundreds of small-scale root crop farmers were mapped and profiled to clear the way for them to join an agri-food value chain financing scheme supported by ITC’s UK Trade Partnerships Programme, buyers and the Fiji Development Bank. This scheme provides a guarantee to avoid the need for farmers to find collateral to get seasonal financing. ITC and its local partners provided production, quality and resilience coaching.
The $740,000 pilot scheme doubled exports of baby ginger and increased farmer incomes by more than 60%. For over two years, the scheme has had zero defaults, despite a massive cyclone. Recognised as commercially viable, even after factoring in support costs, Pacific Island banks are now expanding this approach into other sectors with a $1 million top-up.
- Short-term unsecured SME lending fuels food production for United Republic of Tanzania: ITC hosted “Boot Camps” for small businesses and cooperatives in coffee, spices and horticulture supply chains. Participants learned how to upgrade their management practices and assemble documentation to pre-qualify for short-term business lending. De-risking guarantees through development finance institutions allowed banks to offer lending up to 70% of revenues at around 9%, instead of 17%, per year in 2022. Loans were provided without collateral to enterprises with two or more years of stable earnings that had been prepared for loan qualification by ITC’s partner, the Tanzania Association of Professional Business Development Service Providers.
In the trial’s first month, the scheme disbursed $3.5 million of short-term lending without using each enterprise’s full lending envelopes – leaving space for further expansion in orders. Farmers and processers could expand food and cash crop production for domestic and export markets despite input costs rising to three times 2021 prices. Producers could not have continued to supply customers without these working capital advances.
- Get information through the MSME Financing Gateway: ITC has developed a free, multi-lingual platform that allows enterprises to find and link to grants, financing and business development services that match their needs. The MSME Financing Gateway will go live in five East African countries in early August. The Gateway gives women, youth, rural and urban entrepreneurs information they otherwise struggle to find. It also provides a channel for grant givers, philanthropists, lenders, incubator/accelerators, service providers and impact investors to reach MSMEs. In return, financing and development service providers receive unique analytical reports on potential client demographics, needs and search activities.
A call for donor and DFI support: Amid global supply shortages and uncertainties, we urge donors, development banks, impact investors and guarantors to urgently consider supporting ITC to scale-up its new access to financing and investment services. These services lower lending risks and costs to breathe new life into MSME financing – particularly to support those who provide sustainable food and export supplies.
Please reach out to: financing [at] intracen.org or through Ian Sayers, Senior Advisor for Access to financing and investment at the International Trade Centre: sayers [at] intracen.org.