Risk Management for Agri-SME Finance: Good practices and innovations in risk management for agri-SME finance under COVID-19 (April 2021)

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Risk management for agri-SME finance: addressing new challenges in the era of COVID-19

Agri-SMEs are critical investors in agricultural supply chains, which is the main source of employment, livelihood and income in most developing countries. They create economic value for themselves, and jobs and opportunities for many others – starting from small-scale farmers. However, access to finance is a critical obstacle to the success of agri-SMEs in emerging markets. Although no reliable estimates have been calculated for the financing gap facing agri-SMEs globally, in Sub-Saharan Africa alone it is estimated to reach around US$ 65 billion annually1, thus limiting their growth potential, as well as that of the value chains and economies they are active in.

From the perspective of traditional banking institutions, investing in agri-SMEs tends to be perceived as riskier than investing in larger businesses, in other sectors, or both. At the opposite end of the spectrum, microfinance institutions generally target individuals or smaller institutions. As a result, agri-SMEs find themselves in what is commonly referred to as a “missing-middle” where access to finance is a particular challenge, thus limiting their ability to sustain or grow their businesses.

From a risk-management perspective, agri-SMEs are generally set up to manage risks that occur with high frequency and low severity, such as standard market price fluctuations. However, less frequent but highly severe risks, such as the multidimensional COVID-19 crisis, represent a significant challenge, particularly for the most vulnerable businesses.

As was the case in 2003 with the SARS outbreak, and in 2007-2008 with the global food price crisis, numerous agri-SMEs are facing difficulties dealing with the current pandemic’s knock-on effects. Indeed, the COVID-19 crisis has considerably disrupted activities across agricultural value chains in developing countries, raising new risks for agri-SMEs, such as the abrupt interruption of transportation and market closures, as well as exacerbating preexisting ones like agri-SMEs’ inadequate access to finance and limited market linkages.