The agricultural sector remains underdeveloped and untapped in Ethiopia. Although the sector contributes a third of the country’s GDP and accounts for two-thirds of the workforce, it has not been given the attention it deserves as demonstrated by the minimal finance provided to the sector. Agriculture modernization plans have also remained a myth. Mentioning that it is high-risk, commercial banks are not willing to provide loans to farmers and other actors in the agricultural sector. Even the Development Bank of Ethiopia is no longer interested in financing farmers. Even worse, microfinance institutions, expected to reduce poverty and reach out financially excluded communities, are not in a position to provide much-needed agricultural finance. EBR’s Ashenafi Endale explores.
Fitsum Abera, General Manager of Metrolax, is an investor in the mushrooming strawberry farming industry since opening his company seven years ago. Fitsum exports strawberries to European markets and generates much-needed foreign currencies, beyond satisfying the demand of Ethiopian hotels and supermarkets. However, hotels and supermarkets still import the majority of their agricultural supplies including apples and oranges from Egypt, an economy that survives on the river that flows from Ethiopia itself. Ethiopian Airlines, which provides close to 75,000 catering services each day, imports 95Pct of its inputs, costing millions of dollars annually.
These are just the tip of the iceberg and incomparable with the significant volumes of wheat, sugar, rice and other agro-processed items Ethiopia imports. Achieving food security and import substitution could be very simple, although export is a low hanging fruit, given Ethiopia’s robust agricultural base. “Whether you are starting anew or expanding, access to finance is the biggest challenge in the agricultural sector, unlike other sectors,” says Fitsum. “Only the floriculture sector is comparatively better financed, proving that financing agriculture can bring a higher-than-expected return, especially if marketable export items are cultivated. But if you are committed to invest in other agricultural sub-sectors in Ethiopia, you have to rely on your own resources”
Even though agriculture’s share in the nation’s gross domestic product (GDP) currently stands at a robust level of 34.9Pct, investment flow into the sector is far lower than even the manufacturing sector, which accounts for below five percent of GDP. The share of the agricultural sector in the economy halved over the past decade without visible structural transformation in manufacturing, thus straining the economy.
Growth in agricultural output also dwindled to 3.5Pct during 2017/18 fiscal year, down from 6.7Pct in the previous year. It also undershot government’s targeted growth of 7.9Pct during the fiscal year, though the decline is seemingly not pinching policy makers. Such a reality has resulted in the absence of meaningful agricultural supply to industries, huge unemployment rate, and distressing food insecurity.
The government continues to propagate its big expectations from the sector, while its approach in policy and financial systems remains as good as a no-policy. As the sector only gives back proportionally to what is invested it, it remains in its infancy and underdeveloped despite being practiced for centuries by the population. A case in point is the amount of finance channeled to develop the sector. Out of the ETB472.4 billion outstanding credit extended by the banking system in the third quarter of 2018/19 fiscal year (excluding credit to government), only 5.4Pct (ETB25 billion) went to the agricultural sector.
On the other hand, the majority (36.4Pct) went to industry, followed by 20.6Pct financing for international trade, 13Pct for domestic trade, and 9.9Pct for housing and construction, according to the latest report of the National Bank of Ethiopia (NBE). Even the Development Bank of Ethiopia (DBE), a project financing bank, which is closer to agriculture than commercial banks operating in the country, is turning its back. The agriculture sector received only 16.4Pct of the ETB12.45 billion loan the Bank extended during the last fiscal year. Manufacturing took the lion’s share to the tune of 48.3Pct, followed by financial services at 17Pct. Micro and small enterprises using lease financing arrangement, secured 12.2Pct of the total whilst mining and energy received 5.4Pct.
Agriculture’s share dwindled after close to ETB6 billion of loans was supplied to around 400 commercial farmers throughout the country, primarily in the states of Gambella and Oromia, hardly bore fruit and took DBE’s NPL to a record 39Pct. Unable to recover the loaned money, the Bank is taking back the lands given to the farmers. Though few participant foreign investors fled the country, the majority of the domestic investors under this scheme plead that they were on the right track, if only DBE did not jump to conclusions alarmed by rumors that some were investing the money in Addis Ababa.
Nevertheless, Adhena Seyoum, one of the commercial farmers who took a loan from DBE, blames the Bank for lack of due diligence regarding agricultural financing. “The Bank made multiple mistakes while implementing the scheme. First, it should at least have the patience to give a four-year grace period before requiring repayment as we use man-power to develop modern farms out of untouched forests. Second, it abruptly stopped the disbursement at the stage when we badly needed operating capital, after we invested all we had on clearing, camping, machinery, input and labor. Third, it snatched land from all investors, rather than identifying looters from genuine investors,” Adhena explains.
As the result, commercial farming in Ethiopia still constitutes less than five percent of total national agricultural output. Even this marginal amount is largely attributed to state farms in the upper Awash, Arsi and Bale areas established during the imperial regime half a century ago.
Usually, the federal government takes vacant land from regional governments and allocates it for large scale agricultural investors. But this approach has proved erroneous as the investors usually end up disagreeing with regional authorities. On the other hand, small scale farmers in Ethiopia, even the highly advertised model farmers, cannot develop into middle-scale farmers as they are not able to expand their farms and raise outputs. Rather, most of the model farmers invest their profits on houses in towns and cities or vehicles, rather than expanding their farms and adopting agricultural technologies and upgrading out of subsistence agriculture.
Ethiopia has no proper legal framework that binds agriculture with the financial system. Ethiopia’s land policy, which prohibits land selling or transfers, is one of the bottlenecks for bankers, besides hindering investment in land development and environmental protection. “The agricultural sector in Ethiopia, especially producers, do not get proper attention and finance because it needs a long-term investment and is risky for banks, which have more competitive sectors to lend to, like real estate. Export is over-financed, relatively. The trading market receives better finance from commercial banks,” argues Wondimagegnehu Negera, CEO of the Ethiopian Commodity Exchange. “Financing the production side enables farmers to buy machineries, combiners, improved inputs, and post-harvest technologies.”
“The agricultural sector is highly undermined. Even though government’s policy aims at transforming agriculture to industry, achieving this has thus far not been possible. Farmers are left without finance provisions even though there is capacity to transform the agricultural sector,” says Abie Sano, President of Oromia International Bank (OIB). “Now, the only thing farmers have is land. So they must be able to use it as collateral for finance.”
For the President of Dashen Bank Asfaw Alemu however, financing the agriculture sector is very challenging and risky. “Financing farmers is not encouraged in the banking industry as the chance of recovering the loan is difficult and very costly. But horticulture farmers, for instance, better garner the attention of banks, mainly because they have a well-identified investment land, besides being organized and having a known end-market, unlike smallholder farming in Ethiopia,” says Asfaw, whose Bank’s agricultural financing is not more than 10Pct of the total loan portfolio, while manufacturing constitutes 24Pct.
Asfaw advises that Ethiopia needs to learn from other countries in adopting specialized agricultural banks. “The risk in this business is different, so the shareholders must also be investors who want to invest in the sector. In doing so, it is possible to setup a specialized financing mechanism for the agricultural sector in Ethiopia, even as far as establishing an agriculture bank,” he says.
Dereje Zebene, President of Zemen Bank, agrees. He underlies the cost of poorly financed and unproductive agriculture will affect the whole economy. “Obviously, agriculture in Ethiopia is poorly underfinanced, even though it is vast and the pillar of the economy. Floriculture export and animal fattening are the only agricultural areas listed in our loan portfolio, for instance,” Dereje says. “Agricultural financing in Ethiopia remains risky for banks. The land tenure issue is the first obstacle leaving no mechanism to finance agriculture. Government tries to support the sector through micro-finance institutions and cooperatives, but I do not think they are well coordinated and effective enough. Allowing land to be collateral can improve the situation but exposures to weather and price fluctuations still leaves the risks hanging.”
In view of the limited loanable funds among commercial (private) banks and presence of other more attractive sectors that readily seek loans, banks have shown reluctancy to lend to smallholder farmers and their cooperatives, according to a 2018 study titled ‘The Role of a Credit Guarantee in Alleviating Credit Constraints among Coffee Farmers’ Cooperatives in Ethiopia,’ conducted by Negussie Efa. This again calls for policy intervention that may require commercial banks to reach out to such disadvantaged groups through their lending activities, the study adds.
“One such measure could be imposing a certain quota on banks to channel some percentage of their loan funds (portfolio) to the agricultural sector,” Negussie recommends. “At present, microfinance institutions, and even to some extent commercial banks, seem to lack cooperative-friendly loan products and lending requirements.”
Microfinance institutions are better positioned to replace banks and serve farmers, particularly in financing improved agricultural supply. But their impact is limited as their lending capacity is inadequate, besides their inflated interest rates that is too burdensome for farmers. Close to 35 microfinance institutions in the country supplied a total of ETB44 billion credits in 2017/18, a 38.9Pct rise compared to the preceding fiscal year, according to the NBE.
“Lack of collateral hinders microfinance institutions to provide large sums of credit for machineries and capital-intensive technologies. Their finance is limited to inputs like seeds and fertilizer. Other financing mechanisms are needed for farmers above the small-scale level,” argues Frezer Ayalew, Director of Microfinance Institutions Supervision at NBE.
Currently, NBE is preparing a legal framework to upgrade the five large microfinance institutions to full-fledged banks. This is in addition to the at least five new interest-free banks in the pipeline, along with a diaspora bank. Coordinators of all the new interest free banks which have pledged to tap into the unbanked rural population can improve agricultural financing there, according to Frezer.
On the other hand, Tezera Kebede, General Manager of Peace Microfinance, says Ethiopia’s land policy and lack of agricultural insurance are the main bottlenecks for the absence of finance in the sector. “We conducted a study where we supplied credit by collateralizing farmers’ land holding certificates. Amazingly, all of them paid back 100Pct on time,” he says.
According to Wondimagegnehu, improving large-scale lease financing, creating new financing packages like forward marketing and contractual farming, warehouse financing, and input financing mechanisms would improve financial inclusion. Amin Abdela (PhD), Head of Trade and Industry Department at Ethiopian Economics Association, on the other hand, says the failure to modernize agriculture, caused by absence of agricultural finance, is the main factor for the inability to enact a structural transformation to Ethiopia’s economy. “The issue must be addressed promptly as it is very important to achieve structural transformation and ensure sustainable economic growth.”
For now, the federal government is redirecting its policy towards developing irrigation infrastructure in lowland areas and establishing large-scale commercial farming in those locales. “Average farm land in Ethiopia’s small scale farming segment, which is saturated in the highlands, has declined from two hectares to 0.5 hectares per farmer due to the increasing population size,” says Esayas Lema, Director of Crop Development at the Ministry of Agriculture, Livestock and Natural Resources “So, the expansion of large scale farming in the lowlands is critical.”
8th Year • Dec.16 – Jan.15 2020 • No. 81