“Financing Agriculture in

Ethiopia:
The Missing Link for Structural
Transformation & Economic Development?”

Validation Workshop - Summary Report

Bestwestern Hotel

March 2021
 Introduction

In the last few decades Ethiopia has registered a

significant growth in the agriculture sector.
Nonetheless, private enterprises’ role in the
sector is so far limited. The contribution of the
Private sector can play a significant role in
enhancing production and productivity, creating
jobs, raising households’ income,
and generating, as well as saving foreign
currency.
Precise Consult International PLC has designed
and is currently implementing, a project titled
“Development Policy Innovation Initiative (DPI)”
to bring together diverse voices from the
government, academic and research institutes,
associations, civic societies, and private sector
communities.

Consistent with this under the agriculture sector

branch of the DPI, a desk review has been done
on a topic titled “Enhancing Private Sector
Engagement in Agriculture Sector” and a list of
topics for deep dive study where identified and
prioritized.

Out of the listed areas prioritized the top two

intervention areas were chosen and two different
deep-dive studies were conducted on A topic
“Financing Agriculture in Ethiopia: the Missing
link for Structural Transformation and Economic
Growth?” After the study were finalized, the
validation workshop is organized to get feedback
recommendations and comments from
stakeholders in the sector.

Objective of the validation workshop

The validation workshop aimed at presenting the major findings of the deep dive study that explored the
policy constraints for agricultural financing and to get feedback from participants and to incorporate the
feedback, suggestions and inputs of the participants in the recommendations as relevant.
 Findings and Recommendations
After review of relevant documents, websites and interviews with stakeholders such as high
ranking officials of financial sector, different ministry officials, private sector, academia etc. on the
existing agricultural finance-related policies, operations and strategies of vital institutions,
including: the NBE, DBE, CBE, Private Banks, Insurance Cos., the Ministry of Agriculture, the
Federal Cooperatives Promotion Agency, etc.

Based on the results of the assessment, the following recommendations are identified to help
develop the agricultural finance system in Ethiopia. These are particularly relevant at this very
time because the government of Ethiopia is make reforms of macroeconomic policies, including
agricultural and financial institutions. The recommendation points are believed to facilitate the
“wished for” changes in agriculture sector in general, and private sector development in
particular. The recommendations are forwarded under seven broad categories focusing on
“policy revisions/changes” and “regulatory framework considerations” shown below.

1. Finance Resources for Agriculture – Supply 4. Agriculture insurance - Lack special

side is characterized by high transaction cost
due to inaccessibility of financial institution in
rural, not adequately developed financial
market & weak business case to finance
agriculture. And the demand side is challenges
are no DD estimate of finance for agriculture &
perceiving credit is only for inputs such as
seed and fertilizer are some of them.
Alternative policy recommendations are –
prepare national DD estimate, renovating
financial market and promoting Fintech to
improve accessibility, mobilize saving and
reinstate agriculture specialized bank.
2. Financial Accessibility and Agent Expansion –
Existing policy gaps are limited/no focus to
address Agri-finance bottle necks, inadequate
loan appraisal and follow up procedures,
limited expansion of non-tangible collateral
scheme. Recommendations:- upgrading
SACOs to Banks, promote for private sector to
engage in financing through Angel investment,
equity investment and promote digitization and
interoperability.
3.Ease of Financing - Main policy challenges are
lending procedures and requirements are
more particularized on non – effectiveness
aspects of a project than on its implement
ability or profitability; regulations and/or
procedure ensuring quality of imported Capital
Goods Not Systematized; implementation
Directives (valuation, etc.) on collateralization
of Non-fixed property not issued & special
considerations for Agriculture on Prices of
Financial Products. Recommendations:-
ensure importation of genuine & quality
machineries, enforce detailed valuation of
assets & system of registry; introduce unique
identity & traceability of individual borrower &
transferability of Use Right Of Farmland
Government Initiative to support/promote
Agri. Insurance, no special budget allocation
to reduce premiums & support training
centers and no regulation to improve farmer’s
awareness on insurance are some of policy
challenges. Recommendation: - Allocate
Public Fund aimed at financing risks and
Reducing Insurance Premiums; expand index
insurance along with digitization and Fintech
promotion, support establishing insurance
training center and step up farmers’
awareness about insurance.
5. Financing SHF - Minimum size of land (20 ha) for
loan proposal, land policy - not Allowing
Ownership and Land Congregation through
change of ownership (affecting
mechanization efforts). Recommendations:-
Focus on SM & MEs and smallholders due to
their relative importance & advantages
toward employment; transform PSNP budget
into credit-based & market oriented safety net
program; remove farm size requirements for
accessing credit and emphasize on ROA;
6. Agri-finance and business dev’t service - BDS
support not mandatory, institutional drive
promoting financial literacy is inadequate.
Recommendation: - Make BDS mandatory
among all Financial Services providers;
create system ensuring strict project appraisal
procedures; make project implementation
follow-up mandatory;
7. Monitoring & Evaluation of Agri Financing -
System ensuring efficient utilization of
injected capital to the sector/program/project
is inadequate; no institutionalized & objective
enquiry on effective utilization of disbursed
loans. Recommendation:- Establish centrally
an Agri - specific “M&E Desk” undertake
periodical impact evaluation on completed
projects
 Summary of the discussion

Stakeholders agreed that even though the

Abbreviations
ETB- Ethiopian Birr
GDP- Gross Domestic Product
MFI- Microfinance Institutions
DPI- Development Policy Innovation
SACCOS- Saving and Credit
Cooperative Organizations
DBE- Development Bank of Ethiopia
MSME-Medium Small and
Micro Enterprises
PSNP- Poverty Safety Net Program
IFAD- International Fund for Agricultural
Development
SHF – Smallholder Farmer
Compulsory credit allocation for the Agricultural
sector was proposed and some recommended that
the increase in the number of banks might not bring
that much of a change but the focus should be on
increasing the capacity of existing banks to serve
the agricultural sector through enforcing every bank
to have an agricultural desk.
agricultural sector covers a high share of the
employment in Ethiopia and is expected to have
high productivity, it is the most under-financed
sector. Some of the reason raised for the lack of
interest of banks to finance agricultural sector is the
fear of the high risk associated with the agricultural
sector and the lack of assets in the hands of the
smallholder farmers that the banks require as
collateral.
Although MFIs are doing great work in addressing
the agricultural sector, they are characterized by
high-interest rates and lengthy process of
borrowing. This will make the farmers go to informal
borrowing means in which they pay highest interest
rates. It was said to give more emphasis on the
Indian experience where they pour great finance in
to agriculture while it has a low contribution to their
GDP and making it contribute to their economic
growth.
The stakeholders also added that focus should be
given on where the finance for agricultural finance
should come from. India has an apex institution into
which funds are poured into. And the apex
institutions channel the finance through smaller
financial institutions.

To reach the smallholder farmers, the experience of

DBE was raised which doesn´t only focus on large-
scale farmers but by channeling finance through
cooperatives and MFIs to provide financial service
for the agricultural sector. To improve the
interoperability, the digitalization of MFIs and
SACCOS was proposed. Channeling the finance
through other organizations was seen as an option
to provide the service.
 Concerning agricultural insurance, it was raised
that the insurance service is one of the lowest in
Sub-Saharan Africa, especially in agriculture.
One of the reasons for this was agriculture has a
systematic risk. This means if an insurance
company gives insurance for 1,000 cars and
1,000 hectares their probability of total loss is on
the 1,000 hectares. This caused the low interest
from the private sector to involve in agriculture
insurance. On top of problem of the public fund to
subsidize, it was added that the absence of a
framework on how Ethiopia manages the
agricultural risk brought a problem to provide
insurance service to agriculture.

It was recommended that a clear framework on
the management of agricultural risk should be
developed. Agricultural financing should be
incentivized, and insurance companies should be
mandated to give some percent of their budget to
the agricultural sector as it was the case with
banks.
Means to decrease the risk of agriculture and
implementing different methods of collateralization
systems were seen as a solution to help banks
making loan available for farmers. Eskender
Mulugeta A commercial farmer raised that he
wanted to get a loan using his farm which has
10,000 avocados as collateral. And was declined
because no system in the banks can hold avocados
as collateral while the avocados are estimated to be
worth 1.5 million ETB. A loan guarantee scheme for
banks was applied by foreign aid for the banks to
finance the agricultural sector, but it is not
sustainable.

To overcome this problem, providing loan

guarantees through, warehouse receipt financing,
use-right of land, value chain financing, contract
farming and movable collateral were recommended.
Since the government has already allowed the
usage of livestock as collateral. Implementing
technology to help track the livestock that is used for
collateral was recommended. The value chain
financing was suggested not to be only as a market
linkage system but also as a channel for a financial
service system.

Before implementing the recommendations

increasing the basic financial literacy,
professionalism, and the legal aspect and
management of the loan provided should proceed
to avoid lack of transparency and repayment
enforceability.

Using religious institutions as a means of educating

the farmers was raised. Another point was
that even if lease financing is liberal, most
smallholder farmer’s entitled to a land size that is
less than one hectare which makes lease
companies face challenges in providing service.
Therefore, for a lease financing to be applied
effectively, the practice of collective farming was
proposed.
Productive safety net focuses on destitute farmers in need of food and water and not the bankable ones. It
was recommended that the purpose of the program should work to make the farmers bankable. While the
PSNP has a graduating strategy, it has not been properly implemented. Graduating the PSNP people to be
bankable is the goal. Some farmers have been under aid since the Derge regime that is still in aid. They are
Conserving soil, forest, and national resources but this should be a major goal it shouldn´t be linked to only
PSNP. The farmers need to get out of the aid, be bankable and start being productive.

It was also raised that If the agricultural sector is

getting less than 6% of the available loan and
MSMEs don´t get enough, while banks have 40%
of the GDP and they use only the 36% for loans
where the money for the loan is going should be
traced. In US, only 8% of the bank holding is
used for assets the other is used for loans.
Because the loan is a national resource, it was
raised that there is a need for a system that
ensures effective utilization to be designed and
applied. The value that we people give to credit
should increase because the money that a
person takes as a loan is not just his money but
a national resource. It was also raised that
incorporating the lessons from the failure of the
development bank is necessary.

During the famine of 1977 lots of farmers lost their farm animals. As a disaster response mechanism,
the government of Ethiopia worked with IFAD to provide loans for farmers to help them buy oxen used for
farming. The loan were successfully distributed through farm cooperatives and every farmer had to pass a
viability test to receive the loan and every loan was paid. This experience shows that government can organize
the farmers and finance providers and if the system is applied properly the agriculture sector can be financed
easily. Since banks don´t get into the environment of the farmers efficiently cooperatives were recommended
as a great tool for distributing finance as they are available at kebele which is the lowest administrative
structure. There are more than 393 unions and 94000 primary cooperatives, the study was commented to
focus on financing agriculture through cooperatives and cooperative banks should be independent of any
political influence.

At the end, stakeholders stressed there should

be advocacy and the study should be shared with
concerned parties and discussion platform like this
should be encouraged. In order to bring to operation
all the recommendations it was noted that assessing
what is being done currently at macro, mezzo,
and micro-level is necessary.