The Missing Middle in Agricultural Finance: Relieving the capital constraint on smallhold groups and other agricultural SMEs

Overview

Private-sector finance has made a start in filling this long-established gap, widened over the last decade as public-sector financing frameworks for small-scale agriculture have been withdrawn. However, the flow of capital to agricultural SMEs needs to be scaled up. This paper looks at the barriers to doing so. Both transaction costs and risks are high in lending to agricultural SMEs compared to microcredit, and returns are lower than in other sectors. More private capital will flow if there are competitive lenders and investors with the necessary local presence and understanding, and if the balance between risks and returns, net of costs, becomes more favourable.