But… you are especially thinking the first bit. It’s OK - I hear ya!
This is where I introduce EF Africa Group
, who utilise technology to disburse agriculture equipment finance in Kenya and Tanzania.
The unmet financial needs are astonishing in this sub-sector alone: one study found that only 3.4% of tractor owners used finance to purchase their equipment in one country. Three point four percent, that is not a typo but adds amazing context.
EF Africa Group are an example of a company who have been slowly building into the $100bn “TAM” for several years in Tanzania and more recently in Kenya. More specifically, their own TAM in that sector could be estimated at over $400m i.e. $200m in both Kenya and Tanzania, where tractor imports alone were $172m and $180m respectively in 2021 according to ITC Trade Map data.
EFA are a useful case study due to their presence in Kenya and Tanzania, two of the countries covered in the ISF Report, both of which are populous countries and part of the East African Community trading block and I recently caught up with company Co-Founder and Chairman Michiel Timmerman to discuss.
Timmerman advised they have encountered 2 distinct challenges when looking at both markets together.
⦿ Go to Market - In Tanzania, EF Africa Group command 10% of the tractor market, serving between 100-150 new clients in any given year, which is an amazing achievement. Similar success has been enjoyed in adjacent asset classes such as feed mills or freezers for fish to serve the trade around Lake Victoria and distribution deals have been secured with some of the major Tea estates in the southern Highlands of the country.
In Kenya, the market is very different so their go to market reflects an increasingly competitive lending space where Banks and other NBFI’s actively compete with them. The SACCO’s (Savings and Credit Cooperatives) are much better organised in Kenya and provide valuable touch points for the company, unlike their counterparts in Tanzania which are less consistent in their nature.
The Kenyan market moves quicker, so EFA must move quicker too, which leads to increased technology investment.
⦿ Fintech - The financial technology infrastructure, although still evolving, is more sophisticated in Kenya which creates opportunities for the company.
For example, their in-house credit analysis process in Kenya relies heavily on scraped bank statement data and PDF reports from the infamous mobile money provider MPESA. This can be supplemented with digitised producer sales data, if available, from an offtaker such as a dairy. This data aggregation may sound low tech and complex but this is exactly how major companies such as Plaid - a financial data aggregator
- got started in the Fintech space.
The impact of these tech interventions is clear according to Timmerman - “This facilitates the opportunity of smaller loans at scale”.
Trying to build the same workflows in Tanzania has not been fruitful yet as the technology ecosystem is still fragmented and the distribution strategy hasn’t required it yet. Agri Fintech at scale may arrive slower in Tanzania.
▶️ For me the lesson here relates to the interoperability of processes across borders, or rather the ‘un-inter-operability’ - try saying that 3 times 😵💫.
▶️ Even in a distinct vertical, such as financing agricultural equipment, the process varies from one country to the next and so represents scaling challenges. This is in addition to many challenges noted in the ISF Report:
“For most practitioners involved in agricultural finance, the USD 106 billion formal financing gap will likely not be surprising. Relative to other sectors, agricultural markets are volatile—with high transaction costs, high risks, and low margins for many of the smaller value chain players.”
▶️ Of course, EF Africa presents just the East African context for this. I’m keen to explore challenges beyond this region and hope to explore this same issue with some companies in South East Asia in the near future.
▶️ And one final comment or thought 💭 remains in relation to the role of subsidy, which the Report goes into in some detail. Hmm… how important is this and what really is the best way to incentivise more lending in this sector? That is a huge topic in itself.