Bridging the Gap: Financing Economic Growth in Ethiopia’s Pastoral Areas
The challenge: How can we bridge the financing gap among Ethiopia’s pastoral population? Ethiopia has one of the lowest financial inclusion rates in sub-Saharan Africa with only 14 percent of the adult population able to access formal financial services. This figure drops as low as one percent in rural areas.
The solution: USAID’s Pastoral Areas Resilience Improvement through Market Expansion (PRIME) project, implemented by Mercy Corps, includes a six million USD Innovation Investment Fund (IIF) that supports medium- to large-scale enterprises operating within or directly benefitting pastoral areas in the Somali, Afar, and Oromia regional states.
How it mobilized private capital: The IIF facilitates finance to growth-oriented businesses through matching grants/contracts, leveraging local capital for investments in a range of market development activities that improve market linkages, generate employment, and increase financial inclusion.
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How it was inclusive: The financing gap in Ethiopia is most evident for small and medium enterprises, in general, but it is especially acute for Ethiopia’s Muslim population – a group that makes up 34 percent of the total. One of the stipulations in Islamic banking is that charging interest is not allowed, and yet, interest-free financial products are largely unavailable. The Muslim population comprises up to 98 percent of the total population in the areas of PRIME’s interventions, and thus the IIF improves the financial inclusion of these individuals and businesses in the regions in which we work.
How it was innovative: To date, the IIF has signed agreements with six companies for a total value of around six million USD, with private sector cost-share of $24.8 million USD, or 80 percent! Companies that received support include a slaughterhouse, a micro-finance institution and mobile service provider, a private equity firm, a poultry farm and two milk processing facilities.
Lessons learned: Not every partnership with the private sector will be successful, unless you pay close attention to a number of factors: finding the right business, extensive due diligence, having the right NGO team with the right skills, having the correct agreement/contract format, and putting a good monitoring and evaluation plan in place from the design stage.
This vignette was submitted by Mercy Corps, a global leader in market systems development with initiatives in over 27 countries. To learn more, visit www.prime-ethiopia.org or contact Bethel Tsegaye ([email protected]), Innovation Investment Fund Manager of PRIME – Mercy Corps Ethiopia.
For more information about the structure and best practices of implementing an innovation fund, link to the full report here.
The second vignette comes from Chemonics, where a small investment of public funds was used to bring in private funds at a 5:1 private to public ratio – benefitting 3 million smallholder farmers in the process.
Uganda Feed the Future Commodity Production and Marketing Activity (CPMA)
The challenge: Agricultural productivity in Uganda is low, in part because only approximately 1 percent of farmers utilize fertilizers. The fertilizers in the market are often not appropriate for the land and the package sizes are too large for smallholder farmers.
The solution: Savannah Commodities Co, a locally owned agro-processor, recognized the enormous market potential of providing small packages of custom blended fertilizer to smallholders (which comprise 96 percent of Ugandan farmers), and partnered with CPMA to create a fertilizer blending and packaging facility.
How it mobilized private capital: Savannah approached CPMA and leveraged the program’s deep knowledge of and access to smallholders, as well as the technical assistance it provided to them. Additionally, CPMA agreed to invest more than $168,000 USD to procure fertilizer blending and packaging equipment, in tandem with Savannah’s investment of approximately $850,000 USD, resulting in USAID leverage of 5:1, as required by CPMA. The blending facility will remain part of the CPMA inventory until the conclusion of the Activity, at which point, with USAID approval, ownership may be transferred to Savannah.
How it was inclusive: This investment addresses a market need specific to smallholders by providing one to two kilo packages of fertilizer which is custom blended for their own plots of land, thereby leading to increased yields. Through a combination of Savannah’s existing network of smallholders and CPM’s farmers, Savannah expects to reach over three million smallholders.
How it was innovative: This is the first custom fertilizer blending facility in Uganda, and the first time that Savannah co-invested in procurement of equipment with USAID.
Lessons learned: If there is a demonstrated business need (unmet market demand), you can create a win-win partnership with the private sector. Companies are willing to invest when there is a real business opportunity. USAID funding can exploit those opportunities and leverage the investments. This vignette was submitted by Eileen E. Hoffman ([email protected]), Director of Economic Growth and Trade Practice at Chemonics.
So as we spread out our bedroll for the night, we intend to ponder what we have learned so far in the journey – what we mean by “mobilizing private capital” and how it can support financial inclusion; the different ways we can undertake it; how the financial system works; and what we can do about risk. And in our next post, we will try to make sense of why it all matters and why our Microlinks community should pay attention to it.