Building the market for underserved agri-SMEs

Agricultural Small and Medium Sized Enterprises (agri-SMEs) in East Africa account for 70% of the workforce and play a vital role in supply chain resilience and food security. Yet SMEs are often unable to access the finance they need to grow. Many businesses fall into a ‘missing middle’, where the loans they require are too large for microcredit providers but are viewed as too risky or lack adequate security for conventional commercial bank loans. To bridge this financing gap, Aceli Africa took an innovative approach to mitigating risk for lenders. Based on extensive data on loan-level and portfolio-level economics of agri-SME lending in East Africa (from 31 lenders and over 9,100 transactions totaling $3.7 billion), Aceli Africa offered first-loss cover at a portfolio level to credit providers willing to lend to the ‘missing middle.’ In practice, it offered partial insurance on loans covering potential defaults up to a pre-agreed amount, i.e., for each qualifying loan ranging from $25k-$1.5m, Aceli deposited 2-8% of the loan value into a reserve account that was available to cover the first losses across the lender’s portfolio of qualifying loans. By providing this partial insurance against default, Aceli mitigated a portion of the financial risk from lending to agri-SMEs. The level of first-loss coverage available to a lender accumulated with each loan they provided, incentivizing them to increase their lending to under-served enterprises.