Using lease financing to scale adoption of mechanisation among African smallholder farmers

Lease financing models can unlock access to mechanised equipment for smallholder farmers who cannot afford to purchase equipment. But business models for lease financing are only commercially viable at scale. Grow Africa’s Finance Working Group is investigating smart partnering approaches to move lease financing pilots to scale. This blog is based on a longer briefing paper ‘Lease Finance: Enabling the Commercial Scale-Up of Smallholder Farmers’ Access to Equipment and Technology’ published in May 2016.

The majority of agriculture in Africa is carried out by farmers who produce small quantities of crops for cash on small and disaggregated plots. Their requirements for small-scale equipment and low value loans are uneconomic for banks, which means that the farmers and processors struggle to secure finance to make asset purchases, and productivity and profitability remain low.

Leasing models break this vicious cycle by enabling farmers to access equipment on a ‘fee for service’ basis. In most cases, an agri-service provider (which could also be a farmer cooperative) acts as the ‘lessee’, renting equipment from a leasing company (the lessor). At the end of the lease period, lessors may become owners of the equipment, hand it back, or trade in for an upgraded model on a new lease period (See figure 1.)

The leasing model not only benefits farmers, but also lessees, who often lack the formality and collateral requirements sought by commercial banks for loans to purchase the equipment up front. Instead, the leasing company is the entity that applies for a bank loan and is the legal owner of the equipment throughout the leasing period.

Scale is key for lessors to be able to access commercial loans however. Lenders look for a solid business case with a clear demand, mostly for standard rather than specialised equipment. Lessors must demonstrate that there are enough farmers prepared to pay a fee to access the equipment. Maintenance schedules and costs are also factored in.

The need for scale can present a conundrum for lessors who may be operating in environments where a leasing model is not known or accepted, meaning investment and risk for the lessor establishing the lessee market. Similarly, lessees may struggle to prove there is a solid market of farmers willing and able to pay the usage fees that will enable the lessee to make their lease payments.

Smart partnerships, involving donors and other NGOs, can help bridge the gap between ‘early adopters’ of lease financing and the broader market penetration that will be required for banks to lend at scale to leasing companies.

An example of such a smart partnership can be seen in a recent collaboration between Grow Africa and AflaSTOP to pilot a lease financing arrangement for a portable maize dryer. The dryer was developed as part of the AflaSTOP project to address remedies for the toxic fungus aflatoxin, which flourishes in damp conditions.

Since maize farmers are typically charged a penalty by traders for damp produce, there is a clear incentive for them to pay to use the dryers. The challenge is to convince a lender and a lessor that sufficient leases can be developed and that the revenue justifies the capital costs and services rendered. In order to provide a solid business case to overcome this constraint, a concept has been developed in Tanzania to pilot a small fleet of leased dryers with strategic partners, including AflaSTOP, Norwegian Church Aid, MORAGG (a poultry feed processing and marketing company), Litenga Holdings Ltd and the World Food Programme. This collaboration will introduce two fleets of dryers targeting high moisture areas of grain production and will assess the utilisation, management, revenue and returns of dryers servicing small-scale producers. If a viable business model can be demonstrated, it is expected that commercial lending to the lessors will follow.

This blog is part of the November 2016 series on Scaling and replicating inclusive business models, in partnership with DFID and SEED. Explore with us the key ingredients of a pathway to scale, debates and new ideas on replication, and look at what small companies, large companies and ecosystem actors can do.