Legal and regulatory policies impeding agri financing in Africa

AGRI-FINANCE

- Hedwig Siewertsen

Drawing on lessons from East Africa, which may mirror those elsewhere in Africa, there are five main legal and regulatory policies that impede agricultural financing:

• International financial reporting standards (IFRS 9). This requires banks to provide loans based on expected credit loss (as opposed to actual occurred credit loss). Banks therefore shy away from risky sectors such as agriculture, because IFRS 9 requires them to make provision for losses more conservatively. The opportunity cost of tying up their capital in a sector that is considered risky deters lenders from providing agricultural loans.

• Capital adequacy ratios (CAR). Banks are required to set aside a percentage of their capital in relation to their risk-weighted assets. The CAR requirements imposed by central banks in East Africa are significantly higher (ranging from 10% to 15%) than those demanded by the international standards under Basel III (8,5%). These CAR levels further deter banks from financing riskier assets, such as small- and medium-sized agricultural enterprises and farmers. The risks for agriculture and the private sector are weighted as higher than real estate and government lending, hence the need for banks to set aside more of their capital as a cushion against risks.