The agriculture sector faces a substantial financing gap that limits its growth potential. Yet, the exact size of this gap is unclear due to inadequate reporting by financial institutions. Estimates vary widely, from $60 billion to over $100 billion annually, depending on the source.
Most financial institutions group agricultural loans broadly under "food and agriculture," combining diverse value chains like dairy, poultry, and horticulture into a single category.
This generalised reporting prevents meaningful trend analysis, accurate risk assessment, and informed lending decisions. Misclassification of loans due to inconsistent methodologies further distorts the picture. Regulators exacerbate the issue by not requiring detailed reporting, leaving stakeholders with incomplete data.
On January 21, 2025, thought leaders in agricultural finance gathered in Nairobi for a pre-summit to the Financing Agri-food Systems Sustainably - FINAS 2025 conference (scheduled for May 20–22, 2025).
Participants addressed current challenges in data reporting and collaborated on ideas for designing an improved system. At FINAS 2025, the critical issue of data will be explored in greater depth.
A standardised agricultural loan classification system is crucial for addressing these challenges. By simultaneously tagging loans based on value chains and client activities, such a system can help financial institutions better understand risks and opportunities.
It would provide actionable insights for regulators, donors, and development partners, enabling more targeted interventions and resource allocation.
Standardised reporting would lead to smarter lending strategies and sustainable growth across the sector. But who benefits in such scenario?
For starters, banks and financial institutions will gain better tools for risk assessment, enabling tailored products and higher profitability.
Secondly, policymakers and regulators will use reliable data to develop effective policies and allocate resources.
Thirdly, farmers and agribusinesses will benefit from better access to credit and customised solutions.
Fourthly, funders and guarantors will obtain clearer insights into value chains for better investment targeting and guarantee structuring.
Lastly, insurance providers will use detailed data to design risk-appropriate insurance products and technical assistance providers develop tailored training programmes specific to value chains and client needs while development partners and donors will be able to identify underserved segments and guide impactful interventions.
For an agricultural loan classification system to succeed, it needs broad support from financial institutions, regulators, donors, funders, guarantors, and technical assistance providers.
Financial sector associations play a critical role in fostering adoption by promoting the system among their members and facilitating capacity-building initiatives.
These associations can act as champions of the system, demonstrating its benefits and encouraging its use across the industry.
Adoption can follow either a voluntary reporting model or mandatory compliance framework. A voluntary approach allows institutions to transition at their own pace, while a mandatory model ensures consistency and accountability.
A centralized reporting point, such as the central bank, would be ideal for consolidating data and providing oversight. Centralized reporting simplifies access to information for all stakeholders and strengthens regulatory alignment.
Overcoming Challenges
Resistance to change, cost concerns, and misaligned incentives are significant hurdles. Financial institutions may hesitate to invest in system upgrades without clear benefits, and regulators may not prioritize adding new reporting requirements.
To address this, funders and guarantors can link their support—such as credit lines or guarantees—to improved reporting practices. Training programs and technical assistance can further reduce barriers to adoption.
Unlocking the Sector’s Potential
The agricultural sector holds untapped potential. Addressing gaps in loan classification can unlock targeted investments, enhance risk management, and foster sustainable growth.
Collaboration, innovation, and persistence are essential to driving this transformation. By working together, stakeholders can reshape agricultural finance and contribute to the sector reaching its full potential.
The writer is AgriFinancing managing director and FINAS2025 Secretariat member.
