Central Bank Pushes to Till New Ground in Farm Finance

May 24 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

The Central Bank is launching a sweeping initiative to overhaul the agricultural finance system, targeting deep-rooted structural gaps that have long limited the sector's potential.

The plan seeks to modernise agriculture by streamlining existing strategies and introducing mechanisms that make financial services more accessible to farmers. The National Agri-Finance Implementation Roadmap (NAFIR) targets improved credit access for inputs such as crop and livestock supplies, irrigation, mechanisation, and better marketing systems. A sector-wide baseline study is planned to measure financing gaps and track the impact of reforms over time.

Officials at the National Bank of Ethiopia (NBE) attribute the findings of entrenched obstacles that have discouraged financial institutions from supporting agriculture to limited loanable funds, high risk levels, and prohibitive financing costs. Coordination inefficiencies and cumbersome regulatory requirements are also to blame, as are borrowers' low financial literacy and the absence of robust risk management systems.

The agricultural sector remains central to the economy, contributing 32pc of GDP, employing 64pc of the population, and generating more than three-fourths of exports. Yet, only eight percent of over a trillion Birr total bank loans were extended to agriculture in 2023/24. Of that, one-fourth came from the Commercial Bank of Ethiopia (CBE) to support fertiliser purchases. Microfinance institutions accounted for 18pc of the sector's outstanding credit.

Actual credit provision met a mere two percent of the estimated demand. Including CBE's support, disbursements rose to 52 billion Br, far below the annual potential of 2.58 trillion Br. In its 10-year development plan, the administration aspires to raise this to 881 billion Br annually by 2030.

The authors of NAFIR want it to rest on three pillars. The National Agri-Finance Accelerator (NAFA) is set to offer refinancing, risk-sharing, and credit guarantees. It is designed to expand available credit and reduce lenders' exposure. NAFA also plans to establish interbank markets, allowing financial institutions to trade surplus funds and direct credit to those best positioned to lend.

Farmer Access to Streamlined Financial Services (FAST) offers real-time access to credit, savings, and payment services. It wants to reduce financing costs and improve repayment compliance by building a traceable agricultural value chain. The Agri-Finance Centre of Excellence (CoE) will act as a coordination hub. According to official documents, it will focus on building financial literacy, developing institutional networks, and strengthening risk management systems.

NAFA ambitions to introduce agro-securitisation, gradually selling loan portfolios on the Ethiopian Securities Exchange (ESX) through agro-securities. The authors believe this would provide NAFA with scalable funding and open capital markets to financial institutions facing funding constraints.

According to Abraham Endrias, CEO of Lersha, a digital agri-platform, robust Know Your Customer (KYC) processes are crucial. The platform has digitised the profiles of more than 310,000 farmers across seven regional states and made them accessible to several banks. Abraham noted that KYC requirements such as Taxpayer Identification Numbers (TIN), national IDs, landholding certificates, and marriage documents often present barriers.

"One of the main challenges to financial inclusion is that smallholder farmers are invisible to banks and microfinance institutions," he said. "We simplified the process."

A pilot project with Dashen Bank and the International Finance Corporation (IFC) showed a 100pc repayment rate. Among participating farmers, 39pc increased their incomes and productivity rose by 24pc.

Despite such gains, most smallholders remain outside the formal financial system. The Ethiopian Economic Association (EEA) survey found that agriculture's share of outstanding credit has averaged 7.8pc over several decades, dropping below five percent of new loans in 2021. It identified greater access to fertiliser and credit as key levers for change.

Farmers continue to face production and export barriers. The Oromia Coffee Farmers Cooperatives Union (OCFCU), which sought to secure 2.9 billion Br in financing, managed two billion Birr. Banks declined to accept farmland as collateral, forcing the Union to pledge warehouses and buildings instead. Dejene Dadi, OCFCU's general manager, criticised the Development Bank of Ethiopia (DBE) for suspending loans to rain-fed agriculture in August 2024.

"They'll not lend to rain-fed operations," he said.

Rain-fed farming accounts for 75pc of crop output. While 16.3 million hectares of arable land exist, only 1.2 million hectares of the 7.2 million hectares of irrigation potential are utilised. DBE executives said their policy shift was necessary to reduce the non-performing loan ratio, which fell to 6.5pc from previous highs caused by bad loans, particularly in the northern part of the country. A key issue was the absence of agricultural insurance.

Dejene also took aim at the blanket collateral rules enforced by NBE directives. OCFCU missed out on export opportunities worth 60 containers due to financing shortfalls. Still, the Union generated 23 million dollars in the third quarter of the fiscal year, close to its 25 million dollars target.

"The macroeconomic reform allows us to retain all our foreign currency, making the sector more attractive," Dejene said.

He believes performance-based lending could improve access. OCFCU has also begun participating in carbon markets, selling 100tns and earning 1.7 million euros in the Wollega zone of Oromia Regional State, alone. But, banks remain hesitant to lend without physical collateral.

Samson Assefa, head of cotton development at the Ministry of Agriculture, said some farmers are accessing mechanisation loans with interest rates of 13pc to 18pc. While duty-free equipment imports help, collateral remains a stumbling block. A new law passed by Parliament allows movable assets to be used as collateral, potentially easing access.

Farmers elsewhere face similar constraints.

Asemamaw Azaga, a farmer in Fogera Wereda of Southern Gonder, in Amhara Regional State, struggles to pay for seasonal labour. He pays up to 700 Br daily to hire workers to weed his 10-hectare farm. Fertiliser should be bought in cash, and transport costs for a 1,000Kg shipment now total 10,000 Br.

"It's sheer struggle farming right now," he told Fortune.

According to Melkamu Abreham, representing the Ethiopian Crop Producers & Exporters Sectoral Association, which has 6,200 members farming 2.2 million hectares, his group also faces difficulty securing finance for irrigation. He criticised the exclusion of rain-fed farming from financing programs. He called for long-term finance and collateral reform.

"The decision to exclude rain-fed agriculture from finance is misguided," he said.

For many experts, access to finance, while crucial, is only part of the solution. Muluken Asemamaw, a lecturer at Mettu University with four years of experience in crop protection, said management remains the key challenge. Factors such as land size, terrain, fuel prices, and water access heavily influence outcomes. Post-harvest losses from poor storage, handling, and harvesting practices also affect productivity.

"While mechanisation supports commercial farming, it is not always suitable for every context," he said.

Some have proposed creating a dedicated agricultural bank, but experts warn it could centralise decision-making and complicate risk control. A national risk-sharing facility is also under discussion, though it is feared that the root problem of limited loanable funds will not be addressed.

Riadh Naouar, the IFC's Africa advisory manager, identified poor policy design as a key constraint.

"Many are copy-pasted," he said, noting that agriculture receives only three to four percent of lending across Africa. The IFC recently launched the African Agriculture Accelerator to address food security through improved productivity. He stated the potential of digital finance, arguing that mobile money adoption rates jumped from 17pc to 60pc in some regions.

"Similar platforms to Lersha are needed to link financial institutions and commercial farmers," he said.

The IFC is developing a credit scoring system to support farmer financing, alongside efforts to expand digital KYC, land profiling, and SME supply chain support.

Tesfakidan Admasu, head of the Agriculture & Development Studies Department at St. Mary University and an agroeconomist, stressed the need to de-risk the sector. He argued that providing input loans in kind, rather than cash, would lower default rates. A rural credit scorecard could help bridge documentation gaps, but Tesfakidan said progress depends on farmer education.

"From weather index insurance to warehouse and food processing insurance, every stage carries risk," he said. "The government should prioritise capacity building for farmers."

PUBLISHED ON May 24,2025 [ VOL 26 , NO 1308]