AFEX Commodities Exchange’s mission to hand African smallholder farmers greater bargaining power took a leap forward in February 2021 when it launched the first Warehouse Receipt Backed Commercial Paper in Africa.
Established in 2014, AFEX created a Warehouse Receipt System that provides secure storage for grains that will serve as collateral for farmers to access finance and also allow farmers to get better prices for their produce. Smallholders receive quality farming inputs as loans that they repay after harvest.
Lawal Bala is one of the many farmers that turned around his business after working with AFEX. In Kano, he owned one hectare of land and grew less than 20 bags of rice (100 kilograms per bag).
“I have a hectare of farm and before 2018 I could hardly cultivate it,” he told Nigerian publication the Premium Times. The first farming season working with AFEX, Mr Bala’s crops improved both in quality and quantity. He started harvesting 40 bags.
New financing scheme
Raising $50 million for agri-SMEs, the commodity-backed instrument aims to bridge the funding gap between banks and smallholder farmers in Nigeria.
Under the scheme, AFEX’s warehouse receipts are transformed into a financial asset and listed on the AFEX trading platform.
Ayodeji Balogun, CEO of AFEX, said the financing deal will help eradicate the high cost of procurement incurred by processors by deploying a discounted value of a warehouse receipt distributed among five leading players in the food and beverage, trading poultry and animal feed segments in Nigeria.
“We’ve started to securitise some of the physical transactions so that people are then able to raise commercial paper and different types of debt instruments – and even raise money directly from the capital market, which then flows directly to the farmers and producers,” Balogun told Impact Investor.
With the new fund, AFEX is making good on its aim to increase private sector investment in commodities and create a market-enabling institution covering East and West Africa. The aim is to reach a cumulative total of $5bn in investment to the agriculture sector over the next five years.
AFEX is in the midst of an ambitious scaling up programme. The private commodities exchange started operations in 2014 with a mission to provide solutions to the challenges faced by Nigerian smallholder farmers around aggregation, storage, and financial inclusion.
It has three main propositions – improving access to credit to smallholder farmers; providing storage as a service, for example by allowing farmers to store bags of grain and then sell them a few months later when premiums have increased; and providing market access – connecting buyers and sellers.
The capital raising exercise will enable AFEX to provide its infrastructure as a service to the market and unlock capital for the agriculture sector in Nigeria.
AFEX’s vision of using capital markets to empower smallholder farmers has caught the eye of some major investors. In December 2019, it tapped investment from Consonance Investment Managers, a US-based private equity firm that invests in early-stage and growing businesses across sub-Saharan Africa.
Consonance pinpointed AFEX’s capacity to transform Nigeria’s agricultural sector, boosting trust and transparency in local agricultural supply chains by connecting farmers to market. AFEX’s establishing of the infrastructure to undergird Nigeria's food security agenda was key to its investment decision.
Consonance has brought in a more ‘hands-on’ approach that complements the existing group of high-net-worth founding investors, says Balogun. The latter are traditional, Africa-focused investors such as 50 Ventures, headed by former US ambassador Jendayi Frazer, an architect of US policy for nearly a decade.
Other well-known investors are Tony Elumelu, a wealthy Nigerian investor who chairs Heirs Holdings Limited and Nicolas Berggruen, chairman of Berggruen Holdings, a Seattle-based investor across a wide range of industries and asset classes.
Pulling in these big names was a real challenge, acknowledged Balogun. “The question on investors’ minds was, how will it succeed? So we had to convince them we had a winning formula that works in Nigeria and is scalable across Africa.”
Getting big names like Ambassador Frazer and Heirs Holdings helped open doors for AFEX. “They were the type of people you need at the beginning of the journey,” said Balogun.
“But at the point where we need to start the scaling journey, we needed some more actively involved and supportive investors – and who were connected to the growth trajectory.”
Own impact framework
Investors like Consonance and the backers of the recent fund saw this as a great impact investment, with a great potential for commercial return. “And they also saw that if you are solving this problem, you are also solving generational poverty issues across Africa,” said Balogun.
The commodities exchange has prepared an impact assessment to serve as a communications tool that gives investors and other stakeholders to get a stronger insight into what is being achieved.
Said Sanne Steemers, independent consultant at Agri-Logic: “In order to collect and manage data and monitor the impact going forward, we tailored the approach to some of the stakeholders' requirements and needs. We wanted to have a complete impact framework in place with a clear logic of what the effects could be – backed up by very clear data.”
Read more about the impact framework in this article.