Dutch development bank FMO, the Norwegian Investment Fund for Developing Countries and Rabobank are setting up a $660 million-funded banking and investment management company that will target agriculture as part of its portfolio.
Arise, as the company is to be known, will manage minority stakes in African financial service providers serving rural and small-and medium-sized enterprises in 20 sub-Saharan countries. It will have one office in the Netherlands and one in South Africa, and its chief executive will be the current financial institutions head of department at Norfund, Deepak Malik.
The three partners will bring on stakes they already hold in regional banks, as well as making new investments.
They will make growth equity investments, and build the company’s capital up to $1 billion within the next five years, managing director at the $1.8 billion Norfund, Kjell Roland, told Agri Investor. The fund could provide mezzanine or convertible funding in exceptional circumstances. Norfund and other Norwegian investors will provide 48 percent of funds in total, FMO 27 percent and Rabobank 25 percent.
“We have committed to provide the extra €330 million needed,” he said. “New investments will probably be prioritised to west Africa as we need a bigger foot on the ground there. That is because if you look at the last five to ten years the east African community have seen higher growth than most of Africa. Norfund’s own strategy has been focused in east and south Africa.”
Portuguese mutual association and bank Banco Motepio is also expected to partner with the three financial institutions, although if it joins they will not hold more than around four percent of the company, said Roland. “They have a couple of investments that would make sense in this portfolio,” he said.
Arise will also provide rural enterprises with governance, marketing, innovation, compliance and risk management assistance.
“We will [add] a lot of value by enhancing activities between the banks. Clustering and allowing them to learn from each other … that is quite unique,” said Roland, adding that there is not a specific allocation to agriculture, but that it would play a key role.
“The balance of agri as part of the portfolio will vary from bank to bank,” he said.
Financing small-and medium-sized enterprises, as well as primary producers, is perceived as high risk among investors, including credit providers. However, said Roland, in well-run banks it can also be an attractive investment, even as many large European banks are exiting Africa due to increased regulatory and capital pressure.
“We believe this is a sound investment,” he said. “Historically our Africa portfolio outperforms others, such as those in Latin American and South East Asian banks. Well-run banks in sub-Saharan Africa can give an IRR in the over 15 to 25 percent [range]. We don’t see that changing.”
Roland said that developing Africa’s agriculture in the long term “is a must” for bringing African countries out of poverty.
“On the other hand, lending has to be on commercial terms. This is not subsidised or soft lending,” he said. “It is not the micro-financing setup to lend to subsistence-like farmers. We are looking for commercial partners in agriculture; processors and also commercial primary producers [at] a certain scale. It is a lot about developing the value chain. However, some of the programmes that are set up might also reach smaller scale farmers.”
He did not specify a range of values for companies in which Arise would invest through its banking syndicates.
“The establishment of Arise will contribute to the development of the financial sector in Africa on a scale which is far beyond what Norfund can achieve by itself,” Roland said, adding that it would provide services to unbanked people in the business and rural community. At the end of 2015 Norfund had a portfolio of about $1.8 billion, of which 53 percent was invested in sub-Saharan Africa.
Rabobank’s Banking for Food strategy, which aims to increase food availability, healthy nutrition and price stability in food chains, was a driver in its participation in Arise, according to a statement. Rabo Development, the co-operative bank’s unit for providing financial services access for people in emerging markets holds minority stakes in Zambian bank Zanaco, Tanzania’s National Microfinance Bank, BPR in Rwanda, BTM in Mozambique and DFCU in Uganda. NMB launched a five-year strategy to improve agricultural financing in Tanzania this month.
Arise will be staffed from experts within Norfund, Rabobank and FMO, and will recruit within Africa.