East African agritech company Apollo Agriculture has raised Sh276 million in local currency debt to support the financing of inputs for nearly 24,000 smallholder farmers in Kenya.
Under the venture, Apollo will fund inputs, including seeds and fertiliser, while part of the farmers’ harvest will be sold to recoup the investment under a securitisation plan. IDH Farmfit Fund, a blended finance impact fund, has mobilised the bulk of the Sh276 million debt financing while Kaleidofin, an India headquartered financial services platform, has de-risked the project by providing credit rating services.
The parties have not disclosed terms of the financing to farmers including interest rate charged.
Inputs to farmers are, however, provided under the buy now, pay later model which prices in interest costs upfront.
Securitisation push
Apollo founder and CEO Eli Pollak says the securitisation venture has enabled the firm to unlock bank financing in local currency which is cheaper than hard currency facilities.
Securitisation allows a firm to raise funds by converting future customer repayments for financed products into investable assets. ‘Securitisation has allowed us to create a framework in which commercial banks can come in but with their risks mitigated,’ Mr Pollak told this publication.
‘Historically, we needed to raise working capital mostly in dollars or euros then lending it on in Kenya shillings which is expensive. What we are creating is a powerful model as it would be difficult for a bank to make a small loan to an individual smallholder farmer because of the perceived risks.”
The structure is expected to allow the startup to recycle capital efficiently and align financing to seasonal agriculture cycles while providing investors with improved visibility into underlying asset risk.
Farmer financing
A farmer will receive input on credit from Apollo at the start of the crop season and will only be required to make payments for the financing after the sale of the harvest.
Apollo is betting on the model to lower its costs of funds, passing on the savings to farmers by making the loan terms more affordable, increasing the likelihood of repayments and enabling reinvestments in farms.
The parties to the venture expect to scale the project to mobilise Sh2.37 billion while reaching 130,000 farmers over time.
Apollo has received a credit rating from Kaleidofin, anchoring the startup’s access to institutional financing from entities like the IDH Farmfit Fund.
Kaleidofin’s co-founder and chief executive officer Sucharita Mukherjee says ratings of smallholder focused businesses have been critical in enabling the underwriting of loans from established financial institutions like banks.
‘What has been really lacking is the understanding of this consumer segment, hence our role in providing these credit scores. This is important because there are originators including fintechs, agri-techs and micro-finance institutions who need financing,’ she said.
‘There are sources of capital, but what is needed to make the flow of capital happen is a credit score which helps bridge that gap in understanding.’
Market expansion
Kaleidofin sees the potential of securitisation in the private sector across multiple value chains.
‘We believe there is a huge potential for securitisation and in general, the development of debt capital markets. Securitisation is however just one tool of course,’ added Ms Mukherjee.
‘We are already working on value chains like horticulture, the small business lending space, women entrepreneurship and dairy farming.’
Other local start-ups including Sun King and d. Light have leveraged securitisation to mobilise dollar denominated financing to support growth and scaling.