How agricultural crowdfunding is different from MMM networks, gambling
• Leadway advises investors on due diligence
Conventional banking institutions have increasingly found it difficult granting credit facilities to small-scale farmers and agro-allied businesses despite that Nigeria needs to rev up food production to meet up with demand and to stimulate the economy by reducing importation.
One of the reasons for that is that agricultural businesses are risky, and banks are wary of lending to operators considered mostly as uneducated and lacking in due diligence. Hence, conditions for loans to the sector are more stringent, and this is complicated by lack of collaterals as required by most of the lending institutions.
Government intervention policies and funds are equally marred with bureaucracy, nepotism and fraudulent practices, while micro-financing and cooperative associations have had limited influence on the levels of farm operations and food production in the country.
Crowdfunding, as a result of private sector-led initiatives, appears to be providing a sustainable platform for coordinated and organised funding solution to farmers while minding the protection of investors’ capital and returns on their investments.
It is really an innovative intervention that looks very promising if regulated, harnessed and managed transparently.
At an interactive session organised by Leadway Assurance to close information gaps between investors and crowdfunding firms at Wheatbaker Hotel, Lagos, at the weekend, operators and the insurance firm cleared the air on how crowdfunding is different from gambling, multi-marketing investments entities and money-multiplying networks which have eroded people’s investments over the years. They explained how it works, too.
How does crowdfunding works?
Crowdfunding firms use different models, but the nexus is that they source funds from individuals and corporate investors with a maturation period ranging from six to 12 months and agreed interest rates on specific due dates for return of both the capital and interest.
The fund pool is, in turn, invested in existing farm businesses of either trusted and verified large-scale farmers or reputable farmers’ associations ranging from livestock production, crop production, aggregation and processing. The fund is invested after off-takers have been identified and agreement signed to avoid marketing and sales difficulties associated with crop and other primary agricultural products. The farms on which the crowdfunding company invests is insured and if disasters occur and farm investment is eroded, the insurance restores the capital, not the expected profit.
The toughest of the farmers’ challenges, which is having access to resources for inputs, is resolved without the hurdles of collaterals.
Raising funds through the crowd
There is a great deal of power in efforts of the multitude. The unimaginable could be done through such. There is great potential in pooling resources together coherently. This is so in crowdfunding for agriculture.
Co-founder/Chief Executive Officer of Thriveagric, Uka Eje, one of the crowdfunding platforms present at the interactive session, explained that a primary challenge is convincing people to believe in the projects as a result of past experiences of frauds associated with MMM.
He said: “It is expected that investors will be sceptical about crowdfunding, but assure them that their capital is insured, and that the farms are real. When you break that ice, and you continue to break it, the opportunities are enormous,” adding that Thriveagric has about 15,000 investors on its platform now.
The ice of convincing investors is also broken by presenting audited accounts, financials, and certificates of insurance of every farm where the investment is done.
Ayoola Oluga, Co-founder/Chief Executive Officer of Agrecourse, another agriculture-biased crowdfunding company, explained that crowdfunded resources are invested in real sector of agriculture and the farms are traceable.
Oluga said: “MMM funds are actually not invested in any real sector. They are not doing any business. The bubble bursts when new people refuse to join the networks of MMMs.” Crowdfunding, he also elucidated, is an alternative way of farming by proxy which guarantees the capital with higher profit margins.
Contracts are secured, as explained by crowdfunding operators, for supply and off-taking of agricultural products before investors’ resources are invested in certain farm production. This, they added, prevents marketing, sales and repayment challenges. Off-takers are major food processors like Nestlé, Olam Grains, to mention a few.
“Mostly, we do not engage individual but cooperative farmers, and we create our market. We find buyers before we invest people’s money in food production.
In most off-taking agreements, cash is not given to farmers. Farm inputs such as seeds, fertiliser, insecticides and herbicides, and farm services such land preparation are supplied to farmers. The cost of the inputs and services are documented, and the profit is given to the farmer after deduction of the cost from the sales of the farm products at the end of the crop cycle.
On this, Eje of Thriveagric said: “We ensure that we do not give real farmers cash but farm inputs. It prevents defaults on the part of farmers and it ensures investors’ confidence in crowdfunding. This helps to pay investors their capital and returns on investments.”
Risk mitigation through insurance, monitoring
To adequately cater for risk mitigation, some of the crowdfunding firms insure farms in which the funds are invested.
Head, Agric and Micro Insurance, Leadway, Mr Ayoola Fatona, said the insurer covers risks associated with farm investments of some of the crowdfunding firms found to be real. He explained that the interactive session was organised to assure the investing public that their investments are protected in some of the crowdfunding firms.
Agrecourse boss, Oluga, said: “So far, we have raised $1 million and we have helped 1000 farmers in seven states in Nigeria. Agrecourse has started farming. On its own. And Leadway is involved to protect the farms funded by Agrecourse.
“We do our business as if we do not insure. We do due diligence even to the farm level.”
His counterpart, Eje, said: “Insurance of capital in farms and monitoring of farms for good agricultural practices to ensure profitability” were some of the due diligence steps emplaced to protect investments. Eje added that the Central Bank of Nigeria (CBN), at a certain stage of each of the players, steps in to regulate and protect the investing public.
Return on investments
Though the emphasis is on sustainable food production for local consumption of over 200 million Nigerians, industrialisation, job creation, exports promotion and import substitution, return on investments for investors is an integral part of crowdfunding, and indeed, it is the motivating factor for investors.
While the period of investment is usually six months, depending on the crop the investors want, it could extend to one or two years and the return ranges from 20 to 40 per cent of the capital invested yearly, as explained by the operators. Outrageous interest rates are indications that investors should be cautious, for agriculture does not perform magic with investors’ funds.
A word of caution
Professionals warn that not all agricultural crowdfunding firms are what they claim to be, and not all of them insure all the farms and profit expected is not insured, urging investors not to be gullibly part with their resources. The urge prospective investors on the platforms to verify the farms where they invest in before parting with your money.
Executive Director, Leadway Assurance, Adetola Adegbayi, during a closing remark at the session, said, “Please do not put your money any crowdfunding platform that does not invest in any physical asset; or which claims it invests in agriculture but has no farm. It is as simple as that.”
Moving forward, she said “if they say they have insurance, please note that the insurance is not a guarantee of your funds. Whenever they say they are insured, please note that it is for the underlined assets for which the funds are being provided. So, the insurance covers farms. So, the insurance is essential for the farms if there is loss of produce, livestock and farm assets, then we pay. There are many risks that livestock and produce agricultural businesses face, such as unintentional flooding, outbreaks of diseases.
“We are insuring the underlined risks on farms that your money has been invested, not the money. Always ask them of their formal setups, insurance policy numbers for all the farms, locations and owners of the farms, how long have they existed, do they get grants from international organisations, and their books on accounting and repayments of capital and interest. These are the things you should verify before investing your money in agricultural crowdfunding platforms.”
Explaining further, Mr Fotona said Leadway does not insure individual investors on the crowdfunding platforms directly, but insure farms in which investors’ money is put.
He, however, warned that some crowdfunding firms would insure only a few farms and claim they insure all farms in order to avoid paying premiums and to deceive the investors.
He warned that investors, both local and international, should “cross-check and confirm before putting your money in crowdfunding platforms. Some of them are genuine but many of them are not. Do what you are supposed to do as an investor. At this time and age, nobody should be scammed.
“With Leadway, we have about 22 crowdfunding firms, but only three are on top of their businesses. Agrecourse will insure every farm. We have some that will tell you that their rice, poultry and fish farm are insured but only poultry is insured. They will put it in their websites that they insure every farm but they don’t. So, to a large extent, I can vouch for what some of these guys are doing.”