CHALLENGES PROVIDES URGENT INVESTMENT TO VALUE ADDITION CENTRES IN MALAWI AS COVID-19 CRISIS HITS

Challenges Zambia
Aug 21, 2020 · 5 min read

Malawi’s agriculture has long suffered from a lack of investment, as financial institutions traditionally shied away from this sector because of uncontrollable and systemic risks, higher costs and weak linkages to markets. The emergence of the COVID-19 crisis exacerbates the risks for agricultural lending as movement restrictions disrupt supply chains for agricultural products from farm to table. As a result, this has impacted loan repayments in the agricultural sector and increased uncertainty in the financial sector.

Agriculture in Malawi, as in so many countries, continues to be perceived by the financial sector as having high costs of operation, unpredictable risks like extreme weather or disease, and low, slow returns on investment. Many factors negatively influence the relationship between finance and agriculture, including high costs of transactions, price volatility, and perhaps none more so than extreme weather, which can affect whole regions, reducing crop production, quality, and ultimately sale.

Since 2018, our Challenges Malawi office has focused on the delivery of the five year Creating Robust Opportunities for Crop Production and Sale (CROPS) project, in collaboration with Opportunity International and funded by the Scottish Government. The CROPS project, which launched in October 2018, has aimed at improving livelihoods of more than 6200 rural farmers in four districts, Nkhotakota, Salima, Machinga and Chikwawa. The project has since been working with four Value Addition Centres (VACs) to improve the value chains of a range of crops, and seeks to increase household incomes of more than 6000 participating rural farmers by 10% by 2023.

Challenges Malawi has been supporting the four VACs in business and cooperative development through promotion of value addition and processing activities, access to finance, access to reliable markets, and institutional capacity building. Furthermore, the Lilongwe team are also working with farmers in 10 irrigation schemes to increase productivity of their crops and enhance aggregation of crops for value addition. Central to this programme is improving the value chains of a range of Malawian crops, as well as enabling and promoting value addition and processing activities, boosting institutional capacity building, and improving access to finance and reliable markets.

Bua Value Addition Centre in Nkhotakota, Malawi.

At Challenges we understand that agricultural credit, lending offered to businesses in the agriculture sector, from agro-dealers to farmer organisations, aggregators to extension services, can be profitable if producers are well integrated into a viable value chain. Challenges Malawi has been working with 4 VACs (Bua VAC in Nkhotakota, Lifidzi VAC in Salima, Nsanama VAC in Machinga and Thabwa VAC in Chikwawa) since January 2019 with the objective of increasing incomes of their members through increased crop productivity and increased profitability of VAC-processed products.

Aware of the importance of a sound value chain to the Agri-sector, Challenges Malawi issued a total of £40,000 (35,000,000 MK) loans to four Value Addition Centres (VACs) in May 2020. The loans were issued to enhance the working capital of the VACs and enable the VACs to aggregate sufficient crop produce for processing and marketing.

Packaged rice from Bua VAC in Nkhotakota

Challenges Malawi expects the loans to contribute to increased VAC businesses and profitability through aggregation of sufficient crop produce for processing. It is expected that the four VACs will aggregate and process 145 tonnes of high quality Kilombero rice which will bring a revenue of over MK130 million (£ 139, 000) into the 4 VACs.

The four VACs that benefited from these soft loans are; Bua VAC in Nkhotakota which received MK5 million, and Lifidzi VAC in Salima, Nsanama VAC in Machinga and Thabwa VAC in Chikwawa which received MK10 million each. The loans carry a 12-month repayment period with 2 months grace period.

Thabwa VAC receives MK10 million

In the past 18 months, Challenges’ consultants have focused on enhancing co-operative management skills by ensuring robust governance structures and practices within the VACs, including making sure that decision-making processes are instituted and followed, and that various governance structures (Board of Directors, executive committee and management) understand and fulfil their roles and responsibilities. Challenges has further introduced effective financial management systems in the VACs via knowledge sharing and capacity building for VAC leaders in record keeping, expenditure controls and financial reporting. In addition, by co-developing bankable business plans and market assessments with the VACS, business development and marketing has improved, resulting in sales to various buyers in products like Kilombero rice. Over this time, as a result of Challenges’ interventions and the hard work and commitment of the VAC staff and members, there has been a marked increase in the investment readiness across all sites.

Understanding the negative impact of the COVID-19 pandemic on agribusinesses in the country, and the resulting urgent need for investment support, Challenges designed the loans to ease the financial burdens faced by the VACs. With these loans, Challenges analysed cash-flow projections, availability of sales contracts and assistance offered by the Business Development Officers (BDOs) to manage repayment as key parameters for each VAC’s capacity to repay the loans.

It is almost impossible for rural agribusinesses to access financing due a lack of collateral, hence some value chains promote internal VC financing such as contract farming, in which case, the crop becomes collateral. Among other terms, the loans attract a fair interest rate per annum accompanied by a generous repayment grace period which reduces the loan repayment burden on the VACs.

Mr. Darlington Alfonso, who is board chairperson for Thabwa VAC thanked Challenges for coming to their rescue as they had been struggling to build their working capital for over 2 years. “On behalf of Thabwa VAC, I would like to thank management from Challenges for making this soft loan possible. The loan will go a long way in assisting the VAC to aggregate sufficient crops for processing and the subsequent increase in sales and profitability of our products. I urge my fellow members from Thabwa to work hard to make this loan fruitful” Said Mr. Alfonso.

Challenges Malawi Country Manager Phillip Chidawati added “the loan will be a breakthrough for the performance of VAC business as it will not only enable the VACs to aggregate sufficient crops for processing but also help farmers surrounding the VACs to earn more income through sales of their crops at the Value Addition Centres”.

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