There is consensus among the R&D community that increasing fertilizer use by smallholder farmers is essential to reverse the declining trend of food production in Africa (Hazell & Haggblade, 2009; Sanchez, Denning, & Nzighubea, 2009). Inorganic (mineral) fertilizer usage in Africa currently stands at 9–10 kg/ha-1 of nutrients compared to greater than 150 kg/ha in Asia (Figure 14). At the minimum, mineral fertilizer use should be increased to at least 50 kg of nutrients per hectare by 2015 as per recommendations of the Abuja Summit on fertilizer use in Africa (International Fertilizer Development Center [IFDC], 2006). Key to this is reducing the high costs of fertilizer, which are often in the range of US$800–US$1,000 per ton at farm gate and the most expensive in the world.
In general, the high prices are due to fertilizer markets that are weak, underdeveloped, and characterized by high transaction costs. Consequently, these markets sell at prices that are beyond the reach of the majority of small-scale and subsistence farmers. The high transaction costs are exacerbated by supply-side and demand-side constraints, which severely hinder the development of efficient and effective private sector-led fertilizer markets in Africa. These constraints manifest themselves in the form of irregular and costly supply of inputs and weak demand. A key constraint to both the supply and demand sides is lack of access to finance for the fertilizer value chain actors. Fertilizer is a capital-intensive business; therefore, manufacturers, importers, distributors, and agro-dealers require access to finance to manufacture,procure, and distribute fertilizer.
With regard to access to finance by importers and agrodealers, banks tend to view the fertilizer business as risky and therefore charge high interest rates and impose strict collateral requirements on potential borrowers from the fertilizer business sector. For their part, the importers and distributors find the collateral and lending terms unattractive, given the seasonality of agriculture, the relatively low returns from the inputs business, and the high level of risk caused by climatic variations. As a result, banks in Africa typically have a low percentage of loans to the fertilizer importing and distribution businesses. Although microfinance facilities are widely available in many countries, the size of the loans is typically too small to support the development of a fertilizer business.
Consequently, importers, and even more so agro-dealers and stockists, have limited access to finance to invest in the fertilizer business. The majority resort to using their own savings or income from other business ventures to finance part or all of their businesses. This limits the size of their orders, increases transport and other transaction costs, and restricts the scale of business operations. It also reduces the funds available to invest in market development activities, such as extending credit to farmers and providing technical support and fertilizer delivery services.