Across Africa, agricultural cooperatives are confronting acute capital crises that threaten their viability and growth potential. At present, the global financing gap for smallholder farmers is estimated to exceed USD 170 billion, representing the aggregate unmet demand for agricultural finance at any given time, with long-term capital remaining virtually inaccessible through traditional banking institutions. This chronic undercapitalisation creates a destructive cycle: insufficient investment leads to diminished productivity, which in turn weakens financial resilience and limits future growth.
Capital credits present a potential solution to this challenge. Rather than distributing all annual surpluses as immediate cash payments, cooperatives can retain a portion of these profits as member equity. Under this model, each member accumulates credits commensurate with their contribution to the organisation. These credits can then be redeemed at predetermined future dates, typically following a structured rotation system.
This approach enables cooperatives to build substantial capital reserves from their own membership base. This capital requires no interest payments, while preserving members’ rightful share of profits. The result is a self-reinforcing cycle of capitalisation that strengthens both individual returns and collective financial capacity.
A widening imbalance in capital access
Capital shortages fundamentally undermine the ability of African agricultural cooperatives to compete globally. Without adequate equity, they cannot secure working capital at reasonable rates and are often forced to rely on predatory lending terms that can exceed 25% annually. Consequently, cooperatives can struggle to pre-finance inputs or maintain inventory, creating a cascade of operational problems.
Although donor grants may provide temporary relief, they rarely build the permanent capital base that cooperatives require for long-term sustainability, and so financing crises can trigger complete operational collapse. Without sufficient cash reserves, cooperatives cannot buy seeds and inputs for their members when they are needed, leading to instances where members have to wait months for a payment. This may persuade members to bypass the cooperative entirely and sell directly to middlemen, undermining the viability of the whole operation.
The contrast with mature markets is stark. Large US agribusiness cooperatives such as CHS Inc. routinely retire hundreds of millions of dollars in old capital credits whilst simultaneously funding new investments from retained patronage. With 40–50% of assets financed by member equity, these firms can weather economic downturns without resorting to costly external financing. This ultimately benefits members through reduced service fees.
While it may be difficult for African cooperatives to match these equity levels or weather longer redemption cycles, numerous examples of successful cooperative capitalisation models already exist on the continent. For instance, Kenya’s savings and credit cooperatives have built USD 13.64 billion in assets through member contributions, proving that such models can mobilise significant capital when transparent payback methods exist.
Designing capital credits for African markets
The key challenge in implementing a capital credit model in an African context is not technical but behavioural, rooted in the fundamental economic realities of smallholder farming. Unlike their North American counterparts, who can afford to wait 16 years for capital credits to redeem, African smallholder members have limited funds and more immediate cash flow needs. This makes a longer revolving cycle, impractical for most African cooperatives.
In many regions, this problem has also been compounded by a history of weak governance, opaque financial systems, and short-term liquidity issues. All of which can erode member trust. However, reducing the redemption window to something smaller, like five-to-seven-years, could potentially balance the cooperative’s need for patient capital with members’ desire for tangible returns.
Implementation strategies for cooperative financial innovation
Cooperative boards can ease liquidity concerns by strategically allocating annual surpluses. For instance, paying out a minority share (20-30%) as cash and retaining the rest as capital credits can provide members with both an immediate income and a long-term benefit from the cooperative.
Cooperatives can also leverage mobile phone technology to make capital credits models more accessible to smallholder members. Despite growing mobile phone adoption, smartphone ownership in the region remains at just 51% as of 2023, leaving feature phones as the most common device among rural households.
As a result, Unstructured Supplementary Service Data (USSD) technology has become the primary digital channel for delivering financial services—especially credit—to smallholders, many of whom live in remote areas with limited access to physical banks. By integrating USSD-based loan application, approval, and repayment systems into their operations, cooperatives can provide a fast, secure, and inclusive pathway for members to access working capital without visiting a branch.
These services are rarely provided by traditional banks, reinforcing the cooperative’s value as a member-centric institution that serves financial needs often overlooked by larger institutions. For thousands of farmers, USSD-powered cooperative credit not only improves agricultural productivity and cash flow but also reinforces trust that their interests – not just profit –are central to the cooperative’s mission.
Transparency and governance
However, technology alone cannot guarantee member confidence. Farmers will only commit their capital when they believe their funds are genuinely safe and can be fairly redeemed. This requires comprehensive transparency measures. Mandatory external audits, regular member education sessions, and publicly posted equity ledgers can help reassure stakeholders about the cooperative’s financial health and management practices.
Such measures can also help cooperatives attract external financing partners. Commercial lenders and development finance institutions are more likely to provide concessional finance to cooperatives that demonstrate strong governance and financial transparency. By availing of more favourable loan terms, larger credit facilities, or innovative financing products that leverage the cooperative’s member equity, cooperatives can multiply their investment capacity without depleting member capital reserves.
Meanwhile, at a government level, effective regulation can boost member confidence, stimulate greater internal investment, and help cooperatives achieve long-term financial sustainability. In particular, policymakers can encourage the use of capital credits by providing tax relief on retained member profits and by formally addressing capital credits within the laws governing cooperative associations. In doing so they can formalise and standardise how cooperatives manage member equity.
For instance, requiring cooperatives to keep clear, uniform records or to regularly issue statements showing members’ capital credit balances can transform the voluntary practices of today into legally enforceable obligations. The results can be transformative as cooperatives shift from donor-dependent financing to internally generated capital.
Towards a self‑financed capital credits cooperative
By shortening redemption cycles, leveraging technology, and embedding robust systems of governance, African cooperatives can mobilise substantial internal resources and build stronger, more resilient agricultural enterprises. However, effectively implementing this model requires carefully calibrated strategies that reflect local economic realities.
At Farrelly Mitchell, our agribusiness consultants provide strategic, technical, and commercial expertise to help government agencies and DFIs address complex challenges and drive sustainable growth. With a deep understanding of regional markets and value chains, we help empower local communities by building durable institutions that support smallholder farmers and SMEs. We advise on green finance, policy design, capacity building and much more. Contact us today to discuss how your organisation can unlock financing opportunities and drive sustainable growth for farmers and businesses alike.
