November 23rd, 2016

This year, the price of a kilo of tea reached a five-year high. Every October, tea farmers in Kenya receive a “tea bonus”; the second lump sum payment for tea delivered to the Kenya Tea Development Authority (KTDA) during the year. The first lump sum, the “mini bonus”, is paid each April.

KTDA is a co-operative tea marketing agency that oversees the management, processing and marketing of high quality tea grown by Kenyan smallholder farmers. The annual “tea bonus” and “mini bonus” are important for tea growers because their average monthly earnings from tea during the rest of the year are only about KSh 3,000 (approximately $30).

FSD Kenya’s latest “Field Friday” exercise took us to Embu. We wanted to find out how tea farmers there use financial services. How do these lump sum pay-outs impact their choices? And are there opportunities for the financial sector to serve tea farmers better?

Not one of the people we spoke to solely depends on tea farming. Nyaga, for example, began farming tea in 2012 when he inherited half an acre from his father. He also has a dairy cow and works as a mason.

Macharia is a middle-aged man who keeps dairy cows to supplement his tea income. He likes dairy farming much better than tea since the income flows are regular. He maintains separate bank accounts for both ventures, and borrows money using proceeds of both. He has taken a loan every year after the bonus for the last eight years.

Mukami is in her late twenties. She supplements her earnings by running a small hotel after quickly learning that tea farming is not enough to support her young family.

Tea boosts education

Nonetheless, many consider tea farming the key to their successes. Mumbi, a widow, says her greatest joy today is that all her five children completed their education. When they were young, she would immediately allocate her tea bonus to her their studies as soon as she received it. She now manages a portfolio of income sources and is happy to be able to support her grandchildren whenever their parents are stuck.

We also met Njeru, a retired teacher whose four children have successfully gone through university courtesy of loans linked to tea farming. When asked about his greatest achievement from tea farming, he stated, “Uliza wazazi wote hapa na watakwambia majani chai imetusomeshea watoto (ask all the parents here and they will tell you that tea farming has educated our children).”

One credit manager at a local bank estimates that half of all loans are used for school fees. About 30% are for miscellaneous household needs and only 20% for investments.

The tea bonus trap

When Njeru’s bonus is not enough for his family’s needs, he seeks a loan from a bank or SACCO. “We have built relationships with them and they will give us money to do what we want,” he said, beaming with happiness. He also is very pleased with the interest rate caps, which brought rates down to 14% annually, from 19%. In fact, when we met him, Njeru was applying for a loan to buy a dairy cow to diversify his income, though he says this will be his last loan: “Nimezeeka sasa maneno ya loan naachia vijana (I am an old man now, I will leave loans for the young people).”

It turns out Njeru’s practice of using credit to fill the money gap is very common. The majority of those we spoke to refinance after receiving their tea bonuses. It was clear to us that many farmers in Embu are at risk of getting locked into a vicious debt cycle. Every year is the same; when the bonus is paid, they pay off the old debt, but they are left with very little to live on so they are forced to borrow again.

For the lucky ones, like Nyaga, credit is growth and goal driven. All three loans that he has taken were to build a house for his family. “Familia yangu sasa iko poa (my family is now secure),” he said. When we met him, he was in Embu to apply for a bank loan to buy a motorcycle.

Mumbi’s tea bonus last year was less than half her earnings this year, but she did not need to take a loan thanks to her diversified income. This year, however, she has a goal to buy two dairy cows. “I have money for one and I want the bank to finance me to buy the second one,” she said. A good dairy cow plus insurance will cost her about KSh 100,000 (approximately $1,000), but she thinks it is a “worthy investment.”

When spending tea bonuses, Mumbi believes women are better planners than men. She explained that, “Women are organized; men like spending a lot of money on things that are not very important.” In general, she estimated that about a quarter of tea farmers misappropriate their bonus money.

But for many, a loan is the only way they can survive.

The opportunity for financial service providers

These conversations gave us a great deal of insight into challenges farmers have in balancing lumpy income in-flows and steady expenditure out-flows. The big question that emerged is what financial solutions can enable tea farmers to better match their income, expenses and investment opportunities?

Some initial ideas are:

• attractive savings solutions for those who want to develop safety nets for themselves;
• negotiating deals with schools to enable the tea bonus to flow directly to school fees without the need for school fee loans;
• providing appropriate investment solutions to those seeking to reinvest their earnings;
• creating annuities for farmers to help them spread their tea bonus over a period rather than receiving it all upfront;
• providing other agriculture loan solutions that can encourage small tea farmers to divest into other activities like the dairy farming; and
• graduation solutions that can lift the tea farmers out of loan dependency every year.

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