Agriculture & processing

Evolution of finance to address real economy constraints: A case of FSD Kenya’s partnership with the Agricultural Finance Corporation (AFC).

June 6th, 2023

Kenya’s Agriculture sector contributes to at least 15% of formal employment, 60% overall informal employment and 65% of exports and forex. Additionally, at least 70% of Kenya’s rural folk depend entirely on farming and its associated enterprises across the agricultural value chain.

For perspective, in 2021, approximately 5 million farmers considered agriculture as their main source of income. This is, in fact, a decline from 2016, when the number averaged 6.8 million. Insight from FinAccess 2021 also reveal that at least 49.8% of Kenyans are involved in farming either as a key source of income, supplementary income or for subsistence farming.

The paradox

Despite recording Non-Performing Loans (NPLs) of 5% in 2021, the sector accounted for only about 4.2% of gross loans, in comparison to the banking sector’s (finance and insurance) 12.5% with a bulk (73.79%) of the banking industry gross loans and advances being channeled to Trade, Manufacturing, Real Estate sectors and for personal/household use.

Previous studies also give insight on East African agriculture finance lending statistics which range between 2-7% of total banks credit.

Informal sector funding is also lackluster which is largely attributable to limitation in capacity and resources to model sector specific innovative and applicable financial products.


Characterised largely as rainfed and dominated by smallholders, with land holding of approximately 0.2-3.0 hectares, the sector accounts for about 75% of the total agricultural output and 70% of raw materials for agri- industrial production.

This is impressive, although recent reports suggest significant decline in the sector attributed to, among other things, a shift in the use of agricultural land to real estate.

Within the sector as well, there is somewhat a policy conundrum, designating agricultural finance as a policy orphan.

“Often responsibility for policies impacting agricultural finance falls into a void among several government ministries, such as finance, agriculture, planning, trade, and commerce.”

  • World Bank, 2021

While this is a broad stroke, it paints a characteristic feature of Kenya’s Agricultural finance policy landscape.

Coupled with that, the sector is perennially under-budgeted for. In the 2021/2022 FY, only 2.4% of total budget was allocated to the sector – which is also quite low given its significance.

Climate change adaptation and mitigation is another present discussion within the Agriculture Finance space. It is high time lenders position themselves and make strategic considerations for greening finance and financing green as integral parts of their strategy and lending portfolio. So far, the agricultural sector has not instilled a lot of confidence in lenders who shy away or double down on lending requirements for “green” clients.

Studies by FSD Kenya  have shown the paradox of informalisation (during Covid-19) and its contribution to resilience especially for micro and small business (MSEs). One of the findings was the existence of few formal MSEs/ businesses in Kenya. This has a multiplier effect on the organization of value chains as an ecosystem of practice and in turn, influences the flow of formal finance as lenders prefer well organized/structured value chains which allow for more efficiency and reduction of risks.

Agricultural finance is increasingly innovating to additively have an impact on the bottom of the pyramid, i.e., smallholders. Therefore, sequencing value chain actors and activities in a functional value chain is a value add to the actors, facilitators, supporters and operators. In this case, instrumentation of finance is enlightened, addresses systemic market constraints and in turn, impactful.

Also, structured value chains generate immense benefits to smallholders through increased incomes and employment opportunities, government through targeted extension services and broadened tax bases, and the end consumers, who benefit from quality products and embedded services e.g., traceability. For traders, access to better markets and funding opportunities are ever more within their reach.

Consequently, market failures, which negatively affect a country’s economic growth, due to lack of coordination and transparency along the value chain, are adequately addressed.

Perceived vs actual risks

Lenders still find extending credit to smallholders and Agriculture sector MSEs risky.

These risks are largely classified into a. external risks which encompass price volatility, climate change, and government regulations, b. business risks relating to internal business management gaps of MSEs i.e., business planning, governance and financial management, c. product miss-alignment caused by the seasonal nature of cashflows, lack of favorable types of collateral, and the high cost involved in servicing businesses especially in rural areas.

Nonetheless, demonstrated by the agriculture sector NPLs against a multiplicity of externalities, it is evident that Kenya’s agriculture sector is robust and that some of these risks are perceived.

Tunnel vision?

The new administration has placed Agriculture at the centre of its transformation agenda with 60% of its commitments linked to the sector. Further, within the ‘Bottom-Up Agriculture Productivity model’, a value chain approach to the agriculture sector development has been preferred.

This is a significant shift in paradigm from a farmer-based production model to resource management production model and from conventional government extension modelling to farm resource management strategy, the effects of which, will be felt in a not-so-distant future.

FSD Kenya’s journey with the Agricultural Finance Corporation

A due diligence conducted on AFC in 2016/7 with the support of FSD Kenya recommended the adoption of a market maker for agriculture finance through an apex model, a role AFC took up.

Subsequently, in 2018, FSD Kenya and AGRA, upon request by the National Treasury, jointly supported the AFC in the development of its strategic plan for the 2018 – 2022 period and accompanying strategic plan implementation models.

The models developed include a. warehouse receipt financing model, b. wholesale financing model, c. credit guarantee scheme financing model and d. agricultural mechanization financing model.

One of key notable achievements has been the wholesale lending model that enabled AFC more than triple its outreach, impact and loan-book quality. Likewise, the resulting business transformation initiatives has seen demand for affordable agricultural credit at AFC rise to over KShs. 15 billion annually.

AGRA and FSD Kenya are currently supporting AFC conduct a strategy refresh for 2023 – 2027 period that will see the development of the following additional financing models, a. climate resilience and adaptation financing model, b. financial Inclusion financing model for marginalized segments such as youth and women, c. fintech financing model, d. agricultural re-insurance financing model and e. post-harvest management financing model.

On 12th April 2023, the AFC held an investors conference with an ambitious goal of addressing financing constraints facing the agricultural sector leveraging the four (4) business models developed through this support.

To learn more about the business models, please find the investment papers here.



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