Agriculture & processing

Money to the grassroots: Rethinking agricultural finance models

October 16th, 2020

Why is agricultural sector the least funded sector in Kenya by the formal financial sources despite being the largest sector in terms of GDP contribution (at over 50% GDP contribution directly and indirectly)? The sector has been left largely to informal sector financing mechanisms. These informal sources lack the capacity to provide the right finance to the sector in terms of quality and quantity. According to FinAccess 2019, formal borrowing is used by around 3.2% of Kenyan farmers to finance their agricultural operations. Sale of assets, alternative incomes and social networks are the major sources of capital for investing in the sector.


The report also estimates that 8.5 million people in Kenya engage in some form of agriculture, with 6.3 million of them primarily earning a living from the sector. A 69% majority are involved in food crop farming, yet the country still experiences chronic food shortages due to low productivity and/or losses. Compared to leading global producers, the lack of right financing in areas like inputs, working capital, mechanisation, and risk tools is a leading contributor to extremely low productivity in most of the value chains.

The choice of capital source to finance agriculture is largely determined by the ease of accessing credit. Most farmers Have limited choices and are forced to put up with whatever is available. Is there a way to fast-track access to the right agriculture credit? Kenya is increasingly seeing financial models targeted at fixing demand side challenges, such as access to husbandry knowledge, markets and risks mitigation, while others focus on financial supply side issues like credit scoring capabilities, digital access of rural clients among others. Most of the formal financiers are currently comfortable playing in the space of offering agricultural credit through the check-off model in partnership with the major off-takers in tea, dairy, horticultural export, and to some extent coffee. A few are making strides in financing loose value chains through minimal traction has been made compared to the market size. In most cases, these models largely offer invoice discount facilities as opposed to pre-production capital. Efforts to attract private capital must address the issue of private sector incentives, as well as farmers’ incentives to invest.

Can we remodel the future?

Kenya is ripe for fresh modelling of agricultural financing to incentivise both financiers and agricultural value chain actors to take on the investment risks. The farmer’s incentive to make returns are as strong as the financier’s, and if this fact were to be consciously processed by many farmers, their sustainability is at stake if investments outweigh their returns. Let us imagine what it would take to avail the right finance to some of the large sub-sectors like maize, which is largely grown by many smallholder farmers across the country without distinct off-takers. How about livestock in Northern Kenya, where 62% of sales happen through local market centres and 32% through local traders who purchase at farm gate, with only 0.1% going through cooperatives and 0.4% through abattoirs? Either finance could cause the re-organisation of the sub-sectors, or the sub-sectors’ re-organisation could make finance work. I guess a blend of both is required. A good case for a robust model is the tea sub-sector in Kenya and coffee, which at some point in time was well structured. The dairy sub-sector is coming up as an emerging model for financing smallholder farmers through milk cooling centres contracted by processors.

To achieve this, there is need for concerted public and private sector efforts. Some of the risks and initial investments to effectively crowd-in private sector investment will require public sector de-risking. But more important is the modelling of both , crops/livestock value chains as well as finance value chains.  Agricultural financing history for the developed countries in Europe and America as well as newly developed economies like China and India demonstrate a strong case for a public role in enhancing agricultural sector financing. For instance, the American Farmer Credit System (FCS) was an alternative model created by congress and today offers more than a third of rural finance (farming, housing, agribusiness, utilities). It offers loans, insurance and related services to farmers at competitive prices.

At the onset, Kenya attempted to offer public support through creation of Agriculture Finance Corporation (AFC), incorporated under the AFC Act (Cap 323 of the Laws of Kenya) to support the development of agriculture and agricultural industries by making loans, and providing managerial and technical assistance to players in agricultural value chains. This has had mixed success over the years the institution has existed, calling for a rethink.

Modelling the future of agriculture financing

Back to the value chain models: can we for instance model a value chain for a crop like green grams to serve the smallholder farmers better and to incentivise financiers to participate in it? To the point where farmers are assured of timely right inputs, storage, better prices, risk mitigation tools, among others. I guess this is possible through the creation of new model of a green gram value chain, blended with finance. An activity like communal/public/private warehousing can trigger multiple benefits like sorting the temporal glut that is always witnessed at harvest time when prices drop to less than KShs 40 per kg (about US$ 0.4) compared to over KShs 80 (US$ 0.8) after three months.

An act like availing aggregation, storage, marketing, warehouse receipts system or even commodity exchange models for such a value chain would be a great win. A simple act like the reduction of post-harvest losses, estimated to be over 30% of the produce in Kenya, through warehousing could also trigger better prices and financing of farmers through the warehouse receipt system. Such efforts require a public-private sector partnership to thrive. It is proven that last mile farmer contacts like aggregators, and rural financiers like Saccos are well suited to deliver finance to smallholder farmers. Besides the traditional formal financial sources like banks and Saccos serving the rural economy, fintechs have joined the party. Fintechs bring the technological capability to fast-track data driven credit scoring and field operations but lack the balance sheet to expand their lending.

At the heart of the new strategic direction by AFC is the role that public development banks can play to deliver the Corporation’s policy mandate in supporting the development of agricultural financial markets. This strategic direction should create a catalytic effect to already developed private sector financiers to increase their participation within the sector’s funding ecosystem. Some of strategic objectives, like the development of a wholesale lending model to de-risk and catalyse private sector agricultural financing; supporting the development of viable financial and agricultural value chain models would go a long way in setting the stage for the deployment of more capital to the sector.

AFC has piloted the wholesale model with great success. Similarly, their de-risking programme, supported by the National Treasury Programme for Rural Outreach of Financial Innovations and Technologies (PROFIT), a programme run by the National Treasury, has also yielded good results. FSD Kenya is happy to be part of the AFC strategy development journey, as well as in the next phase of modelling, with the hope that banks will play a major financing and catalytic role in the agricultural sector, in addition to extending public sector capabilities like de-risking and capital mobilisation.

Michael Mbaka is Senior innovations specialist at FSD Kenya.



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