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AFRACA- EAST AFRICA SUB REGIONAL CONFERENCE. 22-24 JULY 2008.

‘INNOVATIONS IN PROVIDING ACCESS TO FINANCIAL SERVICES BY SMALL SCALE

FARMERS’.

AGRICULTURAL FINANCE CORPORATION (K) APPROACH.

ADDIS ABABA, ETHIOPIA.

Presented by Job Kemei.HEAD CORPORATE PLANNING

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SCOPE OF PRESENTATION KENYA’S ECONOMIC OVERVIEW RURAL/AGRICULTURE FINANCIAL

SERVICE PROVISION Agricultural Finance Corporation-

overview Challenges faced in rural and

agricultural finance service provision

Innovation to address rural finance challenges

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KENYA’S ECONOMIC OVERVIEW

The Kenyan economy is agricultural based.

The Agricultural Sector directly contributes to

26% of GDP and a further 27% through linkages

with the manufacturing, distribution and service

related sectors

It accounts for 60% of all export earnings

75% of agricultural produce is from small holder

farmers.

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RURAL/AGRICULTURE FINANCIAL SERVICE PROVISION

The Rural Financial System (RFS) provides access to financial services in the form of Credit, Savings and Insurance

The proportion of rural population with access to financial services varies substantially with remote areas having the least access to these services. This is however changing with technological advances and a paradigm shift from mainstream banking to micro finance.

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RURAL/AGRICULTURE FINANCIAL SERVICE PROVISION

The Agricultural Finance Sub-Sector though under served gets services through Banks, Non-Bank Development Finance Institutions (NB-DFIs), Micro Finance Institutions (MFIs), Non Governmental Organizations (NGOs), Savings and Credit Co-operative Societies (SACCOs) and informal ROSCAS.

NB-DFIs offer only credit are thus limited in their service delivery.

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Agricultural Finance Corporation

Agricultural Finance Corporation is a Government owned Non-Bank Development Finance Institution (NB-DFI).

It is the Government’s main vehicle for credit delivery to agricultural and rural sector

Established in 1963 under a specific legal framework.

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MANDATE OF AFC

To assist in the development of agriculture and agricultural industry by making loans to:

Farmers Co-operative Societies Incorporated group representatives Private companies and public bodies Local authorities and Other persons engaging in agriculture and

agricultural industries

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Challenges faced by AFC in rural and agricultural finance service provision

Low volumes of transaction, due to limited pieces of land/agricultural projects. Income too meager from such low value transactions.

Spatial dispersion of farming enterprises rendering them very costly to administer through follow-ups and projects monitoring.

Long gestation periods of most agricultural projects Sugarcane, Tea, Coffee etc. This causes a challenge especially when resources are scarce as huge capital outlays are tied up. Subsequent shortages push up the cost of credit due to a high unmet demand

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Challenges faced in rural and agricultural finance service provision:

- Cont.. Seasonality of agricultural credit demand dictated by

seasonal nature of enterprises. The flip side is a strain on farmers to undertake their financial obligations during off seasons

Due to the high seasonal nature of rain fed agriculture, huge investments are incurred during planting seasons and relatively low during other times of the year generating a pattern of high credit demand during planting seasons. This demand cannot be adequately fulfilled at this time

High covariant risks (vagaries of weather, pests, fluctuating and often unpredictable produce prices and markets etc).

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Challenges faced in rural and agricultural finance service provision:

- Cont.. Lack of affordable risk mitigation products such

as insurances due to the high covariant risks mentioned.

Limited availability or lack of realizable collateral.

Risks of “reverse development” on realization of security upon default.

Multiple demands on same source of income (family consumption, medical requirements, clothing, school fees etc).

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Challenges faced in rural and agricultural finance service provision:

- Cont..

Misconception by beneficiaries on public institutions supplied financial services mainlycredit –assistance or credit? Most often construed to be Grants

Over-reliance on land as collateral – This has numerous social and political connotations

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Challenges faced in rural and agricultural finance service provision:

- Cont..

‘Debtor friendly’ legal system. Too expensive and time consuming.

Effects of past loan waivers inculcating a culture of “wait-and-see” to loan servicing (for AFC)

Willful and strategic default by loan-beneficiaries citing “mali ya uma”.

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Challenges faced in rural and agricultural finance service provision:

- Cont..

Subsidized credit – poor credit culture; also develops farmer at the expense of the institution.

Restrictive legal framework - limits operational autonomy and product choice.

Poor/lack of timely response to changing operating environment.

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Innovation to address rural finance challenges

1. Group finance.

AFC adopted group financing concept to: -reach Small scale farmers who require small credits.

-Do not have requisite collaterals.

-use pear pressure to collect.

- Improve access to produce markets.

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Innovation to address rural finance challenges. Cont..

2. Wholesale financing.Channeling credit funds through farmer co-

operative societies, Non Governmental Organizations, SACCOs, et al.

Aim:- To increase outreach, reduce lending costs.

-Through peer pressure improve project implementation and loan recovery,

-Reduce moral hazards

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Innovation to address rural finance challenges. Cont..

3. Business partnerships.

Establish partnership with institutions in sector that do not have lending structure.

Aim:- Raise loanable funds,

Direct lending to specific sub-sectors,

Deviate clients perception of public funds, (reduce moral hazards)

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Business partnerships. Cont..

Currently AFC’s business partnerships : Kenya Sugar Board, Coffee development Fund Government ministries. GTZ/PSDA

In total we implement a Kshs 675million

(us$ 10.5 m)

Able to reach over 3,600 small holder clients.

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Innovation to address rural finance challenges. Cont..

4. Contract farming financing.

Financing farmers with specified produce markets and formulizing repayment orders .

Aim:- Ensure markets for produce

-Loan repayment through sale of proceeds.

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Contract farming financing Chain Model

Marketing agencies

Agricultural Finance

Corporation

Farming Input

suppliers

Farmer Entities

Export Market

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Contract farming financing Chain Model

The AFC will reach many small holder farmers producing fresh produce for export market.

Loans are short term revolving facility. Also financed are other non export food

crops under the umbrella of contract farming.

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5. Loan guarantees

The AFC partners with development agencies in agriculture that can offer credit guarantee to small holder farmers and input suppliers.

Through a partnership with an NGO we have been able to finance young trained rural based agricultural input stockists.

- increases application of quality inputs, increase yields and employment.

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FARM INPUTS

MANUFACTURERS

DISTRIBUTERS

Credit guarantors

RURAL BASED

INPUT STOCKISTS

FARMERS

AFC

AGRICULTURAL INPUT STOCKISTCREDIT GUARANTEE PROGRAM

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Produce based financing

AFC enters into partnerships with agri business organization that work with small scale farmers.

Provide finances to small scale farmers on the strength of production contracts with marketing agent.

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AFC- PRODUCTION BASED CONTRACT FINANCING

Marketing and , processing

entity AFC

COFFEE OUTGROWERS

Milling & Marketing Agreement + Recommendations for loans + Farm Inputs + Technical Advice + Surplus payments from marketed coffee

Loan agreement + Disbursements

Loan application

Loan repayment deductions from out growers

Disbursements for inputs on behalf of out growers

Supply of parchment

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AFC- PRODUCTION BASED CONTRACT FINANCING

No collateral will be required as farmers co-ops and contracts with marketing body will be adequate.

Average loan amounts less than Kshs 10,000 (US$1,50)

Loan funds revolved amongst Co-ops members.

Low capital requirement from lender. About Kshs,400 m (US$6.2 m)

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4. Value Chain Approach- New approach.

Recently sealed partnership with other institutions in agriculture to offer value chain financing. The

partnership is to improve the dairy sector along the value chain, particularly in product development, marketing, cost, efficiency and policy issues. Specific objectives of this partnership are-: – Partnership to carry out a focused research into business opportunities in the dairy industry

supply chain to arrive at market oriented solutions to the issues of efficiency, market costs and consumer prices.

– Develop credit products to fund the various categories and levels of business opportunities to enhance productivity and competitiveness of dairy production.

– Identifies critical partners and players in the dairy sector with an aim of forging partnership along the various levels of the value chain.

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Dairy Production Value Chain Approach (conti.....)

Milk Processors

Veterinary Services Providers

Farm Inputs & Feeds Suppliers

AI Services & Embryo Transfer Technology Suppliers

Livestock Insurance Services Providers

Fixed Inputs Suppliers (Dairy Cows)

Business Support & Advisory Services

Financial Services Providers

Milk Processing

Milk Marketing & Distribution

Milk Collection & Transportation

Milk Production

Milk Wholesalers & Retailers

PRODUCTS & SERVICE PROVIDERS

Milk Producers

Milk Transporters

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Technology based Financial Services

AFC embraced new technology and installed new banking software to offer online and real time transactions processing.

To reduce on cost of transaction.

Other related products that are to rolled out are: Customer relationship/savings accounts Electronic money remittances. Electronic loan repayment and disbursements.

Customer Delight - Access information on their accounts 24x7 all year round.

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Fruits of the innovations

The innovations have enabled the AFC to: Offer credit all year round, Attract new partners and funding Improve institutions image to public, donor and

Government. Reduce average loans from over Kshs 500,000 five

years ago to about 40,000. Increase outreach from about 10,000 five years ago

to over 35,000 directly and over 100,000 indirectly through co-ops and partnerships.

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END.END.----------------------------------

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