Working paper 12 - Feast and Famine:Financial Services for Rural Kenya

Author(s):  Argwings-Kodhek, Gem

 

Introduction

Over the last few years there has been increasing mention of the financing problems facing farmers. Whenever they are asked to list their problems, lack of credit is usually high on the list. As a result all the government recent policy documents have raised the issue and pledged to do something to address it.

In the Poverty Reduction Strategy Paper 2001-2004 agriculture was ranked as the number one sector, crop development the priority sub-sector and inefficient rural financial systems the second most binding constraint. Government noted farmers and the rural sector cannot progress without the credit and financial services they have been starved of, and committed to promoting an innovative an efficient rural finance and credit supply system for smallholders and rural primary processors by developing modalities to support schemes through farmer organizations, NGO’s, CBO’s, rural SACCOs, input suppliers and processors.

The practical details, institutional and policy arrangements were to be worked out before large amounts of public money are channeled into particular institutions. In the Economic Recovery Strategy for Wealth and Employment Creation poor access to farm credit is given as a cause of the decline in agricultural productivity. Government commits to review the institutional framework with a view to encouraging the development of institutions that are well placed to provide credit to agriculture including micro-finance institutions and the revival of the Agricultural Finance Corporation.

The Strategy for Revitalization of Agriculture also picks up on the agricultural credit problem. The President in his foreword to the document declares that in order to facilitate the needed transformation of the agricultural sector, establishment of market based agricultural credit and inputs system is one of 5 critical areas requiring public action to modernize agriculture.

The new government found many agricultural problems waiting for it. The Minister of Agriculture formed Task Forces to look into the problems in the sugar and coffee industries. The sugar task force found Ksh 7.5 billion of debt to the Sugar Development Fund of which Ksh 2.5 bn was in arrears. The industry has Ksh 2.5 bn of arrears to the Levy and Ksh 1.8 bn of arrears owed to farmers. The problems in the sugar industry are intimately related to the way the industry is financed. Farmers are financed through outgrower companies, local monopolies that charge relatively high rates per operation and uncompetitive interest rates.

If the Sugar Development Levy Fund were able to develop modalities that give growers freedom to choose competitive service providers, then their cost of production would be brought down and the sector made more competitive. The Coffee Task Force found Ksh 10.5 billion of debts owed by farmers and Ksh 1.2 bn owed by farmers institutions to commercial banks and multilateral lenders. They proposed a mix of debt write off and restructuring and Ksh 5 bn of new money that is needed to rehabilitate the industry.

Many of the problems in the coffee sector stem from the lack of choice as to marketing channels, either at the local cooperative society level, or at the national level where all coffee must go through a central auction. Private treaty sales of coffee could encourage international buyers to pre-purchase and pre-finance production of part of Kenya’s coffee crop at very low interest rates.

The mixture of incomplete liberalization and lack of competing marketing channels is a result of difficulties in agricultural financing. Too often farmers finance processors e.g in pyrethrum where the monopoly board owes growers Ksh 1 bn for unsold products and in the milk market. The only positive and problem free sector is small-holder tea where the KTDA handles an annual Ksh 1.5 bn fertilizer loan program to 360,000 growers without problems. A well-organized output market has resulted in tea growers being inundated with offers of credit from commercial banks, building societies, and cooperatives.

Clearly financial issues are a large part of the problems facing the agricultural sector. The reaction of the private commercial banks has been to avoid agricultural lending, and the reaction of the new government, initially at least, was the funding of AFC and an effort to revive the Guaranteed Minimum Return scheme. However this paper argues that a lot more research and reflection is needed before public funds are committed to fulfilling election promises in ways that cannot be sustained. The government commitment made in the PRSP combined with the Presidents statement in the Strategy for Revitalization of Agriculture is to take the time to work out details of market based solutions to the agricultural credit problem in Kenya. This paper is an attempt to begin that process.

The paper gives a brief description of the history and main institutional forms in the agricultural and rural financial services sector – commercial banks, the micro-finance industry, savings and credit cooperative societies, village banks, building societies and the Agricultural Finance Corporation. It ends by raising some of the issues that need to be addressed as we begin to deal with the institutional and regulatory framework for the subsector including the cost of funds and the array of existing policy and legislative proposals on the table.

The main argument of the paper is that we need to step back and undertake a comprehensive assessment of the sector before government passes new laws, or spends public money in unproductive ways. The paper proposes that the agriculture sector ministries should play a leading role in pushing for that comprehensive assessment. For the sake of their underserved clients.

 

 

Feast and Famine: Financial Services for Rural Kenya