Increase lending to agriculture sector, experts urge Kenyan banks

Saturday October 20 2012

A combine harvester harvesting wheat at a farm in Kenya’s Uasin Gishu County . Pictures: File

A combine harvester harvesting wheat at a farm in Kenya’s Uasin Gishu County . Pictures: File 

By KEN OPALA

The agricultural sector’s top decision-making organ is asking Kenya’s lending institutions to commit at least one in every seven shillings to agricultural producers, if Kenya has to transform its key revenue earner and employer from hitherto low added-value to a commercially-oriented competitive sector.

“We ask banks to increase to 15 per cent their lending portfolio to the agricultural sector,” Agriculture Ministry Permanent Secretary Romano Kiome told sub-Saharan Africa’s largest assembly of farmers, agricultural experts, policymakers and donors, in Nairobi last week.

“This is one of our recommendations,” Dr Kiome added.

The Agricultural Sector Development Forum (ASDS) headed by President Kibaki, is the most influential organ in the sector. It held its third biennial conference on October 14-17, opened by the President Mwai Kibaki and closed by Prime Minister Raila Odinga’s representative.

President Kibaki kicked off the call to the banks. He said only three per cent of the total bank’s lending portfolio goes to agriculture sector. “Although lending by commercial banks to the sector has increased from KSh25 billion ($288.7 million) in 2003 to about Ksh53 billion ($611.9 million) last year, this is still way below the sector’s potential.”

This was underlined by Mr Odinga, who said there is a need for a financial support to develop agriculture sector.

“Access to credit need to (move) to 15 per cent, to enable farmers to engage in agribusiness,” Mr Odinga said in his speech read by Wildlife Minister Noah Wekesa. “We ask all banks to be partners in our endeavour to turn around this sector.”

Banks have yet to collectively respond to the proposal. But James Mwangi, the CEO of Equity Bank hinted at lenders’ readiness to oblige.

“Let’s build partnership. Equity Bank has loaned out Sh6 billion ($69.3 million) to the sector through the Kilimo na Biashara initiative”

“It is not about risks but how we can insulate against the vagaries of nature. We need to modernise our agriculture so that it is not dependent on nature. Once we make the industry noble, big and well-paying, it will have dignity. It will attract even the youth. But we can only do this if we give incentives to all people involved in the sector.”

According to financial analysts, microfinance institutions, including Equity and Jamii Bora, loan about Ksh143 billion ($1.7 billion) to 1.1 million borrowers. Banks had KSh1.6 trillion ($188.2 billion) in deposits by June 2012. About three-quarters of this can be loaned out, which is KSh1.2 trillion ($141.1 billion).

The sector needs just Sh180 billion ($2 billion) from the banks, according to recommendations by the 1,000 participants at the biennial conference—whose theme was “Moving Towards Agribusiness for a Globally Competitive Agricultural Sector.”

Private sector participation

“An ingredient in the process (of modernising agriculture) is availability of credit, which is sensitive to small scale farmers and the youth,” said Agriculture Minister Sally Kosgei. “Agriculture has to be kicked out of subsistence to the market to make it commercial. We need the private sector.”

Were Kenya to achieve the 15 per cent threshold, it will be far ahead of neighbouring economies in terms of credit to farmers. The figure for Uganda is seven per cent while Rwanda is 7.5 per cent.

Access to credit has been the bane of smallholder farmers. Key banks closed their rural branches in the 1990s to offset operational costs. The void was filled by MFIs, which include state-owned Agricultural Financial Corporation. However, these institutions have failed to give low-interest loans to farmers and other producers.

That apart, banks consider the sector a high-risk area, because of uncertain weather.

“A sustainable and widely accessible rural financial system remains a major development challenge,” says a report by Tegemeo Institute, a think-tank of Egerton University.

This is despite the fact that the sector is key to Kenya’s growth. It contributes one in every four shillings the country earns, and employs 75 per cent of the national jobs. Over 80 per cent of the Kenyan population lives in the rural areas and derive their livelihoods, directly or indirectly from agriculture. The rural economy depends mainly on smallholder subsistence agriculture, which produces 75 per cent of total agricultural output.

Kenya’s economic plan, Vision 2030, has identified it as the key driver of the economy.

In 2002, the growth of the economy had dropped to 0.6 per cent, while the agricultural sector was negative three per cent. To reverse this trend, the government crafted the Economic Recovery Strategy for Wealth and Employment Creation and the Strategy for Revitalising Agriculture.

Thus, the economy grew by seven per cent in 2007, only to be hit by election violence the following year.

“Revitalisation was completed, now we have put in the development gear,” Dr Kiome told the media a week ahead of the conference. “We will take stock of the strategies we have implemented and develop new ones. We will harness energies, commitments, understanding and total drive towards taking agriculture to the next level.”

In 2010, the government came up with the Agricultural Sector Development Strategy 2010-2020, an ambitious blueprint that sought to modernise farming.

The sector draws 10 ministries allied to agriculture, which are Agriculture, Livestock Development, Fishing, Co-operative Development and Marketing, Lands, Water & Irrigation, Forest and Wildlife, Environment, Development of Northern Kenya and Other Arid Lands and Regional Development Authorities

During last week’s conference, President Kibaki launched three policy documents—the National Agribusiness Strategy, an ambitious policy that seeks to move farming from the subsistence level it has been to a modern machine that can compete at the international level.

It will take up Ksh383 billion ($4.4 billion) to implement it over the next three years.

The strategy has five pillars: Research and development; organisation of key players, among them farmers; financial (including credit to small producers) and non-financial services; investment and good governance; putting market at the centre of agricultural production.

Its first challenge, it says, “is for producers to understand market demand, using information that is timely and detailed. They need intelligence that is up-to-the minute on quality standards, food safety and plant health, price indicators, production volumes to help them realize the potential of their goods and services on the open market.”

Then “mapping will be carried out to accurately capture what products can best be produced in different parts of the country, and where there are markets for these products. This will help to (maximise) production and distribution.”

The other three strategies—the National Agricultural Sector Extension Policy (NASEP), the National Food and Nutrition Security Policy, and the National Horticulture Policy—reinforce the approach to turning around agriculture to a business machine.

Other recommendations are Strengthening of co-operatives and developing Youth for Agriculture Policy.