Kenya risks falling behind its regional peers in food and industrial production, largely due to inadequate credit to farmers and manufacturers.
The unfolding state of affairs is likely to stifle the country’s economic growth as agriculture and manufacturing constitute about 25 per cent and 10 per cent of GDP respectively.
Researchers at Mentoria Economics cite credit misallocation in a country where productive sectors such as agriculture and manufacturing are starved of cash while most commercial lending is channelled to areas where consumption is high.
The latest statistics from the Central Bank of Kenya show that 85 per cent of loan accounts are held by individuals and households, one per cent goes to agriculture and 0.16 per cent to manufacturing.
Kenyans are borrowing mainly for consumption and not production, painting a grim picture of the country’s economic outlook.
“Agriculture accounts for only one per cent of total loan accounts despite being the backbone of the economy. This cannot be a path to sustainable economic growth,” said Ken Gichinga, chief economist at Mentoria Economics.
“Our research shows that this significant underfunding in agriculture can be attributed to a variety of factors. Perhaps the most significant is the unpredictability of harvest quality and quantity, largely due to low quality of farm inputs,” he added.
In a report titled “Outlook on Agriculture,” the economists said farming is considered risky by the formal banking sector.
“Without adequate credit, farmers are constrained to finance inputs and capital investments,” the report says.
Microfinance institutions charge a high interest rate on credit, thus locking out many farmers.
According to the report, advancing low-cost credit to farmers will help them increase production by giving them access to innovative technology and the farm inputs they need.
Kenya’s agricultural sector faces several challenges, including low productivity, while the yields and value of some crops such as for sugarcane, maize, coffee and tea have either remained constant or declined over the years.
Similarly, production of fish and livestock products is below desired levels, while forest cover and tree growing have been declining due to encroachment and construction of buildings on riparian land.
Limited value-addition in Kenya’s agriculture sector has reduced the competitiveness of the country’s produce in international markets.
Kenyan farmers have been exporting semi-processed and even raw products, which account for approximately 90 per cent of total agriculture-related exports, the report states.