This briefing paper reviewed the recent body of knowledge on mobile finance and looked at three business models in sub-Saharan Africa: Zoona in Zambia (formerly MTZL), SmartMoney in Tanzania and Opportunity Bank Malawi (OBM). It considers the following questions: • Does mobile...
Credit as a Barrier to Smart Agriculture in Kenya
This post was written by Tara Geiger, Brian Harding, Anna Heacock, and Titus Osewe.
Increasing environmental variability represents perhaps the greatest challenge to smallholder farmers globally. Around two-thirds of the developing world’s rural population of three billion live in small farm households, and many of them are poor, food insecure and vulnerable to the effects of a changing climate. Those denied access to sufficient credit — and, therefore, opportunities for current and innovative technologies — are particularly at risk, with compounded susceptibilities to the associated risks of varying and erratic weather patterns like severe drought.
Smallholder farmers in Kenya, including those working with the Feed the Future East Africa Catalytic Sustainable Agribusiness Investment (CSAI) Project, face a variety of barriers to advancing their climate resilience, including the setup of traditional banking institutions and an absence of capital and customized loan products for farmers. Traditional screening models overestimate the risk of default for farmers, cutting them off from finance that could improve productivity and improve resilience.
Banks are caught in a difficult set of circumstances as well. On one hand, financial institutions that fail to consider the impact of environmental variability risk increased exposure to it. On the other hand, when banks factor in concerns about extreme weather events and increase their approval requirements, farmers are unable to find collateral and are forced to turn to informal lending opportunities.
Additionally, though banks in Kenya are expected to avoid lending to those who are unable to demonstrate creditworthiness, they often use arbitrary evaluation criteria for many small and medium enterprises (SMEs) and farming communities, where a dearth of resources and financial opportunities can make it nearly impossible to establish or build creditworthiness.
Even when farmers are approved for loans, institutional requirements are often not in their favor. Although banks should ideally keep interest rates low in order to both encourage loans for new investments and mitigate inflation, Kenya’s Central Bank, for instance, has remained at 10%; this is compared to the U.S. Federal Reserve’s interest rate of 1.25-1.5%. These higher rates can have dramatic impacts on entrepreneurs’ ability to access finance. Difficulties become exacerbated under circumstances considered new or innovative, or in situations where banking employees struggle to see the value proposition of a business. Additionally, there remains a clear lack of trust between financial institutions and farmers, farmer organizations and agri-businesses, and yet there is also a huge demand for banks to design financial packages for farmers.
Programs like the Feed the Future East Africa Catalytic Sustainable Agribusiness Investment (CSAI) Project aim to overcome many of these challenges in traditional financing. By mobilizing private investment in sustainable business practices, SNV and its partners increase the resilience, productivity and profitability of smallholder farmers and agribusinesses, while also reducing Green House Gas (GHG) emissions. CSAI also provides incubatees with assistance navigating financial tools, including financial projections and business planning, while also providing the business acumen to engage with investors and make strategic business decisions.
Other international Agencies like the Food and Agriculture Organization of the United Nations (FAO) are also championing the adoption of sustainable agriculture practices tailored to the local context, enabling smallholders to achieve considerable productivity and income gains, while simultaneously increasing the resilience of their agricultural activities to extreme and variable weather.
Further advances in smart agriculture and agribusinesses will not only increase the overall resilience and survival rates for billions of people globally, they also offer the linked effects of increased nutrition, increased household incomes, increased food security and improved environmental systems. These efforts will require the participation of many different institutions, starting with policies and incentives to increase and improve the beneficial participation of lending institutions in countries like Kenya.