Financial Innovation Builds Climate Resilience in Kenyan Dairy Sector
Access to finance is a central driver to inclusive value chain strengthening and improved agricultural market systems. The way that finance is provided is especially important for sectors vulnerable to climate shocks, such as the dairy sector in eastern Kenya. However, only a fraction of the demand for credit by smallholder farmers and agribusinesses is met each year. As a result, vulnerable smallholders facing recurrent shocks struggle to overcome poverty and build resilience. The Feed the Future Kenya Crops and Dairy Market Systems Activity leveraged market systems pathways and financial inclusion tools to build an ecosystem of agriculture finance partnerships. Between 2021 and 2022, Kenya Crops and Dairy partnered with 29 financial service providers to facilitate $42.1 million of agriculture credit disbursement to 49,938 farmers and enterprises. The activity’s approaches demonstrated effective means of reaching vulnerable farmers and strengthening the resilience of the dairy system.
Challenges facing financial expansion in the dairy sector
Low levels of access to credit by smallholder farmers in rural areas, such as the dry Lower Eastern region of Kenya, are due in part to the high cost of setting up new branches and extending credit to riskier clientele. On the other hand, there is low demand for credit due to a lack of financial information among farmers, misaligned collateral requirements and the cost of financial products. Weak agricultural market systems and inconsistent rainfall patterns in an area that relies on rain-fed agriculture elevates credit risk, making the segment less attractive for financial institutions. Nevertheless, vulnerable smallholders can substantially increase their resilience if provided the opportunity to access credit.
To overcome these challenges, Kenya Crops and Dairy finance interventions were two-pronged, involving the stimulation of agriculture credit supply and demand, and simultaneously de-risking the demand side. The following cases demonstrate how this approach worked through partnerships with two microfinance institutions, Bimas and MyFugo.
Diversifying agriculture credit channels and products to stimulate demand: The case of Bimas
Bimas and Kenya Crops and Dairy co-invested through a matching grant project to deepen and expand Bimas’ geographical spread. The investment supported five existing branches and expansion into two new locations, reaching three counties in Kenya with financial products. With guidance from Kenya Crops and Dairy, local business development service providers helped to strengthen Bimas’ business strategy and improve product design and staff capacity throughout the expansion phase. As part of its revised strategy, Bimas offered financial education to customers and intensified its marketing activities.
Based on market assessments, close to 2,500 smallholder farmers and traders can now access financial services in the new geographies. To better serve its expanded market, Bimas raised $150,000 toward liquidity for agriculture lending from two wholesale lenders and is pursuing an additional $100,000 from lenders. New branches have grown their client base by as much as 70%.
Innovative financing to reduce risk and expand insurance coverage: The case of MyFugo
In Kenya, weak access to insurance has limited farmers’ ability to use finance for purchasing dairy animals and agricultural inputs. Livestock insurance presents an opportunity to use livestock assets as collateral for loans to expand dairy animal ownership. However, only 5 insurance companies in Kenya offer livestock insurance and the remaining 47 companies face high investment costs to scale and expand insurance programs.
Saline Apiyo, a mother of three, struggled to obtain cash loans because she lacked a credit history. With 50/50 matching grant funds, MyFugo and Kenya Crops and Dairy expanded MyFugo’s innovative financing model to two new regions and reached Saline’s farmer group. The expansion was accompanied by scaling an enhanced livestock insurance plan, in partnership with Agriculture and Climate Risk Enterprise Ltd. (ACRE) Africa, an insurance intermediary. MyFugo developed and deployed a digital platform to scale financial and insurance services to new geographies.
MyFugo accepted alternative data, such as records of savings group contributions and repayment, in place of traditional forms of collateral to offer asset financing to smallholders through farmer groups. Saline acquired an improved breed of dairy cow worth Kenyan shilling (KES) 200,000 on credit. The cow provided 18 liters of milk per day. Saline would use 2-3 liters to feed her family and made more than $5 (KES 700-1,000) per day from selling the remaining milk. Within 12 months, she repaid MyFugo in full out of this income and got a second cow on credit. Both cows have now calved.
“The cow, Joy, has brought so much joy to my family. Now I have four cows that are giving me milk and money. I have become a serious dairy farmer and well-off mother, thanks to MyFugo,” said Saline.
The success of the expansion positioned MyFugo to raise blended finance from two impact funders, Jenga Capital and Rabo Foundation. The investment was largely de-risked by a grant component contributed by Kenya Crops and Dairy. As a result, MyFugo has been able to offer larger loans, with the average amount nearly doubling from $650 to $1,165. Fund growth by as much as 300% has increased investor confidence and attracted interest from new funders.
Applying lessons learned to scale impact
The challenges Kenya Crops and Dairy and its partners faced providing finance in shock-prone environments offer additional lessons for scaling interventions. For instance, COVID-19 shocks delayed new financing due to elevated credit risk. In future, contingency planning and the flexibility to rapidly pivot will be included in planning.
Regarding insurance, farmers have continued to be risk-averse since the plan supported by Kenya Crops and Dairy was phased out. Due to the frequency of shocks, it has proven difficult for farmers to overcome mistrust for insurance. MyFugo is currently exploring ways to repackage insurance options that provide incentives and address farmer concerns.
Despite these setbacks, Kenya Crops and Dairy interventions resulted in a robust ecosystem of agriculture finance partnerships based on strong relationships between market actors. Evidence from the activity shows that informal finance channels and agricultural insurance are effective means for increasing incomes for vulnerable smallholder dairy producers and building resilient livelihoods.
This post was written for the Feed the Future Kenya Crops and Dairy Market Systems Activity by Peter Njima, Jared Kassam, Joseph Kimotho, Joseph Mutua and Joanna Springer. For more information about USAID’s work, visit: www.usaid.gov/kenya/fact-sheet/kenya-crops-and-dairy-market-system.
This article is made possible by the generous support of the American people through USAID. The contents are the responsibility of RTI International and do not necessarily reflect the views of USAID or the U.S. government.