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The 5th AFRACA Microfinance Forum Held at Cotonou–Benin On 2nd -4th July 2008 Strategies of Deepening and Broadening Client Base: Case ofAFC Kenya.Experience in reaching small scale entrepreneurs through innovations in microfinancePresented by Haron MwangiMarketing and Business Development Manager[July 2008]
An Overview of Kenya’s Economy • Kenya’s population is 37 million, growing at 2.9% per annum • Per Capita income = US$ 514 (Dec 2007) compared to US$477 in 2006. • GDP growth = 6.9 % in 2007, 6.1% in 2006. • The growth exceeded Africa’s average of 5.8%, and the global average of 5.2% in 2007. • Key growth sectors: Tourism, Transport & Comm., Manufacturing, Building and Construction, Financial Intermediation, Agriculture and Forest
Financial Sector Analysis at 31st May 2007 • The Central Bank • 44 commercial banks • 2 non-bank financial institutions • 2 mortgage finance companies • 1 savings bank (KPOSB) and • 3,925 SACCOs of which 70 are Front Office Service Agents (FOSAs)
Outreach of Financial Service Providers in Kenya (Fin Access Report – Jan. 2007)
AFC-Historical Background • AFC is a DFI established in 1963 initially as a subsidiary of the Land and Agricultural Bank. • In 1969, AFC was incorporated as fully-fledged financial institution under the Agricultural Finance Corporation Act, Cap 323 of the Laws of Kenya. • The main function in these early years was to assist in the effective and peaceful transfer of land to indigenous farmers. It also injected new capital in these farms to spur farm development. The mandate of the Corporation today is to:_ provide credit for the sole purpose of developing agriculture. The Corporation subsequently finances farm ownership, machinery, crop & livestock production, marketing and distribution of agricultural commodities
Vision and Mission OUR VISION:“To be the financial institution of choice for Agricultural Development in Kenya” OUR MISSION: “To provide customer focused financial services for the development of the agricultural sector in Kenya” OUR CORE VALUES:- • Customer Focus • Integrity and Fairness • Trust and Honesty • Cultivating Long term relationships • Embrace Social responsibility • Consultative Leadership
Products/ Services Seasonal Crop credit This is loan for commercial crops such as maize and wheat It at the moment accounts for 48% of the Corporations’ portifolio. Machinery Loans This is a loan given to farmers for the purchase of agricultural machinery and equipment such as tractors, combine harvesters, pickups, milking machines e.t.c Horticulture and Floriculture loan This loan is offered to farmers for growing vegetables, fruits and flowers Water Development loan This loan is offered to farmers for irrigation and livestock use. It includes the purchase of water tanks, pumps and irrigation equipments. It also caters for digging of boreholes, improvement of wells, labour and for transportation and installation these equipments.
Products/ Services Livestock and Fisheries development loan Funded under this product are:- Purchase of dairy cattle, steer, breeding stock, fish farming and processing, poultry, sheep, goats, bee hives, apiculture and piggery. It also covers ranch and pasture development. Cash Crop loan This loan is meant for establishing crops such as tea, coffee, sugarcane, pyrethrum, cashew nuts, citrus and mangoes. Oil Crop loan This is a loan meant to improve growing of crops such as: - sunflowers, cotton, soya groundnuts and castor e.t.c. Agro-processing loan This product targets agri-based activities that increase the value of agricultural products. They include processing of agricultural products such as milk and horticulture, trade in animal feeds, transportation of agricultural products and related marketing activities.
Network Structure & Outreach • 34 branches, in 5 Regions • O.1 million customers • Loan Portfolio (performing) US$ 60 million June, 2008 • Loan Portfolio (non-performing) US$ 27 million June, 2008
Deepening and Broadening Client base ( 1)Partnerships • To grow revenue and to deepen and broaden the client base, AFC has entered into value adding partnership with the Government Ministries and Departments where the Corporation has acted as intermediary and disbursed funds amounting to US$ 10.5 million (Kshs 675 million) from the Kenya Sugar Board, The Coffee Development Fund and The Livestock off-take Credit program under the Ministry of livestock. • Beyond partnership with the Government Ministries and Departments is a partnership private companies such as SASINI LTD where the Corporation is funding coffee farmers to buy fertilizers and related inputs to a tune of US $ I million to reach over 170,000 farmers countrywide. Advances and loans on inputs done at 9 percent . • Both the private and public partnership has improved access to credit facilities to over 300,000 farmers in the last four years. 90 % of these are small scale farmers(verage Loan size US$5800 / Kshs 370,000).
SASINI – AFC PARTNERSHIP FOR COFFEE VALUE CHAIN FINANCING – DIRECT FINANCING Disbursements for inputs on behalf of out growers SASINI AFC Loan repayment deductions from out growers Supply of parchment Loan application Loan agreement + Disbursements for parchment advances Milling & Marketing Agreement + Recommendations for loans + Farm Inputs + Technical Advice + Surplus payments from marketed coffee COFFEE OUTGROWERS
(Innovations in service delivery (Conti...) (2)Dairy Value Chain Approach • Recently sealed is the partnership between AFC, Agricultural Development Corporation (ADC), the Kenya Dairy Board (KDB) and the New Kenya Cooperative Creameries (New KCC). The partnership is meant to improve the dairy sector along the value chain, particularly in product development, marketing, cost, efficiency and policy issues. Specific objectives of this partnership are-: • to partner with KDB to carry out a focused research into business opportunities in the dairy industry supply chain to arrive at market oriented solutions to the issues of efficiency, market costs and consumer prices. This is on going. • to develop credit products that will fund the various categories and levels of business opportunities to enhance productivity and competitiveness of dairy production. • to identify critical partners and players in the dairy sector with an aim of forging partnership along the various levels of the value chain.
Dairy Production Value Chain Approach (conti.....) PRODUCTS & SERVICE PROVIDERS Financial Services Providers Milk Marketing & Distribution Milk Wholesalers & Retailers Milk Processors Milk Processing Milk Transporters Veterinary Services Providers AI Services & Embryo Transfer Technology Suppliers Milk Collection & Transportation Livestock Insurance Services Providers Business Support & Advisory Services Milk Production Farm Inputs & Feeds Suppliers Fixed Inputs Suppliers (Dairy Cows) Milk Producers
Supply Chain approach (3) Cross-Boarder Supply Chain Model • This is a system approach to managing the entire flow of credit, information and services from financial provider, through to the farms and the market. Different organizations and players in the value chain are linked together. • The exhibit below shows the linkage between AFC that provide credit facilities to horticultural farmers (Garden Peas, Snow Peas and Sugar Snaps), Bio-Medica Laboratories which suppliers agrochemicals, seeds, fertilizers and technical advice and Everest Enterprise ltd that market the produce. • The Bio-Medica will also ensure routine supervision of chemical application as per Everest’s PPUF (Recommended Pesticide Used) and therefore ensure GLOBALGAP standards are met. • Through supply chain financing model, AFC has achieved significant competitive advantage. Financing groups of farmers identified and trained by Everest Enterprise Leads to considerable savings of mobilisation and credit supervision costs. Secondly, the arrangement has enabled the Corporation to penetrate deep into the rural areas not served by mainstream banks.
Cross-Boarder Supply Chain Model Bio-Medica Laboratories Ltd 6. Repayment of Input Supplied Agricultural Finance Corporation 1. Input Supply 1. Agricultural Credit Farmer Entities 5. Loan Repayment from Horticultural Proceeds European Export Market 1. Seed Supply 2. Horticultural Produce 3. Horticultural Produce 7. Balance from Horticultural Proceeds Everest Enterprises Ltd 4. Horticultural Produce Proceeds
(Innovations in service delivery (Conti...) 4. Group lending Approach The corporation under the newly established marketing and Business development department is pretesting four prototypes targeting groups of traders in agricultural inputs as well trader in agricultural produce. This will access credit facilities to small scale farmers hitherto excluded from mainstream financial service due to lack collateral. The concept of social security common in microfinance will be used. Secondly the credit will be affordable in the sense that it will reduce transaction cost per individual farmer.
Financial deepening through ICTs (5) Embracing Technology to Improve Access to Financial Services • Appropriate ICT infrastructure installed to facilitate online and real time transactions processing. • Rollout of Equinox for on-line front and back office services. 15 branches out of 34 now on-line. • Communication: (email and website) -Email has made it very easy for staff to communicate -Faster decision making -Reduced cost of mailing -website provide more information on services we offer ICT Achievements Online-Real-time – Customers’ Information is readily accessible and transactions updated immediately Customer Delight - They can access information 24x7x 365 Lower transaction costs
ICT Achievements(Conti…). • Customer Relationship management -communication to customers with ease on the details of their loan accounts as well information on new products thus creating more customer loyalty. • Higher employee productivity–the system has enabled the Corporation to eliminate non-productive processes reducing the loan processing cost and improved turn around time( i.e. from seven weeks to 14 days) • Reduced missed opportunities– The multi channel framework enables the front office to manage the breadth and depth of customer relationships across multiple touch points • Enhanced Customer Satisfaction - Knowing your customer is everything. The system helps the Corporation understand its customers’ expectations and preferences better. • Increased “share of wallet -The system offers powerful analytical tools to enable the Corporation identify individual customers or customer segment and review its products and services to address these dynamic needs.
Mobile Phone Money Transfer Services (6)Application of M-Pesa This is a mobile phone money transfer service provide by Safaricom (The largest mobile telephone operators in Kenya) To be launched early next month, the service will enable small scale entrepreneurs and farmers access money transfers facilities to enable them repay loans without incurring high transaction costs currently being experienced through commercial banks. This will access our financial services deep into the rural areas where M-Peas is operated on agency basis by small business entities in rural shopping centres.
Western Union Money Transfer Services, (7)Western Union Money Transfer. AFC will now offer sub-agency Western Union Money Transfer services under Postbank. It will enable the Corporation tap the need for credit by Kenyans in the diaspora who are interested in farming while working in abroad to remit their loan repayments regularly. (8) Product review and repositioning , Market segmentation and research Market research to develop market driven products and services is now a major priority. Currently under pre-testing are two microfinance prototypes targeting groups trading in agricultural produce and those supplying inputs to the farmers. • Decision making based on well searched information has been very useful.
Challenges • Very low interest rates compared to the prevailing market rate i.e. 10 % per annum (on reducing balance). The Corporation has lost US$21.5 million (Kshs 1.4 billion) as foregone income due to subsidised interest rates over the last five years. • The Corporation is highly undercapitalized- operating at a portfolio of US$58.5 million (Kshs 3.8 billion). To breakeven at this portfolio, the Corporation requires to charge 20% interest rate per annum on reducing balance. Alternatively at 10% the Corporation needs a performing portfolio of US$ 156 million (Kshs10 billion). • Restrictive laws under which the Corporation operates means that the corporation can not borrow or negotiate for finances without government guarantee. Secondly it restricts the Corporation from mobilising savings. • With the newly enacted Microfinance Act (2007) many microfinance institutions (formal and informal) are converting into banks with which gives them a leeway to mobilise saving and even borrow off-shore. The Corporation therefore operates under very uneven financial market. • The risky nature of agricultural financing( vagaries of weather, the post election skirmishes ).
