AFRACA- EAST AFRICA SUB REGIONAL CONFERENCE. 22-24 JULY 2008. ‘INNOVATIONS IN PROVIDING ACCESS TO FINANCIAL SERVICES BY

1. AFRACA- EAST AFRICA SUB REGIONAL CONFERENCE. 22-24 JULY 2008. ‘INNOVATIONS IN PROVIDING ACCESS TO FINANCIAL SERVICES BY SMALL SCALE FARMERS’. AGRICULTURAL FINANCE CORPORATION (K) APPROACH. ADDIS ABABA, ETHIOPIA. Presented by Job Kemei. HEAD CORPORATE PLANNING

2. SCOPE OF PRESENTATION • KENYA’S ECONOMIC OVERVIEW • RURAL/AGRICULTURE FINANCIAL SERVICE PROVISION • Agricultural Finance Corporation-overview • Challenges faced in rural and agricultural finance service provision • Innovation to address rural finance challenges

3. KENYA’S ECONOMIC OVERVIEW • The Kenyan economy is agricultural based. • The Agricultural Sector directly contributes to 26% of GDP and a further 27% through linkages with the manufacturing, distribution and service related sectors • It accounts for 60% of all export earnings • 75% of agricultural produce is from small holder farmers.

4. RURAL/AGRICULTURE FINANCIAL SERVICE PROVISION • The Rural Financial System (RFS) provides access to financial services in the form of Credit, Savings and Insurance • The proportion of rural population with access to financial services varies substantially with remote areas having the least access to these services. This is however changing with technological advances and a paradigm shift from mainstream banking to micro finance.

5. RURAL/AGRICULTURE FINANCIAL SERVICE PROVISION • The Agricultural Finance Sub-Sector though under served gets services through Banks, Non-Bank Development Finance Institutions (NB-DFIs), Micro Finance Institutions (MFIs), Non Governmental Organizations (NGOs), Savings and Credit Co-operative Societies (SACCOs) and informal ROSCAS. • NB-DFIs offer only credit are thus limited in their service delivery.

6. Agricultural Finance Corporation • Agricultural Finance Corporation is a Government owned Non-Bank Development Finance Institution (NB-DFI). • It is the Government’s main vehicle for credit delivery to agricultural and rural sector • Established in 1963 under a specific legal framework.

7. MANDATE OF AFC To assist in the development of agriculture and agricultural industry by making loans to: • Farmers • Co-operative Societies • Incorporated group representatives • Private companies and public bodies • Local authorities and • Other persons engaging in agriculture and agricultural industries

8. Challenges faced by AFC in rural and agricultural finance service provision • Low volumes of transaction, due to limited pieces of land/agricultural projects. Income too meager from such low value transactions. • Spatial dispersion of farming enterprises rendering them very costly to administer through follow-ups and projects monitoring. • Long gestation periods of most agricultural projects Sugarcane, Tea, Coffee etc. This causes a challenge especially when resources are scarce as huge capital outlays are tied up. Subsequent shortages push up the cost of credit due to a high unmet demand

9. Challenges faced in rural and agricultural finance service provision: - Cont.. • Seasonality of agricultural credit demand dictated by seasonal nature of enterprises. The flip side is a strain on farmers to undertake their financial obligations during off seasons • Due to the high seasonal nature of rain fed agriculture, huge investments are incurred during planting seasons and relatively low during other times of the year generating a pattern of high credit demand during planting seasons. This demand cannot be adequately fulfilled at this time • High covariant risks (vagaries of weather, pests, fluctuating and often unpredictable produce prices and markets etc).

10. Challenges faced in rural and agricultural finance service provision: - Cont.. • Lack of affordable risk mitigation products such as insurances due to the high covariant risks mentioned. • Limited availability or lack of realizable collateral. • Risks of “reverse development” on realization of security upon default. • Multiple demands on same source of income (family consumption, medical requirements, clothing, school fees etc).

11. Challenges faced in rural and agricultural finance service provision: - Cont.. • Misconception by beneficiaries on public institutions supplied financial services mainlycredit –assistance or credit? Most often construed to be Grants • Over-reliance on land as collateral – This has numerous social and political connotations

12. Challenges faced in rural and agricultural finance service provision: - Cont.. • ‘Debtor friendly’ legal system. Too expensive and time consuming. • Effects of past loan waivers inculcating a culture of “wait-and-see” to loan servicing (for AFC) • Willful and strategic default by loan-beneficiaries citing “mali ya uma”.

13. Challenges faced in rural and agricultural finance service provision: - Cont.. • Subsidized credit – poor credit culture; also develops farmer at the expense of the institution. • Restrictive legal framework - limits operational autonomy and product choice. • Poor/lack of timely response to changing operating environment.

14. Innovation to address rural finance challenges • Group finance. AFC adopted group financing concept to: -reach Small scale farmers who require small credits. -Do not have requisite collaterals. -use pear pressure to collect. - Improve access to produce markets.

15. Innovation to address rural finance challenges. Cont.. • Wholesale financing. Channeling credit funds through farmer co-operative societies, Non Governmental Organizations, SACCOs, et al. Aim:- To increase outreach, reduce lending costs. -Through peer pressure improve project implementation and loan recovery, -Reduce moral hazards

16. Innovation to address rural finance challenges. Cont.. • Business partnerships. Establish partnership with institutions in sector that do not have lending structure. Aim:- Raise loanable funds, Direct lending to specific sub-sectors, Deviate clients perception of public funds, (reduce moral hazards)

17. Business partnerships. Cont.. Currently AFC’s business partnerships : • Kenya Sugar Board, • Coffee development Fund • Government ministries. • GTZ/PSDA In total we implement a Kshs 675million (us$ 10.5 m) Able to reach over 3,600 small holder clients.

18. Innovation to address rural finance challenges. Cont.. 4. Contract farming financing. Financing farmers with specified produce markets and formulizing repayment orders . Aim:- Ensure markets for produce -Loan repayment through sale of proceeds.

19. Contract farming financing Chain Model Farming Input suppliers 6. Repayment of Input Supplied Agricultural Finance Corporation 1. Input Supply 1. Agricultural Credit Farmer Entities 5. Loan Repayment from Horticultural Proceeds Export Market 1. Seed Supply 2. Horticultural Produce 3. Horticultural Produce 7. Balance from Horticultural Proceeds Marketing agencies 4. Horticultural Produce Proceeds

20. Contract farming financing Chain Model • The AFC will reach many small holder farmers producing fresh produce for export market. • Loans are short term revolving facility. • Also financed are other non export food crops under the umbrella of contract farming.

21. 5. Loan guarantees The AFC partners with development agencies in agriculture that can offer credit guarantee to small holder farmers and input suppliers. Through a partnership with an NGO we have been able to finance young trained rural based agricultural input stockists. - increases application of quality inputs, increase yields and employment.

22. AGRICULTURAL INPUT STOCKISTCREDIT GUARANTEE PROGRAM AFC FARM INPUTS MANUFACTURERS DISTRIBUTERS Input Payment Input Repayment Credit and inputs Inputs RURAL BASED INPUT STOCKISTS Credit Loan Repayments Input Training FARMERS Credit guarantors

23. Produce based financing • AFC enters into partnerships with agri business organization that work with small scale farmers. • Provide finances to small scale farmers on the strength of production contracts with marketing agent.

24. AFC- PRODUCTION BASED CONTRACT FINANCING Disbursements for inputs on behalf of out growers AFC Loan repayment deductions from out growers Supply of parchment Loan application Loan agreement + Disbursements Milling & Marketing Agreement + Recommendations for loans + Farm Inputs + Technical Advice + Surplus payments from marketed coffee COFFEE OUTGROWERS Marketing and , processing entity

25. AFC- PRODUCTION BASED CONTRACT FINANCING • No collateral will be required as farmers co-ops and contracts with marketing body will be adequate. • Average loan amounts less than Kshs 10,000 (US$1,50) • Loan funds revolved amongst Co-ops members. • Low capital requirement from lender. About Kshs,400 m (US$6.2 m)

26. 4. Value Chain Approach- New approach. Recently sealed partnership with other institutions in agriculture to offer value chain financing. The partnership is 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-: • Partnership 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. • Develop credit products to fund the various categories and levels of business opportunities to enhance productivity and competitiveness of dairy production. • Identifies critical partners and players in the dairy sector with an aim of forging partnership along the various levels of the value chain.

27. 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

28. Technology based Financial Services AFC embraced new technology and installed new banking software to offer online and real time transactions processing. To reduce on cost of transaction. Other related products that are to rolled out are: Customer relationship/savings accounts Electronic money remittances. Electronic loan repayment and disbursements. Customer Delight - Access information on their accounts 24x7 all year round.

29. Fruits of the innovations The innovations have enabled the AFC to: • Offer credit all year round, • Attract new partners and funding • Improve institutions image to public, donor and Government. • Reduce average loans from over Kshs 500,000 five years ago to about 40,000. • Increase outreach from about 10,000 five years ago to over 35,000 directly and over 100,000 indirectly through co-ops and partnerships.

30. END.-----------------OUR BUSINESS IS THE FARMERS DEVELOPMENTTHANK YOU!