A . F . C

1. Rural Financial Services Delivery Models, Design, Monitoring & Evaluation – The Experience of AFC Kenya Presentation by: - Mr. Omurembe Iyadi Agricultural Finance Corporation – Kenya June 2005 A.F.C

2. 1.0 Introduction • The provision of affordable financial services to the rural/agricultural sector is a prime component of the development strategy of the Kenya Gov as stated in the ERS and SRA. • The AFC, the Kenya Govt’s DFI charged with the mandate of facilitating the development of the agricultural sector is expected to play a central role in the provision of the financial services

3. Introduction contd: - • AFC has been in existence since Kenya’s independence in 1963; initially performing very well upto the mid-80’s. • Performance experienced a downward trend in the 90’s for various reasons including the poor performance of Kenya’s economy during that time and the credit delivery model in existence at AFC then.

4. Introduction contd: - • AFC is currently undergoing reforms to restructure its credit delivery system and approach to providing services to Kenya’s rural/agric sector. • This presentation discusses the challenges of delivering financial services to Kenya’s rural sector and the reforms AFC is undertaking to meet the challenge.

5. 2.0 The challenge of delivering financial services to the rural / agricultural clientele in Kenya • AFC faces the same challenges faced by all financial institutions in delivering financial services to rural clientele in the developing world. Some of the major challenges are following: -

6. Challenges of provision of Govt directed & subsidized agricultural credit Funds were provided by Govt & donors. These were directed to specific Govt Identified programmes hence “supply driven”. This led to: - • Misconception by borrowers that funds were Government grants, thus unwillingness to pay leading to heavy build-up of NPLS. • Funds were not always available on a regular basis leading to inconsistent lending.

7. Govt directed lending contd: - • Setting of interest rate ceilings and periodic write-offs undermined AFC’s capital base and sustainability. • Products and services were supply driven and did not therefore always meet the farmers needs.

8. Costs and risks related to agricultural lending in Kenya The costs and risks related to agricultural lending have posed a major challenge to AFC. These are: - • Dispersed location of rural clients AFC undertakes supervised credit, long distances between clients in the community and poor road infrastructure makes provision of financial services very costly.

9. Seasonality • Agricultural production in Kenya is mainly rainfed farming. Production is therefore seasonal with long gestation periods before crops can be harvested and sold. • Loan instalments are therefore in lumpsum rather than monthly or weekly. Risk of default on “lumpsum” payments is very high.

10. Seasonality increases transaction costs due to long periods of idle capacity and short periods of activity requiring task forces.

11. Production and yield risks • Yield uncertainty due to natural hazards such as vagaries of weather and pest and disease outbreaks. • Kenya’s rural finance markets lack insurance products to cover production and yield risks therefore seriously over-exposing both producers and lenders.

12. Market and price risks • Market imperfections and price uncertainty are prevalent features of Kenya’s agricultural sector. Markets are yet to stabilise after the shocks of liberalization in the 90’s. • Market and price risks make it difficult for accurate estimation of expected income which is critical for credit appraisal as well ultimately loan repayment.

13. Risk of loan collateral limitations • Land is often the only available loan collateral for the rural communities in Kenya. • Land is sensitive and is often socially and politically difficult to realize in the event of default.

14. 3.0 AFC’s proposed model and design for credit delivery to rural clients • AFC has developed a new business model & strategy to be implemented commencing 2005/2006 FY. The model is benchmarked against international best practices in rural lending. • The business model proposes a shift from provision of supply-led credit to a market driven approach where the institution provides customer focused financial products and other services.

15. The new business model involves three arms as follows: - • Restructuring the retail lending arm • AFC has traditionally supplied credit through retailing. • The current operations through this arm are being restructured to improve loan recovery rates and lower the transaction costs.

16. Reduction of risk costs will be achieved through application of prudential norms, the profit centre concept for branches, collateral and risk mitigation and employment of good governance practices. • Reduction of transaction costs will be achieved through restructuring the organisation, redesigning systems and procedures, automating the MIS and staff development.

17. Establishing a wholesale lending arm • Main objective is to increase rural finance outreach to the agricultural community. • Funds will be loaned to the existing intermediaries who will in turn disburse loans to the rural community in a risk-sharing arrangement with AFC. • Some of the institutions under consideration for partnership include, MFI’s, Rural Saccos, Building Societies and Contract Farming Organizations.

18. The wholesale lending business is expected to be more profitable than retail lending due to: - • Lower risk costs – loan repayment rates will be higher as rural finance providers are less likely to default than farmers. • Lower transaction costs – only a small AFC core team is required to disburse and monitor the loans to rural finance institutions.

19. AFC Proposed Wholesale Lending Model

20. Apex institution plan • To undertake product development, capacity building for AFC and loan beneficiaries and provide technical assistance. Proposed products to be developed: - • support schemes • Insurance schemes – rainfall (area based index), yield insurance etc in partnership with private sector.

21. Price stabilization funds – in partnership with Government. • Credit guarantee schemes – in partnership with Government • Stand-alone products • Input credit, investment credit, working capital backed by improved collaterals e.g. group guarantees, urban assets, liquid security, additional guarantors, salary deductions.

22. Trade finance, loans to rural traders on agricultural commodities. • Warehouse receipt system financing. • Leasing especially for farm machinery. • Contract farming with interlocking agreements with various commodity groups. • Capacity building Capacity building for all eligible MFIs and Saccos to ensure ability to handle agricultural credit on behalf of AFC.

23. Technical assistance AFC in conjunction with Government to come up with programmes to provide technical assistance thro’ joint teams of international and local experts for its staff and all intermediaries it will work with.

24. 4.0 Monitoring and evaluation • Performance of AFC’s credit programmes has traditionally been on measured on loan disbursement rather than the actual number of farmers reached, recovery of outstanding loans and the institution’s self-sustainability. • The new model will be assessed based on international best practices of outreach to target clientele and institutional self-sustainability.

25. The AFC will enter into the realm of the Govt’s new performance contract system in July 2005. • Performance targets to be met and which have been negotiated with Govt include: - • Financial indicators such as pre-tax profit, return on investment and loan portfolio growth. • Operational indicators such as No. of customers reached and loan collection performance. • Qualitative indicators such as the customer service etc.

26. 5.0 Conclusion • The provision of sustainable financial services to rural inhabitants continues to be a challenging undertaking requiring constant review of the approaches and methodologies. • AFC believes that all institutions involved in rural lending have a lot to learn from each other’s experiences and therefore appreciates the opportunity to share its experience. • I now welcome comments and contributions from fellow-participants.

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