How to increase lending to Kenya's Agriculture Sector in 5 steps
1. How to increase lending to the Agriculture Sector
A concept paper (in 5 steps) Comments
1 AgriFin Lending is critically important In 2014 Agriculture contributed 22.03% to Kenya’s GDP which made it by far
the largest economic sector. Yet according to the CBK 2015 Annual Report,
aggregate bank lending to the sector did not amount to more than 4.14% of
total loan exposure in 2014.
Development of a modern Food & Agriculture Sector is determined to be a national
priority in which the financial sector has a critical role to play.
2 18% loan-book allocation A system of priority sectorlending has existed in India since the 1970’s. Whilst
the debate amongst economist as to the merits and challenges of the system
is fierce and ongoing, there is not the slightest doubt that India’s Agricultural
Sector is considerably more advanced than that of Kenya. We believe Access
to Finance is an important factor.
A mandatory priority lending framework is phased in (step-wise, over a period of 5
years) whereby all regulated financial institutions are eventually required to allocate
18% of their loan-book to AgriFinance.
3 AgriFinance … more than farming alone
At F4A we believe that all parts of the value chain are important and need
support and investment. In certain crops post-harvest spoilage ratios still run
as high as 40%. Banks enjoy individual strengths, and will find their own ways
to operate (lend) within risk-tolerant parameters. We equally believe in the
power of market-pull … investing in warehousing, logistics and processing will
drive large(r) numbers of farmers towards inclusion in formal supplier
networks.
Clear rules are established to define what constitutes Agricultural Lending – which
realistically includes the entire Value Chain (incl. inputs, farming, services, logistics,
warehousing, processing etc.). There’s a role for all financial institutions well inside
their respective comfort zones.
4 Non-compliance means investing in AgriFin Bonds
So either way funding is channeled towards the Food & Agriculture sectors(s).
Banks build their own relationships, expertise, and credit portfolio, or they
pay-up for omitting to do and [indirectly] sponsor other financial institutions
to do it instead.
Financial Institutions that fall short pay a penalty. They shall be required to invest in
low yielding AgriFinance Bonds issued by the Government of Kenya – for an amount
equal to their shortfall.
5 Government to provide [very] cheap on-lending facilities The idea comes from Uganda where the Central Bank of Uganda (BoU) is
running the Agricultural Credit Facility (ACF). Banks can apply for a 50%
refinancing for AgriFin client loans which is made available by BoU at zero
percent interest. This is then blended with the bank’s own 50% loan
component which is priced at commercial rates. As a result AgriFin clients end
up with an attractive blended rate (capped at 10% p.a.).
Nairobi, June 2016
The proceeds of these Bonds are recycled back into the Financial Sector. An on-
lending programme is established whereby Financial Institutions can refinance
AgriFinance loans at very low rates, provided these rates are passed on to the
ultimate borrowers (which are farmers or agri-businesses).
![How to increase lending to the Agriculture Sector
A concept paper (in 5 steps) Comments
1 AgriFin Lending is critically important In 2014 Agriculture contributed 22.03% to Kenya’s GDP which made it by far
the largest economic sector. Yet according to the CBK 2015 Annual Report,
aggregate bank lending to the sector did not amount to more than 4.14% of
total loan exposure in 2014.
Development of a modern Food & Agriculture Sector is determined to be a national
priority in which the financial sector has a critical role to play.
2 18% loan-book allocation A system of priority sectorlending has existed in India since the 1970’s. Whilst
the debate amongst economist as to the merits and challenges of the system
is fierce and ongoing, there is not the slightest doubt that India’s Agricultural
Sector is considerably more advanced than that of Kenya. We believe Access
to Finance is an important factor.
A mandatory priority lending framework is phased in (step-wise, over a period of 5
years) whereby all regulated financial institutions are eventually required to allocate
18% of their loan-book to AgriFinance.
3 AgriFinance … more than farming alone
At F4A we believe that all parts of the value chain are important and need
support and investment. In certain crops post-harvest spoilage ratios still run
as high as 40%. Banks enjoy individual strengths, and will find their own ways
to operate (lend) within risk-tolerant parameters. We equally believe in the
power of market-pull … investing in warehousing, logistics and processing will
drive large(r) numbers of farmers towards inclusion in formal supplier
networks.
Clear rules are established to define what constitutes Agricultural Lending – which
realistically includes the entire Value Chain (incl. inputs, farming, services, logistics,
warehousing, processing etc.). There’s a role for all financial institutions well inside
their respective comfort zones.
4 Non-compliance means investing in AgriFin Bonds
So either way funding is channeled towards the Food & Agriculture sectors(s).
Banks build their own relationships, expertise, and credit portfolio, or they
pay-up for omitting to do and [indirectly] sponsor other financial institutions
to do it instead.
Financial Institutions that fall short pay a penalty. They shall be required to invest in
low yielding AgriFinance Bonds issued by the Government of Kenya – for an amount
equal to their shortfall.
5 Government to provide [very] cheap on-lending facilities The idea comes from Uganda where the Central Bank of Uganda (BoU) is
running the Agricultural Credit Facility (ACF). Banks can apply for a 50%
refinancing for AgriFin client loans which is made available by BoU at zero
percent interest. This is then blended with the bank’s own 50% loan
component which is priced at commercial rates. As a result AgriFin clients end
up with an attractive blended rate (capped at 10% p.a.).
Nairobi, June 2016
The proceeds of these Bonds are recycled back into the Financial Sector. An on-
lending programme is established whereby Financial Institutions can refinance
AgriFinance loans at very low rates, provided these rates are passed on to the
ultimate borrowers (which are farmers or agri-businesses).](https://image.slidesharecdn.com/ea602c75-931f-44c0-a29b-2e7094689a95-160626105734/85/Increased-lending-to-the-Agriculture-Sector-v0-21-1-320.jpg)
