Kenya: Credit guarantees drive financial product innovation for smallholder farmers

The Opportunity — Enhancing smallholder productivity through financing

Francis Njane is a Kenyan horticulture farmer from Laikipia County whose yields have quadrupled since joining the Burguret Self-Help Group.

The six-member farmers’ group, formed in early 2019, has enhanced members’ productivity after receiving financing for farm investments from Siraji Sacco, a microfinance institution that provides banking services and affordable credit facilities to its member farmers’ groups.

“With the financing we received, we acquired water pumps, fertilizers and pesticides to boost our yields,” says Francis.

“The Sacco also connected us to markets, leading to our group being contracted by companies like Finlay’s and Kenya Fresh to produce vegetables for export.”

He says that he has been farming all his life, but before joining Burguret, he struggled to raise capital to buy farm inputs, find markets for his produce and maintain a steady cash flow.

“I even tried getting a loan from a bank, but their interest rate was too high and their terms unfavorable,” he says.

The difficulty in accessing agricultural financing is a common plight for smallholder farmers across Kenya.

With financial institutions advancing only 3.3% of total gross loans to the agriculture sector, and just 2.3% of the national budget spent on agricultural programs, chronic underinvestment in the sector continues to undermine smallholder farmers’ productivity.

The absence of customized loan products for farmers, traditional bank screening models that tend to exclude smallholders and the perception of the sector as high-risk by financial institutions mean that smallholder farmers are cut off from much-needed financial services and credit for investment in improved productivity — despite the linkages between improved agricultural productivity and poverty reduction. 

The Solution — Leveraging U.S. International Development Finance Corporation (DFC) guarantees to spur financial innovation

To enhance farmers’ access to agricultural financing, USAID’s Kenya Investment Mechanism (KIM) is leveraging the DFC credit guarantees.

The guarantees cover 50% of the net loss in case of a default, lowering the risk to lenders and encouraging them to extend credit to market segments like agriculture, while removing barriers that have typically prevented farmers from accessing financing from traditional banks, such as stringent formal collateral requirements.

Since October 2018, KIM has managed DFC credit guarantees for five financial institutions providing financing solutions to the agriculture sector.

One of KIM’s partners is KCB Bank, which has four guarantees, two of which are specific to the agriculture sector.

The guarantees enabled KCB to extend a $7.5M credit facility to the Kenya Union of Savings and Credit Cooperatives (KUSCCO), Kenya’s umbrella body for Saccos, which has resulted in access to finance for smallholder farmers with insufficient collateral.

“The facility we received from KCB prompted us to develop Kilimo, a customized financial product for smallholder farmers belonging to agriculture Saccos that are members of KUSCCO,” says Grace Muiruri, KUSCCO’s Central Finance Fund Manager.

“Through Kilimo, the Saccos can provide credit to farmers to enable them to purchase farm inputs and insure their crops against unfavorable weather conditions and crop failure.”

With a membership of more than 10,000 individual farmers, Siraji is one of 22 Saccos that have received credit through KUSCCO’s Kilimo product.

As a result, the Sacco has grown its loan portfolio and extended credit to its farmer groups, including Njane’s Burguret Self-Help Group. 

“We operate a revolving fund for our members,” says Felix Ochieng, Siraji Sacco’s Chief Executive Officer.

“The credit facility we received from KUSCCO helped us improve our liquidity and grow our fund from $3M to $3.4M, enabling us to give affordable loans to our members.”

Felix says that Siraji has even initiated services such as training in crop production, agronomic practices and financial literacy to help farmers increase profits.

Lessons Learned — DFC guarantees drive “trickle-down” solutions for smallholder farmers

Thanks to DFC’s credit guarantee and through Kilimo, KUSCCO can now provide short-term financing for agricultural value chains with a maturity of four to 12 months to its member Saccos.

Their agriculture loan portfolio has since grown from $3.12M in 2017, to $5.27M in 2018, and $6.28M in 2019.

The success of KUSCCO’s Kilimo product has led to a 98.7% utilization rate of its DFC credit guarantee facility.

As a result, KUSCCO is increasing the number of agricultural finance products offered for its members.

“Following KIM’s training on value chain finance concepts and the successful roll out of Kilimo, we developed an additional product called Smart Water for Agriculture,” says Grace.

“We observed that most of the farmers benefiting from Kilimo are engaged in rain-fed agriculture, which can make production unpredictable.”

She says that KUSCCO partnered with SunCulture and Davis & Shirtliff, two Kenyan companies offering solar-powered technology, to promote the use of solar-powered pumps for irrigation.

“We have also partnered with The Nature Conservancy to pilot the Kuza Miti program, which targets commercialization and financing of tree planting and conservation activities in Kenya through smallholder forestry initiatives,” she adds.

For farmers like Njane, access to credit means everything to their livelihoods. “I can comfortably cater to my family’s needs and pay for my children’s education,” says the father of four.

With the profits made after selling its produce, Burguret Self-Help Group, which has been farming on leased land, now has its sights set on purchasing its own land to expand production.

KIM’s support for the DFC guarantees not only addresses factors that discourage investors from financing what was largely considered an unpredictable sector, it has proven to also have a critical trickle-down effect on smallholders’ productivity, profitability and resilience.

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