Financial Inclusion for farmers: the untapped market
We all know the statistics: 25% of Kenya’s GDP comes from agriculture, 50% of Kenya’s export income derives from agriculture and 75% of the agricultural output is produced by farmers holding less than 3 acres of land. In other words, farmers are the backbone of the Kenyan economy, not only as producers but more and more as consumers. However, as we sit here today less than 4% of commercial lending goes to agriculture and public spending on agriculture ranges between 3 to 6% of the budget. While small holder farmers are key in growing the Kenyan economy, financial services hardly reach them. Therefore it stands to reason that if we want to get real about supporting the agricultural sector financial inclusion of small farmers should be a top priority as part of Kenya’s Big Four agenda.
When it comes to small holder farmers what do we mean by financial inclusion? Many people, especially those working in the financial sector, would immediately say: agricultural loans are too risky: farmers default on their loans because of drought, pests, low prices or many of the other problems that farmers have to deal with. And it is true, the business of farming knows many risks, so do we want to add another risk, the risk of default, to the farmer’s life? In other words do farmers need loans? The answer might not be as obvious as you think.
For a farmer to produce, she needs seeds, fertilizers, tractor services and crop protection products, plus the advisory services that allows her to make good use of the inputs and get a crop that is marketable. Because when products are sold, farmers get the income that can be re-invested in the next cycle.
So who should be funding agricultural production? My answer is everyone that derives the benefit of that agricultural production: so apart from farmers these are also the seed companies, agrodealers, fertilizer companies, aggregators and processors. Together they should make sure that farmers have what they need to produce: inputs can be sold on credit and processors can give inputs on credit to secure supply; the larger the company the less issues they have to obtain financing from a financial institution. Farmers will invest their saved income from the last season andmight need an agricultural insurance to make sure they can deliver on their commitments to the input companies and off takers.
For this to work financial inclusion is important. Not for farmers to get credit but rather for farmers to be able to transact in a convenient, affordable and nearby manner. So what does financial inclusion mean for farmers? Firstly to have an account which is free, with no minimum balance, accessible through their phone and for which cash in and cash out services are within 5 kilometers distance. Secondly, this account should insure farmers automatically qualify for health services (NHIF) and optionally for production risks. Thirdly, if farmers are paid in that account, they qualify automatically for some overdraft to iron out their irregular cash flows. This overdraft will have a reasonable interest and be flexible in terms of repayment (not the Mshwari and Tala more than 100% type of interest).
This sounds easy enough with a huge potential market, yet it is not happening. It requires smart partnerships between those benefitting from more agricultural production and patient investments in designing and deploying financial services that make farmers more resilient. These payment, insurance and overdraft services will make farmers known to financial institutions which is key in reducing risk and cost of providing loans to farmers who have the ambition and ability to grow. So first things first: cheap, easy and relevant accounts for farmers, risk sharing in financing agricultural production and financial inclusion of farmers is on track.