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 sector lending 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).