One Industry. Transforming Kenya

Bankers Link Poor Agricultural Financing to Low Public Sector Investment

Between 2000 and 2015, public expenditure on agriculture stalled between 3 to 6%

Commercial lending to agriculture has remained low accounting for 4% of the total lending portfolio

Nairobi, 26th July, 2018 - Low Government investment in agriculture has been identified among the key factors hindering the realization of the sector's full potential in Kenya at a time when the Government is focusing on promoting agricultural output to ensure food security.

A new report by the Kenya Bankers Association's Centre for Research on Financial Markets and Policy attributes the below-potential performance of agriculture to a sustained stagnation of public investment coupled with commercial banks' reluctance to customise credit products to accommodate small borrowers.

The report titled 'Realization of Full Potential of the Agriculture Sector' also notes that the majority of small-scale farmers have not organised themselves as enterprises, reducing their viability for formal credit.

According to the research, public expenditure on agriculture as a percentage of total expenditure stalled at between three to six percent between 2000 and 2015, way below the ten percent target set by the Comprehensive Africa Agriculture Development Programme (CAADP), with investments in the sector resulting in a low impact on risk mitigation, productivity, growth, and competitiveness. Meanwhile, commercial lending to agriculture has also remained low - compared to other sectors - accounting for four percent of the total lending portfolio.

Under the Big Four agenda, the Government has allocated Sh20.25 billion to enhance food and nutrition security to all Kenyans by 2022. The success of the agenda has been pegged on private sector involvement, with the removal of interest rate caps considered as critical cog in facilitating access to credit for the private sector and small enterprises.

Regionally, agriculture commands the largest share of employment and Gross Domestic Product (GDP), accounting for 61 percent of total employment and 25 percent of total GDP in Sub-Saharan Africa. However, the region and Kenya in particular continues to record low yields due to minimal land and labour productivity, underperformance in agricultural value chain, insufficient infrastructure and limited access agricultural finance.

Currently, the prevailing business model of most commercial banks favour large-scale outfits that utilize the full range of financial services, with the standard risk assessment tools employed by commercial banks being oblivious to the unique challenges facing the agricultural sector.

Identifying agriculture-led growth as the most promising and viable pathway to Kenya and Sub-Saharan Africa's development, the research emphasizes the need to boost small-scale agri-food producers and SMES, which requires public-private sector funding as complementary to commercial lenders.

"More public investment towards initiatives designed to reduce lending risks is needed to enable commercial banks to make a contribution to boosting the sector's production capacity," notes the study, adding that financing of agricultural development is not sufficient given Kenya's growth and transformation objectives.

Speaking during the report's launch, KBA Chief Executive Officer Dr. Habil Olaka called on the public sector to target investments that minimise lending risk to the agricultural sector while at the same time enhancing sector's productivity and competitiveness.

"We see compelling opportunities in supporting agri-based enterprises such as textile and leather, while at the same time seeking to empower agricultural production especially among small holder farmers that are typically vulnerable to both weather and market dynamics," he said.

Dr. Olaka encouraged stakeholders in agriculture to develop disruptive business models to generate a pool of adequately capitalized SME's in order to generate effective demand on agricultural produce by facilitating incubation and development of such business models. He also urged banks to continue to innovate and leverage on technology and product linkages such as insurance to support small-scale agribusinesses and farmers.

Notes to editors - About the Kenya Bankers Association:

KBA (www.kba.co.ke) was founded on 16th July 1962. Today, KBA is the financial sector's leading advocacy group and banking industry umbrella body that represents total assets in excess of USD 40 billion. KBA has evolved and broadened its function to include advocacy on behalf of the banking industry, and championing financial sector development through strategic projects such as the launch of the industry's first P2P digital payments platform PesaLink. In line with the Government's policy on public-private partnerships, KBA and Central Bank of Kenya have implemented key projects such as modernization of the National Payments System through the Automated Clearing House, implementing the Real Time Gross Settlement System (RTGS), and the Kenya Credit Information Sharing Initiative. The KBA members are comprised of commercial banks and deposit taking microfinance banks. These banks are represented by their Chief Executive Officers, who appoint a Governing Council to oversee industry wide activities on the General Body's behalf. The Governing Council is supported by various Committees and Sub-Committees which are comprised of nominated bank representatives. These committees coordinate activities with the KBA Secretariat.

Media Contact:

Ms. Nuru Mugambi, Director of Communications and Public Affairs

Phone: +254-20-2221704 / 2224014

Email: nmugambi@kba.co.ke

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