Agriculture is the mainstay of the Kenyan Economy. However, agriculture has experienced low productivity over the years. Poor access to agricultural finance has been identified as a contributing factor to low crop productivity. Kenyan agriculture has undergone some fundamental changes which have profoundly affected agricultural financial services. In addition, most financiers shy away from lending to the agricultural sector because of the covariant risks related to rain-fed agriculture. Given this background, we undertake a comparative analysis of emerging models of agricultural finance that have expanded the agricultural finance frontier to the smallholder farmers. Key findings indicate that demand for farming credit takes the highest proportion of the credit needs among the rural households, thus accentuating the importance of agricultural finance. The state run model of agricultural financing has the lowest financial sustainability. On the contrary, the community financing models are the most likely drivers of change in the rural finance landscape.Agribusiness, Agricultural Finance, Community/Rural/Urban Development, Demand and Price Analysis, Farm Management, Financial Economics, Food Consumption/Nutrition/Food Safety, Food Security and Poverty, Institutional and Behavioral Economics, International Relations/Trade, Labor and Human Capital, Land Economics/Use, Marketing, Production Economics, Productivity Analysis, Research and Development/Tech Change/Emerging Technologies,

Kibaara, Betty

Nyoro, James K.

English

Research Papers in Economics

AAAE Conference Proceedings (2007) 287-290 
 
Expanding the Agricultural Finance Frontier: A Kenyan Case  
Betty Kibaara and James Nyoro 
Institute of Agricultural Policy and Development, 
P.O Box 20498-00200 Nairobi, Kenya 
Abstract 
Agriculture is the mainstay of the Kenyan Economy. However, agriculture has experienced low productivity over 
the years. Poor access to agricultural finance has been identified as a contributing factor to low crop productivity. 
Kenyan agriculture has undergone some fundamental changes which have profoundly affected agricultural 
financial services. In addition, most financiers shy away from lending to the agricultural sector because of the 
covariant risks related to rain-fed agriculture. Given this background, we undertake a comparative analysis of 
emerging models of agricultural finance that have expanded the agricultural finance frontier to the smallholder 
farmers. Key findings indicate that demand for farming credit takes the highest proportion of the credit needs 
among the rural households, thus accentuating the importance of agricultural finance. The state run model of 
agricultural financing has the lowest financial sustainability. On the contrary, the community financing models 
are the most likely drivers of change in the rural finance landscape.  
 
Introduction 
Agriculture contributes 23.9 percent of the Kenya’s 
Gross Domestic Product (GDP) and 60 percent of the 
total export earnings. In addition, 80 percent of the 
population derives their livelihood from agriculture. In 
spite of the significant contribution, agriculture has 
experienced low productivity in the past decade. 
Improving access to agricultural finance is in line with 
the Millennium Development Goals, which aims at 
reducing the proportion of people who suffer from 
hunger by half. Key government documents have 
highlighted the importance of agricultural finance in 
agricultural and rural development. However, Kenya 
has not developed a comprehensive rural financial 
strategy. Lack of working capital and low liquidity 
limit the farmer’s ability to purchase productivity 
enhancing inputs like seeds, fertilizers and pesticide 
(Nyoro, 2002). The average production efficiency 
levels are higher among producers who have access to 
formal credit (Awudu and Huffman, 2000; Kibaara, 
2005). In the late 1990’s, most mainstream 
commercial banks closed down some rural branches in 
order to cut costs and improve profits. The non-
traditional financial institutions have emerged to fill 
the gap created by the mainstream banks which locked 
out low income and irregular earners. In spite of the 
importance of a savings account, only 27 percent of 
the Kenyan population has savings accounts in to 
formal banking institutions (Finaccess, 2007).  
It is against this background that we carried out a 
study to examine demanders, suppliers of agricultural 
credit the emerging models of agricultural financing. 
Data and Methodology 
The data on the emerging agricultural financing 
models were gathered from key stakeholders 
purposely selected from 15 districts within six agro-
ecological zones. We used a structured checklist 
covering the history of the organization, operations, 
outreach, costs, performance indicators, financial 
services provided, socio-economic characteristic of the 
client, requirements, use of loans, transaction charges, 
default rates, sustainability, constraints, and 
opportunities. The study uses supplementary data from 
the Tegemeo Agricultural Monitoring Project Analysis 
(TAMPA) panel data. This is cross-sectional panel 
(2000 and 2004) household data comprising of 1540 
rural households. The data is analyzed using 
descriptive statistics and comparative analysis.  
Results and Discussions 
Demand for Agricultural Credit  
Data from the 2004 Tegemeo survey shows that only 
39% of the households sought credit. Figure 1 show 
that credit for farming purposes remains the most 
dominant need and has increased from 53.71% in 2000 
to 71.15% in 2004.  
 
 Expanding the Agricultural Finance Frontier 
288  AAAE Ghana Conference 2007 
Traditional Suppliers of Agricultural Credit 
The supply of agricultural credit is dominated by 
commodity based credit providers/companies who 
promote tea, sugarcane and horticultural crops 
production. Provision of agricultural credit by the 
commodity based credit providers has increased from 
53.5% in 2000 to 62.7% in 2004 (Table I). This shows 
that the role of contracted farming in provision of 
embedded services such as credit for agricultural 
inputs has become increasingly important. The savings 
and credit co-operatives (SACCOs) remain a 
significant supplier of agricultural credit. However, the 
SACCOs market share has slightly declined from 25% 
in 2000 to 20.6% in 2004 partly because of spillover  
effect of wrangles and mismanagement of SACCOs. 
The informal money lenders and input stockists also 
play a vital role. 
Emerging Models of Agricultural Financing  
State Owned Rural Finance Model 
This is a government owned, financed and managed 
model that provides agricultural credit mainly to large 
scale farmers with an objective of promoting food 
production in the country. In Kenya, the government 
implements agricultural financing through the 
Agricultural Finance Corporation (AFC). The 
corporation collapsed in early 1990s due to non-
repayment of debts and political interferences. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In the past five years, the corporation has been 
resuscitated after receiving 1.3 Billion Kenya shilling 
Table I: Source of agricultural credit in percent, 2000 and 2004 
Source of credit   2000  2004 
Commodity Based Credit Providers  53.5%  62.7% 
SACCOs 26%  20.6% 
Informal money lenders  12.1%  9.9% 
Local trader/input stockists  6.8%  3.9% 
AFC 0.4%  1.3% 
Commercial banks  0.6%  1.0% 
MFIs/ NGOs  0.6%  0.5% 
Source: Tegemeo household survey, 2000 and 2004 
54
71
28
10
13 12
3
3
2 5
0.00
20.00
40.00
60.00
80.00
P
e
r
c
e
n
t
Farming Consumption
needs
School fees Medical Business 
Reasons for credit
2000
2004
 
Figure 1: Reasons for seeking any form of credit in 2000 and 2004 Kabaara and Nyoro 
Role of Agriculture in Poverty Reduction  289
from the exchequer. The funding has enabled the 
corporation resume lending for seasonal and 
development loans. In addition, the corporation has 
expanded its lending frontier to cover value addition 
projects. In order to increase outreach the corporation 
is implementing the wholesaling group lending 
approach to organized farmer groups (AFC, 2005).  
Credit Voucher System 
This is a model of providing agricultural inputs on 
credit to rice farmers in Ahero Irrigation Scheme using 
a combination of a staggered credit voucher and cash, 
thus reducing the likelihood of credit diversion to 
other life cycle needs. The 75% of the credit is 
disbursed via the credit vouchers and 25% through 
cash vouchers. The following actors are involved; 
Savings and Credit Cooperative where farmers are 
members through purchase of shares; a micro finance 
institution which manages the SACCO; input stockists 
from where the farmers redeem vouchers; government 
which provides the irrigation water; the donor who 
guarantee to repay the loaned amount incase of default 
and buyer of the agricultural output. The credit 
voucher system is being piloted in Ahero rice scheme 
since March 2005. During the 2005 crop production 
year, the organization disbursed a total of Ksh. 6.7 
million to 617 farmers in Ahero rice irrigation scheme. 
Beach Banking Model  
This model involves provision of agricultural finance 
services to the fishermen and fishmongers along Lake 
Victoria beaches. The motivation behind this 
innovation is to contribute towards poverty alleviation 
among the fisher folks. The participants are members 
of a SACCO managed by a micro finance institution 
known as SAGA at a fee recovered from paid up 
interest rates. The model operates eight service points 
otherwise referred to as ‘Beach banks’ along beaches 
in Kisumu and Bondo Districts. The ‘beach banks’ 
have front offices that operate like conventional banks, 
providing saving and credit products. It has a current 
membership of 3,000 clients with a total savings of 
Ksh. 15 million. Perhaps the most innovative loan 
product is the market day loan which is a very short-
term loan which is processed within the same day and 
is payable within 5 days at a 2% interest rate. The 
market day loans account for 62% of the total beach 
‘bank’ loans.  
Community Owned Rural Finance Model 
The community owned rural finance model is a rural 
finance model that is owned and managed by the rural 
community with assistance from the donor agency. 
The community forms registered associations. 
Membership is through purchase of shares in the 
associations. The objective of this model is to reduce 
poverty through improved access to financial services 
mainly in the low population density areas with high 
incidences of poverty and few alternatives to financial 
services. Examples of the community owned rural 
finance model are the Financial Service Associations 
or ‘Village banks’ and the church based Mbeu Savings 
and Credit Association. The community models 
provide savings, loan and money transfer services. 
Private Commercial Bank Led Model: a Case of 
Emerging Indigenous Bank 
In the early 1990’s most mainstream banks 
restructured their operations such as closing branches 
in the rural areas to cut down on costs and improve 
profits. This left a gap in provision of rural financial 
services which has partly been filled by the emerging 
indigenous banks such as Equity bank. The emerging 
banks are mainly owned locally and work on the 
principle of taking banking services closer to the 
people. The bank financial services to rural clients 
make up 68 percent of clients in Equity (CGAP, 2004). 
The rural farming community can access supervised 
short term loans for horticulture, dairy, coffee and tea 
farmers. The bank has given incentives to its clients 
such as no ledger charges on saving accounts. The 
bank is also providing mobile banking services in the 
rural areas.  
Stockists Credit Guarantee System 
The credit guarantee system is a model that 
strengthens the lending and borrowing capacity of the 
commercial manufacture of agricultural input and the 
capital constrained input stockists. The credit 
guarantee system involves; a local non-governmental 
organization (NGO) in this case Agricultural Market 
Development Trust which manages the project; 
agricultural input stockists/wholesaler who acquires 
training on business skills; an input manufacturing 
company which lends to the input stockists and the 
donor who guarantees to repay 50 percent of defaulted 
loans up to a maximum of US $40,000. The NGO 
links the trained stockist to the input manufacturing 
company. The company then enters into agreement  
 Expanding the Agricultural Finance Frontier 
290  AAAE Ghana Conference 2007 
with the trained stockist to supply inputs (companies 
and wholesalers) on credit. 
Since 2005, over 150 stockists had been trained in 
business skills thus improving their creditworthiness. 
Ten companies had received a revolving credit 
guarantee enabling them to extend credit valued at 
over one million Ksh to wholesalers. In return, the 
wholesalers have guaranteed over 100 new stockists 
who have received inputs worth four million Kenya 
shillings on credit. This project is being pilot in 
Western Kenya since 2005.  
Comparative analysis of the agricultural financing 
models  
The government led model charges the lowest interest 
rate but servers fewer but wealthier clients (Table II). 
It is also not financially sustainable in the long run. 
The credit voucher model, beach banking and the 
community owned models charges higher interest rates 
yet these are the models that are financing the poor 
rural income households who with per capita income 
below a dollar. The emerging indigenous banking 
model is reaching a higher proportion of the rural 
population who were previously unreached.  
Conclusion 
The study has shown a high proportion of farmers 
seeking credit for farming purposes than for other 
household purposes, thus emphasizing the importance 
of agricultural finance. Different models of 
agricultural financing have evolved over time and the 
proportion of households that seek credit for any  
 
purpose is less than 40%. Therefore, rural finance is 
more than credit provision and policies that promote 
increased access to rural financial services should 
consider provision of a comprehensive financial 
package. The Kenyan government has continued to 
subsidize the wealthier farmers in the country. The 
government needs to focus agricultural finance on the 
group wholesaling approach in order to reach the low 
income farming households.  
References 
AFC.2005. “AFC Strategic Plan, 2005-2010”.  
Awudu, Abdulai and Wallace 
Huffman.2000.”Structure Adjustment and 
Economic Reform in Nicaragua: Evidence from 
Farm Household Survey Data”. Economic 
Systems, 25:113-125. 
CGAP, 2004. “Scaling up poverty reduction: Case 
study for Microfinance”. World Bank Financial 
Sector Network. Washington, D.C. 
Finaccess, 2007: “National Survey on access to 
financial services in Kenya” Financial sector 
deepening working paper. 
Kibaara, B.W. 2005. “Technical Efficiency in Kenya’s 
Maize Production: An Application of the 
Stochastic Frontier Approach”. Masters Thesis, 
Colorado State University, USA. 
Nyoro, J.K. 2002. “Agriculture and Rural Growth in 
Kenya’, Working Paper, Tegemeo Institute of 
Agricultural Policy and Development” 
 
Table II: A comparative analysis the agricultural financing models 
Indicator State  Owned 
Model: AFC 
Credit Voucher 
Model 
Beach Banking 
Model 
Community 
Owned Model 
Commercial 
Bank Model 
Objective  Food Production  Food security  Poverty reduction  Poverty 
reduction 
Profit  
Interest rates per annum  10%  24%  24%  20% to 34%  12% to 18% 
Outreach ( no. of clients)  5,200  617  2,700  70,000  380,800 
Annual HH income in Ksh  260,489  99,317  99,317  159,130  227,103 
Per capital income in US $  1.4  0.5  0.6  0.8  1.2 
Average loans per client  320,000  10,000  18,153  7,215  42,942 
Insurance on loans  No  Yes  Yes  Yes  Yes 
% loaned members   N/A  N/A  30%  38%  21% 
Unit cost of lending 1 Ksh  0.5  0.09  0.02  0.13  0.22 
Savings per client-Ksh  N/A  3,635  5,797  19,000  16,071 
Financial Sustainability  Low  Average  High  Average  High 
Source of funds  Government  shareholders shareholders    shareholders  shareholders 

Expanding the Agricultural Finance Frontier: A Kenyan Case

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics