The agricultural sector is the biggest employer but low government investment is among key factors hindering its full potential in Kenya.
A new report by the Kenya Bankers Association’s Centre for Research on Financial Markets and Policy attributes agriculture’s poor performance to a sustained stagnation of public investment. This is coupled with commercial banks’ reluctance to customise credit products to accommodate small borrowers.
At a time when the government is focusing on promoting agricultural output to ensure food security, the report notes that a majority of small-scale farmers have not organised themselves as enterprises. This reduces their viability for formal credit according to the report titled ‘Realization of Full Potential of the Agriculture Sector’.
The research shows that public expenditure on agriculture stalled at between three to six per cent of total expenditure between 2000 and 2015. This is way below the ten per cent target set by the Comprehensive Africa Agriculture Development Programme (CAADP).
Poor investments in the sector have resulted in a low impact on risk mitigation, productivity, growth, and competitiveness.
Commercial lending to agriculture has also remained low – compared to other sectors – accounting for four per cent 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. Removal of interest rate caps is considered as a 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). It accounts for 61 per cent of total employment and 25 per cent 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 the agricultural value chain, insufficient infrastructure and limited access to agricultural finance.
Currently, the prevailing business model of most commercial banks favour large-scale outfits that utilise 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 smallholder 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.