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Kenya: Is Microfinance Failing Agriculture?
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Business Daily (Nairobi)
OPINION
29 April 2008
Posted to the web 29 April 2008
Charles Njoroge
The food crisis is visiting the world. Hunger is looming and the world is in need of more food everyday.
Food riots due to ever increasing prices for basic foods have been reported. Some governments have been forced to step in and artificially control the cost and export of basic food items. In Kenya, the Ministry of Agriculture says all is well, at least we have four more months before we run out of the country food reserves.
Scientists and social commentators world over attribute the food crisis to a host of reasons: high oil prices, substitution of oil with biofuel crops, ever growing population, extreme weather and ecological stress.
The effect is, with increase in the price of oil, inputs such as fertilizers become unaffordable; transport and tractor hire per acre more expensive. With the increase in oil prices it consequently becomes profitable to grow more biofuel crops. The cycle goes on.
For Kenya, the post election violence that affected mostly the food producing areas of the country complicates the problem further. The settling of the internally displaced persons (IDPs) and the bloated grand coalition cabinet further puts strains on the scarce government resources that could otherwise help respond to the looming danger.
Further, lack of access to innovative rural financial services and over reliance on microfinance to rejuvenate agriculture in rural Kenya compounds the problem.
Microfinance is making its contribution in alleviating poverty in urban and rural Kenya. But one thing microfinance will not do in its current form of "one size fits all financial products" and lack of flexibility in product offerings, is to fully transform agriculture. Only effective, well designed rural financial services, done by sector sensitive, but "best practice" focused institutions will do for this vital sector in Kenya.
Overall agriculture is a technical and fluid sector for any lender. It's expensive and risky sector. The fear for lenders is genuine - there are high transaction costs, vagaries of weather exacerbate the exposure, uncoordinated market for agricultural produce crippled by glut at harvest time and poor contractual adherence by farmers and marketers. These risk factors result in an under-provision of financial services.
But using innovativeness of microfinance and microinsurance technology, this can be overcome today. Many governments and donors have with time reduced assistance to agriculture and embraced microfinance revolution.
Microfinance at its best pushes the rural active poor to urban areas and creates a nation of "traders and hawkers". These cadre of microfinance clients do not feed the nation, though in an equal measure they improve the food value chain and access.
Many factors contribute to the rural-urban push, but access to financial services is increasingly becoming a convincing argument. You only need to start a second hand shop in an urban set-up in Kenya, link up with fellow second hand cloth sellers, co-guarantee each other - and an MFI will support you.
This way, you partner to fight your poverty. Start a farming enterprise and financing will not be easily forthcoming. Credit constraints are frequently experienced by small holder farmers. In Kenya, the second-hand clothes trader is sure of accessing a loan than the rural farmer. Both businesses have different cash flows and microfinance business model favours one over the other.
Creating a million of jobs through hawking and trading is a mirage and a source of sustained conflict in urban areas. But agriculture when organised, support services and inputs made available through efficient and sustainable focused institutions has the potential to create millions of jobs, open rural areas for development and mitigate growth of urban informal settlements and gang culture.
An injection of innovative and sector targeted microfinance services at this point props up the rural areas and directly contributes to agriculture and reduction in crime.
Towards this, the government should facilitate a sector dialogue with financial service providers, input producers and suppliers and marketing agencies to develop a strategy of innovative rural credit access to small holder farmers. These are farmers who shall not afford the Sh4,000 bag of fertilizer and the 2,500 per acre tractor hire and a bag of seed.
A Sh10,000 loan, innovatively designed could be all they ever needed. The farmers need access not subsidies. They can pay back - there are no bad borrowers but bad lenders.
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Mr Njoroge is a consultant and microfinance Trainer.
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