Cut flower exporters face fresh hurdles as risk-averse financial institutions move to reduce lending to the industry whose attractiveness has been dented by the turbulence in the European market.

Financial sector players say uncertainty in the European market and overdependence on rain fed production have raised the floriculture industry's risk profile, making it a hard-sell to lenders.

Financiers are also worried by the industry's unstable labour relations, seasonal demand for its products, and tropical pests and diseases that affect production.

"The industry's traditional attractiveness may still be intact, but there are many risks that have emerged that make banks very conservative in choosing their lending priorities," Allan Dodd, executive director at NIC Bank told a forum of flower growers held in Nairobi on Thursday.

Flower production is a capital intensive venture that financial institutions generally associate with offering opportunities for lending.

Traditionally, the industry's reputation as an impressive annual foreign exchange earner has acted as a magnet to institutions that offer trade financing products.

Financiers have also viewed the industry favourably due to its early growth stage, established infrastructure, and the fact that it is grown in controlled environments.

Kenyan flowers also enjoy a competitive advantage internationally as being naturally grown as opposed to those artificially nurtured in Eastern Europe.

However, financiers see instability of the EU market as a key factor in deciding future business relations with the industry.

Externalised risks

"By relying heavily on EU markets, the industry has also externalised its risk, meaning the ability to repay must be extended to include assessment of conditions of the EU market before loan is granted," said Oswald Magwenzi, an investment officer at the international Finance Corporation (IFC)

Kenya sells 82 per cent of her horticultural exports in EU countries where payment is made in the euro, leaving only 18 per cent of the produce to the dollar dominated destinations of US, Middle East, Japan and Russia.

Of late, however, the recent six-day closure of Europe's airspace due to the Iceland volcanic eruption, and the eurozone crisis have reduced the attractiveness of the EU market, forcing economic planners to rollout aggressive diversification campaigns.

To flower exporters, these changes have translated to supply disruptions, currency fluctuations, and depressed demand for the produce.

These changes have created a foreign exchange mismatch in an industry where 30 per cent of costs are settled in shillings, 20 per cent in dollars, while income is earned mainly in euros.

Moreover, the future of the EU as the country's main market for horticulture depends on whether the East African Community will successfully conclude the long dragging economic partnership agreements (EPAs) with the European Commission.

Government statistics indicate that earnings from the fresh produce sector dropped by 25.5 per cent to Sh19.5 billion in the first half of this year, compared to the Sh26.2 billion in the same period last year, raising fears of another disappointing performance for 2010.

Kenya National Bureau of Statistics data indicates that export of cut flowers dropped from 39,000 tonnes by June 2009 to 35,220 tonnes over the same period this year, with a corresponding drop in earnings from Sh16.4bn to Sh12bn Kenya Flower Council CEO Jane Ngige said the industry is already making inroads into East Europe and some Asian countries.

The council has been waging a multifaceted campaign that ranges from branding and marketing of flowers to complete value chain management.

Ms Ngige said the signing of EPAs in November will help the industry to avoid disruption in accessing its key markets.

Economic diplomacy

"At this rate, the floriculture industry needs to leverage on e-marketing and the recently introduced economic diplomacy to speed up its search for alternative markets," said National Social Economic Council CEO Julius Muia.

Mr Muia urged industry stakeholders to borrow from the Kenya Tea Development Authority and the National Cereals and Produce Board, which have been importing their own fertiliser in bulk, thus reducing input's cost.

The industry, he said, also needs to take advantage of the government's campaign to expand arable land through irrigation to expand operations.

"Other than diversification, we foresee a future where small players in the industry will be forced to merge and automate their operations to keep their costs in check in order to remain attractive to external financiers," said Mr Magwenzi.