Poor Agricultural Financing Linked to Low Public Sector Investment

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 bank’s reluctance to customize credit products to accommodate small borrowers.

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

According to the research, public expenditure on agriculture as a percentage of total expenditure stalled 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 4 Agenda, the government has allocated 20.25 billion shillings to enhance food and nutrition security to all Kenyans by the year 2022. The success of the Agenda has been pegged on private sector involvement, with the removal of interest rate caps considered and 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), accounting for 61 percent of the total employment and 25 percent of the total GDP in Sub-Saharan Africa.

However, the region and Kenya, in particular, continues to record low yields due to minimal land and labor productivity, underperformance in the agricultural value chain, insufficient infrastructure, and limited access to agricultural finance.

Currently, the prevailing business model; of most commercial banks favor large-scale outfits that utilize the full range of financial services, with the standard risk assessment tools employed by commercial banks being obvious 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.