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Finance and Banking

 

Is Microfinance Failing Agriculture ?

A global food crisis is looming. Food riots due to ever increasing prices for basic foods have been reported. Some governments have embarked on controlling the cost and export of basic food items. Scientists and social commentators attribute the food crisis to a host of reasons: high oil prices, the quest for biofuel crops, population explosion, climate change and ecological stress.

With increase in the price of oil, inputs such as fertilizers become unaffordable. On the other hand, transport and tractor hire per acre becomes more expensive. With the increase in oil prices, it becomes profitable to grow more biofuel crops. The cycle goes on.

For Kenya, the post election violence that affected the food producing areas complicates the problem further. The quest to settle internally displaced persons 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.

Despite the fact that Microfinance is helping alleviate poverty in urban and rural Kenya, its current form of “one size fits all financial products” and lack of flexibility in product offerings will not 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.

Agriculture is a technical and fluid sector for any lender. It is expensive and risky. The fear for lenders is genuine – the sector is faced with high transaction costs, vagaries of weather, uncoordinated market for agricultural produce crippled by glut at harvest time and poor contractual adherence by farmers and marketers. These risk factors result in under-provision of financial services. However, using innovativeness of microfinance and microinsurance technology, this can be overcome today.

Many governments and donors have reduced assistance to agriculture and embraced the microfinance revolution. Microfinance at its best pushes the rural active poor to urban areas and creates a nation of “traders and hawkers” who may not feed the nation, but 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 mtumba (second hand) kiosk 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 easily come. Credit constraints are freqently experienced by smallholder farmers. In Kenya, the mtumba trader is sure of accessing a loan than the rural farmer. Both businesses have different cash flows. The  microfinance business model favours one over the other.

Trading by its very nature is an urban phenomena. Agriculture is a rural activity. Creating a million jobs through hawking and trading is a mirage and a source of sustained conflict in urban areas. However, agriculture, when focused has the potential to create millions of jobs, open rural areas for development, mitigate growth of urban informal settlements and reduce gang culture. An injection of innovative and sector targetted microfinance services at this point props up the rural areas and directly contributes to agriculture and reduction in crime.

The government should facilitate a sector dialogue with financial service providers, input producers and suppliers and marketing agencies to develop a strategy of inovative rural credit access to small holder farmers. Farmers who cannot afford the Ksh4,000 bag of fertilizer and the 2,500 per acre tractor hire and a bag of seed. A Ksh10,000 loan, innovatively designed could be all they need. Farmers need access; not subsidies. They can pay back - there are no bad borrowers. It is time all stakeholders became friends of the poor but not poverty.

The financing needs are small, but the impact is big. In any case this is the rationale behind the microfinance business model – innovatively provide financial services for the active poor and low income people by offering smaller loans, savings services and microinsurance, while accepting a wider variety of non traditional collaterals.

Is there a ray of light? Yes, with the current branch expansion and further downscaling by banks and microfinance insitutions, competition for the marginal client and desire for institutional survival through innovation in product offering could be the engine to open rural areas for productive investments. Will the momentum be sustained in the face of the looming hunger and despair?. Time will tell, but the debate rages on.

cgnjoro@gmail.com



By Charles G. Njoroge
Microfinance Trainer and Consultant, State University Bergamo, Italy


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