Financing agri-SMEs can boost Kenya’s agricultural production

With the long rains here, now is a good time to talk about financing the agricultural sector. Insufficient funding hinders the sector from unleashing its true transformative potential.

Despite agriculture accounting for 34 percent of the economy, generating about one out of 10 formal jobs, the sector receives minimal funding.

Data from the Central Bank of Kenya (CBK) shows that it received Sh134.2 billion in credit out of the Sh3,797.5 billion extended to the private sector, accounting for just 3.53 percent of the total private sector credit.

Manufacturing accounted for Sh580.2 billion of loans to the private sector or slightly more than four times what went to agriculture. To be fair to commercial lenders, they are shy about lending to the agricultural sector because it is a risky affair.

Last year, Kenya faced its worst flooding in over two decades, and just a year before, the country experienced the most severe drought in 40 years, which devastated crops and livestock production.

Still, agriculture is an important sector of the economy because it offers the path of least resistance towards poverty reduction.

After all, increasing productivity is simpler than other sectors. For example, providing the right seeds, fertilisers, and credit boosts productivity as we have seen in the maize sub-sector, which hit an estimated record 70 million bags in 2024, up from 48 million bags in 2023 or a 46 percent increase.

This bumper harvest was attributed to the availability and stocking of the right fertilisers and seeds. This bumper harvest is not only creating jobs, but it’s also directly benefiting Kenyans by reducing the price of maize flour, their dietary staple.

The above example is evidence that financing the sector by providing funds for purchasing quality fertilisers, seeds, pesticides, feeds and other inputs can have a palpable effect on lives and livelihoods.

Read: Monetising farming: Solutions for Kenya's agriculture challenges

However, how can we effectively lend to the agricultural sector while managing risks and ensuring returns for lenders? Partnering with companies using technology to overcome these hurdles offers a promising solution.

Agri-fintechs are such companies. These startups are using technology-driven insights to enable them better lend to players in the agricultural value chain in better ways than traditional lenders, which even the banking regulator recognises.

The CBK’s November 2024 Agriculture Sector Survey Report highlights an improvement in access to credit for the sector, attributing this in part to digital lending, which effectively reaches businesses in the agricultural value chain in remote areas lacking brick-and-mortar bank or sacco branches.

Agri-fintechs are also more adaptable or malleable to the realities of the agricultural sector value chain.

Despite its immense potential for improving lives and livelihoods, the sector remains significantly underfunded. Therefore, there is an urgent need for innovative agricultural financing. Partnering with agri-fintech companies offers a promising solution not just for Kenya but Africa.

The lion’s share of funding is often required ahead of the planting season but sales happen after harvesting which is months away.

Even where there are financial products that reflect these dynamics, traditional lenders are more comfortable working with larger firms in the sector and not SMEs, who have relationships, collateral, etc. but these only make up a small percentage of the larger agricultural value chain, leaving many underserved.

Speed is also one area where agri-techs have an advantage over other mainstream lenders.

Speed is particularly important because often it can mean the difference between missing an opportunity or making a loss. Agri-fintech solutions facilitate rapid lending decisions, often within days, a crucial advantage given the unpredictable nature of rainfall patterns or market demands.

The writer is Avenews Country Manager. Email: [email protected]