New loan concept saviour to farmers

By Dann Okoth

Faced with many challenges including rising costs of farm inputs to changing weather conditions,majority of small-scale farmers finding it difficult to cope.

Although the Small Scale Agriculture is important in the economic development, contributing about one fifth of the Gross Domestic Product and employment the farmers it has largely been ignored.

The farmers,play a critical role in the national food security, cannot access bank loans due to their smallholder nature.

The banks, apparently, are reluctant to accept their small plots as collateral to advance loans against.

The farmers are therefore often disadvantaged when it comes to competitiveness in the agribusiness production processes.

Challenges

Even though some of them have joined small cooperative groups, such face many challenges and cannot fulfil the fiscal demands that accompany the business of farming.

However, a new concept mooted by various organisations across East Africa could reverse the situation.

The new concept aimed at affording un-banked famers leeway in accessing loans also enables peasant farmers to fetch maximum returns from their produce by depositing it with organisation until the price is right.

The concept works in such a way that farmers deposit their grain with the grain organisation, which will in turn store the product in strategic national grain reserves such as the National Cereals and Produce Board (NCPB).

The organisation would then advance the farmer a loan, which is commensurate with the amount of grain the farmer has deposited without necessarily selling the grain.

Beneficiaries

The deposited grain acts as the collateral against which the loan has been advanced, says John Kibiego a farmer from Eldoret North who has benefited from the new scheme.

In the event that the farmer fails to repay the loan, only then is his grain sold to recover the loan, explains Philip Kirui, a financial consultant from the town who has been involved in conceptualising the new idea. Moreover, this arrangement ensures that the farmers land is not at any risk of being attached if they fail to repay the loan because the land was not used as collateral in the first place, he adds.

He notes that the new concept, which has only began to take root in Kenya, has assisted farmers to get financial resources to manage their farming activities.

He, however, notes that the concept is quite different from grain buying organisations whose activities are based on profit margins.

The concept was basically formulated to assist peasant farmers who have been locked out of the agribusiness sector by factors such as lack of financial services and poor markets, says Kirui.

But the benefits for the farmers is not limited to accessing agricultural loans as the loans can be obtained for reason other than agricultural production.

"Through the concept I was able to obtain a big loan, which assisted me to complete my building, which had stale for almost ten years," says Kibiego.

The loans also come cheap with most SSA farmers can afford them. The most encouraging thing is the fact that the farmers are never worried that their produce might be auctioned if they fail to fulfil their loan obligations.

"This new concept is very encouraging because more farmers are now willing to take loans and develop their farms.

This was not possible with the banks which demanded huge collateral. Besides bank loans often left the risk of losing your farm hanging like a dark cloud over your head," observes Kibiego.

But apart from just being able to obtain loans against their grain deposits, the farmers are offered an opportunity to source the best prices for their produce.

Faced with the challenges of maintaining their farms and meeting their domestic financial demands, frustrated farmers often sell their produce at a throw away price to NCPB or private millers and grain buyers.

The problem is usually more pronounced whenever there is a bumper harvest and a subsequent glut the market with the NCPB not being able to buy all the farmers produce.

Farmers’ woes

Then, frustrated farmers are forced to sell their produce to private buyers who in turn hoard the produce only to sell it at higher price to the government when the demand is high.

However, with the new concept farmers can deposit their grain with the organisation, which hold it on their account and sell it when the price is right.

In the meantime, however, the farmers can still access finances to assist them in their day-to-day operations based on their grain deposits.

The other advantage of this arrangement is that the organisations also act as market research agents for the farmers and even sell the grain on their behalf, says Kirui.

But other experts say the concept not only assist poor farmers to get loans but also a brilliant idea of how to widen financial services for people in the grassroots.

For many years the poor have been locked out by the institutional financial lenders making them uncompetitive when it comes to activities such as agricultural production.

Simple and easy to operate concepts such grain-for-loans is the way forward in bridging the rural financial gap, says Jeremiah Owiti of Centre for Independent Research, who was instrumental in formulating the concept.

More importantly, the flexibility of the grains for loans concept allows the peasant farmers to use money borrowed against their grain to fulfil other personal financial obligations.