Lack of credit cripples agriculture

By Ramadhan Rajab

Accessing agricultural credit is still a major hurdle to small-scale farmers.

Agriculture Minister William Ruto says despite the growing financial needs due to farmers, financial institutions are reluctant to support them build their capacity and enhance production.

Yet, agricultural sector is key to the country economy. Finance Minister Uhuru Kenyatta says agriculture accounts for over 65 per cent of Kenya’s exports, contributes to over 24 per cent of the country’s total output, and employs over five million Kenyans.

Farmers particularly continue to suffer limited access to credit attributed to the tenure system that limits the use of land as collateral. Other challenges include abnormally high interest rates, and low budgetary allocations. As a result, agricultural business has continued to witness dwindling fortunes in a country perpetually suffering food shortage.

"Despite the sector’s contribution to the economy, agriculture is receiving inadequate cushions amid rising costs and hostile climate," Ruto says.

"We have been talking to financial institutions to up their lending to the agricultural sector. Unfortunately, banks are only holding tighter onto their purse."

Commercial banks’ lending to the sector now stands at 4 per cent from 8 per cent two years ago.

This decline comes at a time more banks are posting impressive returns and growing deposits, which nearly doubled from Sh434 billion two years ago to Sh827 billion today.

This credit squeeze coupled with prolonged drought has negated the Government’s projections to have the sector grow at 7 per cent per annum.

Dismal performance

Over the past two years, the sector has posted dismal performance with growth dipping from 2.2 per cent in 2007 to 5.4 per cent in 2008 and even lower last year.

The minister put the dip squarely on persistent droughts, post election violence that rocked the country in 2008, high prices for agricultural inputs as well declining lending to the sector by commercial banks.

Loans to agricultural sector represent only a small portion of the total loan portfolio of financial institutions. Banks say agriculture is too risky a sector to finance.

Experts also say there are limited banks in rural areas, which makes loan administration across sparse geographical location expensive for banks.

Ruto says limited access to credit had caused an estimated 1.6 million hectares of the 3.80 million hectares of arable land to remain unused.

He called for fast tracking of additional funding through foreign loans to lending agencies to access more funds at 10 per cent interest rate for onward lending to farmers at 12 per cent.

"We call for the review of legislation to compel commercial banks to devote 2-3 per cent of their lending portfolio to agriculture," he said.

Insurance products

Ruto said there was a need to develop insurance products to cover risk in crop and livestock enterprises as well introduction of a fund to assist in natural resource conservation and management for sustainable agricultural production systems.

Despite committing to the Maputo Declaration of 2003, which obligates countries to allocate 10 per cent of their governments annual budgets to agriculture, Kenya allocated a paltry 4.5 per cent of the annual budget to the sector.

And it will take a while before Government meets the Maputo Declaration, at least according to promises from Finance Minister Uhuru Kenyatta. He says the Government is keen to increase budgetary allocation to the sector from 4.5 per cent of the budget to eight per cent over the next three years.

Uhuru notes that the sector still faces uncountable challenges in areas of productivity, land use, markets and value addition, which determine the country’s competitiveness in world markets.

"We cannot turn around the economy when we invest too little in its backbone," Ruto says.

"We need over Sh7 billion to address the problems afflicting our production chains, starting from the primary productions to storage, processing, manufacturing and value addition."

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