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AFC plans to transform into an agro-bank

FINANCIAL STANDARD
By James Wanzala | Jan 5th 2016 | 3 min read
By James Wanzala | January 5th 2016
FINANCIAL STANDARD

 

Agricultural Finance Corporation, established in 1963, is a development finance institution (DFI) wholly owned by the Government. But with the liberalisation of the economy in mid-1980’s, this led to price decontrol, opening up of input and output commodity trade and removal of foreign exchange restrictions.

The institutions servicing the agricultural sector failed to compete effectively leading to high default especially on lending by AFC. AFC was declared technically insolvent in 2000. In the process, all lending programs stalled until 2002 when the Narc government gave it a new lease of life. Business Beat talked to AFC Managing Director, Lucas Meso about the turnaround.

How did AFC survive its near collapse?

In the 1960s and 70’s, AFC performed very well, providing an average of 26 per cent of the total credit to the agricultural sector. However, the introduction of market liberalisation led to poor performance of the economy, especially the agricultural sector and the collapse of related supporting institutions such as the marketing agents.

The poor repayments by farmers, compounded by inadequate budgetary support from the government and discontinuation of donor support led to the collapse of AFC. The government commenced the revival of AFC through an equity injection of Sh1.3 billion spread over five years from 2003 to 2007. This enabled AFC to restart its previously stalled lending, which has seen the organisation move to its current position.

Talking of the current position, what’s AFC’s financial health?

We are now stable although we still need additional support from government. The performance of AFC has improved from Sh50 million in pretax profit in 2011 to the current level of Sh225 million. We have contained our expenses, increased our loan portfolio from Sh1.5 billion in 2003 to Sh7 billion currently. Our client base has increased from 38,000 to 100,000. The demand for credit from AFC is still high and stands at over Sh10 billion annually. With further government funding, we anticipate the portfolio to grow to Sh23 billion enabling us to reach of 1.2 million households.

The organisation’s loan recovery has been rated poor in earlier audits. How has AFC improved?

We would like to appreciate our farmers for being faithful in paying back their loans, and taking agriculture as a business. As a result, our loan recovery performance has improved to over 90 per cent.

What challenges is AFC facing and what’s your turnaround strategy?

Resources are our main challenge. Most farmers, after benefiting from AFC in the past, are going for more loans. We get loan requests in excess of Sh10 billion annually, which we are unable to satisfy. We are currently engaging with other financial institutions to explore options for partnership to raise funds required to meet the high demand. We are also looking to transform the corporation into an agro-bank to enable mobilisation of savings and deposits.

What are the new strategies that have enhanced loan uptake especially for women and youth?

We realised that women and youth are excluded from credit due to lack of collateral. We are structuring them into viable groups in order to access credit without security. We are also offering them training to build their capacity. After the training, they gladly choose which agricultural enterprise to venture into. AFC offers seasonal loans, poultry, dairy, piggery, horticulture, bee keeping, fishing, cereals among other loans.

With the many county funds and organisations currently supporting agriculture, where does this leave AFC?

Kenya is an agricultural economy and there is room for everyone. All these funds in the market cannot meet the need for investment in the agricultural sector. AFC’s contribution is still small. We believe there is still a huge gap that would require investment of up 30 per cent of Gross Domestic Product to close.

How is AFC tapping into counties?

We currently have 44 branch offices in 34 counties. Our aim is to be in every county by 2017 so as to bring services closer to people. We are however, limited by resources, since it costs between Sh16 million to Sh20 million to open a single branch.

Where do you see AFC in the next five years?

We have big dreams as AFC. The corporation will be transformed into a full-fledged agricultural development bank offering all services that a farmer would wish for. We project to reach more than 1.5 million households, therefore impacting over 10 million people. This will be manifested in job and wealth creation as well as food security.

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