Corruption and wastage blight cheap credit dream for farmers

Small-scale farmers produce up to 80 per cent of the food supply in Africa. [iStockphoto]

Soon after independence in 1963, the new government of Mzee Jomo Kenyatta formed the Agricultural Finance Corporation (AFC), a farmer-focused development finance Institution.

The corporation aimed to finance small-and large-scale producers, processors, and service providers in the agriculture and livestock sectors throughout the country to boost food security for the fledgling economy.

"AFC was formed in 1963 initially as a subsidiary of the then Land and Agricultural Bank," says AFC on its website.

"It was incorporated as a full-fledged financial institution in 1969 under the AFC Act and entrusted with the mandate of assisting in the development of agriculture and agricultural industries by making loans, and providing managerial and technical assistance to the loan beneficiaries."

Over five decades later, AFC says on its website that it "remains the leading government credit institution mandated to provide credit for the sole purpose of developing agriculture."

"This role is crucial given that agriculture is the mainstay of the Kenyan economy where 80 per cent of the Kenyan population, which is rural-based relies on agriculture as their main support system," says the State agency.

But this rosy promise of disbursing cheaper loans to farmers in Kenya's agriculture-dependent economy remains a pipedream for many farmers.

Poor management, embezzlement, wastage and a revolving door for managers have left the organisation in a financial mess, according to watchdogs.

Auditor General Nancy Gathungu highlighted this malady in a recent report, which painted the organisation as inefficient, ineffective and handicapped to implement its original mandate due to mismanagement.

"As required by Article 229(6) of the Constitution, because of the significance of the matters discussed in the Basis for Conclusion on Lawfulness and Effectiveness in the use of public resources sections of my report, based on the audit procedures performed, I confirm that public resources have not been applied lawfully and in an effective way," said Ms Gathungu in the report covering the 2019/2020 financial year.

In her list of troubling queries around financial prudence, the Auditor General raised concerns about mounting non-performing loans, loans given without proper collateral, wasteful projects and instances of lack of accuracy on what AFC disburses and is owed by farmers.

For instance, she noted that examination of AFC system logs and loan close-up indicated that a total of 2,255 loans amounting to Sh1.1 billion were closed by the super users (IT Department) "without good reason."

"No explanation was provided on why the super users closed the loan accounts contrary to Section 4.7.1 of the Operations Procedures, which state that the branch accountant is the only one authorised to close a loan upon confirming that the loan servicing account has sufficient credit by applying the necessary codes in the system," said Ms Gathungu.

"Further, a total of 4,603 loans amounting to Sh2.9 billion were closed by undefined users in the system. In addition, loans worth Sh197 million were closed by the systems' vendor."

According to Ms Gathungu, consequently, the accuracy, validity, and completeness of the net medium-term loans to customers of Sh7.7 billion as of June 30, 2020, could not be confirmed.

Non-performing loans

On non-performing loans, she noted that the net medium-term loans to customers balance of Sh7.7 billion also included non-performing loans amounting to Sh2.5 billion which are attributed to 4,743 farmers.

"No efforts have been made to recover the loan amounts. Consequently, the recoverability of the net medium-term loans to customers of Sh7.7 billion as of June 30, 2020 cannot be confirmed," noted the Auditor General.

Reached for comment, AFC management said in a letter dated November 1 to Financial Standard, said it has asked the Auditor General to conduct a comprehensive forensic audit into its operations. It also said it had started strengthening its internal controls.

"During the statutory audits, the Auditor General highlighted a number of issues, which she considered wanting," said AFC Managing Director George Kubai.

"The corporation through the board initiated an urgent detailed forensic audit on all issues raised by the Auditor General to enable the corporation to take the necessary action."

Mr Kubai added that "in addition to the forensic audit, the corporation has also taken internal actions to resolve and strengthen its internal mechanisms where necessary."

"The corporation indeed wrote to the Auditor General requesting for a thorough forensic audit since, according to the law, it is the Auditor General who can conduct such an audit or alternatively grant permission to the corporation to source on the same from the market." In her lengthy list of audit concerns, Ms Gathungu also had a problem with outstanding loans to former staff. Out of the net medium-term loans to customers of Sh7.7 billion, she said an amount of Sh544.6 million under staff loans, which includes an amount of Sh25.5 million due from ex-staff, have been outstanding for a long period.

"Management has not disclosed measures taken to recover the long outstanding loans. Consequently, the recoverability of the outstanding loans of Sh25.5 million to ex-staff as of June 30, 2020 is doubtful," she said .

To highlight the rot, she said a client had an outstanding balance of Sh64.7 million from a loan of Sh100 million disbursed on January 25, 2018.

However, the loan was issued without security and registration of the debenture is still pending two years after the loan was issued.

"Under the circumstances, the corporation risks losing the outstanding loan balance of Sh35.2 million in case of default," says Ms Gathungu.

The AFC statement of financial position for the period reflects a balance of Sh179.4 million under trade and other payables, which include an amount of Sh9.5 million due to the Commodities Fund.

Fraudulent transactions

However, records maintained by the Commodities Fund reflect a balance of Sh1.068 billion, resulting in an unreconciled difference of Sh1.059 billion.

An examination of records between January 2005 and November 2010 revealed that the corporation lost a sum of Sh35.8 through fraudulent transactions involving the encashment of 196 cheques by various staff members, according to the Auditor General.

"Although the cases are still in court, no provisions for the loss have not been incorporated in the financial statements," she said.

"Further, the corporation fraudulently lost cash at AFC Eldoret Branch through unremitted transfers and collections amounting to Sh4.1 million and Sh4.9 million respectively.

However, no action has been made toward the recovery of the stolen cash."

This comes as farmers go without the promise of cheaper credit.

Small-scale farmers produce up to 80 per cent of the food supply in Africa and Asia and face a 90 per cent chance of crop loss due to factors outside of their control, such as pest outbreaks and severe drought.

Financial Standard could not immediately reach Agriculture Cabinet Secretary Mithika Linturi for comment by the time of going to press.