Why CBK rules punish Kenya's safest borrowers and lock millions of farmers out of credit

Central Bank of Kenya [File, Standard]

Smallholder farmers in Kenya are being locked out of formal credit not because they are risky borrowers, but because banking regulations are structurally biased against agriculture, a senior finance expert has said, as the country prepares to host a continental summit on food systems financing.

Jared Ochieng, Agriculture and Processing Finance Lead at FSD Kenya, told Standard on Sunday in a virtual interview that banks allocate only 3.2 to 3.6 per cent of lending to the agriculture sector despite evidence showing farmers have lower default rates than other borrowers.

"How can you have the lowest debt default, but finance is not flowing to you, and you are also classified as the riskiest?" Ochieng said. "Farmers are the most financially literate people. If somebody makes that complex decision, ‘I have this cow, my kid is going to school in January, I need to sell it in December but keep this chicken to stay stable,’ that person is not going to default. Their livelihood depends on it."

Ochieng said the core problem lies in Kenya's prudential guidelines, established under the Banking Act, which assign a 100 per cent risk weight to loans extended to smallholders and small agribusinesses, the same weighting applied to large corporate loans.

"If I extend credit of 2 million shillings to a smallholder as a bank, I must provision 2 million shillings charge on my capital. This penalises banks for financing these persons," he said. "Why would I work with a million people lending 1,000 shillings each when it costs me more in administration?"

He cited Germany as an example where regulations have been adjusted to require 10 percent less capital against loans to micro and small enterprises compared to corporates, justified by the view that a diversified portfolio of small loans is less risky than a single concentrated exposure.

Ochieng added that agricultural finance is further obscured by classification gaps. Transporting farm goods to a processing plant is often labelled as trade finance, while working capital for an agro-processor is similarly miscategorised, making it difficult to track the true size of agricultural lending.

The comments come ahead of the FINAS 2026 summit, to be held June 30–July 3 in Nairobi under the theme "Towards Sustainable Financial Architecture for Africa's Food Systems." The forum brings together policymakers, central bankers, and development partners to address what Ochieng called a "broken" financing model that marginalises the 55 million Africans who depend on agriculture as their main livelihood.

The FINAS summit will feature sessions addressing these structural barriers, including a side event convened by the Alliance for a Green Revolution in Africa (AGRA) on "friendly prudential requirements" for agriculture, and another by Aceli Africa and GIZ on policy mapping and loan classification for agri-SMEs.

A Central Bank of Kenya (CBK) agriculture sector survey conducted in January 2026 found that 48 per cent of sampled farmers reported having borrowed to finance farming, up from 37 per cent in November 2025. Borrowing from digital lenders rose to 26 per cent, while bank loans increased to 33 per cent.

The survey also found that 69 per cent of farmers benefited from subsidised fertiliser, and 81 per cent identified subsidised inputs as the most critical government intervention needed to support production.

However, 72 per cent of farmers still rely on rain-fed agriculture, highlighting the sector's vulnerability to climate shocks, a key theme of the summit's sub-theme on finance for green, inclusive and resilient economies.

Ochieng pointed to platform-based models, similar to those that succeeded in China between 2010 and 2020, as a potential solution. These platforms analyse non-financial behavioural patterns such as farm size, cropping cycles, and input purchases to extend credit where conventional credit reference bureau data is absent.

"You have farmers with typical financial behavioural patterns that are not necessarily captured by CRB mechanisms, wanting to be part of a system designed with conventional credit data," he said.

Ochieng said the global context, tightening liquidity, rising cost of capital, reduced ODA (Official Development Assistance) from traditional donors, and geopolitical disruptions have created an opportunity for Africa to design its own financial architecture.

"We have seen the cost of capital rise, significant disruptions in trade flows, and a growing mistrust in international cooperation," he said. "There is a chance to rethink and chart our way forward by designing systems that allow us to not only cushion ourselves but also work for us."

The FINAS 2026 summit will be officially opened by Cabinet Secretary for Agriculture, Mutahi Kagwe, and will feature keynotes from CBK's Jared Osoro on macroeconomic policy for inclusive green development, and Rashmi Pillai, CEO of FSD Kenya, on channelling finance towards positive social and ecological outcomes.