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Improving access to finance by farmers: what can central banks do?


par Lamon Rutten

The common feature of African farmers is that most of them practise small-scale subsistence farming. In the last few years, however, various interest groups started focusing on agriculture as one of the key drivers of rural development and the number of commercial farmers increased. Yet, most of them are still smallholders.

The choice of small-scale farming is largely dictated by two factors: lack of sufficient money to expand the area under cultivation and a decrease of the surface area of agricultural land which is sub-divided between increasing numbers of family members. But this is not really a challenge as, with the emergence of new technologies, farmers can obtain the highest possible yields from small plots of land. In Kenya, for example, livestock fodder is grown thanks to a new farming technology known as hydroponics which uses mineral nutrient solutions, in water, without soil. The greatest challenge small-scale farmers are faced with is access to financing. A farmer needs to invest US$1,200 to set up a hydroponic project and at least US$350 to set up a commercially viable strawberry farm.

Most banks and micro-finance institutions do not lend to agricultural “start-ups”. It is common practice for most smallholders to borrow funds for a non-farming project and then redirect them to farming activities. This could change if African central banks come up with innovative measures that will make it easier for banks to lend to farmers in confidence. Such measures are common in Asia and Latin America and were once a mainstay of central banks’ policy in Europe and the United States.

Governments were once actively involved in agricultural finance in Africa. Many countries set up agricultural and land financing banks in the 1960s, for example. However, these banks have gradually failed to have a positive impact because of many factors, including corruption, high administrative costs and inefficiency. Many of these institutions have done more harm than good.

While these old schemes should not be revived, one can now make a case for the return of governments and central banks to agricultural finance. It would not be a return to direct lending but it would stimulate commercial banks to become involved in this sector. Today, there are examples in some African countries of how central banks have succeeded in involving themselves in agricultural financing. This could be replicated in other countries.

In Nigeria, the Central Bank of Nigeria (CBN) manages the Agricultural Credit Guarantee Scheme Fund (ACGSF). The fund was established to help farmers who have little or no collateral to get loans from commercial banks. The fund guarantees credit facilities extended to farmers by banks up to 75% of the amount in default net of any security realised. CBN handles the day-to-day operations of the scheme. The Central Bank of Kenya also made a strategic decision in licensing an innovative mobile money transfer system known as M-PESA.

The service has many positive results such as making money transfers easier. With time, it has diversified into a lending facility, M-shwari, created by the Kenyan telecom company Safaricom and the Commercial Bank of Africa in partnership. It is a formal bank account which allows users to save and borrow. The facility has created a platform used by small-scale farmers to build their credit history, therefore increasing the amount of money they can borrow. This allows them to finance their farming operations.

Central banks should also encourage local banks to partner with development groups which focus on improving the welfare of farmers and can jointly develop financing models that reduce risks for banks.

A good example is the partnership model provided by the Alliance for a Green Revolution in Africa (AGRA). In Nigeria, AGRA partnered with CBN and with commercial banks to develop the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL), which has a seed capital of US$500 million.

NIRSAL offers strong incentives and technical assistance to banks, building the confidence and agricultural understanding of lenders with the goal of increasing the percentage of bank lending to farmers and agricultural enterprises from 1.4% to 7% in the next 10 years.

In Kenya, the central bank approved a deal which involves AGRA, the Equity Bank and the International Fund for Agricultural Development (IFAD). Together they developed a project known as Kilimo Biashara (farming for business), where seed capital from AGRA serves as a risk guarantee for Equity Bank as it lends funds to farmers. The central bank also allowed another innovative agricultural financing project known as Kilimo Salama (safe agriculture), a micro-insurance program designed for Kenyan farmers thanks to a partnership between the Syngenta Foundation for Sustainable Agriculture, UAP Insurance and the Kenyan telecom operator Safaricom.

It compensates small-scale farmers in case of losses due to calamities. The farmers receive funds for the next planting season, even in case of crop failure. It is therefore clear that innovation by central banks and the ability to allow innovation to thrive in the financial sector is key to enable the development of suitable agricultural financing products that target a majority of African small-scale farmers.

Facilitating the involvement of commercial banks in agricultural lending will improve the provision of credit, and reduce interest rates which are often very high today. Central banks should explore the scope for proactive action in the area of agricultural finance, learning both from historical and current international experience. An increasing number of cheaper loans will follow, allowing farmers to expand their production, thus increasing food supply into cities. This will prevent dissatisfaction about high food prices among urban consumers. With central banks having economic stability high on their agenda, this is certainly a goal worth achieving. 

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