New bailout rule to inflict more pain on farmers

The recent declaration by Finance minister Njeru Githae that the Treasury will not bail out State corporations that fail to meet their financial obligations is likely to hit agriculture as key institutions in the sector grapple with debts.

The Agricultural Finance Corporation (AFC), which gives loans to farmers, is one of the public institutions that could be hardest- hit by the directive because farmers owe it millions of shillings yet it depends on the government for support. 

READ: Treasury to stop financing indebted state corporations

Last November, Parliament passed a Bill, initiated as a private Member’s Motion, that required the government to release Sh2 billion to AFC to support the institution and protect the assets of farmers who owed it money from being auctioned. If the money is not made available, the activities of the lender could be severely hampered.

READ: Farmers ask government to release Sh2bn grant over crop failure

Lucas Meso, the corporation’s managing director, says the Sh2 billion is not meant to write off farmers’ debts but rather to help the institution to restructure plans on how farmers will repay their debts by giving them additional time.

“The Sh2 billion that we are yet to receive is actually meant to help AFC lend money to other deserving farmers as we negotiate with our debtors on an appropriate time period in which they can settle their debts,” he said.

AFC expects to receive the money for the 2012/2013 financial year. The Budget will be presented in Parliament on Thursday.
The corporation is already making progress in collecting its dues from farmers.

“We are happy with the response that we are receiving debtors. Most of them are now paying up after we renegotiated with them terms of repayment,” said Mr Meso.

Farmers owe AFC Sh1.8 billion as old debts, an amount that has been accumulating since 2003, but the management says they are making progress in recovering it.

The slide in Kenyan shilling against major world currencies would frustrate the farmers’ efforts to use commercial banks as an alternative source of loans following an increase in lending rates.

Eliud Wechuli, a farmer in Trans Nzoia County, says AFC is the best option for a farmer who wants to borrow money because it charges lower interest rates compared to commercial banks.

“AFC will charge a 10 per cent interest rate on a loan , while commercial banks are charging up to 18 per cent, which is much higher compared to what we get as profit after harvesting,” said Mr Wechuli.

The banks raised their lending rates from 11 per cent to 18 per cent during the shilling crisis last year in an effort to stabilise the currency.

Many farmers fail to pay their debts when their crops are affected by drought and other natural calamities, but AFC says in such circumstances, it changes the duration in which farmers can pay their debts.