Lenders shy away from cut flower exporters

Cut flower exporters face fresh hurdles as risk-averse financial institutions move to reduce lending to the industry whose attractiveness has been dented by the turbulence in the European market.

Financial sector players say uncertainty in the European market and overdependence on rain fed production have raised the floriculture industry’s risk profile, making it a hard-sell to lenders.

Financiers are also worried by the industry’s unstable labour relations, seasonal demand for its products, and tropical pests and diseases that affect production.

“The industry’s traditional attractiveness may still be intact, but there are many risks that have emerged that make banks very conservative in choosing their lending priorities,” Allan Dodd, executive director at NIC Bank told a forum of flower growers held in Nairobi on Thursday.

Flower production is a capital intensive venture that financial institutions generally associate with offering opportunities for lending.

Traditionally, the industry’s reputation as an impressive annual foreign exchange earner has acted as a magnet to institutions that offer trade financing products.

Financiers have also viewed the industry favourably due to its early growth stage, established infrastructure, and the fact that it is grown in controlled environments.

Kenyan flowers also enjoy a competitive advantage internationally as being naturally grown as opposed to those artificially nurtured in Eastern Europe.

However, financiers see instability of the EU market as a key factor in deciding future business relations with the industry.

Externalised risks

“By relying heavily on EU markets, the industry has also externalised its risk, meaning the ability to repay must be extended to include assessment of conditions of the EU market before loan is granted,” said Oswald Magwenzi, an investment officer at the international Finance Corporation (IFC)

Kenya sells 82 per cent of her horticultural exports in EU countries where payment is made in the euro, leaving only 18 per cent of the produce to the dollar dominated destinations of US, Middle East, Japan and Russia.

Of late, however, the recent six-day closure of Europe’s airspace due to the Iceland volcanic eruption, and the eurozone crisis have reduced the attractiveness of the EU market, forcing economic planners to rollout aggressive diversification campaigns.

To flower exporters, these changes have translated to supply disruptions, currency fluctuations, and depressed demand for the produce.

These changes have created a foreign exchange mismatch in an industry where 30 per cent of costs are settled in shillings, 20 per cent in dollars, while income is earned mainly in euros.