The agricultural sector remains one of the most deprived in terms of access to credit despite being the largest contributor to Kenya’s gross domestic product and employing over a third of the population.
Agriculture, which generates 22.4 percent of Kenya’s GDP, accounted for 3.3 percent— equivalent to Sh113.8 billion—of total bank loans to the private sector in January.
Outstanding loans to the private sector stood at Sh3.44 trillion as of January 2023, data from the Central Bank of Kenya (CBK) shows.
Commercial banks’ lending to agriculture declined slightly in January, from Sh114.9 billion in December, reflecting the effects of persistent drought on production and the fact that a large proportion of the segment is informal.
Analysts have also tied this to risk management by banks, on account of the uncertainty of cash flows and higher inputs costs amid a weakening shilling.
The sector has traditionally faced challenges of poor market access, lack of collateral and inability to pay back due to lower yields that have continually pushed some farmers out of the sector and led to a consecutive contraction of the sector in its contribution to economic growth.
“The growth in agricultural output has been negative quarter to quarter largely explained by depressed rains. Also the increasing cost of inputs – fertiliser, seeds and machinery- is on a rising trend due to the falling shilling. These factors have strained the sector,” said Ronnie Chokaa, a financial analyst with investment bank Genghis Capital.
“It makes it hard for loan appraisal given the uncertainty of cash flows hence, for banks, it is hard to apportion part of their loan book to the sector. They would rather lean more on the manufacturing sector because of their definite cash flows despite holding high non-performing loans. This means it remains a risk valuation matter for the banks.”
Trade and manufacturing, on the other hand, were the biggest recipients of loans accounting for 17.2 percent and 15.2 percent respectively.
This indicates that trade received Sh591.4 billion in loans cumulatively at the end of the period while manufacturing and real estate got Sh523.4 billion and Sh423.5 billion respectively.
Trade contributes 7.9 percent to GDP, manufacturing accounts for 7.2 percent with real estate coming in at 8.9 percent.
Other gainers include private households and consumer durables which took Sh515 billion and Sh381.6 billion.
These subsectors are among the biggest gainers with the total credit disbursed accounting for 14.9 percent and 11.1 percent.
Transport and communication contributing 13.8 percent to GDP received total loans at Sh301.7 billion, equivalent to 8.8 percent of total private sector credit.
Mining and quarrying received the least credit at Sh22.6 billion, representing less than one percent of the total credit outlay by lenders.
Most sectors recorded a growth in credit in January from the previous month, coming at a time when banks have announced increased lending and allocating a third of their extra cash to the private sector while shifting from the long-dated government debt.
This is emerging in a period they have started adjusting their lending rates upwards after CBK allowed them to freely price loans based on a customer’s risk profile. The agriculture sector recorded a contraction of 0.6 percent in the quarter ended September 2022 compared to a growth of 0.6 percent recorded in a similar quarter of 2021 with the slowdown in performance mainly attributed to unfavourable weather conditions that prevailed in the nine months to September 2022.
This, coupled with the rising cost of farm inputs, infestation and shift in land use from agriculture to real estate development has led to reduced production making it unattractive to lenders.
“Given the high reliance on rain-fed farming, farmers are increasingly vulnerable to drought and unpredictable weather patterns due to climate change,” CBK said in an agriculture sector survey released in January.
“High transport costs, high input prices and adverse weather conditions continue to impact negatively on the retail, wholesale and farm gate prices.” The CBK is advocating for the provision of concessional loans to farmers.
World Bank’s Country Partnership Framework (CPF) report also showed a transition out of the sector on the back of slowed rate of its monthly average wage as compared to the services sector such as accommodation and food and services, technology and financial services.