SME financier Umati Capital has launched a plan that will see farmers paid daily for milk supplied to upcoming processors.
Under the new financing plan that is similar to invoice discounting, Umati Capital will be targeting dairy farmers whose payments for milk deliveries come in 30 day cycles, by offering daily payments on behalf of the processor without collateral.
The processor will get an extended period to repay the money advanced to farmers, says Umati Capital co-founder Ivan Mbowa.
Smallholder farmers contribute 80 per cent of the national milk production while large-scale farmers supply the rest.
Mr Mbowa said that under the financing plan, farmers will access their money at shorter intervals while SME milk processors can stagger their payments from 30 to 60 days, relieving cash flow pressure for both.
“The range of financing is from a minimum of Sh1,000 without an upper limit, with our interest rates ranging from one per cent to a maximum of three per cent per month. We are in a way lending to both parties, but only one party receives the money while the other party repays the money,” said Mr Mbowa.
The company will not be handling the milk supplies neither will it be involved in setting milk prices between suppliers and processors.
Mr Mbowa added that the product, which was launched three weeks ago, has signed up three milk processors with 4,000 suppliers. The largest lending carried out so far stands at Sh2 million.
The plan, which will be carried out through the mobile money platform, is initially available to farmers who are members of cooperatives, says Mr Mbowa.
The African Trade Insurance Agency (ATI) will provide a credit risk cover to Umati Capital.
ATI underwriter Rennie Kariuki said the plan would offer SME financing without collateral or the high interest rates that accompany unsecured lending.
“What we are providing Umati is a 12 month insurance cover, which effectively guarantees Umati payment should the processor fail to remit the money advanced to farmers. Typically, most startups would have to source this kind of insurance cover on the international markets, which would probably have declined the transaction,” said Ms Kariuki.
Umati Capital was started by Mr Mbowa, a former investment advisor at Citibank, and Munyutu Waigi, who is also the co-founder of the online shopping platform Rupu.
Milk farmers have faced higher costs since September 2013 following the enactment of the Value Added Tax Act 2013 that imposed a 16 per cent levy on animal feed.
Major milk processors offer farmers between Sh35 and Sh40 per litre of milk delivered, which they say is enough to cushion the farmers from the higher cost of feed.