Farmers should form groups or cooperatives as is the case in the dairy, coffee and tea sectors to cut lending risks, banks advise.
An increase in insurance products for crops and livestock would also cut the risks involved, making the sector more bankable than today when it accounts for only four per cent of the total credit to the private sector.
Banks say they are likely to lend the smallholder agriculture sector more if related risks are reduced even as they reject push for legislation to allocate a minimum proportion of loan portfolio to the sector.
Farmers should form groups or cooperatives as is the case in the dairy, coffee and tea sectors to cut lending risks, they advise.
Data on the sector and its subsectors should also become available to help bankers make lending decisions.
An increase in insurance products for crops and livestock would also cut the risks involved, making the sector more bankable than today when it accounts for only four per cent of the total credit to the private sector.
Bankers see the suggestion – made by, among others, the East African Farmers Federation (EAFF) – to stipulate a minimum percentage of lending to the sector as misdirected as it is not based on data on the effective demand and cannot precede implementation of far-reaching reforms to cut risks.
“What we need first is to derisk the agricultural sector. If you passed a law to force banks to allocate a certain percentage of their lending to the sector, then the central bank will have a lot of difficulties to deal with because there may be more defaults and issues of financial sector stability,” said Jared Osoro, head of Centre for Research on Financial Markets and Policy linked to the Kenya Bankers Association.
Dr Osoro said the sector must address structural constraints and incentivise banks to allocate it more loans.
He was presenting findings of new research titled Realisation of Full Potential of the Agriculture Sector: Is commercial Financing a Core Missing Cog?
Lead author of the paper Leonard Ouko, an agriculture economist and consultant, said there was need for disruptive business models for funding of the sector.
“We need models that can transform the sector so that people don’t have to own land in order to be farmers. They can lease it. Again we must think about the problem of squatters,” said Dr Ouko.
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