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									     Rural Financial Services Delivery Models,
      Design, Monitoring & Evaluation – The
             Experience of AFC Kenya

Presentation by: -
Mr. Omurembe Iyadi
Agricultural Finance Corporation – Kenya

June 2005

1.0   Introduction

 The provision of affordable financial services to
  the rural/agricultural sector is a prime
  component of the development strategy of the
  Kenya Gov as stated in the ERS and SRA.
 The AFC, the Kenya Govt’s DFI charged with
  the mandate of facilitating the development of
  the agricultural sector is expected to play a
  central role in the provision of the financial

Introduction contd: -
 AFC has been in existence since Kenya’s
  independence in 1963; initially performing
  very well upto the mid-80’s.
 Performance experienced a downward trend
  in the 90’s for various reasons including the
  poor performance of Kenya’s economy during
  that time and the credit delivery model in
  existence at AFC then.

Introduction contd: -
 AFC is currently undergoing reforms to
  restructure its credit delivery system and
  approach to providing services to Kenya’s
  rural/agric sector.
 This presentation discusses the challenges of
  delivering financial services to Kenya’s rural
  sector and the reforms AFC is undertaking to
  meet the challenge.

2.0 The challenge of delivering           financial
services to the rural / agricultural clientele in

 AFC faces the same challenges faced by all
  financial institutions in delivering financial
  services to rural clientele in the developing
  world. Some of the major challenges are
  following: -

a) Challenges of provision of Govt directed &
   subsidized agricultural credit
Funds were provided by Govt & donors.
These were directed to specific Govt
Identified programmes hence “supply
driven”. This led to: -
 Misconception by borrowers that funds were
  Government grants, thus unwillingness to pay
  leading to heavy build-up of NPLS.
 Funds were not always available on a regular
  basis leading to inconsistent lending.

Govt directed lending contd: -

 Setting of interest rate ceilings and periodic
  write-offs undermined AFC’s capital base and
 Products and services were supply driven and
  did not therefore always meet the farmers

b)    Costs and risks related to agricultural
      lending in Kenya
The costs and risks related to agricultural
lending have posed a major challenge
to AFC. These are: -
i.   Dispersed location of rural clients

     AFC undertakes supervised credit, long
     distances between clients in the community
     and poor road infrastructure makes provision
     of financial services very costly.

ii.       Seasonality

           Agricultural production in Kenya is mainly
            rainfed farming. Production is therefore
            seasonal with long gestation periods
            before crops can be harvested and sold.
           Loan instalments are therefore in
            lumpsum rather than monthly or weekly.
            Risk of default on “lumpsum” payments is
            very high.

   Seasonality increases transaction costs due
    to long periods of idle capacity and short
    periods of activity requiring task forces.

iii. Production and yield risks

      Yield uncertainty due to natural hazards
       such as vagaries of weather and pest and
       disease outbreaks.
      Kenya’s rural finance markets lack
       insurance products to cover production
       and yield risks therefore seriously over-
       exposing both producers and lenders.

iv. Market and price risks

     Market imperfections and price uncertainty
      are prevalent features of Kenya’s
      agricultural sector. Markets are yet to
      stabilise after the shocks of liberalization in
      the 90’s.

     Market and price risks make it difficult for
      accurate estimation of expected income
      which is critical for credit appraisal as well
      ultimately loan repayment.

v. Risk of loan collateral limitations

    Land is often the only available loan
     collateral for the rural communities in
    Land is sensitive and is often socially and
     politically difficult to realize in the event of

3.0 AFC’s proposed model and design for
    credit delivery to rural clients
   AFC has developed a new business model &
    strategy to be implemented commencing
    2005/2006 FY. The model is benchmarked
    against international best practices in rural
   The business model proposes a shift from
    provision of supply-led credit to a market
    driven approach where the institution
    provides customer focused financial products
    and other services.

The new business model involves three
arms as follows: -
a) Restructuring the retail lending arm
   AFC has traditionally supplied credit through
   The current operations through this arm are
    being restructured to improve loan recovery
    rates and lower the transaction costs.

 Reduction of risk costs will be achieved
  through application of prudential norms, the
  profit centre concept for branches, collateral
  and risk mitigation and employment of good
  governance practices.
 Reduction of transaction costs will be achieved
  through    restructuring   the     organisation,
  redesigning     systems    and      procedures,
  automating the MIS and staff development.

b)   Establishing a wholesale lending arm

 Main objective is to increase rural finance
  outreach to the agricultural community.
 Funds will be loaned to the existing
  intermediaries who will in turn disburse loans to
  the rural community in a risk-sharing
  arrangement with AFC.
 Some of the institutions under consideration for
  partnership include, MFI’s, Rural Saccos,
  Building Societies and Contract Farming

        The wholesale lending business is expected
         to be more profitable than retail lending due
         to: -
    i.     Lower risk costs – loan repayment rates
           will be higher as rural finance providers
           are less likely to default than farmers.
    ii. Lower transaction costs – only a small
        AFC core team is required to disburse and
        monitor the loans to rural finance

AFC Proposed Wholesale Lending Model

                           To be developed with distribution partners

  Products                            Wholesale Portfolio

                                  Selected                                   Contract
 Channels    Top 10 MFIs        SACCOs (Up                                   Farming
                                                        Societies (2)
                                   to 45)                                 Companies (5-10)

 End-                        Wide Reach of Smallholder and Large-Scale
 Customers                    Agricultural Producers in All Rural Areas

c)   Apex institution plan
    To undertake product development, capacity
     building for AFC and loan beneficiaries and
     provide technical assistance.

Proposed products to be developed: -
    support schemes

    Insurance schemes – rainfall (area based
     index), yield insurance etc in partnership with
     private sector.

     Price stabilization funds – in partnership
      with Government.
     Credit guarantee schemes – in partnership
      with Government
ii.   Stand-alone products
     Input credit, investment credit, working
      capital backed by improved collaterals e.g.
      group guarantees, urban assets, liquid
      security, additional guarantors, salary

   Trade finance, loans to rural traders on
    agricultural commodities.
   Warehouse receipt system financing.
   Leasing especially for farm machinery.
   Contract   farming      with  interlocking
    agreements with various commodity groups.
iii. Capacity building
Capacity building for all eligible MFIs and
Saccos to ensure ability to handle
agricultural credit on behalf of AFC.

iv. Technical assistance

AFC in conjunction with Government to
come up with programmes to provide
technical assistance thro’ joint
teams of international and local experts
for its staff and all intermediaries it will
work with.

4.0 Monitoring and evaluation
   Performance of AFC’s credit programmes has
    traditionally been on measured on loan
    disbursement rather than the actual number of
    farmers reached, recovery of outstanding
    loans and the institution’s self-sustainability.

   The new model will be assessed based on
    international best practices of outreach to
    target clientele and institutional self-

       The AFC will enter into the realm of the
        Govt’s new performance contract system in
        July 2005.
       Performance targets to be met and which
        have been negotiated with Govt include: -
         Financial indicators such as pre-tax profit,
          return on investment and loan portfolio
         Operational indicators such as No. of
          customers reached and loan collection
         Qualitative indicators such as the customer
          service etc.

5.0 Conclusion

   The provision of sustainable financial services
    to rural inhabitants continues to be a
    challenging undertaking requiring constant
    review of the approaches and methodologies.
   AFC believes that all institutions involved in
    rural lending have a lot to learn from each
    other’s experiences and therefore appreciates
    the opportunity to share its experience.
   I now welcome comments and contributions
    from fellow-participants.



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