Rural Financial Services Delivery Models,
Design, Monitoring & Evaluation – The
Experience of AFC Kenya
Presentation by: -
Mr. Omurembe Iyadi
Agricultural Finance Corporation – Kenya
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
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
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.
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
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
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
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
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
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
Channels Top 10 MFIs SACCOs (Up Farming
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: -
Insurance schemes – rainfall (area based
index), yield insurance etc in partnership with
Price stabilization funds – in partnership
Credit guarantee schemes – in partnership
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
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
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
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
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