The dairy sector currently accounts for eight percent of Kenya’s GDP. With 1.5 million smallholder farmers producing milk, dairy has the potential to greatly contribute to improving the food security and resilience of rural farming families in Kenya.
Unfortunately, smallholder farmers often face serious financial constraints to scaling up production. In Kenya, land ownership is poorly documented, so farmers can't use their land as collateral to secure loans. Banks are reluctant to lend money to rural farmers and small business owners who have limited assets and virtually no financial history. This lack of access to commercial finance prevents many farmers and entrepreneurs from growing their businesses.
To help address these challenges, Feed the Future is working with financial institutions in Kenya to support rural microenterprise. Through technical assistance from USAID, institutions ranging from the largest banks to the smallest microfinance institutions are beginning to lend in the dairy sector.
Under Feed the Future, USAID trains bank employees on best practices for “value chain lending,” or providing financial services to farmers, suppliers, processors, and buyers all across a given sector to reduce the costs and risks of doing business. USAID’s Development Credit Authority also backs new loans to smallholders by sharing risk with financial institutions.
The most successful partnership resulting from this effort has been with Kenya Commercial Bank (KCB), the largest Kenyan bank by assets. Sixty-four KCB employees have been trained in value chain lending and approximately US$9 million in loans have been issued in the dairy sector since January 2012 across the 32 KCB branches. The partnership is supporting the rollout of two new financial products: a dairy herd loan and an asset finance loan.
At the KCB Kiambu branch, on the outskirts of Nairobi, loan officer K. K. Kariuki manages a portfolio of 30 dairy loans valued at $290,000 with technical support from USAID. Kariuki started out in an office job doing credit analysis, but his new training in value chain lending enables him to do fieldwork and interact personally with loan recipients.
“A typical day for me starts in the office, when one or more farmers come in to sign their loan agreements,” he says. “Then it is out to the field. I might visit a milk collection center to verify how much milk a loan applicant is selling, or I might visit a loan recipient to confirm that he has purchased his cows.”
For KCB, lending into agriculture at the smallholder level has been a major shift in practice, and the bank’s success has encouraged other financial institutions to begin lending into the dairy sector. Since 2011, USAID has mobilized $110 million in lending to micro, small, and medium enterprises in Kenya. This expansion of commercial finance in Kenya supports Feed the Future’s goals to increase access to markets and trade for smallholder farmers in key agricultural value chains.