Risk management tools for agri-finance

By Bob Aston

Limitation in access and utilisation of agricultural finance results in inefficient agri-value chains, as actors utilise rudimentary business approaches. This heightens agricultural risk, which makes the need for agri-risk management tools even more important to mitigate risks.

Participants at the Fin4Ag Conference: revolutionising finance for agri-value chains, which took place at the Kenya School of Monetary Studies (KSMS) from 14-18 July, 2014, looked at workable solutions that can be used to mitigate against financial risks.

Session 41 on Risk management tools for agriculture finance, which was chaired by Prof. Nuhu Hatibu, Chief Executive Officer, Kilimo Trust Uganda, examined how agri-value chain actors’ access to finance can enhance the efficiency of operations and ensure the realisation of value chain actors objectives in a manner that is supportive to the sector.

Some delegates sharing ideas

Lending to the agricultural sector has been slowed by the preponderance of unaddressed risks associated with the sector. In some instances, uptake of credit by agri-value chain actors is even constrained when credit is accessible. The challenge of risks affecting the sector cuts across value chains, actors, and gender.

While addressing delegates, Annastacia Kivuva, Head – Trade Promotion Unit, Agribusiness Department at the Ministry of Agriculture livestock and Fisheries in Kenya, noted that trends in lending among Kenyan commercial banks indicate that banks invest only about 6% of their total portfolio in agribusiness and the percentage is trending downwards.

She informed participants that the national budget allocation of most African countries still trail far behind the Maputo declaration. She cited the case of Kenya, where agriculture was allocated only 4% of the total budget.

“During an International symposium hosted by Kilimo Trust in 2013, lenders indicated that they have the resources and means to fund agribusiness, but not with the current low capacity of absorption,” said Annastacia.

The limited absorption capacity in agribusiness comes with its own risks as well. As Esther Muiruri noted during the session, it is important for financial institutions, as well as farmers, to factor in risks for any eventuality that may arise. People cannot wish risks away; mitigation factors have to be put in place to help minimise risks.

Marketing, personal, financial and production risks are some of the issues that need to be addressed in order to help farmers. So, as Muiruri urged, farmers should look at production factors before planting as it is important to know if the crop planted will be in demand or not.

“We need to put more effort in the part of a farmer on inclusive insurance cover. The issue of post harvest management also needs to be addressed as most farmers usually lose their produce during such times,” said Esther.

She noted that high levels of inflation negatively affects farmers as it makes loan repayment burdensome while others are unable to borrow from financial institutions due to high interest rates brought as a result of inflation.

She said that Equity Bank has been engaging staff who are knowledgeable in crop husbandry as a risk mitigation strategy. In this set-up, staff members usually deal directly with farmers and can enhance the capacity of farmers in crop husbandry.

Other risk mitigation approaches include: doing market driven financing, using technology to reduce costs, working through partnerships (like forming risk management fund), working with farmer organisations, structuring value chain through reduction of inefficiency, taking up successful models and adoption of proper policies.