Supply chain finance a viable alternative for rural farmers

Agriculture is the main workplace for a majority of Kenya’s population. FILE PHOTO | NMG 

By JACK BWANA

Summary

• Agriculture still remains the main workplace for a majority of Kenya’s population and therein lies the economic salvation and sustainability of many, if innovatively harnessed.

Banks are not always in close proximity to potential clients in rural areas. If there is no bank as is the case with a vast majority of Kenya’s upcountry, an alternative method for farm financing is supply chain finance.

Agriculture still remains the main workplace for a majority of Kenya’s population and therein lies the economic salvation and sustainability of many, if innovatively harnessed.

For finance providers, the risks or costs involved in financing small- and medium-sized farms are often considered too high. Therefore, traders, agribusinesses and farm input suppliers could play a role in financing farmers.

Specific characteristics of supply chain financing schemes are: They are product-based instead of based on the financing needs of the farmer as an entrepreneur; the product’s buyer, i.e. the processing or marketing company, is the key player in the supply chain finance structure, as they ultimately control the cash flow backwards and forwards; - In most cases, farmers do not receive cash but inputs in kind, such as fertilizer, seeds, pesticides etc.; - Risk-sharing arrangements need to be arranged for all beneficiaries of the scheme: processors, farmers, input suppliers and the financial intermediary; the enabling environment needs to be conducive with respect to contract enforcement, land titling, etc.

The limitation of supply chain finance is that is does not finance the farmers as entrepreneurs, but only the particular product (crop or animal/ milk) that the farmer grows.

Most of the financing is short-term instead of medium-term, which in many cases is essential for improving product quality and growing the business. When a full range of regular bank financing is available, supply chain finance is often superfluous.

Focus on all economic activities stimulates development. Access to financial services is the backbone of rural and economic development.

Without a well-functioning financial system, neither aid nor local entrepreneurship can create the right conditions for long-term economic growth.

A financial system that can provide the full package of financial services to the poor, will result in a more stable income flow and enable them to be better equipped for adversities.

In the most ideal situation, providing financial services to micro-entrepreneurs will enable them to expand their businesses and create employment which ultimately results in a strong reduction of poverty, and this contributes to economic development.

However, this is only true for a small portion of the economically active poor. From the perspective of contributing to economic growth, it is therefore essential that financial intermediaries focus on the whole range of economic activities, including SMEs and primary producers.

These can provide employment for the poor, thus generating stable incomes for families and preventing further urban migration by turning Counties into economic blocs.

The best solution towards developing sustainable financial institutions in the poor rural areas, is an integrated rural bank approach. This restructures the financial institutions in rural areas into a rural finance network.

Jack Bwana is Trade, Transport & Supply Chain Consultant.