Smallholder Farmers and Commercial Bank Loans: “Why I May Never Take a loan”

Sep 30, 2015 | All, Digital Financial Services

“Last year, a bank offered me a loan of USD 2,100 but I declined,” says Anne Bett, a dairy farmer from Lessos in Nandi County, in the Rift Valley of Kenya. Anne is a knowledgeable small-scale dairy farmer with six cows that produce 33 litres of milk per day. She practices mixed farming, and besides dairy, she also keeps 250 chickens and grows maize for silage. Anne has a bank account, uses mobile money services and has basic knowledge of savings, banking, and mobile money, but despite this, refuses to take a bank loan. She pointed out that she could get all her inputs on interest free credit (delayed payment) from the Lessos Dairy Coop Agrovet shop. Bank loans frighten her, and she would rather save than take a bank loan.

Anne is not alone in her negative perception of bank loans. In August 2015, AFA interviewed Naomi Muthoni, a young mother of one, and a smallholder indigenous poultry keeper from Maragua, Central Kenya. Naomi and her husband have 30 chickens, 14 Guinea fowls, 11 turkeys, 10 pigeons and quails. She also has a cow and delivers milk to a nearby Cooperative society, at which she has a savings account. Naomi has a phone, is aware of the existing mobile money services, but would not entertain the prospect of taking a loan. “For me, I would never, ever take a loan,” Naomi said emphatically. Top of her list for not taking a loan is fear of her belongings being auctioned, in case for some reason, she fails to repay the loan on time.

Numerous studies observe that lack of finance is one of the key barriers to technology adoption, increased use of farm inputs, value addition and expansion of smallholder agriculture in Sub- Sahara Africa. A recent Dalberg report estimates a current deficit of finance for smallholder farming exceeds $450 billion globally. With this huge deficit, what could be the reason for this reluctance by some smallholder farmers like Anne Bett and Naomi Muthoni to secure financing which could possibly help them increase their output and incomes?

The top three banks in Kenya by assets all have dedicated agriculture lending units and offer a complete range of financial services with multiple agri-focused products, but their uptake has been reportedly low across the board. This points to several factors that may exacerbate the situation, including but not limited to:

  • Lack of in-depth understanding of the needs and affordability levels of the smallholder farmers and the farming sector;
  • Lack of adequate branch infrastructure or rural agents for accessing the mainly rural-based farmers, and possibly
  • Lack of awareness of the usefulness of some of the loan products.

Rudimentary or traditional credit appraisal may also be inappropriate. An in-depth interview with another poultry farmer, Angela Kariuki, from Athi River, Eastern Kenya mid-September 2015 revealed a number of insights. Angela quit her bank teller job in 2012 to concentrate on poultry farming. She then applied for a bank loan to increase her flock. “The bank people visited me on my farm, looked at my enterprise but decided I was too high of a risk,” says Angela. Back then she had 200 improved local breed chickens and wanted to expand. Today Angela gets 4.5 trays of fertilized eggs per day, which she sells for USD 7.0 per tray. She also sells 300 one-day-old chicks every week, has 350 adult chickens, and to top it all, has a brooder, and a hatchery with a capacity for hatching 1,000 eggs. “To reach here, I relied on financial support from my husband and loans from friends and relative, but I still need a loan for a bigger coop and would take one from a bank if it were available,” she explains. She had heard about the convenience of M-Shwari and thought she might try that because she needs a place to store short-term savings as well as take a loan.

In our visit to Lessos constituency in Nandi country, we heard the testimony of a lady who defaulted on a bank loan and as a result, the institution took her most productive cow to offset the debt, an act that left her bitter towards lending institutions. Indeed stories like this scare many smallholder farmers from bank loans.

Moreover, aside from the common risk of failed crops that could delay a farmer’s loan repayment, most farm produce (crops, poultry, and small livestock) require at least three months to become productive. Finding seasonal loans is difficult.

Finally, according to findings of a 2013 report by ActionAid, an INGO, the rate of interest at that time on ag loans (18-20%) was also a factor stopping the interviewed farmers from applying for loans from banks and microfinance institutions. Furthermore, the report noted a tendency by banks to give farmers less than the loan amount they applied for, something the farmers said was making the loans unhelpful. Another point perhaps is the requirement for security. For women especially, lack of access to land title deeds makes it near impossible for them to borrow significant lump sums for assets.

So what forms of credit do smallholder farmers use and why?

As a result of the above challenges in accessing bank loans, many smallholder farmers resort to using credit facilities offered by their cooperative societies for farm inputs, mainly through the checkoff system, against their produce. This works best in places where farmers are in organized value chains, such as dairy, and are members of organized groups. Some rely on credit from their regular input suppliers and SACCOs. But the Financial Dairies for Kenya also suggests that informal methods are extremely important such as borrowing from relatives and friends, “table banking” and social networks.

For credit facilities to be meaningful to smallholder farmers, our field research suggests that the above issues of accessibility, collection techniques, loan repayment terms, interest, and alternative credit scoring cited by farmers need to be taken into consideration when developing financial products for smallholder farmers.


Polycarp Otieno Onyango, the Communications Manager AgriFin Accelerate Program, Mercy Corps.