Financing Smallholder Coffee Farmers In Kenya

Presented byMr. Patrick Nyaga, Managing Trustee, CoDF

during the International Forum on the Social and Solidarity Economy (FIESS), Montreal, Canada, October 17 - 20, 2011

COFFEE DEVELOPMENT FUND

Kenya’s Coffee Sector Profile• Coffee is one of the most important cash crops in Kenya generating annual revenues of up to $ USD 100 Million.• It is estimated that 6 million Kenyans are employed directly or indirectly in the coffee industry. • The total production potential is 130,000 MT per annum. This is in comparison to current production levels of 50,000 MT.

• Although Kenya coffee global market share is small; at 1%, the quality of coffee is highly rated in the world market thus highly demanded by Roasters who mainly use it for blending other coffee varieties.

•The total area under coffee is estimated at 160,000 hectares.•Two thirds of all cultivation (113,333 hectares) is handled by low yield, resource poor smallholder farmers with an average yield rate ranging from 0.2 – 0.7 tons/ha.

Source: Coffee Board of Kenya, Ministry of Agriculture (2009)

60%

40%

Approximately 600,000 smallholdersorganized in

cooperative societies

Approximately 3,000 large, small/medium

private estate farmers

Illustration of National Coffee Production: Coffee Estate Farmers Versus Smallholder Coffee Producers

The smallholders produce 40% of the crop while

Estate plantations produce the remaining

60%.

BACKGROUND

• Coffee Development Fund is a state corporation under the Ministry of Agriculture in Kenya.

• The Fund was officially established by the Government in May 2006 as a financing vehicle for revitalizing the coffee sub-sector after years of low production trends.

• CoDF’s mandate is to provide sustainable, affordable credit and advances to coffee farmers for farm inputs, farming operations and income stabilisation.

• Bulk of farmers receiving loans are smallholders organized in cooperatives

COFFEE DEVELOPMENT FUND-FACT SHEET

BUSINESS

CLIENTS

SERVICES/

MANDATE

FUND SIZE

IMPACT

ELIGIBILITY

FINANCING COFFEE FARMERS

SMALL HOLDER FARMERS/ESTATE FARMERS/COOPERATIVE SOCIETIES

PROVIDING ACCESSIBLE, AFFORDABLE CREDIT AND FINANCIAL SOLUTIONS TO THE COFFEE SECTOR

$USD 13 MILLION

61,245 COFFEE FARMERS

COFFEE FARMERS WITH A PRODUCTION RANGE BETWEEN 0.5 - 3 KG OF CHERRY/TREE

CURRENT FUNDING STATUS

•Public financing through Coffee Development Fund largely remain the main source of coffee financing. •The sub sector is less attractive to private investors due to long turnover periods and a client base considered ‘high risk’•Only one commercial bank provides targeted financing to coffee farmers.•The sub-sector is need of approximately US $ 125 Million to meet its credit demand.

FINANCING APPROACH

Value chain Financing approach

FARMER(Production)

FACTORY/SOCIETY(Primary

Processing)

MILLER(Secondary Processing)

MARKETING AGENT

(Marketing)

Financial Requirements

*Credit for farm inputs and farming operations.

*Credit for farm establishment.

*Cherry Advances.

Financial Requirements

*Factory Rehabilitation *Factory Operations

*Asset Finance – purchase of machinery

Financial Requirements

Asset finance-Upgrading or purchase of new milling

stations. Working Capital

FLOW OF CREDIT

Financial Requirements

Pre-export financing.Financing entry to

certification Programmes e.g.

Fairtrade, UTZ Kapeh

VALUE CHAIN FINANCING IN COFFEE

• Different value chain segments require different types of financing.

• Smallholders populate the lower end of the value chain segment (Production). in Kenya.

• The production segment attracts the greatest credit need. Currently the Coffee Development Fund directs most of its credit towards this segment.

FINANCING CHALLENGES & INTERVENTIONS

Financing Challenges Interventions Undertaken

Dispersed and remote location of coffee farmers presents a challenge in credit delivery.

Formation of lending partnerships with 26 rural-based financial institutions.

Lack of adequate collateral. Adopt social collateral (group lending) to make credit easily accessible to deserving coffee farmers.

High cost of production due to high cost of inputs

The Fund continues to facilitate bulk acquisition of inputs among cooperatives to minimize costs of production to growers.

Governance issues among cooperatives Work closely with other sector players to build capacity for improved governance of cooperatives.

FINANCING CHALLENGES & INTERVENTIONS

Financing Challenges Interventions Undertaken

Unpredictable weather patterns affecting coffee production, leads to losses in potential revenue which is likely to affect loan repayments.

Develop appropriate weather risk management tools such as crop insurance to cushion smallholders against unpredictable weather patterns.

Lack of a social support system which in the past encouraged farmers to remain in coffee production e.g. cherry advance to meet farmers’ daily needs as the farmer awaits payment in six months.

Offer cherry advances to smallholders as an incentive to remain in coffee production.

Delays in coffee payments leads to multiple borrowing among smallholders increasing the level of indebtedness.

Developed an M-Banking service to facilitate convenient, cost-effective and a faster mode of payment.

FUTURE OUTLOOK• Increased demand for coffee in the global market

presents an opportunity for smallholder coffee farmers to intensify efforts in production.

• Increased consumer awareness on environmental issues is likely to generate demand for financing into sustainability Programmes such as Fair-trade and Rainforest

Alliance.

• Farmers are diversifying into speciality coffees given the growing demand in the market

THANK YOU