THE SME DOCTOR

Can SME’s in agriculture

borrow without collateral?

By Dr. Peris Mburu

The agriculture sector contributes approximately 33% of Kenya’s Gross Domestic Product (GDP), accounts for 65% of export earnings and employs more than 40% of the total population, making it central to Kenyans’ livelihoods and food security. However, despite the sector’s significant contribution to the economy, it only constitutes 11% of financial institutions assets. Access to agricultural financing is a major challenge faced by smallholder farmers and micro, small and medium enterprises (MSMEs) in the agribusiness sector. The low lending rates can be attributed to expensive collateral requirements by financial institutions (FIs). Due to stringent collateral requirements, up to 60% of MSMEs’ loan applications are rejected due to inadequate, or lack of, collateral. The option is to borrow from the agile digital platforms whose amounts are small and hardly adequate for growth depending on the stage of SME growth.

Are there any options left for the agricultural SMEs?

We are living in the era of the ‘big data’ majorly drawn from alternative sources such as social media, telcos and utility companies. The fintechs and telcos are leveraging big data to build algorithms that have enabled them to lend digitally without collaterals.

This, in my view, is where the future of lending lies. Data concerning weather patterns and farmer’s production trends can be used to build credible algorithms that can accurately assess the agricultural SME’s risk without over reliance on collaterals. A facilitative legal framework and the necessary credit infrastructure will be required for safe use of this kind of data.

About the Author

Dr Mburu is a financial consultant. She holds a Doctorate in Business Administration from Nelson Mandela Metropolitan University, an MBA from Kenyatta University, BA from the University of Nairobi and Advanced Diploma in Credit Analysis from the Chartered Institute of Bankers in Scotland.