Organisation of African Unity / Inter African Bureau for Animal Resources (OAU/IBAR) Farming In Tsetse Controlled Areas (FITCA - Kenya Project).

This report is based on the findings of a survey carried out for FITCA-K by Kamau Kabbucho of Fineline Systems & Management Limited. The survey was commissioned to identify strategies and mechanisms by which FITCA-K could provide credit for agriculture in the five districts of its operation. The five boarder districts of Bungoma, Teso, Busia, Siaya and Bondo are located in Western Kenya and lie within the tsetse fly infested belt. The recommendations presented in the report are linked to the terms of reference and the views of the key stakeholders that include farmers, FITCA and government representatives in the five FITCA-Kenya districts. The first one is that FITCA should provide credit through the existing microfinance institutions and avoid direct involvement in the delivery of credit. This recommendation is based on three main factors that emerged during the focus group discussions: • If FITCA-Kenya were to go into direct lending, it would face a serious credibility and image problem, as the project is already associated with the government and subsidized credit, with some framers even anticipating loans at zero-interest. This is a big problem, which cannot be remedied quickly or conclusively. • The second reason is that by working with existing MFIs, FITCA can leverage resources substantially, thus stretching the loan capital of Ksh. 10 million as at end of 2001 to reach many more of the farmers. These MFIs have an inclination to get into providing agricultural credit with their own loan capital but have so far hesitated because they lack internal capacity to develop market-driven agricultural credit which also effectively deal with the inherent risks. Thus by underwriting product development and marketing costs, FITCA would provide a strong incentive for these MFIs to get into agricultural lending. • The third reason is the cost of setting up new retail outlets for agricultural loans from scratch, especially for a project that has a limited life. In selecting partners to work with, it is recommended that FITCA base its decisions on the following factors: • Is trusted and respected by the local community and has government support • Seeks to improve the economic status of the poor in the FITCA districts • Has operations in at least one of the FITCA districts • Has an orientation to provide market-driven agricultural credit 3 • Has a vision of becoming a sustainable microfinance institution • Has capacity for rural financial intermediation as evidenced by portfolio-at-risk of below 5% and a positive cashflow • Has a willingness and proven ability to attract/provide loan capital from own financial resources • Has a willingness to sign a partnership agreement with FITCA None of the potential partners assessed by the consultant currently have adequate capacity to develop and market agricultural credit that fits the demand by farmers at reasonable cost and risk. Their incentive to get into agricultural lending is thus low. It is therefore recommended that FITCA develop a programme to strengthen the capacity of potential partners. The project budget for the first year is estimated at KShs. 32.6 million while the total budget over a four-year period is estimated at KShs. 176 million (see Annex 3). Because FITCA itself does not have experience in capacity building of MFIs, it should identify a technical service provider to carry out this role. A detailed logical framework for the initiative is included in this report as Annex 2. It is recommended that FITCA sign a memorandum of understanding with each potential partner, which will clearly state the role and expectations of each partner.