Opportunities in Climate-Smart Agriculture for Kenyan Banks
The Kenya Red Cross estimates that the ongoing drought is likely to render 2.4 million Kenyans hungry by April 2017 and will require KES 1 billion (approx USD 9.7M) to reach 350,000 people in 13 counties. While different stakeholders are contributing resources to provide immediate solutions, sustainable solutions need to be put in place to enhance food security and agricultural productivity through climate-smart agriculture (CSA) by assisting farmers to adapt to the impact of climate change.
The shift towards CSA has been perceived as one of the concrete ways of operationalising the infamous Sustainable Development Goals as it is hinged on feeding the current generation without compromising future consumption needs. Let’s face it: no matter how bad things get, people still need to eat. However, living in the Anthropocene era, it seems increasingly difficult for countries (and individuals) to exercise temperance especially with globalisation and their fervent pursuit of economic growth and development.
Like the majority of the emerging sustainable finance vocabulary, there is scanty revelation on what CSA means on the ground hence agriculture and food security are still not considered key “crunch” issues within the climate change negotiations and finance mechanisms. This seems quite ironic since deforestation and agriculture are one of the largest contributors of greenhouse gas (GHG) emissions. This has created increased uncertainties about potential risks and losses as well as the costs of inaction associated with climate change financing. Research by the Food and Agriculture Organization (FAO) clearly indicates the bi-directional relationship between climate change and agricultural output that affects poverty levels and overall national development.
The shifts in global financial architecture since the 2007/8 financial crisis show that developed nations are unlikely to increase their overseas financial aid in the near future. The decrease in overseas financial aid has also seen the decrease in the share of funds channelled towards agriculture as the share stood at 19 per cent in the 1980s but significantly dropped to 3 percent by 2003 but rose to 6 percent in 2006 according to FAO reports. Globally, the financial resources for agriculture both from ODA and climate change financing have not been able to plug the financing gap and are projected to widen in the future.
FAO reported that the cumulative gross investment requirement for agriculture in 93 developing countries until 2050 will be nearly USD 210 billion annually. More interestingly, this estimate was mainly in primary agriculture and downstream services which were financed by the private sector. For commercial banks in Kenya, climate-smart agriculture presents numerous opportunities such as financial returns, new customer segments, possibility of tax incentives, development returns as well as increased brand value once they have overcome some of the challenges discussed ahead.
First, the passing of the Climate Change Bill 2016 in Kenya allows for the creation of the National Climate Change Fund which is yet to be allocated. In a developing country where there is competitive allocation of budgets within both climate change and development especially in an election year, deficit in current and potential credit for CSA is ever widening. Some risks can be attenuated by encouraging public-private partnerships that assign nationally appropriate mitigation actions to create ownership among stakeholders as well as provide a framework for channelling financial resources to increase overall national output.
Second, it is no secret that agriculture is one of the main foreign exchange earners forming nearly 50 percent of the country’s export share. Despite this fact, investment in the sector has lagged behind as evidenced by underdeveloped rural markets with a majority of the small-scale farmers lacking financial literacy especially women who form 68 percent of the agricultural workforce contributing to low uptake of insurance products. Factoring climate change into overall agricultural output necessitates new financing requirements both in terms of amount and flows which will require accommodative institutions. Climate change poses another risk in so far as agricultural production is concerned.
Commercial banks can fill in this gap through their intermediary role of making use of customer information to assess risks and returns when discovering investment opportunities and providing credit. Some commercial banks have been active in green lending but lack of properly labelled products which precludes them from backwards and forward credit linkages. By use of analytical tools in data mining, commercial banks can further tailor towards climate smart lending and subsequently collate the information for financial and sustainability disclosures to court further CSA-specific potential funding opportunities.
Lastly, there is insufficient aggregation at the smallholder levels which presents high transaction costs, reduced market accessibility and hampers efficient lending due to lack of economies of scale and collateral. The scarcity of ‘investment-ready’ scalable projects that can demonstrate results in multiple areas means that they will have limited access to the much required finance. Noticing this gap, Standard Chartered Bank for instance has designed the input finance model which has enabled small scale rice farmers in Tanzania who formed a co-operative like association to access credit using their commodities as collateral. Their model incorporates a tailor made insurance policy that curtails climate risks, fiscals and disease outbreaks that would otherwise diminish the farmers’ profits. The farmers have been able to pool resources, attain commercial farming skills, produce crops on a commercial scale and benefit from commercial pricing.
This is not to say that finance is the panacea for addressing issues revolving around climate change and agriculture. This will require the cascading down of the nationally appropriate mitigation actions to county levels as well as the private sector to encourage public-private linkages to mobilise financial resources, provide technical assistance, to play their part in risk mitigation by improving information flows and disclosures and assist in pooling resources to maximise benefits.
Disclaimer: All views expressed here do not necessarily reflect the opinions of my employers or clients, past or present.
