Nancy Gathungu, Auditor-General of the Republic of Kenya.
Six directors of the Agricultural Finance Corporation (AFC) have defaulted on Sh35.82 million which they took from the company, but has now been deemed unrecoverable, making them among borrowers who have defaulted on loans worth Sh3.06 billion.
An audit report by Auditor-General Nancy Gathungu says the State-owned development financier lent a total of Sh54.92 million to seven directors in the year ended June 2022. However, six of them defaulted on Sh35.82 million or 65.2 percent of the total loan.
Ms Gathungu did not disclose the identity of the directors or whether they are still serving at the company, but the defaults have raised questions over the state of governance at AFC, given the defaulted loans cannot be recovered.
“Review of records revealed the six accounts have been graded as non-collectable even upon disposal of attached securities as per the existing credit policy. Although a provision of Sh5,955,000 has been made on directors' loans, this may be inadequate,” she said.
This comes even as nearly a third of loans issued by the lender have fallen into arrears, putting the company, which is owned by the government, at the risk of losing billions of shillings.
According to the audit report, AFC had issued a total of Sh9.89 billion loans to customers by June 2022, but customers had defaulted on Sh3.06 billion or 31 percent of the total loans.
This means its default rate is more than double the commercial banking sector’s ratio of gross non-performing loans (NPLs) of 13.9 percent in 2022 as well as the recommended maximum NPLs ratio of 15 percent for African development finance institutions.
“However, only loan balances amounting to Sh830,573,976 held in 2,457 accounts with arrears amounting to Sh829,695,138 were transferred to the debt recovery unit for specialized attention during the year under review,” said Ms Gathungu.
AFC, which was established in 1963, gives loans to farmers at 10 percent interest rate, making it one of the cheapest in the market even as interest rates charged by commercial lenders continue to rise.
In the last five years, the agency has disbursed loans worth more than Sh20 billion to farmers.
The high rate of defaults has been crippling the company’s ability to lend cheap loans to farmers amid rising demand for the loans.
AFC last year revealed that it receives loan applications of about Sh15 billion from farmers each year but is only able to lend about Sh4 billion due to its precarious financial situation.
In the year to June 2022, the company made a measly net profit of Sh26.7 million, marking a 79.6 percent decline from Sh131.1 million in the previous year.
“This huge reduction was informed by the reduction in recovery from non-performing loans,” said the company.
During the year, the lender disbursed loans worth Sh3.87 billion compared to Sh4.13 billion a year earlier and collected Sh4.44 billion marking a growth of 1 percent from Sh4.39 billion in the previous year.
To boost its lending capacity, AFC last year inked a partnership with Financial Service Deepening (FSD) Kenya and the Alliance for Green Revolution in Africa to create a Sh100 billion fund aimed at boosting lending to farmers in the next five years.
The lender said the new model will slash imports of food, increase local output and spur economic growth in the sector that has over the years been underfunded.
