My article two weeks ago on banks that understand agribusiness financing has raised a lot of interest from various parts of the country. Koech from Kitale said he is a smallscale dairy farmer. He has been turned away from agribusiness financing by many banks for the reasons I explained in the article.
The farmer further said he wished banks could stop rejecting farmers’ loan applications and instead help them understand what banks need for farmers to qualify for financing. His view was that banks should be partners with farmers in agribusiness where the farmer inputs loan money into their business and generates new money in form of profit for themselves and loan interest for the bank.
In my discussions with farmers, I always tell them banks are in the business of trading with money. Most farmers are very apprehensive about taking loans because of the interest charged and the unpredictable nature of farming.
It is good for farmers to appreciate that the main product of banks is loan money. The payment a borrower makes to the bank is the loan arrangement fees and the interest on amount borrowed.
Farmers should also embrace risk mitigation measures of agribusiness which are capped by insurance. After one has taken all the necessary measures such as quality livestock, good management and professional disease control and prevention; the farmer should insure the animals. Insurance does not make money for the farmer. It only compensates in case of unpreventable losses.
I recall a farmer who always insured her animals for five continuous years without ever making a claim. In the sixth year, she told me she believed she had mastered disease control and prevention. She stopped insuring against my advice. The same year, two of her experienced employees left. She lost 14 of her 20 dairy cows when one of the new workers inadvertently fed the poisonous datura plant to the cattle. The farmer quit dairying.
Actually, one should be happy if they insure and never get a situation to make a claim. Insurance companies on the other hand, in my view, could consider discounted premiums for compliant farmers as reward for their diligence in livestock production risk mitigation.
The main challenge with agribusiness financing for livestock farmers is that borrowers in most cases are required to repay the loan monthly. Most banks do not have a grace period for repayment. The agribusiness understanding bank thrives on the concept of funding the production cycle rather than the normal business.
If a farmer does pigs, then there is the six to seven months of rearing piglets up to baconer stage with no monthly income. No repayment demand will be made during that period. There is no one-size-fits-all in agribusiness financing. Each financing solution is crafted according to the income cycle of the business.
The bank provides various types of funding solutions in livestock production including service providers like me. Looking at the products, it is evident the bank has gone beyond lending money to agri-enterprises but instead views the farmers as partners in the business. I find this interesting because both the farmer and bank are interested in sustainably generating new money.
The solutions offered by the bank cover all cost centres for a farming or agribusiness enterprise as shown on the table. Farmers should review the various areas of expenditure to determine which apply to their enterprises and ensure they have best practice on their farms or other agribusinesses. In my view, the bank’s approach if sustained long enough will help professionalize agribusiness especially farming.