Innovative Finance and Grain Storage among Farmers and Traders in Kenya

Photo credit: One Acre Fund

Adoption of agricultural technologies like fertilizer and improved seeds is low in African countries compared to other developing countries and evidence suggests that using these technologies can dramatically increase farm productivity and income. In an ongoing study, researchers are collaborating with One Acre Fund to examine the effect of credit and savings on the adoption of fertilizer and hybrid seeds, farm productivity, and farmer livelihoods.

Policy Issue 

Adoption of modern agricultural technologies in organic fertilizer and hybrid seeds in particular can lead to large increases in productivity and profitability for many African smallholder farmers. Yet actual adoption rates for these technologies are low: fertilizer use in Sub-Saharan African countries is about twelve times lower than other developing countries and adoption of modern crop varieties is about five times lower than in Asian countries. One potential explanation is that low adoption is linked to poor access to credit or savings, meaning that farmers often have difficulty finding enough cash when it comes time to make these purchases. Improved access to credit, in the form of upfront fertilizer and seed loans which are paid back over time, could spur adoption. Yet credit is relatively expensive and inflexible compared to savings. Savings products could help farmers accumulate cash to make fertilizer or seed purchases, but it may be difficult for farmers to save due to competing uses for their money and demands from family or friends. While credit and savings may potentially benefit farmers, there is little evidence about the relative effectiveness of either tool for increasing use of agricultural technologies.

Context of the Evaluation 

About 79 percent of Kenya’s population lives in rural areas and relies on agriculture for most of its income. Smallholder subsistence agriculture produces about 75 percent of total agricultural output and the primary crop is maize. For many farming households, home maize storage is the primary source of savings and is typically much larger than other formal sources (e.g. bank accounts) or informal sources (e.g. community savings groups). Yet many households suffer from substantial post-harvest losses in maize stores, due to insects or rotting. Farmers also appear to use storage inefficiently: they sell their maize at low post-harvest prices and often buy it back later in the season at prices that are four to five times as high. As a result, farmers may lack the cash needed to purchase fertilizer or seed during planting season. Yet for farmers who need cash, access to credit remains low: according to a 2009 national survey, 60.4 percent of adult Kenyans reported no access to credit or loans, and less than 10% of farmers in the study region in Western Kenya report having access to formal credit. Based in Kenya, One Acre Fund (OAF) works with over 130,000 farm households in Kenya, Rwanda, and Burundi, focusing mainly on seed and fertilizer loan and delivery. When expanding into new areas, OAF holds initial community interest meetings and then organizes groups of farmers who all receive the same program or service.

Details of the Intervention 

In partnership with OAF, researchers are examining the effect of different credit and savings products on the adoption of fertilizer and hybrid seeds, farm productivity, and farmer spending on health, education, and food. In particular, they are currently evaluating whether well-timed access to credit allows farmers to make better use of storage and sell their output at higher prices, and they are studying how any additional profits are re-invested. Researchers first randomly divided 232 groups of farmers (5-7 per group) into one of the following groups:

  1. Post-Harvest Loan: 77 groups (474 farmers) were randomly selected to be offered a loan directly following harvest in September or October.
  2. Post-Harvest +3 Loan: 75 groups (480 farmers) were randomly selected to be offered a loan three months after Harvest in January.
  3. Comparison Group: 80 groups (635 farmers) were offered no loan.

Stored maize served as loan collateral, and all farmers who received loans also received a laminated tag with OAF’s logo attached to farmers’ stored maize. Following random assignment of the loan treatments, a subset of individuals within each group was randomly selected to receive a simple cash lockbox to promote savings. Additionally, researchers randomly selected 159 farmers within the comparison group to receive laminated tags to test whether the tag alone allows farmers to credibly claim to friends and family that they cannot give away their stored maize. Stored maize is easily visible to family and visitors and local norms promote sharing of surplus maize, so the tag may allow farmers to justify not sharing.

Results and Policy Lessons 

Take-up rates for both loans were high at 60-70 percent and results indicate farmers increased both storage and net revenues. Farmers who received loans saved approximately twenty percent more maize than farmers who did not. Net revenue increases were small (10 USD) and increases in per capita consumption were small and not significant. It is important to note that the harvest season was unusual as prices only increased by 20-30 percent rather than doubling at the peak period, which may have affected farmers’ profits.

The results also suggest that the timing of a loan matters as farmers who received a loan in October – immediately after harvest – held onto more maize, made more money and increased their per capita consumption. Their return on investment after loan repayment was twenty percent.

Additionally, by geographically varying the density of loans offered, researchers were able to estimate market price effects (i.e. how the loans and resulting storage behavior affected local market prices). In areas with a high density of loans, post-harvest prices are significantly higher, which is consistent with more grain storage among treatment farmers. Higher prices also benefit farmers who did not receive a loan and sold grain immediately post-harvest. This indicates that creating widespread access to credit may help reduce seasonal variations in price and also affect the benefits of credit. Overall the results suggest that increasing access to credit can increase farmers’ storage, revenue and consumption and that loans issued immediately after harvest are most effective.

Project ongoing, further results forthcoming. Working paper with preliminary results provided at right.