How banks can support sustainable agriculture
That banks are well positioned to support their clients in the food, agriculture and land use sector and help shape activity for the sector in supporting the transition to climate-smart agriculture and sustainable food systems is not in doubt. For them to achieve this, financial institutions must align their lending portfolios to boosts resilience and guarantees reasonable returns.
This was the basis of a panel discussion I was proud to be part of on the sidelines of the African Green Revolution Forum (AGRF) 2022 Summit in Kigali, Rwanda this week. The summit was a unique opportunity for participants to share experiences with regard to channeling green financing toward the financial inclusion of small producers who often lack access to markets, credit, knowledge, and technology.
At the foundation of food systems are farmers – small-scale farmers, who produce roughly a third of Kenya’s food. Yet millions of them live in poverty, and they also need to adapt to climate change to survive. We, therefore, need to strengthen efforts towards ensuring that farming communities’ economic base is secured to overcome income inequality and lack of social protection.
The agricultural sector needs financial backbone and support to create the much needed impact. This implies creating new lending frameworks and products and actively working with the sector to price farming loans to encourage sustainability. Climate-smart agricultural solutions must be tailored to the financial needs of individual farmers, with particular care to listen to and support farmers who have experienced discrimination in access to finance or predatory finance.
The transition to a more sustainable and climate-smart agricultural system that can meet future demand without exacerbating environmental degradation and climate change is an urgent priority. Many of our most pressing environmental challenges, from widespread deforestation to biodiversity loss and rising carbon dioxide emissions, can be linked to agricultural expansion.
Agriculture is second only to the energy sector as the largest source of carbon emissions, accounting for a quarter of global greenhouse gas emissions. Adoption of sustainable agricultural practices is critical to managing climate change.
The major barrier to farmers adopting sustainable practices has been a lack of access to affordable financing. This is due, in part, to the perceived risk lending institutions have ascribed to the sector. Lack of understanding of how the sector works, combined with high transaction costs with dispersed farmers, has created a reticence among financial institutions to innovate.
For many smallholder farmers, access to essential resources (farm inputs) for investing in boosting the production and value of their crops, such as credit facilities and insurance programs remain inaccessible. Market accessibility, fertilizer and value-add are also a big challenge. The implication of this is that, very soon, if care is not taken to encourage more youth participation in agriculture, there will be a decline in innovation and productivity which will ultimately have a negative effect on Africa’s economy.
Food markets are inherently volatile. Weather, economic conditions, conflict, and health shocks all affect food production. Food systems today are not set up to deal with mounting risks, such as climate change or biodiversity loss. There is a need for coordination between various players to share expertise and respond to emerging crises with an aim to promote stable, productive and equitable food systems.
The onus is on us, especially lenders, to accelerate awareness of the urgency of climate action. As a bank, we believe finance can be leveraged to be a tool and force for good. It is on this basis that KCB Group is catalyzing East Africa’s agriculture which currently takes almost 10 per cent of the bank’s loan book. The bank is looking at sustaining this and growing it further in the next few years.
Whereas there has been considerable alignment on mainstreaming the agriculture sector, there is still room for regulatory improvement for increased uptake of sustainable projects. One way of achieving this would be to provide financial banking partners with additional de-risking financial instruments and grants for technical assistance for food value chain actors and farmers.
As global leaders continue to ponder on how to support the transition to sustainable agriculture, there is need for stakeholders to show resolve that will accelerate the transition to a greener economy. Supporting risk mitigation instruments that will help to mobilize commercial finance, and which can be used to finance sustainable agriculture and accelerate forest protection, will be a pivotal tool for protecting communities and enhancing resilience.
—The writer is KCB Group Chief Executive Officer