It elicited a lot of comments on the cost of finance offers to Kenyans, since an interest capping law passed in 2016 that restrict banks to lend at a maximum of 14%, the lack of regulation of app loans who may be taking advance of Kenyans by charging usurious rates etc. It also led to a mention of a research report from Micro Save about the digital credit landscape in Kenya that was shared by one of the authors.
The Microsave Report (PDF) titled “Where Credit Is Due: Customer Experience of Digital Credit In Kenya” had lots of insights. It was drawn from feedback from 1,009 farmers located in 50 villages, equally split between Central Kenya and Western Kenya, and also with an equal number of men and women in the study.
At the end of it, the report makes some recommendations to the Communications Authority of Kenya and the Central Bank of Kenya – such as to control the type of messaging sent by text to consumers, and to require app loan companies to share information and to list all defaulters, respectively.
Habits of Borrowers
There is a preference for Chama’ s, SACCO’s and M-Shwari as a source of funding. App loan amounts are too small for significant investments.
Majority of the customers took up loans to smooth consumption, emergencies or to boost business.
They don’t understand terms and conditions of app loans and they don’t understand credit reference.
There are three types of borrowers: repayers (who pay loans on time), defaulters (who don’t understand the consequences of being listed), and jugglers who take both traditional and app loans – but if they are financially stretched, they are more likely to repay the traditional loans.
Customers have learned to game the system through timely repayment of loans and juggling multiple borrowers.
There is no extra “PIN” required to request and withdraw an app loan and some family members have done this in secret leading the phone owner to default on a loan.
Digital credit usage doubled in Kenya between 2015 and 2016, with awareness and usage of digital credit by far lower in rural Kenya.
Digital credit, which offers privacy, is replacing shop credit and family/ friends as financiers.
The simplicity of the loan application procedures matters; too much information requested or if there are too many variables that make it confusing, makes potential borrowers drop off.
Download a loan app or use USSd
App usage is rather low – and this probably related to lower usage of smartphones as their batteries rarely last a full day as compared to cheaper feature phones that retain battery charge for several days of use.
Phones are mainly used for money transfer, deposits, and withdrawals. There is little usage to get information or to browse the internet
64% of respondents in the survey had a basic phone (57% in 2015). Smartphones were 14%, growing slightly and off-setting feature phones which declined slightly to 26%.
Loss of a phone may result in a borrower defaulting on repayment.
Credit Reference Bureaus
Formal lenders require clearance from a credit reference bureau (CRB) which costs $22 (i.e Kshs 2,200) and that may exclude borrowers from formal finance. App loans don’t require this, e except that borrowers have not been black-listed.
One concern is there is little understanding of credit reference bureaus, and of channels for redress of any disputes.
Not all fintech’s report loans to credit reference bureaus.
App loan costs
High loan/interest charges are not a concern as they are comparable to other informal money lenders
At the time of the survey, M-Shwari issued 62 million loans (worth Kshs 1.3 trillion), while Equitel and KCB about 4 million each. In comments to accompany the release of their 2017 bank results last month, KCB had 13 million mobile customers, Equity Bank has 12.1 million, while a CBA statement noted that the bank also serves 33 million mobile savings & loans customers, in East Africa, in partnership with mobile money operators.
The Competition Authority of Kenya has rejected an application for exemption by the East African Tea Trade Association (EATTA) to set brokerage commission and warehouse prices. EATTA, which operates the weekly Mombasa Tea Auction, had sought to be exempted from the provisions of section 21 and 22 of the Competition Act No. 12 of 2010 (the Act) on some of its activities for an indefinite period.
The rejection was premised on:
The setting of broker fees and commissions under the auspices of the EATTA was a hardcore contravention under Section 22 (1) (b) of the Act as it is a form of price fixing;
The setting of brokerage fees was beneficial to the brokers with no express benefits to consumers and tea producers;
The Kenyan brokerage fees were higher compared to those in Sri Lanka and India and have remained unchanged for a long period of time;
Warehousing is an important element in the tea value chain and that fixing of warehouse fees would undermine innovation and improvement of value preposition to customers given that warehousemen will be assured of the minimum fees set by EATTA. This the Authority concluded that it will encourage inefficiencies in warehousing thus impacting on the trade negatively.
However, the Authority allowed, for a period of three (3) years), the trading to be permitted amongst membership.
What drives the agriculture pricing of maize, potatoes, and milk in Kenya? Part I of a post by @kwambokalinda of M-Farm
In commercial agriculture, as in any business venture, the aim is to make a profit on an investment, within the environmental and policy framework available for the sector. It is, however, not in question that there exist unsavoury practices practically the world over. Recent potato, maize and milk shortages in the weeks between March 2017 and the present day illustrate as much.
That said, it is pertinent that fault is placed where it lies, and speaking to traders in the Kenyan potato, milk and maize value chains, it was gathered that low rainfall in November 2016, as well as with the rains in April, led to price fluctuations in the weeks after February 2017. Mitigating circumstances lowered prices during the same period, when traders sourced their produce in areas that had rainfall in November 2016, such as;
In the case of potatoes, this included Narok and Mau Narok, which are blessed with forest rains and fertile lands in Tanzania.
With milk, rains in April meant that costs to access to main roads went up – and with farmers unable or unwilling to ease traders’ burden, the costs are being transferred on to consumers.
As for maize, a 90-kilo bag which a farmer sold at Kshs 2,200 in December, had doubled by March 2017: Meanwhile, millers have been consistently buying the maize at Kshs 4,700 per bag
We have to remember to factor such matters into our plans and budgets as Kenyans. Also, we have learned that it takes the government a lengthy period to act or even plan for such occurrences. It would help to have neutral sources of data alongside that of the government to help shape the response to food security challenges in Kenya.
Many people in Nairobi and other towns and in the diaspora are ‘telephone farmers’. These are people who own or have bought, or inherited land, buildings, equipment on rural farm that they now support. They send money a few times a month for salaries and for operations of agricultural ventures that never seem to have any significant payback.
The owners probably read the Saturday newspapers with envy as they see other farmers holding up rabbits, bananas, watermelons or other bounty from their farms which earn them thousands of shillings every week or month.
The difference between them and the typical telephone farmer is that they are active investors as farmers, not passive which is what a faraway telephone farmer is. That leads to the first point about telephone farming.
The goal of telephone farming is asset preservation, not income generation, and doing some economic activity on a distant farm protects it from invasion by squatters or grabbers.
The social aspect: Telephone farming sustains the local community; it keeps a line of communication open and allows for the community to have a stake in the preservation of the asset as they go about their business. The picture (above) depicts what should be a banana farm, but clearly the beans the workers are growing in the same field are doing much better. There might be pilferage, misuse of equipment, or other losses: but they should be within tolerable limits and not erode the underlying assets.
The costs of farming are much lower for telephone farmers compared to other businesses investment in urban areas. E.g. labour costs are much lower: an amount of Kshs 2,000 is a salary on many farms, but that could be an electricity bill in Nairobi.
A good rule of thumb for the telephone farmer is to be present at the farm during major operations like planting and harvesting.
There was a weekend discussion over this article by the standard which looked at the different prices paid by the Kenya Tea Development Agency (KTDA) as tea bonuses to farmers in different parts of the country. KTDA had just announced a record Kshs 84 billion earnings from small holder tea farmers for the year, a 32% increase of which 62 billion will be paid out to tea farmers ar a rate of Kshs 50 per kilo on average. (25% covers the costs of production). Few could believe that farmers in Ketch, the widely accepted centre of Kenya’s tea could earn half of what farmers in other regions get.
Farmers in Kericho and Bomet have complained of low bonuses they expect (South Rift farmers will only receive Kshs 13 billion). KTDA’s region five comprises Kericho and Bomet counties with seven tea factories and an equal number of satelite factories. From the region, the highest paying factory, Momul, will give farmers Kshs 35 per kilo of green leaf as bonus, while the lowest paying, Litein and Chelal, will pay Kshs 26 per kilo. In the Eastern region, also known as Region Three, however, the highest paying Munuga Tea Factory will pay suppliers Kshs 48.35 per kilo of green leaves as bonus.
A farmer threatened that they would break away from KTDA and establish a new tea auction in Kericho. “There is no doubt that Mombasa Tea Auction is controlled by cartels who manipulate tea prices.
Kericho Governor Paul Chepkwony says they will source for tea markets in the US, UK, China and West Africa. “Our idea is the direct tea sale concept, which has been tried successfully by the management of Kokchaik Sacco which, through Finlay’s Tea Company, earns $3 (Kshs 303) per kilo. There is no reason at all why KTDA should pay farmers as low as Kshs 26 per kilo of tea as bonus,” says Chepkwony.
Richard Cheruiyot, a former KTDA executive operations director, lamented that..there were still numerous taxes and levies being charged on tea (which all amount to about Kshs 6.10 per kilo of tea annually)
(source: KTDA site)
This is not the first time the variance has been challenged and last year KTDA published a piece explaining the tea bonus calculation:
Each factory had a specific rate (bonus) which it pays to its farmers based on the factory directors’ approval.
KTDA is a tea marketing agency..owned by smallholder farmers who hold shares in their respective tea factories .. and 560,000 smallholder tea farmers in Kenya are shareholders of KTDA through their factories.
It is important to note that farmers receive monthly pay at the rate of Kshs 14 per kilogram of green leaf delivered to the factory in addition to the 2nd payment (bonus).
Factories process varied volumes of tea depending on the size of the catchment areas and the volumes of tea produced. This determines factory capacity utilisation and hence cost efficiency.
Teas from the factories also fetch different prices at the markets – either through the auction or direct markets. Consumer preferences also affect pricing, with some markets preferring teas from specific factories. The quality of green leaf is further determined by ecological and climatic features such as types of soil and quantity of rainfall, as well as the quality of farm management practices such as application of fertilizer, pruning and plucking. Further, the cost of production varies from factory to factory based on labour and energy efficiencies, cost of credit and investment income.
Factories with expansion projects that are financed by loans will incur higher finance costs than those which are not expanding. Given the current interest rates regime, such costs can be substantial. On the other hand, factories with healthy cash flows and which have no need to borrow will ultimately invest their surplus and earn more income. It is this combination of factors that determine what income individual factories pay their farmers.
An older article in the Nation on tea bonuses mentioned:
(that) Historically, factories around the Mt Kenya region have fetched higher payments than those in western Kenya based on a skewed marketing concept and buyer preferences at the auction.
(also that) Factories west of the Rift Valley are highly indebted to banks for loans to expand processing capacities to match increased acreage.
11 factories in the Western Rift are satellites (do not enjoy full status) which means they cannot market their tea at the weekly Mombasa auction, and neither can they elect directors.
Finally, the 2016 Kenya Economic Survey noted that:
The area planted with tea increased by 3.2% from 203 thousand hectares in 2014 to 209 thousand hectares in 2015, primarily from small holders. Despite the increase in area under tea, production decreased significantly by 10.3% from 445.1 thousand tonnes in 2014 to 399.1 thousand tonnes in 2015.
The unit price of one Kilogram of tea recorded 42% increase to Kshs 293 in 2015 due to international supply constraints.
Tea was the leading source of foreign exchange with revenue from the commodity rising by 31% to Kshs 123 billion in 2015.