Financing Small Scale Irrigation in Sub-Sahara Sahara Africa Key Results from the Kenya Case Study Wolfgang Hannover Washington DC, 1 March 2007 Picture: KickStart - Kenya 1
Outline of the Presentation 1. Existing situation in the financing of small scale irrigation 2. Recommendations for strengthening the financing of small scale irrigation 3. Major lessons learned with relevance for other countries of Sub-Saharan Saharan Africa (SSA) Definition used for small scale irrigation (SSI): SSI includes all irrigation activities that involve small farmers who own and manage an individual plot or are part of a community managed scheme 2
1. Existing Situation in Financing SSI - Irrigation Potential and Use by SSI - In Kenya SSI development is one of the key strategies for land use intensification with expected positive effects on rural incomes and poverty alleviation 20% of the irrigation potential or 106,000 ha is already under irrigation; 50% of this area is under SSI about 15,000 ha of the area under SSI are operated by individual farmers about 35,000 ha are under communal irrigation schemes 3
1. Existing Situation in Financing SSI - Characteristics Individual SSI Systems - Major characteristics of individual SSI systems: Individual SSI systems are established where small farmers have direct access to usable water resources close to their fields in Kenya rapid market driven SSI expansion took place in recent years mainly in high potential areas strong impetus resulted from opportunities to produce financially attractive horticultural crops the availability of a range of affordable low to medium cost SSI technologies supported the development: these fit different socio-economic and physical conditions cost and risks of SSI on-farm investments are substantially reduced significant productivity and income increases are possible 4
1. Existing Situation in Financing SSI - Characteristics Communal Irrigation - Major characteristics of communal irrigation schemes: Communal irrigation schemes account for most of government supported irrigation development such schemes are mainly promoted where water sources are not immediately bordering agricultural development areas they require relatively high investment cost in irrigation infrastructure these are for smallholders only economical if a minimum number participate (often 150 to 250 farmers) production on plot is responsibility of each farmer, who has same needs for access to finance as farmers of individual systems have 5
1. Existing Situation in Financing SSI - Financial Requirements SSI Systems - examples of typical SSI systems typical area coverage per unit/farmer typical investment cost per unit,, US$ seasonal production cost for intensive vegetable prod., US$ 1.low cost manual operated systems: - bucket kit 50 m² m per unit 15 up to 9 - drum kit 500 m² m per unit 110 up to 95 - pressure treadle pump 6,000 m² m per unit 185 up to 880 2. medium cost motorised system 10,000 m² m per unit 610 up to 1,480 3. communal irrigation scheme 4,000 m² m per farmer 1,700 up to 630 6
1. Existing Situation in Financing SSI - General Financial Service Supply - The Kenyan financial sector exhibits greater financial depth and more institutional variety than most other countries in SSA financial institutions (FI) with focus on lower income market and applying best practices are on the increase rural outreach has improved in recent years, but is concentrated in the more productive agricultural areas a more appropriate legal and regulatory framework is currently under preparation for financial cooperatives and MFI; meso level institutional support infrastructure is under development main share of agricultural credit is provided by commodity based credit providers followed by financial cooperatives and commercial banks the product range offered to small scale farmers is rather narrow and limited mainly to short term financing and saving services 7
1. Existing Situation in Financing SSI - Financial Service Supply for SSI - The specific provision of loans for SSI is until now rarely practised in the country: high potential areas: most farmers investing individually into SSI are to some extent commercialised and grow anchor crops (tea, coffee): for financing of SSI they use own resources or a combination of own resources and finances available from short term input loans farmers not growing anchor crops often have limited or no access to financing services and are only to a small extend involved in SSI medium potential areas: only relatively slow SSI development; most farmers have no or limited access to financial services; production and marketing prospects are more limited low potential arid and semi arid areas: no use of financial services for SSI; serious marketing problems hinder SSI development 8
1. Existing Situation in Financing SSI - Financial Service Supply for SSI (cont.) - Financial service supply for community irrigation schemes: the relatively high initial investment cost exceed financial capacities of most low income farming households in the past scheme development cost were financed by government grants,, this turned out to be as not sustainable it had also negative effects on ownership development and resulted often in weak WUAs with poor performance on scheme/farm levels after several policy reviews the new approach adopted requires farmers on private land to co-finance the scheme development cost 9
1. Existing Situation in Financing SSI - Financial Service Supply for SSI (cont.) - Major issues related to the specific financing of SSI the scale and outreach of specific financial services to SSI development is still limited FIs have generally very limited experience in dealing with this customary segment product ranges and methodologies are not adapted to the requirements of SSI farmers especially medium term finance is not available to SSI farmers farmers have limited knowledge about services/products of FIs 10
2. Strengthening the Financing of SSI - Major General Concept Elements - Consistent and interlinked policies and promotional strategies are to be designed for the financial and water/irrigation sectors; these are to set the framework for market driven development of SSI and related financial services through the private sector further policy and capacity building efforts are required for sustainable rural finance system development: on the macro level: support to the creation of an enabling legal and regulatory framework - especially for financial cooperatives and MFIs on the meso and micro levels: support to the strengthening of the financial service infrastructure 11
2. Strengthening the Financing of SSI - General Concept Elements (cont( cont.) - FIs need to adhere to commercial approaches without direct subsidies in financial service provision for demand driven SSI development in the case of financing the relatively high initial investment cost of communal irrigation schemes: provision of grant financing is required for parts of the investment clearly separated from grant financing the provision of commercial medium term loans is required to support farmers in financing their investment share if required by the FI a well structured loan guarantee may have to be provided by the government/the the respective donor 12
2. Strengthening the Financing of SSI - Closing the Information Gap - Reducing the information gap between financial service providers and SSI farmers: farmers require better knowledge about available financial services FIs need to perceive that financing SSI is an interesting option for significantly increasing their business activities the required information for closing the information gap is to be provided by extension services, meso-level rural finance support institutions as well as by FIs that want to enter the SSI customer segment 13
2. Strengthening the Financing of SSI - Widening Financial Product Range - Some general aspects on widening the financial product range: to facilitate the demand oriented design of products a FI needs to generate good knowledge on the irrigation sector, the financial requirements of SSI farmers, their production system and related production and marketing risks the support to SSI does not require a special product range but flexibility within the product range and adopted methodologies 14
2. Strengthening the Financing of SSI Widening Financial Product Range (cont( cont.) Major aspects to be considered in the design and provision of financial services to SSI farmers: timely availability and customer-friendly procedures proximity of FI or delivery mechanism that allow easy access by farmers a combination of loan products including medium term loans and savings according to the demands of farmers flexibility within the loan product range especially also regarding repayment modes and collateral requirements 15
2. Strengthening the Financing of SSI Widening Financial Product Range (cont( cont.) Innovative alternatives for the financing of SSI: micro-leasing of irrigation equipment as alternative to medium term loans FIs can also support lending to SSI farmers indirectly. Examples of such wholesale lending practices include the financing of: equipment suppliers, agro-processing or marketing organisations production input suppliers community based financial intermediaries risk reducing measures such as use of tripartite arrangements between the FI, SSI farmer and the marketing organisation 16
2. Strengthening the Financing of SSI - Increasing the Outreach of FIs - high potential areas generally have good conditions for establishing financial services for SSI the focus for improving outreach is on strengthening capacities of existing rural FI through: scaling up the product range according to the demand of SSI farmers increasing efficiency and transparency of services 17
2. Strengthening the Financing of SSI - Increasing the Outreach of FIs (cont.) - medium potential areas: already existing rural FIs are expected to gradually expand to lower potential areas in search of new markets development of a favourable market environment is a condition for successful SSI development and related financial services for improving outreach in areas with lower development potential it may be justified to support initial institutional development measures low potential region faces serious limitations for establishment of effective and sustainable rural financial service delivery: options for providing financial services in locations with substantial potential for establishment of market oriented viable SSI production systems include: development of community-based financial intermediaries use of the linkage approach 18
3. Major Lessons Learned Small-scale farmers can manage SSI systems efficiently provided they have: access to affordable technologies sufficient financial incentives for intensifying their production for sustainable SSI development and related financial service delivery through the private sector consistent and inter-linked sectoral policies and implementation strategies are to be designed sustainable rural finance system development requires creation of appropriate supportive policy and legal environment setting-up of a viable financial service infrastructure SSI farmers need access to: a whole range of financial services based on commercial principles financial institutions that have enough capacity to adopt terms and conditions as well as lending methodologies to their requirements 19
3. Major Lessons Learned (cont.) SSI farmers of community irrigation schemes with high initial investment cost require: grant financing for parts of the investment clearly separated from grant finance access to commercial medium term loans for their financial contribution to investment cost as well as commercial short-term term loans political interferences are to be avoided and phased out where they still exist, e.g. on subsidized interest rates and directed credit serving areas with low economic potential without markets entail high risks for the FI and remains a challenge 20
3. Major Lessons Learned (cont.) The delivery of financial services alone is in most situations not sufficient for SSI development. Support is also required for: creation of reliable marketing structures enhancing local availability of affordable SSI equipment improving entrepreneurial and technical capabilities of farmers promotion of close networking and partnerships between farmers, marketing organisations and financial intermediaries 21