The new finance solutions building the resilience of African farmers and herders

* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.

Projects in Kenya test bold ways to finance farmers whose livelihoods are threatened by climate change

Deon Nel is CEO of the Global Resilience Partnership.

Unpredictable weather patterns have become the new normal across the globe. In developing countries that are hardest hit by shifting temperatures, the food security and livelihoods of millions of smallholder farmers are under threat.

With a second El Nino set to kick in globally this new year, bringing an elevated threat of droughts and flooding, these communities will continue to bear the brunt of an extreme and unpredictable climate.

One important route to building resilience to threats like these is plugging gaps in financing - to help farmers and herders offset the growing risks.

The Food and Agricultural Organisation estimates that less than 10 percent of smallholder farmers have access to finance. Smallholders are routinely seen by lending institutions as risky investments, and rarely have the collateral needed to take out a loan.

But groups like ours, the Global Resilience Partnership (GRP), a partnership of organisations building resilience against climate shock, and many more like the Stockholm Resilience Centre and Britain’s aid agency, are working to reverse this trend. With the U.S. Agency for International Development, for instance, GRP is working on two innovative projects in Kenya.

 

TOWARDS A SHARIA-COMPLIANT LOAN IN NORTHERN KENYA 

In Wajir County, northern Kenya, the livestock market system is the backbone of the economy. It is home to half a million herders who hold around 80 percent of their wealth in animals.

Hotter temperatures now threaten to disturb the careful balance of this network involving herders and traders. If livestock is wiped out by drought, the ability for the community to cope with the next shock becomes harder, with fewer assets and resources at their disposal. We can, however, break this cycle.

Without financing, livestock traders are limited by the number of animals they can purchase at once, and herders struggle to find a fair price for their cattle. Research by aid group Mercy Corps has identified this as a major constraint to the livestock market in this region. But until now, no Sharia-compliant loans were available in Wajir. This has been a major challenge for the majority Muslim community, research shows.

In response, our partner on the ground, Mercy Corps, has worked since 2015 with local credit lending institutions to develop a unique Sharia-compliant loan for livestock traders and herders and provide financial training.

The loan - which does not incur interest but rather relies on a model of sharing profit and loss between the farmer and financier – has helped spread the risk. Trader groups that have taken out the loan were able to buy and fatten up livestock every fortnight to help build up collective assets. They were then connected to lucrative meat export markets in Nairobi. To obtain the loan, traders were required to organize into groups, involving a mix of women and men. Eight weeks of financial training were provided, and partnerships with six meat exporters in Nairobi were signed to guarantee a market for the animals.

With access to financing, traders were able to purchase and sell more animals than before, resulting in enhanced incomes which benefited both themselves and the herders they purchased from. Even as severe drought struck during the project pilot phase, the livestock trade was able to survive, as the traders had the funds to purchase dying cows and fatten them up for market.

PUTTING RISK-CONTINGENT CREDIT TO THE TEST

In Machakos, in eastern Kenya, farmers also face unpredictable short and long rainy seasons. We have been working with the Washington-based International Food Policy Research Institute (IFPRI) on a project to help manage this risk and build longer-term resilience through another innovative financing model.

Risk-contingent credit, the financial product under development, involves a unique collaboration between insurance providers and lending institutions. Farmers are given access to loans for seeds, but if a pre-determined threshold for rainfall is not met, repayments on a farmer’s loan are automatically covered by the insurance provider. The rainfall is measured by an innovative index, compiled by IFPRI. So if there is no rain, and no harvest, a farmer does not have to make payments on the loan.

This financing system acts as a social safety net, allowing farmers to persist through poor harvests. Through minimising risk, the project gives farmers confidence to invest in their farms, increasing their resilience against risk and maximising their incomes.

The project goes further than simply providing farmers loans. It helps ensure that they can make the most out of this loan through financial training in insurance policies by project partner Equity Bank. This helps them to maximise the effectiveness of their investments to build assets to help communities withstand leaner times.

Farmers receive seeds, fertilizer and pesticides to ensure that they have the inputs that they need to start building sustainable businesses. They are also given the best agricultural advice to help maximise their profits.

While the climate becomes more unpredictable and the challenge more complex, we need to continue to look for bold solutions to adapt to a changing world.

To tackle the complex challenges facing the world’s most vulnerable, we need to test bold and innovative solutions to financing such as this. Right now, financial support is simply not reaching those who need it most. But these partnerships in Kenya show that we can change this, and simultaneously boost farmer incomes, protect food supplies and build resilient communities and ecosystems.