FinDev Blog

Do Flexible Loans Improve Access to Agricultural Credit?

How to enhance access to credit for smallholder farmers
Farmer holding beans, Kenya. Photo by Mwangi Kirubi, 2015 CGAP Photo Contest.

In Kenya, only four percent of bank lending goes into agriculture. Most of this lending goes to large-scale farmers, while smallholder farmers have to rely on informal loans. Financial institutions face a number of challenges financing the smallholder farming sector, including a lack of collateral, vulnerability to shocks such as flood and drought, and the risk of loan default. However, with the Kenyan government prioritizing food security as one of the top four areas for development in its Big Four Agenda, it is increasingly important to find ways to finance smallholders.

What flexible loan features are needed by smallholders?

For formal financial institutions to lend to the sector, they must be able to respond to the unique needs of smallholder farmers, who often don’t have the regular incomes needed to repay standard loans. This means they need to offer the same flexible features as informal loans. These include:

  • Grace period: A pre-defined time just after taking up a loan when farmers are not expected to make a repayment.
  • Flexible repayment schedule: A payment schedule which allows farmers to make loan repayments at their own time and pace within the term of the loan.
  • Bullet payment: The option to make a one-off repayment to cover the full loan amount, usually after the harvest.
  • Balloon payments: Incremental repayments towards the loan over the term of the loan, starting with smaller repayments and increasing in size as time goes on.
  • Loan refinancing: An option to renegotiate with the lender to borrow more funds before the original loan is paid off when faced with shocks that affects the farmers’ crops, such as flood or drought.
  • Loan rescheduling: An option to renegotiate with the lender to extend the loan repayment period when faced with shocks that affect the farmers’ crops.
  • Credit line: Access to more credit even before completing the repayment of an earlier loan, as long as the total outstanding loan does not exceed an agreed amount.

Do flexible loans help smallholders gain more access to credit?

In an attempt to understand if flexible loans really helped farmers to access more credit, I interviewed 103 smallholder farmers in Siaya County of Kenya who had borrowed from three lending institutions that offer flexible loans to farmers in the area. I asked them how much they had borrowed from the lenders, and, to determine their loan’s flexibility level, I asked them which flexible loan features were included in the loan contracts they had signed.

Using a scale ranging from 0 (lowest flexibility) to 1 (highest flexibility), I created an index to indicate how flexible a given loan is. The survey results showed that the loans taken up by farmers ranged from a flexibility level of 0.17 to 1. However, higher levels of flexibility did not correspond with higher credit amounts, nor vice versa. The amount borrowed did not depend on how flexible the loan was.

While flexible loan terms appear to meet the unique needs of smallholder farmers, my survey results concluded that flexibility did not have a significant effect on the amount of credit taken up by farmers.

Not flexible enough?

However, I hypothesize that the issue may be that the loans on offer, while advertised as flexible, were not actually flexible enough to make a difference in how much credit a farmer might take. On average, the farmers’ loans had a flexibility level of 0.42 - moderately flexible. Besides grace periods and flexible repayment schedules, the other flexible loan features were barely offered to most farmers.

Even in cases where farmers were offered flexible features such as flexible repayment schedules, they were rarely exercised. This is because the borrowers were pressured by their group members to repay their loans quickly in order to improve the group’s overall credit rating. Lenders provided incentives to groups for paying up their loans more regularly and for completing their loan repayments earlier than scheduled. Because groups competed to get rewards for clean records and earlier loan repayments, the incentives pushed borrowers to repay their loans regularly and complete their repayments before the loan period expired.  

The way forward

To improve the effectiveness of flexible loans in enhancing access to credit among farmers, microfinance institutions and other formal financial institutions lending to farmers should take the following steps.

  • Redesign flexible loan products to allow for additional flexible features, such as bullet payments, balloon payments and credit lines. When farmers are faced with shocks, lenders should allow for loan refinancing and/or rescheduling.
  • Create more awareness among farmers about all the flexible features in their loan products. Make sure they know what options are available to them and empower them to make the choice that best works for their needs.
  • Improve loan administration to allow farmers to exercise the options available to them. This should include incentivizing loan officers to allow full repayments to be collected by the end of the loan term, once farmers have harvested their crops.

At the same time, the government of Kenya should:

  • Provide credit guarantee schemes to lenders as an incentive for lending to the smallholder farmers who are considered risky.
  • Disburse credit to smallholder farmers through micro-lenders who already have experience working with smallholder farmers and designing flexible loan products.

These measures are not exhaustive but can ensure that more farmers are able to take out and pay back loans without undue pressure. In order for Kenya to achieve its Big Four Agenda food security goal, we need to take action and bring smallholder farmers into the formal financial system. 


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Anonymous , Saudi Arabia
14 October 2020

I understand that the effect of flexible loan terms does not affect loan take-up. How about the impact of such terms on qualitative matrices like the quality of life, building up of capital/resilience against shocks, and impact on farmers' credit score?

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