Meeting the demand for well-designed agriculture credit that allows farmers to assume small amounts of debt without using the farm as collateral has been a huge challenge for many financial service providers. Yet it is common knowledge that most small farmers shy away from loans due to bad experiences of losing land due to unpaid loans. Farmers, Fishermen and Fields/Pastoralists (F3) Life is a for-profit start-up company has come up with an innovative finance product that provides cheap loans to smallholder farmers in return for simple conservation measures. The idea of F3 Life originated from the Payment for Ecosystem concept, also known as Payment for Environmental Services (PES). The PES mechanism has in the last few years gained recognition, as a promising tool for the protection of global ecosystems and poverty alleviation, especially in areas rich in ecosystem services like developing countries.
PES is a market-based approach to conservation based on the twin principles that those who benefit from environmental services should pay for them, and those responsible for providing these services, should be compensated for providing them. Participation in a PES mechanism is voluntary which means that service providers receive payments on condition that they provide the desired environmental services or adopt a practice that will lead to generation of those services. In the PES mechanism, people managing and using a natural resource, in most cases forest communities, land owners or farmers are paid to manage these resources, protect water sheds, conserve biodiversity or capture carbon. This is achieved through deliberate actions such us, re-forestation, protecting living trees or adopting new agricultural practices. Payments are then made by beneficiaries of environmental services such as clean water users, hydropower companies, local governments etc. PES is similar to subsidies or tax and it encourages the conservation of natural resources. PES was the topic of discussion during the Water Dialogue that took place on the 14th of October at the Strathmore Business School.
In Kenya, the PES mechanism has been slow in picking up due to a myriad of challenges including: low understanding of PES mechanism, poor buy-in, lack of proper guiding principles, and unclear justification for beneficiaries to pay, among others.
In July 2013, Mr Ngigi and his colleague saw an opportunity to re-define PES in Kenya after witnessing firsthand the challenges that were hindering the uptake of the concept, while working with an international NGO. The duo formed the company F3 Life and introduced a microfinance angle to the scheme, so that provision of green credit would contribute to improved management of the environment. The company also provides participating farmers with high quality technical advice to ensure that they take up conservation techniques that boost farm productivity through conservation. Environmental conservation is a key condition for one to qualify for a loan.
Once a farmer qualifies for a loan, they prepare a conservation plan for their farm together with F3 Life before signing the contract. There are six levels in the credit model: Starter level, where a farmer can borrow a small loan as little as Kes 2,000 which has a one month repayment period and interest of 5%. Once the client pays off the loan, he qualifies for the next level, which is the Bronze status, with a loan twice the initial amount. The credit model extends to the Silver, Gold, Platinum and Platinum Plus levels. To qualify for the next level of funding, the participating farmer has to repay the previous loan within the agreed period and ensure that the agreed conservation measures, which vary for each level have been implemented successfully. The conservation measures required for a farmer to qualify include planting grass on sloping farms, planting trees and using organic matter, all of which improve the condition of the soil, prevent soil erosion and prevent land degradation. The Platinum level is the highest, and here a farmer can borrow asset finance of up to Kes 150,000 repayable over two years at an interest rate of 2.5%. According to Mr Ngigi, the default rate so far is almost zero. One of the incentives in place includes a sliding scale of interest as the initial loans are offered at a monthly interest rate of 5%, which reduces to half as one moves up the ladder.
The green loans are not secured against fixed assets but against items bought with the credit such as green houses, water tanks or water pumps. F3 Life has successfully been able to demystify provision of financing to smallholder farmers which remains a major hurdle for this class of farmers. For a long time Kenyan banks and microfinance institutions have deemed smallholder farmers as high risk clients and rarely advance loans to farmers except under special arrangements like where a donor provides a guarantee fund to cushion the bank.
The F3 Life delivery model is also simplified as the loan is provided through mobile money platforms and the clients receive text reminders when payments are due. The company is just completing the pilot stage where they have been working with 50 farmers around the shadows of the Aberdare mountains. The farmers have been able to successfully climb the credit ladder and most of them have attained Gold status, which allows them to access asset financing of up to Kes 64,000 with a repayment period of 18 months and 2.5% interest. According to Mr Ngigi, the results are so far encouraging as the region under the pilot has witnessed a transformation in physical landscape.
