VSLAs: Building Blocks around Climate Change

In Kenya, various stakeholders are contributing to addressing climate change through their involvement in areas such as energy and agriculture. However, there is still a need for increased financial access to fully tackle the climate change paradigm. From the Global Findex outlook , it points that 80% of adults in the Kenyan population are banked, however the remaining size of the population remain excluded especially those in rural areas. There is even a 24 percentage point gap in access to accounts between urban and rural populations in favor of the former.

 Additionally, mobile money accounts are now used for more than just person-to-person payments, with about 75% of mobile account owners making or receiving at least one payment that was not person-to-person. They have also become an essential saving method, with 39% of mobile money account holders using them for savings and 7% using them to borrow money, meaning that more needs to be done, especially to smallholder farmers in remote regions in Kenya who remain unbanked and unequipped with the right infrastructure.

Village Savings and Loans Associations (VSLAs), also known as Chamas in Kenya, are playing an interesting role in promoting a savings mindset among smallholder farmers in various agricultural counties in Kenya. According to the Global Findex, there is a significant difference in financial behaviors between rural and urban areas in Kenya. While 54% of urban adults save their money in financial institutions or mobile money accounts, only 41% of rural adults do so. Similarly, 45% of urban adults borrow from financial institutions or mobile money, compared to only 37% of rural adults. However, the data shows that saving groups (VSLAs) are more prevalent in rural areas, with 33% of rural adults saving in VSLAs, compared to 28% in urban areas. Additionally, 21% of rural adults borrow from VSLAs, compared to only 14% in urban areas. These figures highlight the importance of VSLAs in rural areas, where traditional financial services may be less accessible. By providing a community-based alternative to formal financial institutions, VSLAs are helping to bridge the gap and improve financial inclusion for rural populations in Kenya. Smallholder farmers invest in their farms using the funds they borrow from their VSLAs and are directly addressing the challenges posed by climate change. However, VSLAs face significant challenges, including their formalization but also access to providers or organizations that integrate the right technological solutions in order to overcome it. In contrast to modern banking institutions, VSLAs may not be as well-structured. This leaves a big gap for most unbanked farmers who require proper support around funding mechanisms in order to raise more funding and thus improve their direct involvement across different agricultural value chains.

It is hence key to understand the role each actor can play to increase access to finance for these VSLAs to address climate change.

In this sense, here are some ways on how the different actors of the Kenyan financial sector could work together to address climate change using VSLAs:

DFIs & Donors

• Making funding available to tackle smallholder farmer financial exclusion to support building climate resilience.
• Partnering with Agri research organizations to clearly identify smallholder farmers constraints in specific or various agricultural value chains.
• Partnering with organizations tackling Agri and Climate Finance to understand different mechanisms of creating sustainable solutions to farmers

Public private partnership (PPPs)[1]

• Creating innovative solutions to tackle climate change through smallholder farmers in VSLAs; For example, promoting the use of climate-smart agricultural practices such as conservation agriculture or introducing renewable energy solutions to reduce emissions in the agricultural value chains.
• Designing financial instruments, mechanisms, products, and capacity building programs aimed at increasing the efficiency of farmers and lowering their risks on specific areas in the agricultural value chain, such as weather-indexed insurance or crop loans with flexible repayment options for VSLA saving farmers.
• Structuring Partnerships with other stakeholders, Financial Institutions, Agri SMiLEs (Agri Small, Medium inclusive of Large Enterprises) aimed to address climate change using climate smart interventions such as sharing knowledge, resources, and expertise to achieve a common goal.
• Collecting adequate KYC (know your customer) data to inform future interventions needed to create new inclusive solutions to farmers in VSLAs around climate tailored to their specific circumstances.
• Promote replication and adaptation of their previous working models for VSLAs on climate into new countries to support tackling climate change in multiple geographies, this can be done through identifying key stakeholders, adapting to local contexts, and building local capacity.
• Creating Value Chain and Market Linkages by designing multi-stakeholder platforms that facilitate information flows, dissemination and business transactions between suppliers and buyers to remove middlemen hindering the distribution chain - VSLAs can play a crucial role in facilitating these platforms by bringing together smallholder farmers, processors, buyers, and financial institutions within their communities.
• VSLAs can provide a platform for sharing information on market opportunities and prices, facilitating business transactions, and removing middlemen who exploit farmers in the distribution chain. This approach can help smallholder farmers in VSLAs increase their incomes, improve their livelihoods, and contribute to sustainable economic growth.
• Creating knowledge platforms and opportunities to constantly educate farmers in VSLAs on different climate trends, climate smart agriculture and good agricultural practices

Insurance and Financial Institutions

• Investing in different climate adaptation technologies to identify future trends of climatic hazards and come up with adaptation measures to mitigate climate risks and create climate resilience schemes for farmers in VSLAs
• Designing Digital Financial Solutions for VSLAs that are inclined to climate and mainstream them to specific groups in the community.
• Devising innovative ways to formalize VSLAs or partner with them and then perform credit scoring and maintain a track record for smallholder farmers to access finance and channel it to tackle climate change
• Providing value chain specific financing to VSLAs to improve their Agri loan portfolio while tackling climate change using smallholder farmers.
• After partnering with /formalizing VSLAs, Providing Weather Index-based microinsurance to reduce transaction costs and spare low-income farmers the trouble of having to go through the onerous process of filing claims.

There are still many challenges[2] to overcome to reach full financial inclusion for all Kenyan farmers, particularly those in rural and remote areas.

As different stakeholders in Kenya seeks to accelerate financial inclusion, the role of smallholder farmers in VSLAs need to be in the vision of the general digital financial transformation framework .

If the entire enabling ecosystem of stakeholders provides the right financial mechanisms and instruments, smallholder farmers will directly create an impact to tackle climate change through climate finance initiatives tailored for different agricultural value chains.

Such initiatives will also contribute to building the resilience of smallholder farmers through ensuring they can generate income for themselves and their households to be able to provide them with other essential needs.