Financing Large-Scale Mitigation by Smallholder Farmers: What Roles for Public Climate Finance?

TLDR

The growing interest in climate finance for low‑emission agriculture is tempered by limited knowledge on how to deploy it to scale mitigation practices among smallholder farmers, especially given that Kenyan dairy farmers rarely use formal finance due to capacity constraints. The study evaluates how public climate finance can enable Kenyan dairy farmers to adopt low‑emission practices by strengthening linkages, building capacities, and promoting a diversified, demand‑responsive financial innovation strategy. The authors analyze financing needs and institutional arrangements, identifying concessional loans, credit guarantees, and grants as suitable instruments. The study finds that while dairy farmers can make financially profitable low‑emission investments, commercial‑term credit is not viable for those lacking off‑farm income.

Abstract

There is increasing interest in accessing climate finance to support low-emission, climate resilient agricultural development, but little is understood about how climate finance can be deployed to catalyse large-scale adoption of mitigation practices by smallholder farmers. This study assesses the potential roles of public climate finance in enabling smallholder farmers in Kenya's dairy sector to adopt low-emission farming practices. Drawing on multiple studies conducted as part of the design of a nationally appropriate mitigation action for the Kenyan dairy sector, it examines financing needs, institutional arrangements for channelling climate finance, and appropriate financial instruments. The study finds that financially profitable investments can be made by dairy farmers, but credit financing on commercial terms is not viable for dairy farmers lacking off-farm income sources. Dairy farmers make little use of formal financial institutions for several reasons, and while financial institutions have a strong interest in increasing their finance to the dairy sector, they face a variety of capacity constraints. Climate finance may have roles to play in strengthening linkages between dairy farmers and financial institutions, building capacities of different actors in the dairy and finance sectors, and enabling both farmers and financial institutions to manage risks. Concessional loans, credit guarantee funds and grants are all relevant financial instruments. If agriculture is to attract climate finance in support of large-scale mitigation action, a diversified, demand-responsive approach to financial innovation is required that engages different types of financial institution to support access to both savings and credit services tailored to the varied needs of men and women dairy farmers and the dairy value chain actors they work with.