A Kenyan Agro-producer weathers the financial crisis & turns a profit

August 3rd, 2010

kenyan-agro-producer1 It is a cold day in June with a clear blue sky overhead, not unusual for Nairobi, an East African city that sits below the equator. I arrive a few minutes early for my appointment with the head of a local agricultural export company. The building is non-descript but impressive, rising four stories and overlooking Jomo Kenyatta International Airport in the industrial area of town.

When Timothy Mwangi enters the conference room, his broad and inviting smile automatically disarms. The story behind this engineer-turned agro exporter is the reason for my visit. As the head of a family-owned export business that has effectively weathered the storms of the international financial crisis, I am here to unearth the reasons behind their success.

Fallongreens began operations in 1997, a relatively short time compared to some of their competitors, who have been in business for decades. The company grows, processes and exports ready-to-cook packed foods to Belgium, Germany, the Netherlands, Switzerland and the UK. Their produce of baby corns and carrots, broccoli, French beans, garden peas, passion fruit, snow peas and sugar snaps line the shelves of grocery stores across Europe, which represents 90% of their business.

"In the early days we relied on out-growers to produce our fruits and vegetables. This situation left us vulnerable to other people's time lines. As a result we couldn't always meet our customers demand on-time. After about 10 years we reached a cross roads. At this point, we needed to make decisions that were vital to our expansion," explains Timothy.

To explain their current success, he rewinds to 2006. In addition to increased demand from customers, they were also facing increased vulnerability from buyers who were delaying payment. "The turning point for us", notes Timothy, was a German buyer who was literally sitting on $23,000 of our money. He simply refused to pay and there was very little we could do about it."

At about the same time, the company had just planted the first crops on 100 acres of land they purchased in the Eastern province of Kenya. Lacking resources to select credit-worthy customers themselves, the company was also relying on wholesalers to take their goods to market at grossly inflated prices. Combined, these two events left little financial wiggle room. The urgency to receive their $23,000 payment from the German buyer grew critical.

"I first learned about ATI through a friend at the World Bank. I heard they had pioneered an insurance product that could help exporters so I called to find out more. This was in 2006. By the end of that year, I had signed up for an insurance policy and I was a client."

The first benefit of the credit insurance policy that Timothy noticed early on was that ATI was able to collect the $23,000 debt owed by the German buyer.

"It was really something", he notes. "I had been calling these guys in Germany for months with no results. As soon as ATI called on our behalf, they were willing to cut a cheque for the full amount within weeks."

This deterrence effect is what Timothy has come to bank on. Another added benefit is that he no longer relies on wholesalers to sell his goods. Through a global network of credit referencing, ATI subjects all his prospective buyers to a rigorous credit review. The advantage is that he doesn't have to worry about his receivables because he now sells directly to ATI-approved buyers. And if a buyer defaults with other customers at any stage, ATI will notify him through a first-alert monitoring system.

The concept of credit risk insurance is relatively new in Africa. Timothy explains that many of his competitors who have been in business for over 20 years don't see the need for insurance because they feel their clients are loyal. This may be a naïve assumption as the financial crisis of 2007 and 2008 proved.

"I can remember the collapse of a major Kenyan company back in 2008. They were stocking UK stores and unfortunately, one of their main customers just happened to be a UK chain that went bankrupt. Not many companies could survive under those circumstances", comments Timothy.

Although the jury is still out on the final impact of the global financial crisis on Africa's agriculture sector, there is one theory that sees a continued bright future for this sector.

In a 2009 research paper produced by the UK-based Overseas Development Institute on the impact of the global financial crisis on Kenya, noted that fruit and vegetable export volumes grew by 20% and 43.9% respectively from June 2007 to April 2008. The report went on to state that families in the West were cutting costs by eating at home rather than going out, the demand for fruits and vegetables, the report concluded, would therefore continue to increase.

Regardless of whether this trend will be confirmed, Timothy's company and other agricultural exporters are important to the Kenyan economy. They are a key source of jobs and foreign-currency exchange working in a sector that accounts for 24% of the country's real GDP and approximately 60% of its exports.

If agricultural exporters are to reap the potential benefits of opportunities in regional and international markets, they must examine their risks carefully. Exporting can incur many risks and for exporters that want to expand into other markets, these risks can double. "We're now looking to expand into Botswana and I will rely on credit insurance 100% -- if a buyer there doesn't pass ATI's test, I just won't do business with them."

As the interview draws to a close, there is still one question that lingers. I grab the opportunity as Timothy begins to gather his papers. "Specifically," I ask "how has ATI's credit insurance helped your business?"

After a few seconds, his face lights up as he starts rattling off figures. "Well let's see, since 2006, our production has risen from 800 tonnes to 1.6 million. Our farm has expanded from 100 to 400 acres. And our payroll has doubled from Ksh 800,000 per month to 1.7million with jobs that are of higher value."

"And how much of this growth can you attribute to credit insurance?"

Without skipping a beat, Timothy replies "60% of this growth is a direct result of credit insurance. With a lower chance of buyers defaulting on payments, I can focus on growing my business. 'Safety', that is the biggest benefit for us."

 All names of people and companies used in this article have been changed to maintain the anonymity of the company.

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