Dairy farmers in Kenya are being hit hard by climate change.
The country is seeing increased droughts, and, with dry spells projected to increase up to 27% in severity and heat waves likely to increase in duration by up to 30 days, climate change will continue to exacerbate the multitude of challenges farmers and their families face.
Access to water is key for dairy farmers and is a significant challenge in Kenya, especially in rural areas where the majority of the population lives. 76% of households in rural areas do not have piped water access, and spend an average of 3.5 hours per week fetching water (KIHBS 2018).
Continuous access to clean water is vital for dairy production, with an adult healthy dairy animal requiring about 75 liters of water daily, animals can die without water in 2-3 days. Increased herd movement to water sources impacts cow health and also imposes a substantial time burden, particularly for women and girls, with negative consequences such as dropping out of school.
With changing weather patterns and unpredictable rainfall, rainwater harvesting can provide a sustainable source of water for agriculture and livestock production. This is particularly important in dairy farming, as water scarcity and poor-quality water can lead to decreased milk production and health issues in dairy animals. Large water tanks are an efficient method for storing harvested rainwater.
However, financial constraints limit smallholder farmers’ ability to invest in rainwater harvesting tanks for climate adaptation and improved dairy productivity. Lack of access to credit, limited financial resources, and competing household expenses are major barriers to investing in water storage tanks.
Against this backdrop, PxD’s program on Asset Collateralized Loans (ACLs) for water tanks presents innovative financing mechanisms to address water scarcity and liquidity bottlenecks to improve climate resilience and dairy productivity in developing countries.
How dairy ACL works
Water tanks pose a unique financing opportunity. They are large and difficult to move, and they retain their market value over time, meaning the assets themselves can serve as the collateral for a loan.
This removes the need for guarantors, which often poses a significant barrier to access to credit. Repayment is made automatically from the milk income earned through milk sales from the farmers throughout the month. If the farmer was to default on the loan, the tank could be resold at close to the original value.
About 1.8 million smallholder farmers depend on dairy farming for their livelihoods in Kenya but a bulk of them are unable to obtain loans from traditional lenders, such as banks, because they do not have the collateral or credit history required.
The ACL approach, therefore, has several advantages over traditional lending methods, which often require extensive paperwork and collateral that many smallholder farmers do not have.
Our Research Project
PxD has been implementing a two-year research project on ACLs for water tanks in collaboration with the University of Chicago’s Development Innovation Lab (DIL) and two dairy cooperatives (Lessos and Sirikwa Dairies) in Kenya’s Rift Valley region.
A previous study (Jack et al., 2019) demonstrated strong evidence that the ACL model for water tanks could improve farming and household health, as well as well-being outcomes among smallholder dairy farmers.
The study, conducted in partnership with the Nyala Savings and Credit Co-Operative Society (SACCO), randomly offered some farmers the opportunity to replace loans with high down payments and stringent guarantor requirements with loans collateralized by the asset itself.
At the end of the study, default rates were extremely low (less than 1%). Milk sales to the cooperative increased by 6-10%. And, because of the increased water supply within households, girls spent 19% less time fetching water, and school dropout for girls decreased by 85%.
This new study aims to evaluate the impact of ACLs for water tanks on economic and household outcomes among dairy farmers in Kenya. The main outcomes of interest include milk production and milk sales, loan performance, dairy farming practices, water use, time use (particularly for girls and women), household welfare, and well-being.
Delivering tanks to farmers
In partnership with the dairy cooperatives, PxD identified farmers that are eligible to receive the water tanks.
Eligible farmers need to pay an upfront deposit (currently 20%) to receive the tank, followed by monthly loan repayments over a two-year period. Farmers can choose between a 2500-liter or a 5000-liter tank depending on their needs. They receive the tanks at their doorstep for free, with a water tap that is ready to install. Starting from January 2023, PxD rolled out the tanks to a small group of 100 farmers. As of mid-March, 15 farmers had received the tank.
Farmers like Philip Too, a farmer from Sirikwa Dairy who has four dairy cows. Most of the people in his village rely on wells for their household water needs but unfortunately, they do not have sufficient water storage equipment. He is one of the few lucky farmers who are connected to electricity and thus he intends to fill his tank with water from a well within his farm using an electric water pump. With the tank, he hopes to have enough water to not only meet domestic needs for his family and livestock but also irrigate his small kitchen garden from which he expects to fetch some income by selling surplus vegetables to his neighbors.
Esther Sambai, a farmer from Sirikwa dairy, decided to get a 5000-liter capacity tank instead of a 2500-liter tank to meet the needs of her household and neighbors. She said, “My well does not dry up and many people in my village get water from my household for free in the morning when I am at home. As you can see, we pump water directly from the well and therefore I decided to get a bigger tank so that I can store enough water for my family and neighbors. With a tank, my neighbors will be able to access water even when I am away. I will also use the tank to supply water to my animals.” Esther has a solar-powered pump but before the ACL for water tanks, she did not have a water storage tank. The ACL has enabled her to finance a tank easily.
In the coming months, we plan to roll out the tanks to additional farmers (with the goal of reaching 750 farmers in total).
From our early interactions, we have learned that several factors influence take-up including time of the year, competing financial needs such as school fees, and low trust in new financial products which could limit farmers’ take-up of the product.
To address this, we hope to pilot low-risk ways of making the ACLs for water tanks more accessible, such as by lowering the deposit or offering a grace period. We will continue to test similar loan flexibility mechanisms until we can define a product that is interesting, safe, and accessible to farmers across contexts and geographies.
PxD is also making its first foray in Kenya into using low-power radio communications for remote sensing by experimenting with water sensors in this study. These sensors will allow us to measure real-time water levels for dairy farmers so that we can correlate supply, consumption, and dairy output. We hope this paves the way for us to explore the use of other sensors (such as those that measure soil moisture or air quality) to improve farmers’ access to real-time information.
Our first few months of rolling out water tanks have given us insight into the potential for ACLs to enhance credit access for productive assets by reducing the financial burden and collateral obligation that smallholder farmers typically face.
We believe this initiative can have a profound impact on farmers and their families in different contexts struggling with access to water, and could be a path not only to increase profits for farmers and the welfare of their livestock, but improve the well-being of women and girls who are those being most impacted by climate change.