Analysis of factors influencing demand for agricultural credit among farmers in Kapenguria, west Pokot County, Kenya

Abstract

Farmers borrow loans from different sources; both formal and informal. Loan borrowing in different regions of the nation also differs significantly; in Kapenguria, the loan uptake is low. In spite of the expanding credit market, agricultural credit market is not growing as fast as the other sectors of the economy; therefore the need to investigate the factors influencing demand for agricultural credit. The variables were categorized into three: Farm and farmer characteristics, policy oriented factors and costs of direct production inputs. Three hypotheses were tested in line with the three categories of variables. A combination of stratified sampling and simple random sampling technique were used to obtain a sample size of 313 respondents. The study is based on the factor demand theory where credit was considered as a factor of production but it is not demanded directly; instead, demand for direct inputs of production lead to demand for agricultural credit. A log-log factor demand model for agricultural credit was specified with maize as the crop of reference and estimated by multiple linear regression technique. More than half (58%) of the respondents were male while 42% were female and men borrowed more amounts than women. Additionally, married farmers borrowed more than single farmers. Equity bank was the major lender in terms of clientele and total amount given out as agricultural loans followed by Kenya Commercial Bank (KCB). Financial intermediaries rationed loans by a mean of 18,717 shillings. Most (75%) of the respondents borrowed at interest rates higher than 10% with the highest being 24%. Women had higher mean expenditure on seeds and fertilizers than men while farmers in age group 40-49 had the highest mean expenditure on seeds and fertilizer. Significant farm and farmer characteristics were: access to extension, proximity to credit facility, household size and experience in farming with p values 0.000, 0.042, 0.002 and 0.000 respectively. The two policy oriented factors (value of collateral and interest rate) were significant with p values 0.000 and 0.003 respectively. Two production inputs were significant (cost of labor and cost of seed maize) with p values 0.000 and 0.018 respectively. The study recommended expansion of coverage of financial services through increased agency banking. It further recommended intensification of farmer advisory services, establishment of initiatives that would promote borrowing, development of suitable loan products for the small scale farmers and establishment of special programs that would avail credit for purchase of production inputs. To understand this topic further, a nationwide study could be done to bring out the factors influencing demand for agricultural credit. Other studies could focus on comparatively analyzing factors influencing demand for agricultural credit between small and large scale farms. The influence of government and NGO aided programs on demand for agricultural credit is another area that could be subjected to future studies.