Factors affecting access to formal credit: a case study of small scale farmers in Busia County, Kenya

Abstract

Agriculture is the leading Economic activity in Kenya and it is the way of life for most rural households. It accounts for about 18% of wage Employment and contributes about 26% of the country’s GDP. The main objective of this study was to investigate factors that affect access to formal credit amongst small scale farmers in Busia County. The study also aimed to establish the farmer characteristics that determine access to credit and Economic characteristics that affect access to credit. The data was collected from a cross sectional survey of 375 rural households who were proportionately sampled from a population of 15,705, interviewed 2 K-Rep officers, two officers from Agricultural Finance corporation, and two officers from Kenya Women Finance Trust. Interviews, structured questionnaires, observation and document analysis were used to collect quantitative data from the sampled households. Descriptive and linear regression were used to analyze quantitative data. The regression coefficients were tested at 5% level of significance. Findings of this study revealed that the joint effect of the explanatory variables in the model accounted for 90.6% of the variations in the factors affecting the farmers’ credit access. Sixteen out of the eighteen variables (and coefficients) are significant at 5% and hence greatly influence credit access. It was only the marital status and sales increase for the past two years that did not have a significant coefficient. The results revealed that 32.9% of small-scale farmers accessed agricultural credit, whereas 67.1% did not access credit. The findings also revealed that agricultural credit access by female farmers is still very limited (25.6%) compared to male dominance (74.4%). Generally, ability to pay the loan in due time, education level, Marital status, family size, Gender, number of employees, source of income other than farming, the length of time farm had been in operation, farming, business or group association, size of the farm, age, credit program, keeping financial records for your farm, distance of farm from the nearest town, and the number of years in farming were highly important in influencing access to agricultural credit. Most farmers in the region have not fully exploited their potential in agricultural production due to capital constraints and small land size. Government should improve service delivery in terms of extension services and where not possible should encourage public private partnerships in delivering extension services to the farmers. Awareness campaigns on the need to adopt new technologies and use of fertilizer should be encouraged. Enabling environment for group marketing of agricultural produce to increase the bargaining power for better prices so that farmers can increase their productivity. Government should therefore promote forums that can be used to educate the farmers on the need to borrow credit and link them to the lending institutions. Effective training programs that would include; insurance to mitigate the risks in farming, financial literacy programs to familiarize smallholder farmers with the skills required to effectively understand, access and utilize credit financial services to enhance their agricultural activity. Financial institutions should consider issuing production credit in form of farm inputs in order to improve the impact of credit on production. Effort should be focused on how the credit input services can be enforced to lend in kind to reduce fungibility into consumption expenditures. There is need to review existing policies and in some cases development of new ones that will enable policy mechanisms to realize equitable access to credit for small holder farmers.