Production Finance for Small Farms in Kenya: the Case for Group Credit

Abstract

Economic growth in Kenya depends on agricultural prosperity. With only 18% of the total land area in Kenya suitable for farming, improvement in productivity will mainly hinge on improved agricultural techniques. This requires the increased use of purchased inputs such as hybrid seeds and fertilizers. The majority of the farmers in Kenya, however, cannot afford purchased production inputs, and they have little access to credit. A number of constraints inhibit the flow of credit to small holders. These include the colonial tradition and lack of effective small holder loan programs. There is, however, one promising type of credit system based on lending to groups of small holder farmers. Group lending responds to such major constraints in small holder lending as the lack of appropriate collateral to secure loans and the high institutional cost of small holder lending. Further, it achieves economies of scale by dealing with several farmers per loan. The group lending approach depends on the collective responsibility of groups for individual loans. It works in such a way that one's receiving of loan funds hinges on the groups's repayment of previous loans. This maintains an incentive for loan recipients to repay. This approach has been tried successfully by Non- Governmental Organizations, sections of a few government

programs and various informal groups. These institutions have been working in widely scattered areas within the country. Their impact has therefore been limited by scale while the informal groups have further been limited by financial constraints. For greater impact, it is proposed that group lending be expanded on a wider scale. The major strategy proposed for the implementation of this approach is the use of existing financial institutions, farmers groups, and other institutions. This requires strengthening the operations of the institutions directly involved in lending and borrowing to make them more effective in the delivery and utilization of the credit. The framework within which the institutions work is critical to the success of this approach. Credit and banking policies need to reflect a more balanced picture. Reorganization is required in the marketing and distribution of farm inputs to the small scale producers. Storage facilities need to be improved to meet the expected increase

in agricultural productivity by the farmers groups. Complementary services such as extension must be modified to serve the interest of small holders. Further research is needed to understand issues involving small holders such as saving potential, and the determinants of credit demand.