A survey of the lending practices of financial institutions to the agricultural Sector in Kenya

Abstract

The main objectiveof the study was to carry out a survey to determine the lending practices of financial institutions to the agricultural sector in Kenya. Data was collected by the use of a structured questionnaire,which had both closed and open-ended questions. Data collection was done around factors affecting the lending practices by financial institutions to the agricultural sector which included the interest rate, collateral, exchange rates, the business environment, technological advancement, existing and new competition by financial institutions, customer type and government policy. Fifty (50) financial institutions were contacted with 100% response rate. The study was descriptive in nature and descriptive statistics were used to analyse the data, which was presented in tables, frequency distribution and percentages. The study revealed that an increase in interest rates leads to increased interest burden on loan holders, which later leads to borrowers defaulting and probably to bank failures since this increases nonperforming loans in a bank's portfolio. The study also revealed that of all the banks contacted a higher percentage(56%) were not lending to the agricultural sector while 46% were lending to the agricultural sector, This was as a result of the risks associated with lending to the agricultural sector especially those associated with lack of traditional forms of collateral, price falls, and yield risks. However, there is renewed interest in agricultural sector policy frameworks, financial systems building and demand for financial services by the rural population which may increase the level of lending to the agricultural sector. It was also observed that government intervention coupled with the effects of interest rate liberalization, frequently result in too much credit being given to few, hence straining borrowers debt servicing capacities,and jeopardizing credit schemes.