The political economy of farm credit in kenya

Abstract

Farmer access and financial performance are used as criteria to evaluate major farm credit schemes and lenders within the formal sector in Kenya. A non-mathematical model is constructed to demonstrate the interaction of political and financial factors in determining the performance of the farm credit system according to these criteria. The model identifies why and how major government initiatives in farm credit provision so frequently have been disappointing by either or both of these criteria. The questions of access to credit, the relevance of credit to on-farm innovation, and the ability of credit to stimulate agricultural production are also related through the model. The performance of the system is viewed from the perspective of financial repression and its effect on the development of financial structure. The hypotheses explored in the study demonstrate the applicability of elementary capital market and financial theory to Kenya's agricultural credit system. The model derived from these hypotheses highlights the constraints to financial development, in terms of farmer access and the financial viability of agricultural loan portfolios, imposed by the peculiar set of assumptions upon which government intervention in credit provision, often with the support of external donors, is based. ,The model is derived largely from the malfunctioning of major elements in Kenya's farm credit system, whLch has been the most visible fact of theoretical and operational interest. However, its validity is confirmed by the explanatory power of the framework it offers for the analysis of the outstanding success of the cooperative structure in rural financial intermediation in the early 1970's. The Repayment Index, which makes its debut in this study, is applied in two concluding exercises as a social science research tool and as a credit management tool. Borrowers' repayment performance may be precisely quantified and ranked in terms of Repayment Index values. Rigorous statistical treatment of repayment performance, including correlation with borrower, farm and loan characteristics, is possible using Repayment Index values. These values also furnish a basis for loan administration decisions and for the comparison of the performance of loan portfolios, credit decisions and decision makers, and of other managerial variables within the lender's control.