Financing Smallholder Agricultural Production in Kenya: An Analysis of Effective Demand for Credit

Abstract

Financing smallholder farming has been one of the major concerns of Kenya’s development efforts. Many credit programs have evolved over the years but with dismal performance. In a study that sought to find the best way to fund smallholder agriculture, it became necessary to analyze and document smallholders’ effective demand for credit. Of particular interest was the comparison of the existing production plans and production plans under strictly profit maximization. Linear programming model was used to formalize observed plans and determine those under profit maximization. Both the activities and the values of outputs under different objectives were compared. Farm Investment Analysis was undertaken to determine the suitability of funding farm activities through credit. The study was undertaken in selected zones of Murang’a and Kisumu districts, being typical smallholder areas. Sample farmers were visited and structured questionnaires administered to cover farm events and physical resources of short rains 1995 and long rains 1996. This formed a basis of formulating the farm plans. Ten years down the road, objectives of smallholders have not changed as have been observed during outreach programs. The results showed that: (i) farmers’ activities in the observed plans were different from those under strictly profit maximization; (ii) the observed plans had significantly lower profit than those under profit maximization; and (iii) meeting constraints through credit was only feasible when the objective was profit maximization. Smallholder agriculture, characterized by subsistence production, does not exhibit effective demand for credit, and funding it therefore requires means other than the competitive market.