Determinants of Lending to Farmers by Commercial Banks in Kenya

Abstract

Kenya is an agriculture based country and there is a lot of interest in the financing activities in this vital sector. The explanation provided by theory that there is connection between lending policy and issues like credit standards; assessment of return on credit; and assessment of risk on credit to farm may not be universal to all sector or countries. This research was, therefore, designed to find out the determinants of lending to farmers by commercial banks in Kenya. The study was conducted through a survey using self administered structured questionnaires delivered to commercial banks in Kenya. The respondents were required to provide an assessment of their lending policy to farmers vis-a-vis their policies on Credit Standards with Regard to Farmers; their Assessment of Return on Credit to Farmers; and their assessment of Risk on Credit to Farmers. The results indicate that banks give out loans to finance farming activities and that farmers have reliable sources of income that enable them to pay back their loans in time. The results show that Credit Standards Credit Standards Regard to Farmers negatively affected lending to farmers. The research has also found that Return on Credit to Farmers negatively affected lending policy to farmers. Further, Risk on Credit to Farmers negatively affected lending to farmers. This indicates that Credit Standards with Regard to Farmers; Return on Credit to Farmers; and Risk on Credit to Farmers reduces the amounts provided to the farmers in Kenya. Factors such as the location of the financial institution, loan size extended to farmers, interest rates charged on credit to farmers affect lending to farmers by commercial banks. Based on the findings and the conclusions of this study, it is recommended that policies should be designed to ensure that the income from farmers in Kenya is stabilized to mitigate risk and improve their creditworthiness. Policies should also put in place to ensure that farmers have skills to manage their finances properly to maintain excellent financial records with banks. Policies should be put in place to help banks relax their credit qualification for farmers so as to stimulate the demand and supply of credit.