Effect of macroeconomic factors on Commercial banks lending to agricultural Sector in Kenya

Abstract

The study sets out to investigate the effect of macroeconomic factors on commercial banks' lending to agricultural sector in Kenya. The relationship between the effect of macroeconomics factors and sectoral lending by commercial bank is of major concern in the bank lending function in an economy. Commercial banks use the findings of the effect of macroeconomics to predict the performance of sectors in order to take precautionary measures in lending to avoid financial crisis. Insufficient supply of agricultural sector credit is one of the constraints to modernizing agricultural production. Lending by commercial banks to the agricultural sector has not lived up to expectations. To this end, the study set out to investigate the effect of macroeconomic factors on commercial banks' lending to agricultural sector in Kenya. The findings have established the effect of Inflation rate, Interest rate, Exchange rate and (GOP) on commercial banks' lending to Agricultural sector. The population of the study comprised of all commercial banks' in the entire period in Kenya that were licensed and registered under the Kenya banking act. All the commercial banks in Kenya were sampled in order to provide a complete picture on the effect of macroeconomic factors on commercial banks' lending to agricultural sector in Kenya. The data required for the study was obtained from secondary source in the central bank of Kenya that was used to investigate the relationship between dependent and independent variables. The theoretical framework that was used in this study explored business cycle theory and contemporary banking theory of financial intermediation as the main root of limited percentage share of commercial banks' lending to agricultural sector in Kenya .The researcher employed descriptive survey design and data analysis used descriptive statistics, correlation analysis and regression analysis. While commercial banks were found involved in lending activity, they continued to lend low to agricultural sector. It was clear from the study that, a unit increase in interest rate, inflation rate and exchange rate negatively affected theamount of credit provided by the commercial banks respectively. This resulted to decrease in the amount of credit.GOP was found to have a positive relationship to lending. A unit increase of GOP led to increase to amount of credit provided by commercial banks. To cater for the credit needs of agricultural sector, it is incumbent upon the commercial banks to review its lending dimension. The study has important implications in terms of policies that will enhance economic growth through agricultural financing. There is need to increase the amount of lending to agricultural sector through the reduction of interest rates and controlling the negative effect of exchange rate and inflation to allow more economic growth in the country