Institute for Development Studies, University of Nairobi

The provision of subsidised credit for smallholders is widely supported as important means of encouraging smallholder capital formation and production, and as one of the ways of redressing the balance between smallholder agriculture and the rest of the economy. In this paper, Kenya’s experience with smallholder credit is reviewed and some of the major issues of relevance to policy in this field are examined. First, the macroeconomic issues involved in smallholder credit policy are discussed, particularly its' relationship to aggregate savings and the productivity of investment at the macro level. The case for providing smallholder credit on fully commercial terms is then reviewed, and the arguments presented in its favour are strong. The case for providing credit at subsidised rates rests on arguments of more limited application in practice, suggesting that the place of subsidised credit might be more modest than had been thought. Finally, some institutional questions are raised and some alternative approaches to those being followed at present in Kenya, are suggested.