AN ANALYSIS OF MOTIVATIONAL FACTORS INFLUENCING CREDIT DEMAND
AMONG SMALL-SCALE FARMERS A CASE STUDY OF UASIN GISHU COUNTY
Background of the study
Agricultural credit has often been cited as a great concern for farmers, government and
development experts as a key input in enhancing the productivity and performance of the
agricultural sector. This is especially so in developing countries where agriculture plays a major
role in economic development. Shortage of agricultural credit has in the past been considered as
a major constraint to technology uptake, improvement of farm productivity and thus employment
creation. In Kenya, the agricultural sector directly employs 3.8 million people and 70 percent of
country’s population depends on it in the rural areas (CBK, 2007). But according to a Central
Bank of Kenya report (2009), 47 percent of Kenya’s population has never had credit.
Declining farm productivity and intensification coupled with rising prices of farm inputs
are a serious challenge for the government. A survey by the ministry of planning and national
development(MoPND, 2008) shows that 63 – 71 percent of the population live below the poverty
line and cantherefore not raise funds for uptake of technology. In 2008, Kenya had a food deficit
arising from the low production of 28 million bags of maize versus a national consumption
requirement of 36 million bags (GoK, 2008). The cost of fertilizers rose from Ksh.1750 per 50
kg bag to Ksh.4000, while petrol and diesel prices increased by more than 50 percent (CBK,
2008). Kenyans found themselves ill prepared for the high cost of farm inputs and this, coupled
with declining farm productivity, have seen real incomes plummeting.
The rate of inflation has also been on the rise having moved from 12 percent in 2006 to
30 percent in 2008 (FAP, 2009)hence affecting imports of farm in-puts. The combined effects of
drought, economic recession, rising oil prices and declining productivity as observed in recent
times have made government and other stakeholders eager to improve the situation by providing
avenues for farmers and farm businesses to access finance that would be used in acquisition of
farm inputs and for making investments in farm intensification . In 2003, Ksh.800 million was
disbursed to Agricultural Finance Corporation (AFC) by the Government for lending to farmers.
In 2006 and 2007,the government set aside in its budget Ksh 1 billion to establish a youth
fundand a Women fund which was later increased to Ksh. 2 billion in 2008 to help youth and
women in the rural areas invest in any viable economic activity including agricultural
enterprises.
A report on the year 2003/2004 financial year funds allocated to AFC show that every provincial
branch was allocated ten million (GoK, 2004). However, the Rift valley province branch of AFC
received very few applications for the loan funds from farmers and agribusiness traders (MoA,
2004). According to the report by the end of October of 2004, 80 percent of the 10 million was
still lying in the accounts of AFC. Subsequent reports on the youth fund and the Women’s fund
also indicate that applications for the funds were very low in the county.Why farmers would fail
to take the opportunity of applying for credit offered at lower interest rates (AFC charges 12
percent per year) than the market rates(18 percent) was a cause for curiosity in this study.
Apparently some social, economic and individual factors seem to play a hidden role in
perpetuating this enigmatic situation.
Statement of the problems
An assessment of the overall disbursement of credit in 2008 shows that the agricultural sector
received only 10.4 percent of total available credit compared to 24.9 percent for the finance and
real estate; 19.8 percent for manufacturing and 17.8 percent for trade and hotel industry (CBK,
2009). Empirical evidence from Kenya, indicates that 28.5 percent of rural households receive
credit from formal financial institutions, and among those who do, the commercial farms and
famers groups accounts for 51.60 percent of the total volume of credit disbursed (Owuoret al.,
2004 ; CBK, 2008).The situation as observed in Uasin Gishu county also reflects a similar
pattern with a higher proportion of non-poor than poor households using credit; about 68 percent
versus 41 percent in 2007applied for farm credit. Though the numbers of branches of
commercial banks and microfinance institutions had increased, poor farmers’ response to
products offered by these banks remained low (KNBS, 2008). A survey done by Financial Sector
Deepening Project (CBK,2009) covering both urban and rural households to assess credit access
in Kenya indicates that those who applied for loans did so in order to pay for school fees and to
purchase farm equipments .The report also showed that there is very little ‘shopping’ for bank
products. The low demand for loans was caused by high the interest rates levied on loans by
financial institutions and commercial banks. However, most banks realized this shortcoming and
reduced the bank rates from 28% to 18% and counting. This method of interest reduction worked
very well that the number of credit demand increased tremendously.
Significance of the study
This study will be of great significance to financial institutions in a way they will realize various
strategies to employ as to increase credit demand. A lot of effort and studies have been devoted
to the supply side of credit but this study seeks to look at the demand side of credit in order to
help readers and policy makers understand the farmers demand constraints for credit. This may
contribute towards the design of a more relevant policy that is sensitive to the challenges faced
by small-scale farmers. For the sake of reducing the high poverty levels and dependency, a
solution is needed that can unlock the economic potential of Uasin Gishu county. This study
hopes to contribute towards such a solution.
Scope and delimitation of the Study
The study covered Uasin Gishu County in Rift valley Province in Kenya and targeted
small- scale farmers. In particular, the author was interested in the respondents who had never
sought credit and those who had managed to receive loans from the lending institutions. The
study did not consider those who use family, friends and other informal sources of finance. Of
pertinent interest to the research were the factors influencing formation of intention to seek
information on credit and number applications for credit. Included in the study were locals in
formal employment in the area, small-scale business people and retirees who also practice
farming and live in the study area.
Conceptual Framework
Independent Variables Dependent Variables
Motivational Factors Credit Demand
Interest rates
Source: Author (2022)
The rate at which credit will be demanded is affected by the level of interest rates for instance; if
the borrowing rates are high, clients will be discouraged to take loans and vice versa. On the
other hand, when the interest rates keeps on fluctuating every time, clients might end up not
taking any credit facility with the phobia that it will rise beyond their expectations and render
them unable to pay the loan advanced.
Credit repayment tenure affects credit demand such that clients will go for longer periods of
credit repayment as compared to shorter period. This is because, longer repayment periods
allows time for income generation through the money borrowed and hence avoiding losses that
can be caused by using the money borrowed to repay the loans as for shorter periods of
repayment time.
Advertising increases information know how because clients will be able to realize and get an
insight of the credit policies of different financial institutions and hence go for the most
favorable one. Through advertisement, market widens and hence leading to high credit demand.
Good customer relations will always encourage clients to want more of the services rendered by
the financial institutions. Customer relations makes clients feel appreciated and at ease hence
responds faster to credit demand.
Interest rates
Credit demand
Credit repayment tenure
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Customer relations
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