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
Publisher
University of Nairobi