Agricultural Lending and Non-performing Loans Among Commercial Banks in Kenya

Abstract

he Agricultural sector has been a key driver of economic growth in Kenya for the past four decades and is the main source of livelihood for almost 80 per cent of Kenyans. The sector has continued to play an important role in the economy of this country as its contribution to the Gross Domestic Product (GDP) has increased from 26% in 2012 to about 29.3% in 2013. Agricultural lending plays a very important role in the society as small–scale farmers are able to access affordable credit and hence improve productivity, enhance their food security and expand their income. It is on this premise that the researcher sought to establish the relationship between agricultural lending and Nonperforming loans in commercial banks in Kenya. The study examined past literature related to agricultural lending against the set objectives. It utilized a theoretical framework in explaining the determinants of Nonperforming loans. A descriptive study design was used with 43 commercial banks as the target population. Secondary data was obtained from CBK supervisory reports and financial statements were analyzed further. The data covered a period of 5 years from 2009 to 2013. Descriptive approach was used to determine the weights of the variables. Interpretation of data was done using SPSS and MS Excel. Inferential statistics involving use of ANOVA and regression analysis was done. Results from this study was presented using charts, tables and graphs. The study concluded that growth in loans to Agricultural sector do not necessarily affect the non-performing loans. It was observed that high interest rates were not a major concern for Agricultural loans as there was a positive relationship between growth in ad a high demand even at annual interest rate of 20.41 % in the year 2011 and even a higher demand for credit at an annual interest rate of 18.15% in 2012. The researcher therefore concluded that lending to Agriculture is not as risky as perceived by most lenders as the finding depicted a positive relationship between growth in loans to Agriculture sector and Non-performingloans. The researcher recommends that further research be done to investigate why the gross loans to agricultural sector are high despite high Non-performing loans figures recorded during the period under study and how lending to agricultural sector has contributed to high non-performing loans.