Flexible Loans and Access to Agricultural Credit for Smallholder Farmers in Siaya County, Kenya

Abstract

Access to credit is a pervasive problem for smallholder farmers in developing countries. While there are several factors why this is the case, the manner in which the loans are designed could play a significant role in explaining the low access to credit in Africa. Studies show that this problem might be exacerbated by the strict loan terms available in most standard loans that are irrelevant to farmers’ irregular cash flows. Thus, as studies show, the remedy could be in lenders offering flexible loans. As more lenders, especially in the microfinance sector, design flexible loan products, research shows conflicting results in terms of whether such products improve access to credit. These conflicts are due to methodological, measurement and contextual differences. Further, previous studies focus on single elements of flexible loans and not an index of several elements of flexibility to determine whether the varying levels of flexibility in loan products would explain credit access. Due to the limitations of these prior studies, this study attempted to re-examine the effect of flexible loans on credit access in the agricultural sector by assessing whether the degree of loan flexibility matters in credit access. The study used a cross-sectional survey design where structured questionnaires were used to collect quantitative data from 103 farmers simple random sampling method and who had taken up loans with various credit institutions in Ugenya sub-county. Further qualitative data on the supply side of credit access were gathered through stylised facts where interviews were conducted with farmers, and local authorities as well as secondary information. The questionnaire was pre-tested on a sample of farmers and changes made before the final survey was conducted. The tool was also examined for both validity and reliability. Using a combination of various data analysis software, the study conducted descriptive, bivariate and regression analyses in order to answer the research questions and test the hypotheses. Results of the descriptive analysis showed that the average age of heads of households in the sample was 49 and that majority of heads of households were men. The study also found that majority of the farmers had a secondary level of education. The average household size in our sample was six people while the average wealth of households, which was measured as the number of items owned, was four. Majority of the farmers were enrolled in input credit programmes and the average size of credit was KSh. 14,777. The descriptive results also showed that the average loan flexibility as measured by the Loan Flexibility Index (LFI) was 0.419. The bivariate relationships performed using chi-square tests showed that access to credit differed across sex, education, type of credit, and wealth status of households. The results also showed that access to credit differed across bullet payment, loan refinancing and loan rescheduling. The regression results showed that none of the flexible loan elements had a significant influence on access to credit and neither did LFI at 5% level of significance. The study concludes that while flexible loans do not have a significant effect on access to credit, the direction of the relationship suggests that farmers are credit rationed when the loans are highly flexible. The study recommends that credit institutions should re-design their loan products in order to meet the needs of farmers as well as eliminate informal and subconscious barriers to exploitation of elements of flexible loans. The study also recommends that the government should encourage and incentivise financial institutions to offer flexible farm loans through targeted policies such as credit guarantee schemes. Further research should also be carried out in this area to have a better understanding of the determinants of credit access in general and the link between flexible loans and access to credit in particular.