Rural livelihoods and households' participation in financial markets: the case of smallholders in Kakamega and Vihiga districts
The increasing land scarcity due to rapidly expanding population has raised two key concerns for rural development policy. First, any increase in land productivity can only be achieved by intensification of farming activities. Secondly, while land is regarded as farm households' most important productive asset, it is becoming apparent that the parcels may be too small to make any meaningful contribution possible to incomes. Consequently. questions have been raised on the viability of agriculture as the basis for poverty reduction in rural Kenya and whether desirable policy goals would therefore be more financial investments on current portfolio of land or in off-farm sector. But regardless of the interventions pursued, financial capital is central yet the smallholders lack access to a range of financial services for risk coping and for improving their productivity in a significant manner. This study sought to establish a clear link between the micro-level activities in which the rural dwellers engage and the demand. range and factors that influence their Iikelihood and extent of participation in the credit markets. The study employed a livelihoods approach to two data sets obtained from samples of farm households living in Kakamega and Vihiga Districts. The data was analyzed using descriptive statistics and regression analysis. The analysis of the income structures revealed that the share of off-farm income in total household income is relatively higher (60%) in the land-constrained Maragoli location (Vihiga) than in land abundant Shirugu location (50%) of Kakamega. Further analysis of the income distribution also indicated that while increase in land productivity is important in securing improved livelihoods for rural dwellers, it may not be sufficient to enable them escape poverty. Growth of non-farm sector is necessary especially in regions with declining land access and must be emphasized if such households are to escape poverty. This means that while agricultural credit is necessarily important in such areas to improve land productivity, the evidence on income structures points to the necessity for promotion of a broad array of financial services that are likely to expand space of non-farm activities. This would augment their livelihoods and reduce their vulnerability to shocks such as drought. While access to credit is crucial in facilitating both farm and off-farm investments, only 13% of the total sampled population reported receiving formal credit. The low participation was attributed to stringent requirements by the formal lenders. The financial institutions mostly offer specialized products hence are unable to meet the diverse financial demand of rural households. The estimated Logit and Tobit models to explain likelihood and extent of participation in formal credit markets in Maragoli and Shirugu locations indicated that the level of education and possession of a formal savings had positive intluence on households' participation in both regions. The study conc ludes that since the majority of the rural poor still depend on land-based agriculture. even where land is scarce such as in Vihiga district. the immediate course of action must lie in increasing the productivity of the natural resource base (mainly soils). In this regard. investments in mineral fertilizers, high yielding and high value varieties (such as horticultural crops) are vital yet evidently lacking in the study locations, especially among the resource poor. But these must also be integrated with expansion of extension services and improvement in access to product markets. The study recommends promotion of education and mobilization of savings to improve financial services delivery and spur broad-based development in the rural areas. It also underscores need for further evaluation of the marginal effects of access to credit on various categories of household incomes and welfare aspects in Kenya.