effects of credit facilities and agricultural production of small scale farmers

EFFECTS OF CREDIT FACILITIES AND AGRICULTURAL PRODUCTION OFSMALL SCALE FARMERS

(A CASE STUDY IN ELDORET EAST CONSTITUENCY)

ABSTRACT

The main objective of the study was to assess relationshipbetween credit facilities and agricultural production ofsmall-scale farmers in Eldoret East Constituency of Kenya.In order to achieve the purpose of this study, threespecific research objectives were addressed: to determinethe demographic characteristics that influences theaccessibility of credit by small scale farmers in EldoretEast Constituency, to determine the impact of creditfacilities on small scale farming in Eldoret EastConstituency and to establish the relationship betweencredit facilities and agricultural production of small-scalefarmers in Eldoret East Constituency of Kenya. This studyutilized a descriptive survey based on a sample drawn fromAinabkoi and Moiben locations of small scale farmer’s ofEldoret East Constituency. The conceptual framework of thestudy was based on conceptual relationship betweenindependent and dependent variables. Probability samplingwas chosen among the many sampling designs available, multistage, cluster, stratified and simple random sampling wereadopted to get 153 respondents for the study. Data wascollected by use of structured questionnaires, interview.Data from the research instruments were analyzed usingdescriptive statistical analysis. Correlation analysis andchi square test of independence was used to establish therelationships between the independent variable and thedependent variables. From the finding of the study, thestudy established the demographic characteristicscomparison based on credit status of small scale farmersindicates that borrowers have significantly higher valuesthan non-borrowers, especially in area cultivated, input

i

usage and productivity. A similar trend was observed whenfarmers with farm size equal to or greater than two hectareswere compared with those with less than two hectares. Fromthe finding, it can be observed that there is strongpositive correlation coefficient r = 0.841, p<0.01, showed ahighly significant relationship between demographiccharacteristics and credit facilities accessibility of smallscale farmers. The finding reported furthered revealed apositive association between credit and agriculturalproduction of small scale farmers. Provision of credit tosmall-scale farmers makes them more productive. The findingshow that credit facilities accessibility is among the mainrelated factors that predict agricultural production ofsmall-scale farmers in Eldoret East Constituency. This studystrengthens the hypothesis that there is a directrelationship between credit and productivity. The findingsof this study will help identify the major problems facingsmall scale farmers in Kenya and recommend solutions tothese problems. This research will provide insightfulreference that agriculture policy makers and researchers andscholars in Kenya can rely on in regard to challenges facingsmall scale farmers and may also reveal other areas thatmight require further research.

TABLE OF CONTENTS

DECLARATION i

DEDICATION ii

ACKNOWLEDGEMENTS iii

ii

ABSTRACT iv

TABLE OF CONTENTS v

LIST OF TABLES ix

LIST OF FIGURES x

LIST OF ACRONYMS xi

OPERATIONAL DEFINITION OF TERMS xii

CHAPTER ONE 1

1.0 Introduction 1

1.1 Background of the Study 1

1.2 Statement of the problem 4

1.3 Objective of the study 5

1.4 Research Questions 6

1.5 Hypotheses 6

1.6 Significance of the study 7

1.7 Scope and limitation of the study 8

1.7.1 Scope of the study 8

1.7.2 Limitations of the study 9

1.8 Conceptual Framework 10

1.9 Operationalization of the Conceptual Framework 10

1.9.1 Independent Variables 11

1.9.2 Dependent Variables 11

CHAPTER TWO 12

2.0 LITERATURE REVIEW 12

2.1 Review of Theories 12

2.2 Criticism of the Theories 15

2.3 Empirical Review 16

iii

2.3.1 Credit services and economic growth 16

2.3.2 The Role of finance 18

2.3.3 Effects of credit services on small scale farmers19

2.3.4 Impediment to the development of the credit and

financial system in

developing countries. 21

2.4 Summary 24

CHAPTER THREE 27

RESEARCH METHODOLOGY 27

3.0 Introduction 27

3.1Research Design 27

3.1.1 Area of Study 28

3.2 Population Size 28

3.3 Description of Research instruments 29

3.3.1 Questionnaire 29

3.4 Validity and Reliability of Research Instruments 30

3.5 Description of Sample and Sampling Procedures 30

3.6 Description of Data Collection Procedures 31

3.7 Description of Data Analysis Procedures 31

CHAPTER FOUR 32

DATA ANALYSIS, INTERPRETATION AND PRESENTATION 32

4.0 Introduction 32

4.1 Demographic characteristics 32

Table 4.1 Gender of the respondents 32

Fig 4.1: Gender of the respondents 33

iv

Table 4.2 Age bracket of the respondents 33

Fig 4.2: Age bracket of the respondents 34

Table 4.3.Level of Education of respondents 34

Table 4.4: Duration as a farmer 36

Fig 4.4: Duration as a farmer 37

Table 4.5: Level of scale of farming 37

Fig 4.5: Level of scale of farming 38

4.2 RESEARCH QUESTIONS 38

Table 4.6 Access to agricultural loans 38

Fig 4.6: Access to agricultural loans 39

Table 4.7: Where to get the loan 39

Fig 4.7: Where to get the loan 40

Table 4.8: Reasons for not asking for loan 40

Fig 4.8: Reasons for not asking for loan 41

Fig 4.9: Other financial services 41


Table 4.10: Types of services obtained 42

Fig 4.10: Types of financial strategies that could improve

credit access for small scale farmers as well as reducing

cost and risk to financial institutions 43

Regarding the types of financial strategies that could

improve credit access for small scale farmers, majority

of the respondents believed that restructuring of poorly

performing financial institutions could help and a

minority of respondents 3% said development of non

farming economic sectors in rural areas would help. 43

v

Table 4.11: In what way can financial institution be

attracting to rural area 43

Fig 4.11: In what way can financial institution be


Table 4.11: Problems facing the small scale farming in your

area 44

Fig 4.12: Problems facing the small scale farming in your

area 45

Table 4.11: Recommend policies to be adopted to solve the

above problems and enhance small scale farming 45

CHAPTER FIVE 46

5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 46

5.1 Summary of major findings 46

5.1.1 Summary of the findings 46

5.1.1.1 What are the demographic characteristics that

influence the accessibility of credit by

small scale farmers in Eldoret East Constituency,

(Research Question 1)? 47

5.1.1.2. To what extent does availability of credit

facilities affect small scale farming

production in Eldoret East Constituency, (Research

question 2)? 48

5.1.1.3 What are the relationship between credit facilities

accessibility and

vi

agricultural production of small-scale farmers in

Eldoret East Constituency of Kenya, (Research question

3)? 48

5.2 Conclusions based on findings 49

5.3 Recommendations 50

5.4 Suggestions for Further Research 52

REFERENCES 54

vii

LIST OF TABLES

Table 4.1 Gender of the respondents 51

Table 4.2 Age bracket of the respondents 52

Table 4.3.Level of Education of respondents 53

Table 4.4: Duration as a farmer 55

Table 4.5: Level of scale of farming 56

Table 4.6 Access to agricultural loans 57

Table 4.7: Where to get the loan 58

Table 4.8: Reasons for not asking for loan 60

Table 4.9: Other financial services 61

Table 4.10: Types of services obtained 62




area 65

Table 4.11: Recommend policies to be adopted to solve the above problems and enhance small scale farming 66

viii

LIST OF FIGURES

Fig 4.1: Gender of the respondents 52

Fig 4.2: Age bracket of the respondents 53

Fig 4.3: Level of Education of respondents 54

Fig 4.4: Duration as a farmer 56

Fig 4.5: Level of scale of farming 57

Fig 4.6: Access to agricultural loans 58

Fig 4.7: Where to get the loan 59

Fig 4.8: Reasons for not asking for loan 61



area 66



Fig 4.10: Types of financial strategies that could improvecredit access for small scale farmers as well as reducing

cost and risk to financial institutions 63

ix

LIST OF ACRONYMS

ADB Agricultural Development Bank

AFC Agricultural Finance Corporation

FAO Food and Agricultural Organization

of the United Nations

GOK Government of Kenya

GDP Gross Domestic Product

GNP Gross National Products

NGO Non-Government Organization

x

NIE New Institutional Economics

UN United Nations

UNEP United Nations Environmental Programme

OPERATIONAL DEFINITION OF TERMS

In this section, operational definitions are presented as

will be used within the context of this study:-

xi

Motivation- Is willingness to exert high levels of efforts

towards achieving organizational goals and conditioned by

the effort/ability to satisfy some individual needs.

Evaluation – refer to the assessment of the effectiveness

with which goals or objectives are attained in relation to

specific standard.

Poor Management- Type of management that does not lead to

effective resources allocation and employee motivation.

Product: A Product is anything that can be offered to a

market for attention, use that might satisfy human want or

desire.

Small Scale Farmers- Are the farmers in which their

production systems are extensive/semi-intensive utility-

oriented

xii

CHAPTER ONE

1.0 Introduction

1.1 Background of the Study

The contribution of the small scale farmers to local income,

subsistence and food nutrition is significant, as this help

to reduce the poverty level in the country. The sector

currently provides direct employment to millions of Kenyans

people. The sector also supports export that earns Kenyan

billions of shilling in foreign exchange annually. Small-

scale farming has the potential to contribute significantly

to the country gross domestic product if the sector is

accorded the necessary facilitation. In Kenya the small –

scale farming sector continues to battle with the daunting

task of moving from a ‘subsistence syndrome” to the “plan of

entrepreneurship”. Smallholdings play a very important role

in Africa agriculture, both in terms of their number and the

number of people involved.

The “poor efficient” hypothesis of Theodore W. Schultz has

attracted much attention since the 1960’s. Schultz made the

1

statement that it was neither the perverse economic

behaviour of farmers (including small-scale farmers), nor

the fecundity of man that was to blame for agricultural

woes. “In, my judgment, the real culprit causing the poor

performance of agriculture in the less developed countries

is the lack of economic opportunities in agriculture,

opportunities that are rewarding to farmers. It is the lack

of viable opportunities that is the crux of the matter”

(Schultz, 1964). Schultz (1964) contended that farmers in

“traditional” agriculture, using “age-old techniques”, are

generally efficient in their resource use, although they are

poor.

Although they note methodological reservations in this

regard, Eicher & Baker (1982) quote a large number of

studies in which marginal value product and marginal factor

costs of inputs in African agricultural were found not to

differ significantly from each other. This leads support to

Schultz “poor but efficient” hypothesis. Van Rooyen et, al.

(1987) conclude that small farmers in traditional

2

agriculture will generally be capable of making rational

economic decisions if the technical and economic constraints

they face are removed. However, these constraints continue

to be treated in an uncoordinated way, encouraging their

recurrence over time. One of these constraints is the

access to financial services. This element formed the basis

of this study.

Apart from the efforts of the government to ensure that

small –scale farmers have access to financial services, the

provision of financial services to the small-scale farming

sector has generally been static and has been declined in

some parts of the developing countries because of the risks

involved in dealing with farmers and the incompetence of

some credit provides in dealing with small holdings (Kuhn et

al, 2000). Access to credit services by small scale farmers

has been the focus of considerable research over the past

years. Kuhn & Darroch, (1999) cited lack of repayment

discipline; and the resultant extensive losses have weakened

many institutions. According to Braver man and Gausch

3

(1986), loan delinquency and default have plagued

agricultural credit programmes in low income countries,

especially with respect to loans provided by agricultural

development banks

Mohane et al, (2000) emphasized low interest rates for credit

normally lead to low interest rates on deposits, thereby

hampering the growth for savings and preventing financial

institutions from becoming financially independent. Fenwick

and Lyne (1998) indicated that high loan transaction costs

have discouraged lenders from serving certain groups of

farmers. Therefore, credit is conditional chiefly by

providing securities in the form of land or other assets.

Most small-scale farmers are not able to satisfy this

requirement because of poverty and the tenure arrangements

associated with their land assets. According to Gonzalez-

Vega et al (1997) the cost of borrowing, including the risk

of failing to obtain credit or obtaining it too late (for

example after planting) was high. Studies have shown that

4

borrowers’ cost of acquiring formal loans can be

substantially larger than the normal interest payment.

As the drive to boost agricultural production becomes

desperate in the face of rising population, the small-scale

farming sector continues to live in a “dilemma of

agricultural problems.” It continues to be excluded from

enjoying the benefits of using financial services. These

problems contribute to low per capita food supplies; hence

most of the small-scale farmers survive on family

remittances or move out of agriculture. However, the”poor

but efficient” hypothesis of Theodore Schultz convince

policy-makers of the need to design and implement policies

and programmes directly aimed at improving access to

financial services and the other above-mentioned primary

determinants in the small-scale farming sector.

Taking the above into consideration, this study seeks to

assess the relationship between credit facilities and

agricultural production of small-scale farmers in Kenya: a

5

survey study of small scale farmers in Eldoret East

Constituency. The study applied theoretical framework based

on the New Institutional Economics (NIE) as a school of

thought that provides the basis for analyzing and better

understanding of the major factors behind the success or

failure of small-scale farmers’ in developing countries.

The rest of the research was organized as follows. Chapter2

presents the Literature review while chapter 3 will

describes the research methodology. Chapter 4 presents data

analysis and presentation and chapter 5 presented conclusion

and policy implications.

1.2 Statement of the problem

The study sought to assess the relationship between credit

services and agricultural production of small-scale farmers

in Kenya: For a long period small scale farmers have

remained at the same level due to a number of unknown

reasons (Kibera, 1996). The provision of financial services

to the small-scale farming sector has generally been static

and has been declined in some parts of the developing

6

countries because of the risks involved in dealing with

farmers (Kuhn et al, 2000). Furthermore, lack of repayment

discipline, loan delinquency and default has plagued

agricultural credit programmes in developing countries

(Diagne and Zeller, 2001). Especially with respect to loans

provided by Agricultural Finance Corporation (AFC) bank of

Kenya. Consequently, AFC constitutes the single largest

credit provider for small scale farmers.

Most farmers have limited access to formal credit due to

high interest rates, terms and conditions that cannot be

fulfilled by the borrowers, among others. And even though

informal lenders charge high interest rates, borrowers still

patronize them because they are easily accessible and

documentation and collateral are not necessarily required.

However, borrowers from formal sources, specifically

cooperatives and rural banks, have been increasing over time

(Eaton, 2001). In order for small scale farmers to access

credit services, there is need to address their needs. Small

scale farmers’ savings can only finance on the on the little

7

percentage of their needs. There is clear indication that

they need external financing and the necessity to intensify

the existing micro-credit scheme. The existing should be

improved, a philosophy behind group credit should be

implemented i.e. moral guarantee would be exploited rather

than the present focus on land title and other assets that a

group as an entity cannot present and thus limited access to

credit (Ridler & Hishamunda, 2001).

Based on this background, this study sought to determine the

effect of credit facilities on agricultural production of

small-scale farmers in Eldoret East Constituency, Kenya. An

analysis of credit source decisions made by small-scale

farmers will enables the researcher to get a clearer

perspective of the question of interest.

1.3 Objective of the study

The main objective of the study was to assess relationship

between credit facilities and agricultural production of

small-scale farmers in Eldoret East Constituency, Kenya. To

8

achieve this aim, the following specific objectives were

used:

1. To determine the demographic characteristics that

influences the accessibility of credit by small scale

farmers in Eldoret East Constituency

2. To determine the impact of credit facilities on small

scale farming in Eldoret East Constituency

3. To establish the relationship between credit facilities

and agricultural production of small-scale farmers in

Eldoret East Constituency of Kenya

1.4 Research Questions

To address the objectives of the study, the following

research questions were used.

a) What are the demographic characteristics that influence

the accessibility of credit by small scale farmers in

Eldoret East Constituency?

b) To what extent does availability of credit facilities

affect small scale farming in Eldoret East

Constituency?

9

c) What are the relationship between credit facilities and

agricultural production of small-scale farmers in

Eldoret East Constituency of Kenya?

1.5 Hypotheses

The following hypotheses were tested:

HO1: There is no relationship between demographic

characteristics and credit facilities accessibility of

small scale farmers

H02: There is no relationship between credit facilities and

agricultural production of scale farmers in Eldoret East

Constituency.

1.6 Significance of the study

This study is significant since it is hoped that findings

and recommendation of the study might assist the policy

makers in the Ministry of Agriculture and livestock in

planning and making appropriate decisions. The researcher’s

desire is that this research would stimulate debate on small

scale farming programme and through that galvanize public

and government support for the programmes. This research

will provide insightful reference that agriculture and

10

livestock policy makers and researchers and scholars in

Kenya can rely on in regard to challenges facing small scale

farmers.

The findings of this study will be significant in many ways

and would benefit a cross-section of Agriculture

stakeholders. It would help identify the major problems

facing small scale farmers and seek to find solutions to

these problems. This would help in establishing better

credit scheme programs and strengthening Ministry of

Agriculture to make them deliver quality services to the

farmers. In efforts to achieve this, the study will

provide useful information to the Agriculture s stakeholders

on the major problems facing small scale farmers in Eldoret

East of Uasin Gishu County and equip them with knowledge on

how to deal with these problems.

The Ministry of Agriculture and livestock is concerned with

the welfare of farmers. This study would therefore provide

information that would lead to the improvement of financial

11

scheme programs and consequently the efficiency and

effectiveness of rural financial market. The information

generated by this study would be of great benefit to the

department of agriculture in Uasin Gishu County and other

agriculture offices in Kenya in understanding the effect of

credit services on agricultural production of small scale

farmers with a view to improving credit scheme programs.

Therefore, this research work would be of immense benefit,

not only to the Government in terms of the appreciation of

impact of credit facilities on agricultural production of

small scale farmers which have been overlooked, but also to

the industries. The study would also contribute to knowledge

and enhance practices in the management of small scale

farmers in Kenya.

In addition, this research would equip both policy makers

and industrialists with the strengths and weaknesses of

various strategies and practices in the management of small

scale farmers. This would make it easier for both Government

and Industries to combine the best management practices with

12

appropriate mix of policies and incentives to achieve the

objectives set for small scale farmers, and the agricultural

sub-sector. Furthermore, this study would provide insightful

reference that agriculture policy makers and researchers and

scholars in Kenya can rely on in regard to challenges facing

small scale tea farmers. The study would add knowledge to

the area of financial credit services on agricultural

production, which would reveal other areas that might

require further study. Recommendations would be made to

that effect.

1.7 Scope and limitation of the study

1.7.1 Scope of the study

The study was conducted in Eldoret east constituency of

Uasin Gishu County and covered small farmers, district

agriculture officials and respondent from Ministry of

agriculture and lives stocks. The study was limited in

terms of coverage and depth. Hence, it was limited to the

objectives mentioned in the study. The inadequacy of

relevant literature on the subject is the bane, can be both

expensive and daunting tasks. Delineating of the study area,

13

therefore, becomes necessary. Furthermore, the study

restricted itself to rural financial markets. It also

concentrated on the micro aspects of rural finance. In terms

of financial services, only credit components were analyzed.

Other services might not be considered.

1.7.2 Limitations of the study

The study is limited to small scale farmers in Eldoret east

constituency hence the results may not be generalized to the

rest of Kenya and also to the large scale farmers. However,

in view of the common demographic and characteristics of the

respondents, the findings of the study can be extrapolated

for a caution general applicability in various Kenyan work

situation and environment.

There are other limitations, and a number of challenges that

may likely to be encountered in the course of this study,

including the findings that can only be generalized within

the Uasin Gishu County If there will be need to extend these

generalizations to other districts, differences in

14

geographical locations and farmers characteristics should be

taken into consideration. The categorization of the farmers

that the study adopted did have its own limitations.

The accuracy of the data depends on the information given by

the respondents. In general, one should note the difficulty

of obtaining accurate financial data from respondents.

However, all the appropriate scientific approaches to ensure

that the confidence levels are high enough shall be

implemented.

1.8 Conceptual Framework

This study adopted conceptual framework to show the

relationship between the independent variable and dependent

variable. The independent variables includes accessibility

of credit facilities, impact of credit facilities,

efficiency of credit facilities and constraints and the

challenges. The dependent variables were itemized as the

levels of Small scale farmer agricultural production

indicators. Small scale farmer agricultural production is

indicated by production levels, productivity growth level,

15

number of employees, quality levels, operation efficiency

and levels of efficiency and effectiveness. . This is shown

in Figure 1.1 below.

Figure 1.1 Relationships between facilities and agriculturalproduction of small-scale farmers Independent variables

Dependent variables

1.9 Operationalization of the

Conceptual Framework

The key variables of this study are independent variables,

dependent variables and intervening/mediating variable

1.9.1 Independent Variables

The independent variables include interrelated components of

internal control systems (co accessibility of credit

facilities, impact of credit facilities, efficiency of

Small scale farmer agricultural production- Production levels- Productivity

growth level- Number of

Employees- Quality levels- Operation

efficiency

16

credit facilities and constraints and the challenges.). The

study used Liker-type scale (1-5) where 1. Strongly agree 2.

Agree3. Neutral 4. Disagree 5. Strongly disagree to examine

the relationship that exists between the relationship


small-scale farmers. An aggregate measure of effects of

independent variables on dependent variables was obtained by

aggregating the mean score measures of the items

1.9.2 Dependent Variables

In this study, the dependent variables were itemized as the

levels of Small scale farmer agricultural production

indicators. Small scale farmer agricultural production is

indicated by production levels, productivity growth level,

number of employees, quality levels, operation efficiency

and levels of efficiency and effectiveness.

17

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Review of Theories

This study adopted theoretical framework based on New

Institutional Economics (NIE) developed as a result of the

flaws of neoclassical economics. The neoclassical economics

is largely based on the assumption of perfect competition.

The basic underlying assumption of the neoclassical

economics is that exchange is a frictionless and a costless

process and it contends that where costs exist these are

passive and therefore not important. In addition, the

neoclassical economics provides the theoretical underpinning

of structural adjustment and assumes that exchange arises

spontaneously from the atomistic interaction of self-seeking

individuals. In essence, the neoclassical economics relies

on the universal concepts of supply and demand. It makes the

18

market an abstraction device of institutional detail and

regards the firm as what Cormier (2001) calls, a “black

box.”

North (1989) argues that the neoclassical model which has

served as the basis of economic reasoning for most scholars

holds only under the severely restrictive assumptions of

zero transaction costs; but positive transaction costs cause

institutions to matter. As a result, Oliver Williamson

(1985) coined the phrase the” New Institutional Economics

(NIE)”, which is a vast and a relatively new

multidisciplinary field that includes aspects of economics

and other social sciences. The NIE does not fundamentally

challenge the precepts of neoclassical economics but

criticizes it for failing to explain the nature of

institutions and the role they play in supporting the

existence and operation of markets. Institutions, according

to Stein (1994), exist as a means of reducing transaction

and information costs so that markets can operate

efficiently. To quote North, information processing by the

19

actors as a result of the costliness of transaction

underlies the formation of institutions (North, 1990).

NIE has various branches, but there is as yet no consensus

on what is included in the NIE. However, there are broad and

general salient approaches namely transaction and

information cost on the one hand and the theory of

collective action on the other. Only transaction and

information cost economics will be considered for the

purpose of this study. Transaction cost economics predicates

that the cost of transacting as determined by institutions

and institutional arrangements is the key to economic

performance. It argues that the institutions of a country

such as its legal, political and social systems determine

its economic performance.

In NIE, some of the unrealistic assumptions of the

neoclassical model (such as perfect competition, zero

transaction cost) are relaxed, but the assumptions of self

seeking individuals attempting to maximize an objective

20

function subject to constraints still holds (Poulton,

Dorward, Kydd, Poole and Smith, 1998). In addition,

institutions are incorporated as an additional constraint.

Williamson developed an analytical framework within which to

analyze transaction costs based largely on Ronald Coase’s

(1937) article, “The nature of the firm”. By definition,

transaction costs include the costs of gathering and

processing the information needed to carry out a

transaction, of reaching decisions, of negotiating

contracts, and of policing and enforcing those contracts

(Williamson, 1985). Similarly, they include the cost of

searching for a partner with whom to exchange, screening

potential trading partners to ascertain their

trustworthiness, bargaining with potential trading partners

(and officials) to reach an agreement, transferring the

product, monitoring the agreement to see that its conditions

are fulfilled and enforcing the exchange agreement.

Williamson presents four basic attributes that organise

transactions and economic activity: specificity of assets,

21

frequency of transaction, uncertainty pertaining to

resulting performance of a transaction and difficulty in

measuring performance of a transaction.

The purpose of the NIE is both to explain the determinants

of institutions and their evolution over time and to

evaluate their impact on economic performance, efficiency

and distributional implications (Nabli and Nugent, 1989).

Like Williamson, North (1990) suggests that institutions

change as communities’ rules of the game change in the long

run. An important component of the NIE approach is the

acknowledgement that economies perform differently because

of the way institutions evolve. There appears to be a two-

way causality between institutions and economic growth as

identified by Nabli and Nugent (1989) as well as Kherallah

and Kirsten (2001). Institutions have a profound influence

on economic growth and on the other hand economic growth and

development result in a change in institutions. It is

important to note that not all institutional changes are

beneficial to general economic welfare.

22

2.2 Criticism of the Theories

The proponents of New Institutional Economics thought that

provides the basis for analyzing and better understanding of

the major factors behind the success or failure of

agricultural practices in developing countries. The New

Institutional Economics (NIE) theory does not fundamentally

challenge the precepts of neoclassical economics but

criticizes it for failing to explain the nature of

institutions and the role they play in supporting the

existence and operation of markets.

NIE has various branches, but there is as yet no consensus

on what is included in the NIE. However, there are broad and

general salient approaches namely transaction and

information cost on the one hand and the theory of

collective action on the other. There appears to be a two-

way causality between institutions and economic growth as

identified by New Institutional Economics (NIE) theory.

Institutions have a profound influence on economic growth

23

and on the other hand economic growth and development result

in a change in institutions. It is important to note that

not all institutional changes are beneficial to general

economic welfare.

One of the defects of New Institutional Economics (NIE)

theory is that farmers in developing countries like Kenya

face many hidden costs that make it difficult for them to

gain access to markets and productive assets. Transaction

and information costs rate among the barriers that may be

influenced by policy. The cost of transacting does in every

case come down to the fact that the institutional framework

provides the incentives or disincentives for efficient

production and incentives for people to engage in

activities. Differential transaction cost among small scale

farmers stems from asymmetric access to assets, information,

services and remunerative markets.

The theories of economic development did not explicitly

identify the strong growth linkages and multiplier effects

of agricultural growth to the nonagricultural sectors.

24

Agriculture has strong, direct forward linkages to

agricultural processing and backward linkages to input-

supply industries.

2.3 Empirical Review

2.3.1 Credit services and economic growth

Economics hold different views and opinions regarding the

importance of the financial systems for economic growth.

There has been a tendency among some pioneers of development

economics to neglect financial in the mainstream of economic

development thought. Some economist inadvertently

undervalued the role that finance plays in determining the

pace and pattern of growth (Gurley & Shaw, 1955). Lucas

(1988) asserts that economists” badly over-stress” the role

of financial system by ignoring it (Levine, 1997). Economic

development has commonly been discussed in terms of wealth,

labour, force, output and income. These real or “good

“aspects of development have been the centre of attention in

economic literature, to the co-operative neglect of

financial aspects (Gurley & Shaw 1955). None if the pioneers

25

among development economists (Bauer, Colin Clark, Hirschman,

Lewis, Myrdal, Prebicsh, Rosenstein- Roden, Rostow, Singer

and Timbergen) even went as far as to listing finance as a

factor in development (Stiglitz, 1998: Chandavarkar, 1992).

The work of Franco Modigliani and Merton Miller in 1958 gave

impetus to the “non relevance of the financial structure”

proposition. Their model was based on four assumptions:

first, that firms can be identified by “risk class”; second,

that individual borrowing can substitute or firm borrowing;

third, that investors have full information about the

returns of the firm; fourth, that there are no taxes, or at

least that tax policy does not treat debt and equality

differentially (for a detailed discussion see Stiglitz,

1988).

A number of studies, however, have attempted to clarify the

hypothesis that financial structure matters and that

improvement in the financial intermediation process are

preconditions for economic growth. For example, Schumpeter

(1912) and MacKinnon (1973) provide broad descriptions of

the roles of the financial system in choosing and adopting

26

new technologies, and Mckinnon highlighted its importance in

promoting the use of better agricultural techniques.

Donors and policy makers in both developed and developing

countries have now started to recognize that efficient

financial systems help growth , partly by mobilizing

additional financial resources and partly by attracting

those resources to the set uses. I other words, finance

matter .According to Gurley and Shaw ( 1955), development is

associated with a debt issue , accretions of financial

assets and the “institutionalization of savings and

investment” that diversifies channels for the flow of

loanable funds and multiplies varieties of financial as well

as goods. It must, however, be pointed out that the

financial system’s contribution to economic development

depends upon the quantity and quality of its services and

the efficiency with which it provides them.

27

2.3.2 The Role of finance

Evidence based on the combination of firm-level and cross-

country data beginning to show conclusively that finance is

important in development. Results from such studies are

remarkable. The exogenous component of financial depth-

banks and the private sector- explains a large part of

growth, which is unexplained by many variables and policies

commonly thought to determine economic growth (World Bank,

1992). Clarify on the role of finance in economic

development was enhanced by the studies of Edward Shaw and

Ronald Mckinnon, who challenged the Keynesian growth models

that ignored finance ( 1988). These two economists coined

the terms “financial deepening” and “ financial repression:

According to Mckinnon, financial repression fosters dualism

in developing countries and is responsible for greater

income inequality and less than optimal investment

efficiency. The policy implications of these models are that

economic growth can be increased by abolishing institutional

interest rate ceilings and other restrictions on the

functioning of financial markets, to ensure that the

28

financial system operates competitively under conditions of

free entry.

Recent developments in theoretical literature by Levine

(2000:1997), the King and Levine (1993) are of importance in

answering the questions concerning the contribution of

financial services to economic growth. Those authors show

conclusive evidence that finance makes a substantial

contribution to economic growth. Levine (1997) created a

simple framework with which to conceptualize the role of the

financial markets and institution. Different types and

combinations of information and transaction costs motivate

distinct financial contracts, markets, and institutions. In

ameliorating transaction and information costs, financial

systems serve one primary function; they facilitate the

allocation of resources, across space and time, in an

uncertain environment (Merton and Bodie, 1995).

29

2.3.3 Effects of credit services on small scale farmers

Access to credit and other financial services has the

potential to make the difference between grinding poverty

and an economically secure life. Access to financial

services, especially credit is believed to have a

significant impact on various aggregate and household-levels

outcomes, including agricultural productivity technology

adoption, food security, nutrition, health, and overall

household welfare (Diagne & Zeller, 2001, Diagne, 1998)

According to Diagne and Zeller (2001), access to credit

affects household welfare outcomes through three pathways.

The first pathway is through the alleviation of the capital

constraints on agricultural households. Access to credit

increased the ability of poor households with little or no

savings to acquire agricultural inputs. Furthermore, easing

potential capital constraints through the granting of credit

reduces the opportunity costs of capital-intensive assets

relative to family labour, thus encouraging the adoption of

labour-saving , higher –yielding technologies and therefore

30

increasing land and labour productivity, a crucial factor in

encouraging development ( Diagne & Zeller , 2001, Freeman

et al , 1996, Fuentus, 1996), furthermore , credit could

significantly influence a farm household’s income by helping

its members to tap economic opportunities , thereby

assisting then to get out of poverty( Adugna & Heidues,

2000, Binswanger & Khandker, 1995).

Various studies (e.g. Carter, 1989) collaborate the

centrality of credit access to the evolution of the

agricultural sector. However, most profit maximizing banks

have continuously and systematically rationed small farms

out of formal credits markets. The implications of this

unequal credit access are well documented in the

international literature. According to Carter (1989), the

implications are that agricultural productivity, income

distribution and other facets of the agrarian structure are

critically expropriation, marginalization, and

impoverishment of the small scale farming sector. A number

of the theoretical studies that have been carried out on the

31

above mentioned questions suggest that credit indeed has

positive impact on small farm production.

Binswanger and Siller (1983) showed that poor access to

credit was one of the constraining factors in the adoption

of new technology on small –scale farms. Eswaran and Kotwal

(1986) argued that varying access to credit by different

farm size categories is a critical factor in shaping the

organizational structure of agrarian production. A study

done in Nicaragua by Carter (1989) also indicated a

significant effect of credit on input use.

The second pathway according to Diagne and Zeller (2001) is

by increase in household’s risk-bearing ability and by

altering its risks –coping strategies Access to credit and

other financial services enables households to adopt more

effective precautionary savings strategies, thereby

enhancing such household’s capacity to invest in more risky

but more profitable technology and enterprises. The third

pathway is that credit enables households to smooth

32

consumption ( Diagne & Zeller , 2001, Adugna & Heidues, 2000

and Binswanger & Khandker, 1995). By doing so it maintains

the productive capacity of households. As the World Bank

(1989) observes: “improved consumption is also an investment

in the productivity, the rate of technology adoption food

security, nutrition, health, and overall household welfare.

2.3.4 Impediment to the development of the credit and

financial system in developing countries.

Developing countries, especially in Asia and Africa, enjoyed

relative financial stability under colonial rule until the

end of World War II. However, their financial systems

suffered from colonial neglect and stagnation. Most of

these financial systems were heavily oriented towards

agricultural exports, other primary production and foreign

trade; they catered principally for expatriate communities,

and financial services to the indigenous communities were

limited. In most developing countries, the financial system

was underdeveloped until independence; it consisted of a few

foreign banks, cooperative societies, post office savings

33

banks, and moneylenders. South Africa, Zimbabwe and Namibia

have extensive banking systems. However, these banks have

not provided any noteworthy services other than savings

mobilization (Strauss Commission, 1996) to the regions in

which small scale farming by blacks predominated. Provision

of financial services to small-scale farmers and micro

enterprises remained underdeveloped. Among the contributing

factors to poor service delivery to small-scale farmers and

micro enterprises were explained bellow.

Financial institutions in the rural areas of most developing

countries are beset by problems resulting from poor or the

absence of infrastructure (Asian Development Bank, 2000). A

lack of ready access to social amenities such as water,

electricity and communication facilities renders it

relatively unattractive for qualified personnel to man the

rural financial system (Spio et al, 1995).

The use of the financial system as a tool for disbursing

political patronage creates strong disincentives for

repayment and diminishes the confidence of the savers. The

34

pattern of “politically giving and forgiving” credit has

undermined trust in the credit system (Von Braun, 1992).

Institutional weaknesses are partly from information

problems and partly from human capital problems.

Valuable repayment records that would allow the

reconstruction of credit histories as a tool for future risk

management are not available. Financial repression has

frequently caused banks to under-invest in information

capital (Gonzalez-Vega & Graham, 1995). Supervision of

institutions has not kept pace with their expansion and

development, and this has led to corruption and other

abuses, rendering depositors and investors unprotected.

Appropriate technology has not been adopted, resulting in

high transaction costs, both in monetary and non monetary

terms. The important effects of a failure to provide

education – creation of human capital – cannot be over-

emphasized (Asian Development Bank, 2000). The differences

in worker productivity in developing and developed countries

have been partly attributed to the human capital factor.

35

Neither has the equality of bank management employees

improved to a desirable level. The inadequacy in terms of

management and density of rural financial institutions has

resulted in market failures in most countries. This brings

into play the attendant problem of under-capitalisation of

the rural economy (Musinguzi & Smith, 2000).

The physical environment in which the clients of the rural

financial system operate is full of uncertainties.

Widespread drought in most developing countries has led to

periodic, wholesale de-capitalization, which is a

particularly severe hindrance where financial markets are

still in their infancy (Von Braun, 1992). Many, if not most,

donors and policy makers saw the supply of credit to farmers

in less developed countries as an important solution to

production related problems, and therefore threw much cheap

money into that sector. However, the unpleasant environment

in which these farmers operated, contributed to huge

delinquencies and defaults, turning many financial

institutions into “white elephants” (Spio, 1995).

36

Uncertainty in land tenure and land markets inhibited the

efficient utilization of land as collateral. Deficiencies in

delivery systems for agricultural inputs, and relatively

drastic seasonal price fluctuations of major food and export

crops, have probably contributed significantly to the poor

development of rural financial markets (Spio & Groenewald,

1998).

The policy environment according to (Lipton, 1976)

apportions part of the blame to private investors, aid

donors, or the too-powerful administrators for the rural

deprivation that has been found in most developing

countries. Urban interest, pressures and ideologies have

dominated policy formulation. Policies are designed to

allocate greater shares of developmental resources to urban

areas. The policy environment pertaining in most developing

countries has been a stumbling block in the development of

the financial system (Asian Development Bank, 2000). The

overall level of development of a country, and especially

any lack of recent growth, does not provide an incentive

37

climate in which finance and financial institutions can

function well. High rates of inflation and instability in

foreign exchange rates have been the order of the day.

Financial repression regarding interest rates and the

existence of widespread directed credit programmes have

affected the ability of financial institutions to achieve a

substantial outreach and attain viability (Yaron et al,

1998). The legal framework has also contributed

significantly to the slaw growth of the financial sector in

developing countries, because it often lacks provisions to

ensure enforcement of loan contracts (Spio, 1995). Other

policies, like linking rural credit to agricultural input

delivery systems, have also affected the rural financial

markets. One of the two often hinders the other because of

internal weaknesses in both systems (Von Braun, 1992). The

interest rate policy has furthermore had a great effect on

the development of the rural financial markets.

38

2.4 Summary

A growing body of empirical analyses (discussed above)

clearly indicated how credit facilities accessibility affect

agricultural production of small-scale farmers and are

affected by – economic development. There is a strong

positive link between the functioning of the financial

system and the long run economic growth. Theory and

evidence make it difficult to conclude that the financial

system merely – and automatically – responds to

industrialization and economic activity or that financial

development is an inconsequential addendum to the process of

economic growth.

Economist have come a long way since the time when many

viewed the financial system as a sideshow, or a passive

channel that allocate scarce resources to the most efficient

uses. Today, almost everyone agrees that the financial

system is essential for development. However, the recent

East Asian financial crisis indicates that the causal link

between finance and growth is determined by the nature and

39

operations of the financial institutions and policies

pursued.

Interventions by government have been pervasive in

developing countries. The success of these interventions

has been mixed, weighing heavily towards the side of

failures and undesirable effects. What is clear from this

review is that an efficient allocation of resources can be

achieved only through a sound financial structure, which

must embody prudential regulation, supervision and control;

appropriate institutions and institutional philosophy;

financial instruments that are consistent with savers’ and

borrowers’ preferences and needs; and a rational structure

of positive real interest rates.

This study was therefore unique because the review also

indicated that improved access to credit services can have

two principal effects on farm households. First, it can

raise the expected value of income, and therefore of

consumption, future investments and assets accumulation.

40

Second, it can decrease the downward risk of too low an

income to satisfy basic consumption needs. These two

effects tend to have significant impacts on various

aggregate and household-level outcomes, including

agricultural productivity, technology adoption, food

security, nutrition, health, and overall household welfare.

41

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction

The chapter outlines the methodology and procedures and

modalities in data collection. It also covered research

design, determination and identification of the population

sample size, sampling design, sampling procedure, the

instruments of data collection, validity and reliability of

data collected, sources of data, methods of collection data

and methods of analyzing the data.

42

3.1Research Design

While carrying out the study, the researcher employed

descriptive survey method. Survey research is capable of

collecting background information and hard to find data and

the researcher would not have the opportunity to motivate or

influence respondents “responses. Sproull (1995; 30)

recommends the survey technique for research where attitudes

ideas comments and public opinion on a problem or issue are

studied. The descriptive survey approach was chosen for the

present study, because it seeks to gain insight into a

phenomenon as a means of providing basic information in an

area of study (Bless and Higgon-Smith 1995). The strength

of the survey method is also evident in its ability to

study, describe, explore and analyze relationship among

geographically gathered subjects.

3.1.1 Area of Study

This study seeks to assess the relationship between credit

services on agricultural production of small-scale farmers

in Kenya: a case study of small scale farmers in Eldoret

43

East constituency. Eldoret is the headquarters of Uasin

Gishu County in Rift valley province and it’s situated in

the heart of one of the richest agricultural zones in Kenya.

It’s also located along the international trunk road linking

Nairobi and Kampala, the capital cities of Kenya and Uganda

respectively. It was established in 1912 as tinny settlers

farming outposts, but today it has grown into an important

agricultural, commercial and industrial center in the

country. Administratively, the district is divided into

six divisions namely Ainabkoi, Kesses, Kapseret, Moiben, Soy

and Turbo. Politically, Uasin-Gishu has three

constituencies; Eldoret East, Eldoret North and Eldoret

South.

Eldoret is the main urban town and the administrative center

of the district. Other smaller urban centers are found along

the main trunk roads and include; Turbo, Moi’s Bridge,

Moiben, Soy, Burnt Forest and Simat in order of their sizes.

The inhabitants of Uasin-Gishu County are mainly of the

Kalenjin, Luhya, Luo, Kisii, Kikuyu and Kamba ethnic groups.

44

There is a significant population of Asians too, especially

in urban areas

3.2 Population Size

Leedy (1993) observed that nothing comes out at the end of a

long and involved study that is any better than the care,

precision, consideration and the thought that goes into the

basic planning of the research and the careful selection of

the population. The population refers to the group of people

or study subjects who are similar in one or more ways and

which forms the subject of the study in a particular survey.

The research population of this study is defined as

land/plot owners, tenant farmers, district and ministry of

agriculture and livestock, the population understudy could

be estimated to be 160 respondents.

3.3 Description of Research instruments

The study utilized both primary and secondary sources of

data collection. Primary data served as first hand

information and it was obtained through the use of

questionnaires interview schedules and field observations

45

while secondary data is the data that is already available

i.e. data which has already been collected and analyzed by

someone else. The sources of secondary data Include: -

Journals, books, magazines, newspapers, reports on various

associations and researchers connected with agriculture.

These documents were obtained from University and public

libraries.

3.3.1 Questionnaire

Since the researcher intends to use questionnaire to get the

information needed, it is important to do the research in

two stages. The pilot run, follow by the main study. It is

almost impossible to predict how the questionnaire will be

interpreted by the respondents; the researcher therefore,

feels that it was necessary to test the questionnaire items.

At this stage the potential problems were eliminated and the

results were used to refine the final questionnaire.

The area to be inquired covered topography, climatic

conditions and population characteristics .The number of

items were framed to cover those areas. The researcher used

46

questionnaires that are both open ended and close ended for

the study. They were administered through face-to-face

interaction with the respondents and responses classified by

the researcher. The questionnaire composed of short answer

questions .A few questions that may not have specific

answers and therefore needing personal opinions were

provided to give subjective answers; however the responses

were restricted.

3.4 Validity and Reliability of Research Instruments

In order to lessen the danger of obtaining inaccurate answer

to research questions emphasis on two particular research

designs were considered: reliability and validity (Saunders

et al. 2007). Validity is the ability of a chosen instrument

to measure what it is suppose to measure. Reliability is the

extent to which research results would be stable or

consistent if the same technique is repeatedly. Moreover the

way the measuring is conducted and how the information is

processed affects the outcome of research (Fraenkel and

Wallen, 2000).

47

Validity was undertaking through pilot study. The aim of the

pilot study was to test the research instruments. Assessment

involves checking and correcting the sequence, phrasing,

grammar, spelling, repetitions, omissions, relevancy and the

length of the questions. Reliability of instruments was

determined through a pilot study. Test-retest method was

used to confirm the reliability of the instruments. The

instruments were administered to the same respondents twice

within an interval of 2 weeks.

3.5 Description of Sample and Sampling Procedures

Sampling is a process of selecting a portion or sub-set of

population on which research will be conducted, in order to

ensure that conclusions from the study may be generalized to

the entire population (Neuman, 2000). A sample size of 160

respondents was chosen from various farmers and agricultural

officers within the study area. Purposeful sampling was done

in the area of study out of which 160 respondents were

obtained through simple random samples.

48

3.6 Description of Data Collection Procedures

The researcher proceeded to collect data from the selected

respondents after receiving permission from the Department

of Accounting and Finance and faculty of Commerce of

Catholic University of Eastern Africa. The researcher

visited the study area before hand for familiarization and

acquaintance with targeted respondents, especially the small

scale farmers. During this visit, the nature and the purpose

of the research was explained to the respondents by the

researcher. The researcher respect the individuals’ rights

to safeguards their personal integrity. The respondents were

assured of anonymity and confidentiality. No identification

numbers or names reflected on the questionnaires.

3.7 Description of Data Analysis Procedures

The data collected for the purpose of the study was adopted

and coded for completeness and accuracy. The data collected

for the purpose of the study was analyzed statistically

using descriptive and percentage analysis methods. The

analysis was undertaken to establish the degree of

49

relationships between some pertinent factors and issues as

well as to show the relative size or significance of each

factor relative to the others. Specifically, chi-square and

Pearson’s product moment correlation were used to test

hypotheses to show the difference between the independent

and dependent variables.

CHAPTER FOUR

DATA ANALYSIS, INTERPRETATION AND PRESENTATION

4.0 Introduction

This chapter present an analysis of the data gathered using

the tools discussed in the previous chapter. The chapter

focuses on the analysis, interpretation and discussion of

the study findings. This section covers data analysis and

findings of the research. This study presents the data on

the relationship between credit facilities and agricultural

production of small-scale farmers in Eldoret East

Constituency of Kenya. Data was collected from one hundred

and fifty three (153) small-scale farmers. Of the 160

respondents sampled, a hundred and fifty three (153)

responded, a reasonably high response rate of 96 percent.

50

4.1 Demographic characteristics

Table 4.1 Gender of the respondents

Gender Frequency Percentage (%)

Male 115 75

Female 38 25

Total 153 100

Regarding gender of respondents, it is evident from the

above finding that majority of the farmers respondents 75%

were male and a least percentage of respondents 25% were

female.

51

Fig 4.1: Gender of the respondents

Table 4.2 Age bracket of the respondents

Age (Years) Frequency Percentage (%)

0 – 25 10 6.5

26 -35 30 19.6

36 – 45 70 45.8

46 – 55 40 26

Over 55 3 2

Total 153 100

52

The above findings indicate that majority of the small

scale farmers in Eldoret East 70(45.8) were between the age

of 36-45 years followed by 40(26%) between the age of 46-55

years. 26-35 years of age were 30(19.6%) while 0-25 years

were 10(6.5%) and a least percentage of 3(2%) were aged over

55 years, this indicates that majority of those between the

age of 0-25 were still in school and busy building their

careers and those above 55 years were old enough to practice

farming.

Fig 4.2: Age bracket of the respondents

Table 4.3.Level of Education of respondents

Level of education Frequency Percentage (%)

No formal education 10 6.5

Primary 65 42

53

Secondary 68 44.5

Tertiary 8 5

University 2 1

Total 153 100

Regarding the level of education of respondents, majority of

the respondents 44.5% were secondary leavers followed

closely by those who had primary level form of education at

42%. No formal education, tertiary and university had

respondents of 6.5%, 5% and 1% respectively. This indicates

that most literate people who could have managerial skills

do not involve themselves in farming.

Fig 4.3: Level of Education of respondents

54

Table 4.4: Duration as a farmer

Duration Frequency Percentage (%)

0 – 5 years 15 10

6 – 10 years 36 23.5

11 – 15 years 60 39

16 – 20 years 30 19.5

Over 20 years 12 9

Total 153 100

The table above indicates that majority of the respondents

had been farmers for a period between 11-15 years while a

55

least percentage of 9% were had practiced farming for a

period of over 20 years.

Fig 4.4: Duration as a farmer

Table 4.5: Level of scale of farming

Level Frequency Percentage (%)

Small scale 115 75

Medium scale 23 15

Large scale 15 10

Total 153 100

56

Regarding the level of scale farming, most respondents (75%)

said they were small scale farmers followed by those who

said they were medium scale farmers at 15% and a least

number of the respondents were large scale farmers.

Fig 4.5: Level of scale of farming

4.2 RESEARCH QUESTIONS

Table 4.6 Access to agricultural loans

Access Frequency Percentage (%)

57

Yes 64 42

No 89 58

Total 153 100

About access to agricultural loan, most of the respondents

(58%) said they dint access loan while a least percentage of

68% said they accessed loans. This shows that financial

institutions are not available in the region.

Fig 4.6: Access to agricultural loans

Table 4.7: Where to get the loan

58

Source Frequency Percentage (%)

Input supplier 42 27

Bank 43 28

Informal lenders 15 10

AFC 53 35

Total 153 100

Most of the respondents 35% said they obtained loan from AFC

followed by 28% who said they obtained it from banks. 27%

obtained their loans from input suppliers while a least

percentage said they obtained from informal lenders.

Fig 4.7: Where to get the loan

59

Table 4.8: Reasons for not asking for loan

Reason Frequency Percentage (%)

Request would be rejected

42 27

Still owing 35 23

Not knowing where to apply

15 10

Interest rate too high

56 37

Do not like to

incur debt

5 3

Total 153 100

Regarding reasons for not asking for loan, 37% of the

respondents seem to fear the high interest rate followed by

27% who ting their request will be rejected. 23% still owed

the lending sources and a least percentage of 3% said they

do not like incurring debt.

60

Fig 4.8: Reasons for not asking for loan

Fig 4.9: Other financial services

Other services Frequency Percentage (%)

Yes 35 23

No 118 77

Total 153 100

Regarding other sources of financial services most of the

respondents 77% said their existed no other sources while

23% said their were other sources.

61

Fig 4.9: Other financial services

Table 4.10: Types of services obtained

Access Frequency Percentage (%)

Saving account 87 57

Current account 66 43

Total 153 100

The above table indicates that the services obtained by

farmers include saving account and current account with

savings account having the highest number of respondents

87(57%) and current account with 66(43%).

62

Fig 4.10: Types of financial strategies that could improve

credit access for small scale farmers as well as reducing

cost and risk to financial institutions

Regarding the types of financial strategies that couldimprove credit access for small scale farmers, majority ofthe respondents believed that restructuring of poorlyperforming financial institutions could help and a minorityof respondents 3% said development of non farming economicsectors in rural areas would help.


attracting to rural area

Way Frequency Percentage (%)Lowering interest

rates

126 82

63

Increasing the

repayment period

27 18

Total 153 100

Regarding what way a financial institution can be done to be

attracting to rural areas, majority of the respondents 82%

believed in lowering interest rates while a least

percentage18% said increasing the repayment period could be

attracting to rural area.


attracting to rural area

64


area

Problem Frequency Percentage (%)Drought 0 0Poor

infrastructure

76 50

Poor managerial

skills

32 21

Unavailable

financial

institutions

28 18

Market 17 11Floods 0 0

Total 153 100

The table above indicates that the problems commonly faced

by farmers in this region is poor infrastructure at 50%, 21%

said poor managerial skills followed by 18% and a least

percentage of 11% said market for the goods was a problem.

None of the respondents believed in neither floods nor

drought was a problem to the farmers.

65


area

Table 4.11: Recommend policies to be adopted to solve the

above problems and enhance small scale farming

Problem Frequency Percentage (%)Improve

infrastructure

76 50

Training of

farmers on

managerial skills

32 21

Availing financial

institutions

28 18

Building market

places

17 11

Total 153 100

66

Regarding recommendation of policies to be adopted to solve

the problems faced by farmers, majority of the respondents

(50%) believed in improvement of structure while a least

percentage of respondents 11% proposed building of market

places.

CHAPTER FIVE

5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of major findings

Drawing from the findings of this study as shown in the

previous section, this section provides a systematic

discussion of these findings in light of the theoretical and

empirical literature. This chapter discusses the findings in

line with the study objectives and corresponding hypothesis.

The chapter finally captures the researchers’ conclusion,

recommendations and recommendations for further study.

5.1.1 Summary of the findings

The purpose of the study was to investigate the relationship


67

small-scale farmers in Eldoret East Constituency of Kenya.

The studies have indicated a variety of background

demographic characteristics of the respondents. Furthermore,

the chapter discusses the study findings thematically in

line with the objectives and in reference to existing

literature. Three thematic issues were analyzed. These

included: demographic characteristics that influences the

accessibility of credit by small scale farmers, the impact

of credit facilities on small scale farming and the

relationship between credit facilities and agricultural

production of small-scale farmers. Analysis of the

respondents’ questionnaire and interview responses revealed

the following findings.

5.1.1.1 What are the demographic characteristics that

influence the accessibility of credit by small scale

farmers in Eldoret East Constituency, (Research Question 1)?

A demographic characteristics comparison based on credit

status of small scale farmers indicates that borrowers have

significantly higher values than non-borrowers, especially

in area cultivated, input usage and productivity. A similar

68

trend was observed when farmers with farm size equal to or

greater than two hectares were compared with those with less

than two hectares. Those with farm size equal to or greater

than two hectares had higher socio-economic values in farm

income, non-farm income, savings, area cultivated and

productivity. The results further indicate those small-scale

farmers with bigger farm size, good repayment record and who

hold title deeds to land are more likely to borrow. On the

other hand, farmers with higher family labor stock, higher

non-farm income, higher remittances and pensions are less

likely to borrow for farming purposes.

The results also reveal that small scale farmers in the

Moiben division are more productive than those in the

Ainabkoi division. The hypothesis that demographic

characteristics of farmers have no relationship with

accessibility of credit can be rejected. From the finding,

it can be observed that there is strong positive

relationship showed a highly significant relationship

between demographic characteristics and credit facilities

69

accessibility of small scale farmers. These views imitate

the findings of Amjad, (1993) that small scale farmers

credit facilities accessibility are positively affected by

farm size, education, land ownership, seeds usage,

fertilizer usage, other inputs usage such as chemicals and

family labor stock.

5.1.1.2. To what extent does availability of credit

facilities affect small scale farming production in

Eldoret East Constituency, (Research question 2)?

Regarding whether availability of credit facilities affect

small scale farming production in Eldoret East Constituency.

The descriptive statistics reveal a positive association

between credit and agricultural production of scale farmers.

Provision of credit to small-scale farmers makes them more

productive. The results also indicate that other latent

characteristics of borrowers, such as managerial skills also

contribute to higher productivity. This finding can be

supported by the works of (Carter, 1989: Sail &Carter, 1996)

70

that acknowledged accessibility to credit enhances

productivity of small-scale farmers.

5.1.1.3 What are the relationship between credit facilities

accessibility and agricultural production of small-scale

farmers in Eldoret East Constituency of Kenya, (Research

question 3)?

Research question 3 sought to determine the relationship


small-scale farmers in Eldoret East Constituency of Kenya.

These results indicate that all items pertaining to credit

facilities accessibility influence small-scale farmers. The

finding show that credit facilities accessibility is among

the main related factors that predict agricultural

production of small-scale farmers in Eldoret East

Constituency. This study strengthens the hypothesis that

there is a direct relationship between credit and

productivity. Provision of credit to small-scale farmers

makes them more productive. This finding supports the

hypothesis of Adams (1988) that borrowers may still be

performing better than non-borrowers even without credit,

71

because borrowers have certain characteristics that make

them inherently more productive.

5.2 Conclusions based on findings

The findings of this work have been derived from the study

objectives. The study sought to assess relationship between

credit facilities and agricultural production of small-scale

farmers in Eldoret East Constituency, Kenya. Based on the

findings above, it can be concluded that:

A demographic characteristics comparison based on credit

status of small scale farmers indicates that borrowers have

significantly higher values than non-borrowers. Furthermore,

a similar trend was observed when farmers with farm size

equal to or greater than two hectares were compared with

those with less than two hectares. Those with farm size

equal to or greater than two hectares had higher socio-

economic values in farm income, non-farm income, savings,

area cultivated and productivity.

72

The finding also indicate those small-scale farmers with

bigger farm size, good repayment record and who hold title

deeds to land are more likely to borrow. On the other hand,

farmers with higher family labor stock, higher non-farm

income, higher remittances and pensions are less likely to

borrow for farming purposes. The finding of the study show

that the following factors affect productivity of small

scale farmers positively: farm size, education, land

ownership, seeds usage, fertilizer usage, other inputs usage

such as chemicals and family labor stock.

The results of the credit effect measures indicate that the

difference in productivity between borrowers and non-

borrowers is due to both the use of credit and to the pre-

existing inherent characteristics of the farmers. This study

strengthens that there is a direct relationship between

credit and productivity. Provision of credit to small-scale

farmers makes them more productive.

73

5.3 Recommendations

The purpose of this study was to investigate the effects of

credit facilities on the agricultural production of small-

scale farmers in Eldoret East Constituency, Kenya. Based on

the findings, analysis, discussions and conclusions of this

study, the following recommendations were made:

Based on the results obtained in this study, it is

recommended that credit institutions or lending agencies

should look out for the demographic characteristics that

significantly influence loan repayment before granting loans

and advances to small-scale farmers to reduce the incidence

of loan delinquencies and defaults.

However, it must be pointed out that a credit policy, which

improves access to formal credit for small farming

enterprises is a necessary condition, but not sufficient in

itself to solve the inequality and stagnation problems

encountered in the small-scale farming sector. It is

therefore imperative that the appropriate incentives are

provided that will enable farmers to maintain a high level

74

of production and adequate returns on capital investible and

labor employed.

There is need for Government through ministry of agriculture

to re-organize all the existing institutional credit schemes

whereby Agricultural Extension agents should educate farmers

on the sources of credit facilities available to them. The

extension agents should mount education and enlightenment

programme on the significance impact of credit. Agricultural

loan interests should not be too high so as to discourage

farmers from borrowing money from moneylenders.

Commercial banks and other credit institutions should

improve upon their loan procedures, so as to facilitate more

small scale farmers assess to their credit facilities.

Since Government policy measures influence the environment

under which these industries operate, deliberate policy is

needed on the part of Government to create climate that is

conducive and favorable to the growth, development and

profitable operation of small scale farmers. Accordingly, it

75

is recommended that Government strengthens micro finance

institution and other financing windows and lower interest

rates and other cost of funds and also consider the

expansion, in scope and operation, of small scale farmers,

and enhance other sources of finance available to the

farmers.

The serious nature of managerial problems calls for a

provision whereby loan facilities from banks and other

funding schemes carry with them the necessity of providing

managerial assistance to the small scale farmers in order to

upgrade their financial management function and to improve

their management and technical skills. Training of staff is

also important. The training should not only seek to improve

the Farm workers knowledge and skill but must affect his

attitude and behaviour towards costs.

Government should harmonize taxes and levies to reduce

harassment of small scale farmers and enhance conducive

environment for doing business; for the small scale farmers

76

to improve their performance, some improvements in the use

of appropriate cost control technique are quite necessary.

The cost control techniques are not fully developed due to

the problems associated with personnel. In order to enhance

the adoption of appropriate techniques and profitability,

small scale farmers should employ personnel with adequate

professional knowledge and experience.

5.4 Suggestions for Further Research

Taking into consideration the results of this study, the

purpose of this section is to propose some themes for

further research designed to understand the relationship


small-scale farmers in Eldoret East Constituency, Kenya. The

study did not exhaust all matters related to it. Other

issues emanated from the study that requires further

investigation. These are as follows:

In the perspective of the present study, effects of credit

facilities on the agricultural production of small-scale

77

farmers can be studied by considering the data of developed

countries.

A lot of works need to be done. Similar studies on a broader

scale that covers more counties in Kenya should be conducted

to give an idea of what is obtainable in other parts of the

country and the world. Therefore, further research in this

area is recommended in every segment of this piece of work.

It was established in the study that both the use of credit

and latent borrower characteristics contributed

significantly to the productivity of borrowers’ farms. The

results imply that borrowers do have the advantage in

performance over non-borrowers as a result of their inherent

characteristics, even when operating without credit. It

would be interesting to identify these latent

characteristics which contribute to the increase in farm

productivity of the borrowers.

Research into the behavior of credit institutions in the

country will also help to explain some of the actions by the

credit institutions as well as assisting policy makers in

formulating the appropriate interventions. Lastly, the study

78

relied on cross sectional data; it would be useful if a

similar exercise were done using time series data

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