The Role of Agricultural Finance on Sme Growth in Kenya

The study focused on the role of agricultural finance in the growth of small and medium enterprises located in Machakos district. The study sought to establish the factors that affect the entrepreneurs’ ability access to agricultural finance and what factors determine the source of capital the entrepreneur will chose to finance his/ her enterprise. The purpose of the study was therefore to find out whether agricultural finance has played any role in MSE growth.

The specific objectives of the study were to assess the effect of agricultural finance on MSE growth, review lending procedures of agricultural finance institutions and analyze the major constraints hindering the availability of agricultural finance to SMEs in the study area. The study also sought to evolve policy recommendations that will improve the administration of agricultural finance to small-scale enterprises in Kenya. An exploratory-descriptive research design was applied in collecting qualitative and quantitative data from respondents using a structured questionnaire.

Stratified sampling technique was applied to select 120 respondents from the six administrative divisions of Machakos district. Small scale entrepreneurs engaged in farming, wholesale and retail trade, primary processing of agricultural products were selected as the units of study. Rural-based enterprises were selected mainly because surveys on micro enterprises in Kenya have shown that about 78% of the enterprises are located in rural areas (Parker and Torres, 1994).

The study used mainly primary data from individual entrepreneurs and farmers receiving credit from both formal and informal credit institutions as well as those who did not in Machakos district in Kenya. Secondary data was derived from the appropriate literature review from previous studies, Central Bureau of Statistics and other relevant sources. Data was collected using a survey through face-to-face interviews. A semi-structured questionnaire was administered and results presented using tables.

The findings of the study are that agricultural finance is highly critical to the growth of SMEs but the amounts disbursed are inadequate, lending procedures are cumbersome and existing policies on agricultural financing do not fully cater for the needs of the entrepreneurs. The cost of credit is the main determinant of choice of sourcing for finances for entrepreneurs and 60 per cent of the entrepreneurs interviewed generally considered the current interest rates charged by financial institutions as prohibitive and high.

This research recommends policy amendments to create an enabling environment leading to interest rates reduction and development of new and acceptable forms of collateral. A review of lending terms and procedures is recommended to make it easier to access the unbanked in the society by accommodating the informal sector and offering repayment terms that suit the prevailing business environment.