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O     
   

‡ SMEs in Kenya form a very crucial sector


in terms of employment generation, wealth
creation, welfare improvement and their
immense contribution to the national GDP.

‡ However, SMEs are generally


undercapitalized due to operational
difficulties in accessing finance.
Statement of the problem cont«
‡ Lack of working capital and low liquidity limit the
entrepreneur¶s ability to purchase productivity
enhancing inputs like seeds, fertilizers and
pesticides and more stock (Nyoro, 2002).

‡ The average production efficiency levels are


higher among producers who have access to
finance in agricultural related enterprises in
Kenya (Kibaara, 2005).
‡ The lack of finance is one of the most
binding constraints in the growth of SMEs,
as only 14 percent of SMEs might resort to
borrowing, out of which two thirds was for
capital Investment.
‡ Many SMEs are not going to banks to
meet financial needs due to various
reasons including:
‡ lack of knowledge regarding bank
products,
‡ low market penetration by banks,
‡ lengthy and difficult loan procedures, lack
of security,
‡ lengthy documentation,
‡ and social as well as religious reasons.
‡ Within the context of the agriculture
industry, there is a great need for credit for
in order to accelerate the growth of MSEs.
The demand for rural credit has
outstripped the supply over time.

‡ The current annual demand is estimated


at Kenya shillings 75 billion while the
supply stands at 18±22 billion Kenya
shillings (MoA, 1995; Kimuyu and Omiti,
2000).
‡ Agricultural finance is notoriously risky.
Many farmers need credit to purchase
seeds and other inputs, as well as to
harvest, process, market and transport
their crops. While borrowing on the basis
of anticipated crop production might seem
logical where collateral assets are few,
such loans expose the lender to
production and price risk..
‡ Natural disasters, a decline in
market prices, unexpectedly low
yields, the lack of buyers of
agricultural produce, or loss due
to poor storage conditions are
only some of the factors that can
result in lower than-expected
revenues. Such a fall in revenues
can often lead to high default
rates on agricultural loans
p
   

‡ The main objective of this study is


to examine the role of agricultural
finance in MSE growth.

‡ The study seeks to find out


whether agricultural finance has
played any role or no role in MSE
growth.
Specific objectives of the study
‡ Review the lending procedures of agricultural
finance institutions.
‡ Assess the effect of agricultural finance on MSE
expansion and growth.
‡ To analyze the major constraints hindering the
availability of agricultural finance to small and
micro enterprises in the study area.
‡ To evolve policy recommendations that will
improve the administration of agricultural finance
to small-scale enterprises in Kenya
 !"#
‡ The study seeks to answer the following
questions
‡ Do lending procedures of AFC affect the
availability of agricultural finance?
‡ What is the effect of agricultural finance on SME
expansion and growth?
‡ What constraints hinder the availability of
agricultural credit in the study area?
‡ What policy suggestions should be
recommended to ease administration of
agricultural finance to small scale enterprises in
Kenya?

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‡ Eempirical and theoretical literature concerning
agricultural finance with specific in-depth focus
on its role in SME growth is reviewed. The role
of agriculture in economic growth is analyzed,
the entrepreneurial finance needs at various
stages of business growth and constraints facing
the agriculture sector in Kenya. We also
examine the typology of financial institutions
offering agricultural finance in Kenya and in
Africa. The chapter also looks at the constraints
facing agricultural finance institutions as a
source of entrepreneurial finance.


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‡ %!&#
‡ The research design used in the study would be
exploratory-descriptive research design. It is exploratory
in that the major emphasis would be on the discovery ad
trying to get more insight on the effect of agricultural
finance on SME growth. The design would also be
descriptive as the effect of the finance on the growth of
SMEs would be explained.

‡ & '"'( !"#


‡ The study targeted entrepreneurs engaged in farming,
wholesale and retail trade, and primary processing of
agricultural products. The sample size was 120
respondents drawn from six administrative divisions of
Machakos district.
Research methodology«
"&'!("'
‡ The study was carried out in March 2008
in six divisions of Machakos district where
the clients are located. Machakos district
has 9840 registered businesses (GOK,
2007). The A.F.C. branch here is one of
the oldest branches offering agricultural
finance and the impact of the organization
is also focus of the study.
‡ 3.4)'(!#&#%)'(!*
‡ This includes both credit and noncredit users. The
researcher selected 120 small-scale. The entrepreneurs
identified the available formal and informal sources of
credit from which they had benefited. There are six
administrative divisions in Machakos district .Each
administrative division was allocated 20 respondents
giving a total number as 120. Purposive sampling was
then applied in the selection of respondents who were
willing and satisfied the set criteria of being in business
for more than 18 months with 1-50 employees. The
required sample size was selected using the
proportionate stratified sampling and judgmental
sampling respectively.
‡ Each administrative division was allocated
20 respondents giving a total number as
120. Purposive sampling was then applied
in the selection of respondents who were
willing and satisfied the set criteria of
being in business for more than 18 months
with 1-50 employees.
‡ The required sample size was selected
using the proportionate stratified sampling
and judgmental sampling respectively.
‡ 3.+  "(( !"#) "%
‡ Data collection methods include the use of
questionnaires, observation and
discussions.
‡ 3.+.1!),  "(( !"#
Data collection tools
‡ The main data collection instrument used in the
study was a questionnaire. Respondents who
are literate were asked to fill tone or the same
was used as an interview schedule for illiterate
respondents. This was administered in Kiswahili
for ease of understanding.
‡ The researcher also used observation method to
complement data generated from the
questionnaire. This data from the observation
was used for correlation purposes to enhance
data reliability.
"#%,% "(( !"#
‡ This was mainly done using data
from the Central bureau of
statistics and ministry of trade and
industry data on registered
businesses in Machakos district.
‡.
‡ 3.6  #(,!
‡ Data was analyzed using both qualitative and
quantitative methods. Data was first coded and
organized into concepts from which
generalizations were made fro the entire
population. Data was then tabulated and
frequencies calculated on each variable under
study and interpretations made from the
collected finding in the field.
‡ Measures of central tendency such as
mean, mode and median and measures of
dispersion like standard deviation and
percentages were calculated and
interpretations made. Data is then
presented in form of tables and pie-charts
and graphs.
‡ The analyzed data was then converted
into descriptive statements and/inferences
about relationships
Distribution of respondents by
gender
Ô    
 
 




3 %
e
fe e
6 %
! !- !"#".'"#-,
% !"#((/(
‡ ! !- !"#".'"#-,% !"#(
(/(
‡ The level of education is important as it
determines the channels of communication used
by the respondent, degree of confidence and the
ease of acquisition of new managerial skills. The
education level also determines the level of
confidence in approaching financial institutions.
In order to determine the education levels
respondents were asked to indicate their
education levels and the results are tabulated in
table
‡ ! !- !"#".'"#%# -,"0#!'
‡ Entrepreneurs found at the business were asked
to indicate the nature of the ownership of the
business. This was defined as sole
proprietorship, partnership, limited company and
any other form of ownership. No responses were
received from any other form of ownership.
Overwhelmingly most of the businesses are sole
proprietorship. The frequency is indicated in the
chart below.
‡ Business ownership
Ownership status of respondents

artnership
ownership form

i ited o pan

o e propreitership

percentage
‡ Agricultural finance impact was best
reflected through increase in sales volume
(40 per cent), increase in profit (10 per
cent) and increase in number of
employees at 12 per cent, increase in
production levels is at 25 per cent. The
results are shown on the figure 4 below:
‡ Major areas of business growth
Major areas of business business
growth

others
New businesses
in rease in sto
new e o ees
rofits
ro u tion
sa es o u e

÷equency
‡ The entrepreneurs also indicated the
entrepreneurial finance had an overall
impact on the growth of the business (7
per cent of the respondents) while 20 per
cent of the businesses had declined as a
result of the agricultural finance obtained.
Sources of seed capital

O   

 

thers

Sale of personal assets


O r

ommercial ank

Loans from relati es

ersonal sa ings

0 10 20 0 40 50 0 70
r  y
Lending procedures
‡ Easy loan security system was cited as the main
reason for choosing a certain lending institution
(4 per cent) while no restrictions on loan use
was also cited as an important factor ( per
cent).Simple application procedures is also a
critical factor ( 5 per cent).Fast processing of
loan applications was also cited by 0 per cent
of the respondents as an important factor in
choosing a financial institution to cater for the
financial needs of the borrower.
Characteristics of lending
institutions

n other

o restrictions on loan use

oan si e a ro iriate to needs

as loan securit s ste

i le a lication rocedures

ast rocessing of loan

ro i it to lender offices
Role of AFC In Provision Of
Agricultural Finance
‡ The researcher sought to find out whether AFC has been fulfilling its
mandate. The results indicate that very few of the respondents have
obtained credit from AFC due to various reasons mostly based on
lending procedures which are too complex and the strict collateral
requirements. Majority of the respondents (89 per cent) of the
respondents had not obtained credit from the organization. Out of
the three who had received financing from AFC each had received
an average of Ksh 200,000 each with the highest having received
Ksh 00,000 from the organization.
‡ The major reasons for not receiving financing from AFC was the
requirement of land as collateral which many do not have as the
land they own is held communally. Further many respondents were
unhappy with the restriction on loan use as there was the
requirement that the applicant must have 25 per cent contribution in
either cash or kind which deterred many would be applicants.
RECOMMMEDATIONS
‡ When choosing financial institutions to approach for credit, 5 per
cent of potential borrowers would look at the interest rates charged
by the lender from the findings of the research. On establishing that
they are relatively cheap in the market, then they would consider the
following issues in order of priority . 0 per cent of the respondents
would first consider whether the lending institution would consider
adjusting the repayment premiums in this respect) therefore they
would prefer MFIs which would penalize the group members to
cover for this shortfall rather than sell the individuals assets. 2 per
cent of the respondents consider the speed of processing loans
third is what collateral the institutions would ask for then fourth
whether the lender might consider rescheduling the loan in times of
misfortunes. Application procedures, proximity to offices or their
officers and size of loan available rank fifth sixth and seventh
respectively. A significant minority of entrepreneurs are happy with
the way things are.
‡ When choosing financial institutions to approach for credit, 5 per
cent of potential borrowers would look at the interest rates charged
by the lender from the findings of the research. On establishing that
they are relatively cheap in the market, then they would consider the
following issues in order of priority . 0 per cent of the respondents
would first consider whether the lending institution would consider
adjusting the repayment premiums in this respect) therefore they
would prefer MFIs which would penalize the group members to
cover for this shortfall rather than sell the individuals assets. 2 per
cent of the respondents consider the speed of processing loans
third is what collateral the institutions would ask for then fourth
whether the lender might consider rescheduling the loan in times of
misfortunes. Application procedures, proximity to offices or their
officers and size of loan available rank fifth sixth and seventh
respectively. A significant minority of entrepreneurs are happy with
the way things are.
CONCLUSIONS
‡ There is need to develop lending policies
that recognize that financial services are
part of an interactive system of financial
institutions, financial infrastructure, legal
and regulatory framework, social and
cultural norms. There is need to simplify
lending procedures and develop unique
loan products that cater for the needs of
the entrepreneurs in the agricultural
sector.
‡ All the stakeholders must build and enhance the
business skill of the entrepreneurs in order to increase
their growth potential .When the business capacity of the
entrepreneurs is high, the can visualize the direction
which they want their business to grow in the future. As a
result, with increased capacity, they can be able to
develop comprehensive business plans to achieve that
vision and as a result increase the demand for credit in
the market , improve productivity and employment and
generally assist the government to meet its development
agenda. Treating the farm household as a financial unit
integrating a variety of economic activities, and basing
lending decisions on repayment capacity rather than how
funds are utilized is also important to ensure more flow
of funds to the MSEs that require agricultural finance.
‡ More research should be conducted on methods
of information gathering on the borrowers to
reduce default rates and strengthening capacity
of the agricultural finance institutions in order to
enhance credit delivery. Further there is need to
carry out research on how agricultural finance
providers can adapt their services to become
more flexible in timing, amounts disbursed and
repayment schedules

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