Flexible Loan Products and Financial Performance of Agricultural Enterprises in Mount Kenya Region
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Date
2024-06
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Kenyatta University
Abstract
Agriculture remains a top contributor to the Kenyan economy, significantly
affecting the country's Gross Domestic Product. However, agricultural businesses
have historically performed poorly, contributing to high food insecurity. Access to
credit is crucial for improving productivity in this sector. Yet, the seasonal nature of
agricultural income, due to biological processes of maturity, harvesting, and sale,
complicates credit availability. Financial institutions typically offer rigid, fixed
repayment schedules aimed at promoting fiscal discipline, reducing transaction
costs, and simplifying procedures. These schedules, however, clash with the
irregular revenues of agricultural businesses, causing disparities in cash flows and
irregular loan repayments. The Agricultural Finance Corporation (AFC) has
introduced flexible loan products tailored to match loan repayment schedules with
projected cash flows from various agricultural enterprises, addressing the mismatch
between cash flows and loan repayment. Despite the potential benefits of flexible
loan products, limited evidence exists on their impact on the financial performance
of agricultural borrowers. This study aimed to investigate the effect of flexible loan
products on the financial performance of borrowers in the agricultural sector,
specifically examining their impact on annual sales turnover and the coping
mechanism index. Additionally, the study explored other factors affecting the
financial performance of agricultural enterprises. A cross-sectional survey
methodology was employed, gathering primary data from 198 active borrowers of
AFC in the Mt. Kenya region using questionnaires. The questionnaire was pre-tested
before the final survey. Descriptive statistics revealed that 159 respondents had
received some form of flexible loan, while 31 had not. All respondents had attained
some level of education. Among the respondents, only 32 were aged between 18-35,
with the rest being older. On average, two-thirds of the respondents had undertaken
the financed venture for more than five years. The average coping mechanism index
was 0.55.Regression analysis indicated that flexible loan products did not have a
significant effect on sales revenue. Instead, education and experience significantly
affected sales revenue at a 5% significance level. However, flexible loan products
significantly impacted the coping mechanism index at a 5% significance level. The
study recommends that AFC and other lenders continue issuing flexible loan
products and encourage agricultural borrowers to have additional income sources.
There is also a need to develop youth-friendly loan products to increase their
participation in agricultural activities. Further studies should investigate the trade-offs between flexible loan products, loan default, and loan repayment
Description
A Research Project Submitted in Partial in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Economics (Cooperation and Human Development) the School of Business, Economics and Tourism of Kenyatta University. June, 2024
Supervisor
Peter Miringu Njenga