Determinants of Credit Demand by Smallholder Farmers in Kenya: an Empirical Analysis

Abstract

In many developing countries, official credit programmes have been used as important components of rural development. However, the failure to properly identify the credit needs of the target groups has been blamed for the limited success experienced in many of such credit programmes in the developing countries.
With the use of farm level cross sectional data from Nakuru district of Kenya, this article analyses the significance of institutional lending terms and conditions in determining farmers‘ demand for credit. The results show that such terms and conditions significantly, but negatively, influence farmers’ demand for institutional credit, effectively discouraging them from seeking such credit. The insignificance of interest rate in determining demand for credit, reinforces the use of nonprice credit rationing in allocating credit funds to farmers. The article proposes the use of a market rate of interest as a means for reducing such rationing and increasing the access of more small scale farmers to credit.