Factors influencing default in servicing agricultural loans: a case study of Agricultural Finance Corporation, Machakos County

Farm credit offered by AFC is an important tool in poverty alleviation through creation of working opportunities for beneficiaries. The facility improves the economic and social status through poverty alleviation, employment creation and income generation for low income farmers with limited opportunities. Through this facility, the government mainly targets to improve the livelihood and food sufficiency among the rural populace. However, loan repayment is faced by high levels of default among the beneficiaries which hinders goal achievement. This study was done to examine the borrower and the lender dynamics that influence default among smallholder farmers in Machakos County in order to analyze farmers‟ debt servicing capacity. To achieve this objective primary data were gathered through a survey using data from 100 farmers. Systematic random sampling technique was used to pick 100 clients who were selected from the county database of 701 farmers notwithstanding their repayment status. The selected farmers supplied data via administering a structured questionnaire. Descriptive statistics and a binary logistic model were employed for determining and analyzing default factors. The results of the binary logistic regression analysis showed variables to be either positively or negatively related to default. Four factors which were found to be statistically significant at 5% level are age, experience in farming, credit use and politics. Age and politics were found to be negatively related while experience was positively related to compliance in debt servicing. These factors are important and should be considered when designing a sustainable credit model. The study recommends that the success of future lending in AFC lies in targeting to disburse loans to young but experienced farmers; lenders should train their loan beneficiaries and offer them adequate amount of loan and reasonable timeliness. The government should encourage enterprises diversification and pave way for technology improvement through a well-articulated agricultural extension program. Conclusively, the direction of influence of these determinants should serve as a guide, in efficient disbursement of farm loans in the future.