Using Flexible Loans To Improve Access To Credit For Farmers in Kenya

KENYA POLICY BRIEFS JULY 2021 Volume 2 No.
2
Towards Realisation of Vision 2030
Series 1 – Economic Pillar: Financial Services
Using Flexible Loans to Improve

Access to Credit for Farmers in Kenya
Fredrick Onyango Odhiambo and Dr Radha Upadhyaya
possible for a single loan product to have
Context more than one element of flexibility (Labie
Lending to the agricultural sector in et al., 2017). Thus, loan products may differ
Key Messages Kenya is low. According to a report by the in their levels of flexibility. Previous studies
Kenya Bankers Association (KBA), only have failed to model flexibility in this
four percent of commercial banks’ manner. This policy brief discusses the
Lenders are designing loan lending goes into agriculture (KBA, extent to which loans offered to smallholder
products with flexible terms 2018). Most of these loans go to large farmers are flexible as well as whether
farmers as smallholder farmers are credit access increases with the increase in
to respond to the unique unable to meet banks’ requirements as the level of loan flexibility. The paper then
needs of farmers in a bid to well as the stringent repayment terms discusses the implications of results for
improve access to credit. demanded by banks. Thus, smallholder practice and policy.
However, these products are farmers have to rely on other sources of
finance for farm financing. As Kenya
moderately flexible thus are seeks to achieve the food security goal Approach and Results
not improving access to as enshrined in Vision 2030, it is This policy brief summarises the
credit for farmers as increasingly important to finance study by Odhiambo (2019) who examined
envisaged. smallholder farmers in order to improve the influence of flexible loans on access to
agricultural production and productivity credit among smallholder farmers. The
Lenders should redesign loan and transform the rural economies. study collected primary survey data from
products to make them more Given that farmers do not have 103 farmers who had borrowed from
flexible by providing flexible regular incomes, making regular lending institutions in Ugenya Sub-county of
options such as bullet repayments from agriculture is untenable. Siaya County. The sub-county has a high
Some lenders, especially microfinance concentration of financial institutions that
payments and credit lines. lenders, have designed loan products offer flexible loans to smallholder farmers.
Lenders should also educate that offer farmers some flexibility in The study used a simple random sampling
farmers on full product repayment. Such loans mostly contain method to select respondents from a list of
features to increase their features such as grace periods and members in farmer groups and individual
flexible repayment schedules. Other borrowers.
financial literacy in order to features include bullet/balloon payments, The results indicate that the loans
improve their agency. loan refinancing, loan rescheduling, and products offered to farmers were
Government should provide credit lines. Flexible loans are expected moderately flexible. With the flexible loan
credit guarantee schemes to be attractive to farmers given that they index ranging from 0 (low flexibility) to 1
usually match the cash flows of farmers. (high flexibility), the study showed that the
for institutions that lend to Thus, access to credit is expected to index had a value of 0.42 (moderate
farmers to encourage the improve when loan products are flexibility). Descriptive analysis showed that
lenders to design more designed with flexible terms. This has the most common flexibility features in the
flexible loan products. been a subject of debate among loans offered were grace periods and
scholars. flexible repayment schedules (see Figure
There are conflicting results on 1).
whether flexible loans improve access to As shown, all farmers reported that
credit for smallholder farmers (see Weber the loan products had flexible repayment
& Musshoff, 2013 and McIntosh, 2008). schedules and, therefore, they were allowed
This may be due to the differences in the to make loan repayments at intervals that
measurement of flexible loans. Previous they chose. Further, 98% of the farmers
studies have used single indicators of reported being given grace periods before
flexible loans where only one aspect of they began loan repayments. About a third
flexibility is examined. However, it is (35%) of farmers agreed that they could be
Figure 1 – Percent of Farmers with Various Flexible Loan Features
©2021 Authors 67
Published by Academia Kenya, https://academia-ke.org/journals/
KENYA POLICY BRIEFS JANUARY 2021 Volume 2 No. 1
Towards Realisation of Vision 2030
refinanced in cases where their crops were flexibility by introducing more flexible highly flexible loans and limit credit
affected by some shocks such as flood or loan options. More options such as rationing.
draught. Only a handful of farmers (13%) credit lines and bullet payments
said their terms of loans allowed them to should be included within the portfolio
make bullet payments. The results also of flexible loan features. Acknowledgements
show that few farmers agreed that they  Lenders should also educate farmers This brief is derived from a Master of
would access a credit line (3%) or their on all the features of loan products Development Studies thesis by Fredrick
loans be rescheduled (3%) in case of any available to them to improve the Onyango Odhiambo and supervised by Dr
shocks that affected their farm output. financial literacy and, therefore, their Radha Upadhyaya. We acknowledge the
However, these were rarely agency. Farmers are most likely farmers who took part in this survey. We
exercised by borrowers, especially those unaware of their choices because the also thank the students and faculty
that were in farmer groups. This is because loan officers do not educate them members of the Institute for Development
the borrowers were pressured by their more about their options. Studies for their valuable comments during
fellow group members to repay their loans  Farmers should be offered more cash the development of the original thesis.
quickly in order to improve the group’s
overall credit rating. Lenders provided loans instead of in-kind credit to
incentives to groups for paying up their improve access to credit. Lenders who References
loans more regularly and for finishing their offer in-kind credit argue that the
KBA (Kenya Bankers Association).
loan repayments earlier than scheduled. fungibility of cash explains the
(2018). Realisation of Full Potential of
Because groups competed to get rewards provision of farm inputs. However, the
Agriculture Sector: Is Commercial Financing
for having maintained clean records and results showed that offering in-kind
a Core Missing Cog? Nairobi: Kenya
repaying their loans earlier, the incentives credit was associated with lower
Bankers Association.
pushed borrowers to repay their loans access to credit.
Labie, M., Laureti, C., & Szafarz, A.
regularly and complete their repayments  Lenders should also improve the loan (2017). Discipline and Flexibility: a
before the loan period expired. administration and allow borrowers to Behavioural Perspective on Microfinance
The bivariate results showed that exercise the rights within the loan Product Design. Oxford Development
access to credit differed across sex, contracts such as allowing borrowers Studies, 45(3), 321-337.
education, type of credit, and wealth status a grace period before they begin loan McIntosh, C. (2008). Estimating
of households. Access to credit also repayments or allowing them to make Treatment Effects from Spatial Policy
differed across three features of flexible repayments at time intervals of their Experiments: an Application to Ugandan
loans namely bullet payments, loan choosing. Microfinance. The Review of Economics
refinancing and loan rescheduling. Medium-Term and Statistics, 90(1), 15-28.
On whether flexible loans influence Odhiambo, F. O. (2019). Flexible Loans
credit access, the results showed that
 Provide Credit Guarantee Scheme:
and Access to Agricultural Credit for
flexibility had no influence on the amount of Lenders consider agriculture a risky Smallholder Farmers in Siaya County,
loan farmers borrowed. The main drivers of sector. Smallholder farmers are even Kenya. Nairobi: University of Nairobi.
access to credit were the type of loan, considered riskier. In order to Weber, R., & Musshoff, O. (2013). Can
education level of the farmer, and the incentivise lending institutions to Flexible Microfinance Loans Improve Credit
household wealth. More specifically, higher provide more credit to smallholder Access for Farmers? Agricultural Finance
credit access was associated with higher farmers, the government can provide Review, 73(2), 255-271.
levels of education, wealthier households, credit guarantee schemes. This will
and provision of cash-based loans as act as a way to de-risk lenders from
opposed to asset-based loans. any loan defaults. Authors
 Disburse credit through lenders: Fredrick Onyango Odhiambo,
ombako82@gmail.com
Policy Smallholder farmers are more likely to
be credit-rationed when the loan ResearchPro Solutions,
Recommendations product is highly flexible. Thus, the P.O. Box 102609-00101, Nairobi, Kenya.
government can provide more funds Dr Radha Upadhyaya
to the farmers through lenders that radha@njora.com
Short-Term offer flexible loan products. This will Institute for Development Studies,
 Lenders should re-design their flexible encourage more lenders to offer University of Nairobi,
loan products to improve the level of P.O. Box 30197-00100, Nairobi, Kenya.
©2021 Authors 68
Published by Academia Kenya, https://academia-ke.org/journals/

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KENYA POLICY BRIEFS JULY 2021 Volume 2 No.

Series 1 – Economic Pillar: Financial Services

Using Flexible Loans to Improve

Figure 1 – Percent of Farmers with Various Flexible Loan Features

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