Determinants of agri-lending in Kenya

Abstract

Purpose The purpose of this paper is to examine the factors that influence financial institutions’ lending to the agricultural sector in Kenya. Design/methodology/approach The paper employs a panel data of 15 licensed financial institutions (commercial banks and deposit-taking microfinance institutions) from 2011 to 2016. The random effects and ordinary least squares panel corrected standard errors estimation techniques are employed to estimate the effect of liquidity, size, equity, lending rate (LR), type of financial institution and non-performing loans on agri-lending. Findings The results indicate that only 3.9 per cent of loan portfolio of the sampled financial institutions were advanced to the agricultural sector over the study period. From the panel regression analysis, the paper finds agricultural credit risk to reduce lending to the agricultural sector while size, LR and type of financial institution were observed to significantly increase agricultural lending. Compared to 2011, agri-lending was also observed to have declined between 2012 and 2015. Practical implications The findings highlight important indicators for enhancing lending to the agricultural sector in Kenya and other emerging economies. Originality/value As far as the authors are concerned, this presents the first empirical evidence on the determinants of agri-lending by financial institutions in Kenya.