CHAPTER 1 INTRODUCTION

1.1 Background to the Problem The financial requirement of any enterprise small or large can be under two broad headings, fixed capital and working capital. Fixed capital refers to investments in assets such as land and equipment while working capital consists mainly of cash and investments of raw materials. This implies that working capital can be thought of as representing the funds required to operate the enterprise over the production period. (Desmond, 2002).

The relative importance of these requirements depends on a number of factors: the most important being the size of the enterprise, the industry group in which it operates and the nature of technology employed. Generally, small enterprises tend to have lower relative requirements for fixed as against working capital due to high degree of labour intensity (or conversely, the capital intensity exhibited.

Agriculture has a contribution of thirty-one percent to the G.D.P.; it employs above seventy percent of the total labour force and thus needs financing to enhance its growth (G.o.K, 2001). The main source of financing seems largely to be institutions that comprise formal financial sector. One feature common to all formal financial institutions is that they are subjected to varying degrees of Central Bank control. Such controls include interest rate and loan portfolio ceilings, cash reserve requirements, foreign exchange controls and selective credit policies. In many developing countries, Central

bank controls, particularly those related to interest rates can be exaggerated by the existence of an oligopolistic banking system and lead to the phenomenon of financial repression whereby the financial needs of large established urban borrowers are wellserved but the small-scale rural borrowers have limited access to formal credit and must depend on the informal financial sector, frequently on less favorable terms (IMF, 1983). The capital market segmentation implicit in this situation tends to lead to inefficient resource allocation, particularly with respect to capital relative to labour utilization (Steel and Takagi, 1983).

As a source of finance to the small-scale rural entrepreneur, the formal sector, and more so the commercial banks have never been particularly attractive, despite their predominance in the financial sector in Kenya. Commercial banks are essentially urbanbased institutions and even when they make excursions into rural areas, the urban underpinnings permeate the operations, as evidenced by procedures ill-suited to the rural environment.

Small-scale rural entrepreneurs are viewed as high-risk borrowers thus increasing the importance of collateral security. The small loan sizes imply high unit administrative costs, aggravated, at times, by the geographical dispersion of potential clients. Given the characteristics of the funds held by commercial banks, with most being in the form of current liabilities, there is an obvious tendency to lend only for short periods. (Green 1970). This partly accounts for the situation in which even when commercial banks operate in rural areas, they tend to concentrate on the larger borrowers.

The small-scale rural borrowers themselves frequently view commercial banks as unattractive sources of credit. The complex procedures, alien attitudes of bank staff high transactions costs and high collateral requirements are such as to effectively reduce the accessibility of commercial bank credit to small-scale rural borrowers. This is not due to any inherent bias against small borrowers but rather a reflection of the economic and financial circumstances, which impinge on those institutions.Access to formal credit from commercial banks by the majority of the small-scale rural farmers, is thus severely restricted unless these adverse circumstances are mitigated by some intervening factors.

1.2 Statement of the Problem What is the impact of collateral in accessing credit by small scale farmers? The formal institutions seem largely inappropriate to small-scale farmers. High costs per transaction, complex bureaucratic lending procedures, elaborate paperwork and high collateral requirements are some of the factors which militate against effective utilization of the existing banking facilities. Small-scale maize farmers mainly use their lands to pledge as security to obtain loans from banks, since they do not have machinery to replace land as collaterals. However, banks are becoming reluctant to accept land as collaterals thereby limiting the amount of credit extended to small-scale farmers. This study therefore sought to assess alternative sources of finance available to the farmers. 1.3 Research Questions This study sought to answer the following research questions: a) Should the farmer use savings as a source of finance? b) Should the farmer use credit associations to obtain credit? c) Should the farmer use trade credit as a source of finance?

d) Should the farmer use informal insurance schemes to obtain credit? e) Should the farmer use local money- lenders as a source of finance? f) Is the farmer aware of the alternative sources of finance available to him? g) What levels of interest rates are charged on various informal sources of finance?

1.4 Objectives of the Study The main objective of this study was to assess the alternative sources of financing available to small-scale maize farmers in Trans-Nzoia District. Specifically the study was to; a) Analyze credit facilities available from the informal financial sector by the smallscale maize farmers. b) Establish whether small-scale maize farmers are aware of the alternative forms of credit available to them. c) Establish the real interest rates paid by small-scale maize farmers in using various informal sources of finance.

1.5 Significance of the Study The study is intended to benefit the small-scale maize farmers, government, lenders and other researchers. i) Small-scale farmers will be able to analyze and utilize the available alternative sources of finance from those they already have. ii) The government will use the findings to design and facilitate appropriate credit policies for small- scale farmers.

iii) Lenders will use this information to build a better structural basis to attract the smallscale farmers. This could be through granting cheaper loans and removal of collateral basis of lending. iv) The study was of use to other researchers in extending further research regarding financing small-scale farmers.

1.6 Scope of the Study The study was carried out in Trans-nzoia District. The site was selected because the district is agricultural based, with sixty percent of its area being arable. The district has a very high production of maize crop, Small-scale maize farmers are found in five of the seven divisions with large-scale farmers occupying only two divisions (District Plan 1997-2001). Small-scale farmers are found in majority of the divisions where maize is grown.

1.7 Limitation of the Study The study cannot be generalized to all small-scale farmers in Kenya since only one District was considered. This can affect the reliability of the study carried out. The effect of triangulation affects the findings of the study. It cannot confidently be said that this study is representative of all small-scale farmers in Kenya. Some farmers were reluctant to give information especially on their earnings and borrowing due to scare of taxation or theft. Some felt that such information was confidential and had to maintain secrecy.

CHAPTER 2 LITERATURE REVIEW 2.1 Informal Sources of Credit Oketch et al (1991) observed that the reason that small-scale enterprises are rarely able to borrow from formal sources is because they have no tangible assets or marketable securities to offer as collaterals. They also cannot prepare the rigorous financial forecasts and reports required by formal credit sources to appraise loan application.

Dondo (1994) observed that lending to individuals without requirement for tangible collaterals has been adopted by many organizations with credit programs for micro and small-scale enterprises in Kenya. Tangible securities are replaced with guarantors and in some cases, mortgages. Loan terms are usually one to three years. He asserts that loan guarantee schemes are increasingly being implemented as a means of persuading commercial banks and other institutions to stop lending to "risky" sectors and to entrepreneurs without the requisite formal securities. Guarantee schemes facilitate the availability of long-term funding and familiarize banks with project start-ups in such sector.

Desmond (2002), states that informal financial sector refers to the financial activities that take place outside the ambit of institutional finance. A variety of individuals or entities may be involved in this sector including landlords, merchants (wholesalers and retailers), pawn brokers, money lenders and such traditional financial entities as rotating savings and credit associations (ROSCAS) found in many parts of the developing world. Loans from family and friends would also be considered part of the informal sector. The characteristics of the various entities comprising the informal financial sector, given the inherent heterogeneity, vary considerably.

Chandavarkar (1985), suggested that, informal sector is also called the non-institutional or the un organized financial sector, the term informal is probably more appropriate given that the informality of the financial activities is its most distinguishing characteristic.

Brunton (1984) explains that from the perspective of providing finance to the rural small-scale enterprises, however, there are certain common features, which distinguish the informal operators from the institutions operating in the formal sector.

Transaction costs. Typically, transaction costs of loans from the informal sector are low, essentially because of the informality of the activities. Usually, the lender has an intimate knowledge of the borrower and this facilitates rapid decision making. Transaction costs are also low because of the low overhead costs faced by the informal lender frequently, the informal lender is one person and little formal documentation is used. Lodman (1984) defines transaction costs as "outof-pocket out lays required to obtain documents, pay commissions and travel to and from the lenders office as well as the opportunity costs of time involved to complete all required procedures"

Credit access. There are normally no restrictions on access to credit from the informal sector- except that eventuated by poor repayment performance. Collateral requirements are minimal and usually the knowledge of the borrower on the part of the lender is all that is required. Also, informal operators normally do not place restrictions on how loan funds will be utilized.

Loan periods. Credit from the informal sector is largely short-term in nature so that it is mainly used to finance working capital requirements. However, the limited availability of medium and long- term funds to the rural SSE may result in small entrepreneurs utilizing short-term credit to finance fixed assets with implications on the ability of the enterprise to service the debt in the required time period.

Financial market operations. Most informal operators function only in one side of the market providing loans but not accepting deposits. Unlike the formal institutions that operate in this way, however, this one-sided intervention does not 7

seem to interfere with the informal lenders access to information concerning financial flows in the market. Also frequently, the informal operator combines the financial operations with non-financial services such as merchandising and marketing. Central Bank control. Informal credit operators usually escape central banking controls such as interest rate and loan ceiling, reserve requirements and the implicit taxation of the institutional sector through governmental preemption of funds it controls for instance below equilibrium rates of interest

(Chandavarkar,1985). This absence of controls confers on the informal operator a distinct advantage over the formal institutions and could conceivably increase the competitiveness of the informal sector

Dondo (2001) in a research about micro-enterprise credit observed that there are two striking features of informal systems. First, most of them involve savings transactions. Second, they tend to be membership-based. He outlined three distinct informal financial subsystems as financial arrangements among relatives and friends, traditional money lenders and rotating savings and credit associations (ROSCAS).

2.1.1 Savings Kilby, et al (1984) observed that a significant proportion of the initial capital both fixed and working for small-scale enterprises is obtained from personal savings accumulated from other activities. Similarly, expansion of these enterprises is mainly financed from internally generated funds. This scenario has frequently led to the argument that smallscale enterprises particularly rural do not exhibit a high demand for external sources of finance.

Anderson (1982), suggests that viewing savings as part of financial intermediation process introduces the notion that as a source of finance, it is much broader concept than merely one of internal surpluses. For whereas the savings of the individual rural household may be inadequate to finance the totality of the small-scale enterprises

requirements, efficient mobilization of household savings by financial intermediaries can significantly increase the availability of funds to rural enterprises.

2.1.2 Financial Arrangements among Relatives, Neighbors and Friends. Dondo (2001) observed that credit from friends and relatives constitutes an important source of start-up capital for many micro-enterprises in urban areas and for small-holder farmers in rural areas. He points out that such arrangements are deeply rooted in the Kenyan culture due to several factors; It facilitates social linkages among Kenyan culture Geographic proximity between lenders and borrowers allows financial transaction to be made on a more personal basis, facilitating the extension and repayment of credit. Credit terms are popular as many of the loans are interest-free and do not require collateral; their repayment arrangements tend to be open-ended and based on reciprocity.

2.1.3 Savings club Rutherford (1999), describes savings clubs as groups of people who save together (but not jointly) and thus monitor each other savings discipline. They can be understood as ways of controlling the disadvantages and risks inherent in other forms of home savings, particularly the problem of maintaining regular deposits (the discipline problem) and the risk of trivial spending (satisfying what has been called the illiquidity preference (Shipton, 1994)).

2.1.4 Money guards Money guard guards money against the dangers of temptation to indulge in trivial spending as well as the risks of loss or theft. They can thus be seen as a way of getting round the problems of home savings (West African Study, 1999).

Rutherford (1999) in his research in Uganda found that the owners of small enterprises often deposit their savings with their trade suppliers. The supplier acts as their overnight banker often, the deposits can also be viewed as down payments on future supplies.

2.1.5 Deposit Collectors. They earn a fee for doing what guards and clubs do for free, but in a more regular and reliable fashion. In some parts of the world notably West Africa, deposit collectors or mobile bankers are the most common money swap management device available and have become an institutionalized part of their cultures. West Africa deposit collectors usually collect an agreed sum on a daily basis, and change one days deposit per month. Accounts are normally cleared after each month, a device that enables users to check regularly on the reliability of their collector (action audit). Some collectors also lend to selected clients, in which case the savings may be carried over as security from month to month (West Africa Savings Study, 1986).

Rutherford (1999) tried to establish whether this tradition is alive in East Africa and found that deposit collectors exist in Uganda but they were rare, exceptional, not at all institutionalized with their working practices ad hoc and individual. 2.1.6 Reciprocal Lending This involves a system where the home savings are consumed by a neighbor or a relative. It involves transaction between individuals. Such lending is described as a savings through device since it depends on the constant and repeated building up of small quantities of household savings with lump sums arriving as loans from the neighbors when the home saving is low, and departing again as a lump-sum loan to the neighbor when the home savings have built up again (Rutherford 1999).

2.1.7 Informal Insurance Schemes They employ the principle of reciprocity. These are groups which have regular contributions of a fixed sum per member and give pre-determined pay-outs for given contingencies. Such institutions are on the margins of being true financial devices or

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services but related systems which are newer and less embedded in social relationships are clearly true money management devices (West African Savings Study, 1986).

2.1.8 Rotating Savings and Credit Association (ROSCAS) A group of people wishing to build up a lump sum from regular savings agree to save a set sum per person at a set interval. On each occasion (which may be daily, weekly or monthly, or any other suitable interval) the full amount of all the deposits is given to one member. The meetings continue until everyone has received this prize. At the end, everyone has contributed equally and received equally Dondo (1991) in his research, found that in Kenya; ROSCAs are found in rural and urban areas either as registered social welfare groups or as unregistered groups of friends and family members. In another study in 1994, he found that more than 80% of the ROSCAS in Kenya comprise from 5 to 10 members, but that some groups comprise up to 60 members. Moreover, 76% of the group members were women. He observed that ROSCAS provide credit to those who would likely to be ineligible to borrow from other sources. They also mobilize savings, serve a social function and provide a form of insurance (e.g. in personal emergencies, members contribute to their needy colleague, who may also borrow from the groups savings). He outlined advantages that ROSCAS offer to members as; The operations are simple and easily understood by even illiterate members. By springing from local initiative, ROSCAS generate a sense of ownership and loyalty and embody truly participatory development. Mutua et al (1991) in a research about micro-enterprise credit, employment, income and output pointed out that links between ROSCAS and other institutions are few, though some NGOs provide them with lending funds, usually as loan. The differential between the interest members pay to the ROSCA and the interest the ROSCAS pay the creditor is retained and boosts the ROSCAs loan capital.

2.1.9 Accumulating Savings and Credit Association (ASCAS). The principle of the ASCA is that every member makes deposits regularly (though some ASCAS allow members to vary those deposits both across time and between themselves) 11

and some members borrow from the fund thus built up, while others choose not to. The cash that flows through an ASCA can accumulate rather than be liquidated at each meeting as in a ROSCA. If the fund is too small to attract a borrower, it must be stored temporarily. These characteristics make the ASCA more flexible (Rutherford, 1999).

2.1.10 Money Lenders and Pawn Brokers. Beyond non-commercial money lending among relatives and friends, there exists commercially oriented money lenders in both the rural and urban areas. Landlords or farmer lenders are found in rural areas (Dondo 1994). Money lender lends money in a systematic way as a financial service, rather than as part of normal social life. Pawn broking is described as advances given against electric and electronic household goods such as refrigerators and music systems although money lenders and pawn-brokers are reported to be rare in East Africa. They charge very high interest rates, and require expensive assets to advance loans. (Rutherford 1999).

2.1.11 Supplier Credit It is an important source of finance since suppliers will provide necessary goods on credit, or even cash advances to their clients. A strong relationship of trust is established with the suppliers who are then used as money guards. (Dondo 1991).

2.2 Conceptual Framework From the literature, the need for other forms of financing is determined by the availability of the alternative sources of finance as shown

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Figure 1: Sources of Finance and Uses of Funds

Independent variables Savings

Dependent variables

Credit Association

USES OF FUNDS: Growth. Mechanize the farm. Hire more labor. Buy chemicals and raw materials.

Trade Credit

Informal Insurance Scheme

Local Money Lenders

Relatives Neighbors and friends

2.2.2 Dependent variables Growth of the farmer. The more the credit accessibility, the more the farmer is able to grow in terms of increasing the farming acreage.

Mechanizing the farm. The more the accessibility to finance, the more the farmer will use modern farm implements and machinery due to affordability.

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Hiring more labour. As the farmer has more accessibility to finance, he is able to hire more labor and his growth is enhanced.

Buying chemicals. The farmer could be able to modernize his farming methods by use of chemicals and this is possible if accessibility to finance is increased.

2.2.3 Independent variables

These include savings, trade credit, credit associations, informal insurance schemes, local money lenders and relatives, neighbors and friends. They are sources of credit that the farmer uses to finance his expenditures.

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CHAPTER 3 RESEARCH METHODOLOGY 3.1 Target Population. The sample was drawn from the small-scale farmers engaged in maize farming in TransNzoia district. The sample size was 100 small-scale maize farmers.

3.2 Sampling Strategy The researcher employed multistage sampling technique to obtain the number of locations and sub-locations that were to be considered. The numbers of farmers were then selected from the various sub-locations using simple random sampling technique to allow equal opportunity for all. Small-scale maize farmers from five divisions were considered.

3.3 Data Collection Instrument Interview schedules were the main instruments for data collection. The researcher administered the schedules together with the research assistant to the sampled respondents. The schedules contained both open and closed-ended questions. Openended questions were used to solicit qualitative data and suggestions while closed-ended questions sought to obtain quantitative data for statistical analysis. Questions which were asked focused on small-scale farmers and their credit requirement, which formed the core of the study.

3.4 Data Analysis The collected were analyzed by using statistical package for social sciences software (SPSS). Descriptive statistics such as frequency tables and percentages were used. Multiple regression, correlations and cross tabulations were also used. Multiple regressions were used to determine the magnitude and direction of the relationship between dependent variable and independent variables.

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3.5 Research Design In the study, descriptive survey approach was used to assist the researcher in attaining data to answer questions concerning the current status of the subject in the study. The purpose of descriptive research is to determine and report the way issues are. It describes such issues as possible behavior, attitudes, values and characteristics.

3.6 Data Collection Procedure The study relied on both primary and secondary data. Primary data were obtained from the sampled respondents while the secondary data were available from existing literature. The primary data were collected by the researcher assisted by a research assistant who was trained before the actual research.

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CHAPTER 4 DATA PRESENTATION AND ANALYSIS 4.1 Introduction The purpose of this chapter is to analyze the variables involved in the study and interpret the results. Data description, analysis and interpretation are presented.

The table below presents frequency distributions and percentages on how small-scale farmers obtain their loans. TABLE 4.1.1 Respondents Choice of Financial Institutions.

Financial Mode

Respondents Frequency Percent 51 12 2 24 1 10

Mutual assistance groups or associations Co-operative Society Landlord Local Money Lender ICDC agents Trader

51 12 2 24 1 10

Total

100

100

Table 4.1 shows the respondents choice of financial modes. The respondents patronized mutual assistance groups, which were chosen by the majority of the respondents, representing 51 percent followed by local money lender representing 24 percent. Only 10 percent chose traders while those who opted for landlords and ICDC agents were 2

17

percent and 1 percent respectively. The choice of the various sources of finance is represented in a pie chart as follows: Figure 2: Source of Funds

t r

m a

I c

The table below shows the amount of loan that majority of small scale farmers borrow. TABLE 4.1.2 Amount of Loan Borrowed By the Respondents In 2003

Amount Borrowed

Respondents Frequency Percent 1 0 8 12 61 11 2 2 1 2 100

0 1- 1000 1,001 10,000 10,001 20,000 20,001 30,000 30,001-40,000 40,001- 50,000 50,001- 60,000 60,001-70,000 Over 70,000 TOTAL 100

1 0 8 12 61 11 2 2 1 2

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Table 4.2 shows that majority of the farmers borrowed between twenty thousands and thirty thousand which represents 61 percent of the farmers that were interviewed. Only two farmers out of one hundred borrowed over seventy thousand.

Figure 3: Rate of Interest Charged

rate of interest charged

40

30

20

Frequency

10

0 7.00 8.00 8.50 9.00 10.00 11.00 12.00

rate of interest charged

The mean rate of interest charged on loans was found to be 9.15. The highest interest rate that was charged is found to be twelve percent while the lowest interest charged was found to be seven percent. These high rates prompted the farmers to borrow low amounts of loans. The high interest rates were caused by high demands for loans by the farmers. The table below is presented to indicate the reasons why small-scale farmers choose a particular finance source. It presents responses in terms of frequency and percentage.

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TABLE 4.1.3 Reasons For Choosing a Particular Financial Institution.

Responses Frequency It is near to my home (n) Friendly attitude(f) Member of the association(m) Ease of getting loan other (e Total 18 10 42 30 100 Respondents Percent 18 10 42 30 100

The respondents gave various reasons why they chose to borrow loans from a given financial mode. These reasons are shown in table 4.3. Being a member of a particular financial institution was the most common reason for choosing the source of funds which was given by 42 percent of the respondents. It is also evident that ease of getting the loan is a reason for choosing a particular finance source. These reasons are represented in a pie chart as follows-

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Figure 4: Choice of Finance Source

choice of finance source
n

f m

The table below indicates the problems that small scale-farmers encounter in obtaining loans from various sources. The results are presented in frequency distributions and percentages. TABLE 4.1.4 Problems Encountered in Obtaining Loans
Problems Respondents Frequency Lack of collaterals(c) Bureaucratic procedures( b) High traveling costs( t) TOTAL 72 15 13 100 Percent 72 15 13 100

Table 4.4 above shows that the most serious problem encountered in obtaining loans is lack of collateral with 72 percent, followed by bureaucratic lending procedures with 15 percent and high travelling costs with 13 percent. These problems are represented in a pie chart as follows:

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Figure 5: Problems Encountered In Obtaining Loans

problems encountered in obtaining loans

The table below presents the type of security that small-scale farmers use in obtaining loans from various sources, in frequencies and percentages.

TABLE 4.1.5 Type of Security Offered.

Type of Security Frequency Piece of land (l) My asset (house, bicycle) (a Shares in a co-operative (s) TOTAL 58 27 15 100 Borrowers Percent 58 27 15 100

Table 4.5 above shows that fifty eight percent of the farmers use their land as collateral, twenty seven percent use their assets to pledge as collaterals while fifteen percent use their shares in their respective co-operatives as securities in obtaining loans. This is represented in a bar graph as follows; 22

Figure 6: Security for Loans

security for loans
70 60

50

40 30

20

Frequency

10 0 a l s

security for loans

The table below shows how the small-scale farmers intended to use the borrowed funds.

TABLE 4.1.6 Intended Uses of Funds

Response Frequency Increase acreage (a) Buy pesticides (b) Buy fertilizers (f) Hire labor (h) Buy farm inputs (i) TOTAL 37 15 15 19 14 100 Respondents Percent 37 15 15 19 14 100

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Table 4.6 shows that thirty-seven percent of the interviewed respondents wanted funds for increasing farming acreage. Nineteen percent wanted to borrow funds to hire labour, fifteen percent prioritized their funds in buying fertilizers and pesticides each while fourteen percent wanted funds to buy farm inputs. The intended use of funds is presented in a pie chart as bellow.

Figure 7: Uses of Funds

a h

f b

The table below presents responses on the most serious reason that hinders expansion of farming activity of the small scale farmer.

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TABLE 4.1.7 Reasons Hindering Expansion of Farming Activity.

Response Response

Respondents
Frequency Percent

Finance (f) Labor (l) Management (m) TOTAL

65 9 26 100

65 9 26 100

Table 4.7 shows that majority of the respondents cited lack of finance as the most serious hindrance to expansion of their farming with sixty-five percent, followed by lack of proper management with twenty-six percent and finally lack of labour with nine percent. This is presented in a bar graph as follows:

Figure 8: Reasons Hindering Expansion

70

60

50

40

30

20

Frequency
10 0

Finance
Reasons hindering expansion

Labor

Management

The table below presents the percentage of respondents years of schooling. 25

TABLE 4.1.8 Years Spent In School

Years
0-4

Frequency 10 60 30 100

Percent 10.0 60.0 30.0 100.0

Valid Percent 10.0 60.0 30.0 100.0

Cumulative Percent 10.0 70.0 100.0

4-8
8-12 Total

Table 4.8 above shows that most of the farmers interviewed have spent between four and eight years in school representing sixty percent of all respondents. Ten percent have spent between zero and four years while thirty percent have spent between eight to twelve years. This is presented in a bar graph as follows: Figure 9: Years of Schooling

70

60

50

40

30

20

Frequency
10 0

0-4 Years of schooling

4-8

8-12

The table next page indicates the frequency and percentage of farmers who have undergone some training on farming. 26

TABLE 4.1.9 Training on Farming

No (n) Yes (y) Total

Frequency 60 40 100

Percent 60.0 40.0 100.0

Valid Percent 60.0 40.0 100.0

Cumulative Percent 60.0 100.0

Table 4.9 above shows that sixty percent of the farmers have not undergone any kind of training on farming, while forty percent of the respondents have undergone some kind of training on farming. This is shown in the pie chart below. Figure 10: Training On Farming

The table below shows the frequency and percentage of those respondents who keep farming records.

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TABLE 4.1.10 Keeping of Farming Records

Valid

No (n)

Frequency 90 10 100

Percent 90.0 10.0 100.0

Valid Percent 90.0 10.0 100.0

Cumulative Percent 90.0 100.0

Yes(y)
Total

Table 4.10 above shows that among one hundred respondents, ninety of them do not keep farming records. This represents ninety percent of the respondents. Ten respondents keep farming records and this represents ten percent of all the respondents. This is represented in a pie chart as follows: Figure 11: Keeping Of Farming Records

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Table 4.1.11 Correlations

Cor relations rate of interes t charged .036 .724 100 1 . 100

loan amount

Pearson Correlation Sig. (2-tailed) N rate of interes t charged Pearson Correlation Sig. (2-tailed) N

loan amount 1 . 100 .036 .724 100

Table 4.11 above shows that the correlation between amount of loan borrowed and rate of interest charged is 0.036. Table: 4.1.12 Awareness for Sources of Funds Years of Schooling 04 48 8 -12 Total No. of Sources 2 6 12 Frequency 10 60 30 100

4.2 Interpretation From the analysis, small-scale farmers borrowed their funds from mutual assistance groups or associations because they were members of their particular associations. Membership in this case seemed to be the main reason for choosing to borrow from an association.

It is also evident from the analysis that small-scale farmers would choose to borrow where collateral requirement is minimum or non-existence since majority of the farmers

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could only use their land and other low valued assets. This is consistent with the literature where there is a negative relationship between collateral value and the demand for loans.

The correlation coefficient between interest charged on loan and the amount borrowed is weak. The relationship is explained by only 3.6% indicating that there are other factors that determine the amount of loan borrowed apart from the interest rate. According to the coefficient estimate, this variable is not an important determinant of borrowers choice of loan amount.

Lack of enough funds is the contributing factor against the growth of small-scale farmer. Other factors like lack of managerial skills and lack of ready market for their produce are not significant in explaining the lag in growth of the farmer.

The small-scale farmers level of education has a significant influence on the choice of finance mode. It is observed that those farmers who have spent more years in school are aware of more sources of finance that are available to them cheaply. Those who have spent fewer years in school are not aware of more alternative sources of funds available to them.

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CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary The main objective of this study was to assess the alternative sources of finance available to small-scale maize farmers. Due to bureaucratic lending procedures from the formal sources of finance, high collateral requirements, and the travelling costs incurred in trying to reach them, these alternative sources were found to be in the informal financial institutions.

Mutual assistance group or association was found to be the most dominant source of finance and most small-scale farmers preferred this source mainly because they are members of the associations. Most scale farmers were found to be small borrowers of between twenty thousand and thirty thousand. These amounts of funds loaned to the farmers were however found not to have been influenced by the interest rates.

The collateral is a significant determinant of the choice of financial mode and was considered the main obstacle in obtaining loans from various financial sources. Most farmers preferred the source where collateral requirements were minimum. Most farmers had their piece of land to give as collaterals and intended to use their borrowed funds in increasing their farming acreage and hiring labour to work in their farms.

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Lack of finance was the most serious reason that hindered expansion of farming activity. This indicated that sufficient finances to the small-scale farmers could improve their growth capacity. However, there was no relationship between training on farming and keeping farming records since majority of the farmers including those who have undergone training on farming do not keep farming records. Finally, those small-scale farmers who have spent more years in school were found to be more aware of alternative sources of finance that are available to them than those who are less educated.

5.2 Conclusions Formal institutions demand security for their loans however small. This has prompted those farmers in need of finances to seek alternative sources of funds where demand for collaterals is quite low. Even though some informal institutions ask for collaterals, it explains the reason why small-scale farmers choose to borrow from selected sources and not others.

The study found that low education level in majority of the farmers is associated with lack of knowledge of other institutions in the informal financial sector that are available to them. This explains also why majority of the farmers could only borrow from mutual assistance groups.

The study also found that the cost of borrowing does not influence the choice of any institution in the informal sector. Even the high interest rates charged on loans by most informal institutions does not make farmers change their borrowing patterns. The farmers

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have however not exhausted all the alternative sources of finance that are available to them. 5.3 Policy Recommendations 1. Local money lenders be recruited as extension agents. The government should allow them registration as financial agents of the formal financial sector. The money lenders would then acts as agents in granting and recovering loans at a commission. The local money-lenders have more information about borrowers than the formal financial sector institutions have. They are therefore more likely to be more effective in granting and recovering loans.

2. The study also suggests that state loans like those provided under the ICDC loan agency or AFC be channeled to the farmers via the IFS especially the mutual assistance groups. This is because local money-lenders and farmers assistance groups understand their clients well, including their activities.

3. I.F.S. institutions to be registered and a body to monitor and oversee their lending activities be created, to facilitate optimal lending and enable the government to consider them when facilitating the monetary policy.

4. Intensify education programs in rural areas. This is because higher levels of education will equip farmers with necessary knowledge on the various options they have in obtaining their finances and where interest rates are lower or collateral requirement is minimal.

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REFERENCES Aleem, I (1990). Imperfect information, screening, and the cost of information lending: (A study of a rural credit market in Pakistan) The World Bank Economic Review vol.4, No3, September, pp 329-349. Ammar, s. Et al. (1990). The Thai rural credit system public subsidies, private information, and segmented markets The World Bank Economic Review vol.4, No.3 September. PP.271-294.

Aryeetey, E. and Hyuha, M. (1990). Informal financial institutions and markets in Africa An Empirical study. Paper written for the IBDR Africa Economic conference, Nairobi.

Chipeta, C. and Mkandawire, M.L.C. (1989). The informal financial sector in Malawi: Scope, Size and Role. Paper presented at Africa Economic research consortium, Harare.

Dondo, A. (1994). Credit to the informal sector, approaches and models experienced in Kenya.

Due, J.M (1990). Funding small-scale enterprises for African women: case studies in Kenya, Malawi and Tanzania. Africa Development Review. Vol.2, No.2, December, pp.58-80 Government of Kenya Trans-Nzoia District plan 1998-2004

Hoff, K. and Stiglitz, J. E. (1990). Introduction: imperfect information and rural credit markets-puzzles and policy perspectives The World Bank Economic Review, vol. 4 , No. 3 September, pp. 235-249.

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Hyuha M. and Ndanshau, M.O. (1990).The informal financial sector as the forgotten half in financial reform. Paper presented at the sixth economic policy workshop, Dar-es-salaam. Kilby, P., Liedholm, C. and Meyer, R., (1984). Circulating capital and non-farm Enterprises. In undermining rural development with cheap credit, D.W. Adams, D.M Graham and J.D. Von Pischke, eds, boulder, Colorado: West view Press. Oketch, H. O., Mutua, K. A. and Dondo, A.C. (1991) Micro-enterprise credit, Employment, incomes and output: some evidence from Kenya.

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APPENDIX I
KENYATTA UNIVERSITY DEPARTMENT OF APPLIED ECONOMICS P.O.BOX 43844 NAIROBI KENYA TO ALL RESPONDENTS 7TH OCTOBER 2011 Dear sir/Madam,

RE: RESEARCH ON INVESTIGATION ON ALTERNATIVE SOURCES OF FINANACE AVAILABLE TO SMALL SCALE MAIZE FARMERS

I an undergraduate student of Kenyatta University. As part of my course requirement, I am currently conducting the above mentioned research with an aim of investigating on the alternative sources of finance available to small-scale maize farmers in Trans Nzoia District.

Enclosed is a copy of the questionnaire, which I will kindly request you to take a little of your time and complete. The information you will provide in the questionnaire is for academic purpose only, and will be treated in confidentiality. This information is meant to contribute to an important study whose results are likely to improve accessibility to finance by maize farmers.

I wish to thank you in advance for your willingness to participate in this academic effort.

Yours Sincerely, Kabinyu Zipporah Wacera.

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APPENDIX 2 INTERVIEW SCHEDULE Division-----------------------Sub-location ------------------Age --------------------------Location----------------------Sex----------------------------Main Occupation-------------

Other sources of income---------------------------------------------------------1. Where do you mainly borrow money from? a) Local money lender d) Co-operative society g) Your association [ ] (b)Trader [ [ ] (e) Friends [ [ ] ] ( c)Landlord [ ] ] ]

(f) ICDC Agency [ ] (i) Neighbors [

] (h) Relatives [

Others (specify). 2. How much did you borrow last year? (Ksh)------------------------------3. How much did you pay? (Ksh)-----------------4. Why do you choose that source of finance? a) It is near to your home b) Friendly attitude [ [ ] ] ] ]

c) Member of the association [ d) Ease of getting the loan [

Others specify 5. What problem do you encounter in obtaining loans from: Banks? -----Moneylender? ----Co-operative society? ---Your association? ----Traders? ----Others (specify) -----a) Lack of collaterals b) Bureaucratic lending procedures c) High travelling costs [ [ [ ] ] ]

d) Others (specify)

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6. What security do you provide for the loan? a) Your piece of land. How many acres are they?. b) Your assets (e.g. house, radio, bicycle, clothing etc)---------------------c) Any other (specify)-----------------7. What is your intended use of borrowed funds? a) Buy farm inputs b) Increase the farming acreage. c) Hire labour d) Buy fertilizers [ [ [ [ ] ] ] ] ]

e) Buy pesticides and insecticides [

f) Others (specify) 8. Please indicate the most serious reason that hinders expansion of your farming activity. a) Management b) Finance c) Labour d) Market of the produce e) Others specify). 9. How many years have you spent on schooling? a) 0-4 b) 4-8 c) 8-12 [ [ [ ] ] ] [ [ [ [ ] ] ] ] (please

d) More than 12 [ ] 10. (a )Have you undergone any training on farming? Yes [ ] No [ ]

(b) If yes, do you keep farming records? Yes [ ] No [ ]

THANK YOU FOR YOUR COOPERATION!

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APPENDIX 3 TABLE OF STUDY AREA Area (km2) 263.4 296.5 679.6 330.8 191.9 425.9 299.2 2,487.3

Division Central Cherangany Endebess Kaplamai Kiminini Kwanza Saboti Total

Locations 5 4 3 5 2 3 5 27

Sub-Locations 11 10 7 7 3 10 6 54

Source: DISTRICT COMMISSIONERS OFFICE, KITALE, 2001.

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