Analysis of Group Based Loan Default in Kenya: The Case of Agricultural Finance Corporation of Kenya

Abstract

The study aimed at investigating group loan default at Agricultural Finance Corporation (AFC), a state owned Development Finance Institution in Kenya formed in 1963, whose main role is to assist in the development of agriculture and agricultural industries by making loans to individual farmers, groups, private companies, public bodies, local authorities and other persons engaging in agricultural activities. AFC began lending to groups in 2006 with its Eldoret Branch of Uasin Gishu County being its pioneer branch. The performance of the group loans was good with a default rate of 0.5%. However, in the succeeding years the performance of the group loans in the Eldoret branch became very erratic recording a high of 80% default rate in 2008. The findings of the study done in 2013 suggest that amount of loan has no effect on default; size of the group has a significant positive effect on group loan default, while age of the group, experience in borrowing and education level all produced significant negative effect on group loan default. The findings of the study are useful in designing of credit scoring systems by AFC and other lending institutions following the group lending model