Abstract
Commercial banks plays a crucial role in the Agricultural sector in advancing farmers affordable credit to improve their productivity, enhancing their food security, and expanding their income. Financing of the sector however continues to get the lowest levels of credit in Kenya compared to other sectors due to poor loan repayment. This study aimed to establish the effect of macro-economic factors of Gross Domestic Product (GDP), Real Effective Exchange Rate, and the Lending rate on Agricultural Non-performing Loans (NPL) and to assess the effect of Growth in Loan Portfolio on Agricultural NPL. Secondary data relating to Commercial Banks lending to the agricultural sector for a period of 7 years from 2011 to 2017 was collected from forty-two Commercial Banks in Kenya. Results showed that agricultural NPL had a strong positive correlation with real GDP (0.836, p<0.001), the Real Effective Exchange rate (0.865, p<0.001), and a weak inverse correlation with the average Bank Lending rate (-0.48, p<0.01). The study concluded that commercial banks should pay close attention to the two factors (Gross Domestic Product and Real Effective Exchange rate) when providing loans to the agricultural sector to reduce the level of impaired loans. The banks active in agricultural lending should, therefore, take the performance of the real economy into account when extending loans given the reality that loan delinquencies are likely to be higher during periods of economic boom as suggested by the study results. Equally Commercial banks should trade with high prudence to curb a possible impairment due to reckless lending and over-estimation of the borrower’s ability to pay back. They should constantly review the complexity and diversity of the new loans to the agricultural sector periodically like quarterly, and do aging analysis to ensure that the growth in agricultural loans do not serve to window dress the portfolio at risk percentage while the actual amounts in default are increasing.
Highlights
The demand for agricultural loans in Kenya has been increasing the past three decades in response to the increasing opportunities to expand production and value addition of agricultural produce
This study investigates the factors that influence the Non-performing Loans (NPL) in the agricultural sector
This study attempted to ascertain the effect of four selected factors
Summary
The demand for agricultural loans in Kenya has been increasing the past three decades in response to the increasing opportunities to expand production and value addition of agricultural produce. According to the Central Bank of Kenya bank supervision report (2015), gross loans and advances increased from Kshs 1.94078 trillion in 2014 to Kshs 2.1653 trillion in 2015 which translated to a growth of 11.57 percent. Agricultural Farming in the country continues to get the lowest levels of credit between 4 and 6 percent from the year 2000 to 2015 compared to other sectors of the economy due to high risks associated with it such as drought, floods and the inability of small-scale farmers to provide collateral for their loans [5]. Treasury data shows that total loans advanced to the agriculture sector shrunk by Sh13.737 billion in the year 2017 from Kshs 93.712 in 2016 to Kshs 79.975 in 2017 indicating that loan repayments were more than new disbursements. Loans issued to farmers represent less than 3 percent of the Sh1.6 trillion loaned out to the private sector by banks despite it contributing a fifth of the country’s GDP [6]
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