The Effect of Financial Deepening on the Performance of Smallholder Farmers in Homa Bay County, Kenya

Abstract

Theory shows that financial sector deepening has a positive impact on performance of and could widen access to financial services for the Small Holder Farmers (SHF). However there is no consensus on empirical relationship between financial deepening and performance of SHF. This study aimed at analyzing the empirical relationship between financial deepening and the performance of SHF in Homa Bay County, Kenya. The research covered two years starting from 2011/2012 to 2012/2013 because records for previous periods were not easily accessible. The study used the multiple regression analysis. The dependent variable was performance of SHF while total assets, deposits, loans and share capital were the regressors. The research established that the performance of farmers would still grow by Ksh. 2,155.92 annually independent of any factors determining SHF performance. However, SHFs’ average assets, loans, share capital and deposits do significantly influence the performance of SHF. The coefficient of determination indicated that 65% of variation in SHF was attributed to assets, loans, share capital and deposits. It was found that a 1% rise in share capital would result in 1.74% drop in performance of SHF and that increasing deposits by 1% would lead to 1.71% drop in performance of SHF if all other variables remain constant. Hence, share capital and deposits are negatively related to performance of SHF. It was also found that 1% rise in Loans would lead to 0.96% rise in performance of SHF and that 1% rise in private credit would drive 1.03% rise in performance of SHF. Therefore, loans and other forms of private credit negatively influence the performance of SHF. Thus, it is recommended that strategies to enhance financial deepening be put in place as a mechanism of stimulating performance of SHF in Homa Bay County.

Keywords: Financial Deepening, Financial Performance, Smallholder Farmers, Credit Access, Agricultural Finance, Agricultural Development, Economic Growth