ABSTRACTTHE IMPACT OF AGRICULTURAL CREDIT ON DEMAND FOR FACTORS OF PRODUCTION, FARM OUTPUT, AND PROFITABILITY IN KENYAByElliot Wamboka MghenyiThis dissertation develops a model that allows not only estimating the impacts of agricultural loans on farm outcomes, but also explaining the pathways through which access to credit affects the outcomes. This approach provides a fuller understanding of the extent to which innovations in rural financial markets could improve farm production and profitability. The study takes advantage of an exogenous shock in agricultural credit in Kenya to evaluate the impact of a group credit program on farm outcomes. The results show that: (i) group credit increased demand for nitrogen nutrients in fertilizers by 43.65 percent, (ii) there was no impact on demand for phosphorous and potassium nutrients, and (iii) there was no impact on demand for hybrid seeds. There is also growing interest to understand the relationship between credit constraints and human capital acquisition. The results show that group credit increased demand for adult hired labor by 141.82 percent and decreased demand for child labor by 51.82 percent. That credit frees child time from farm labor suggests that innovations in financial markets could have long-term effects on human capital development, and therefore should not be evaluated only on the basis of short-term outcomes. The result that group credit increased demand for adult hired labor suggests rural labor markets can be effective in raising incomes for land constrained but labor abundant rural households – while keeping children away from working in farms. The study also estimates the impact of group loans on maize profitability. The results lead to the conclusion that group credit is profitable when used to purchase fertilizers and hire labor for maize production. An average farmer invested KES 4814.75 from group loans to maize production and realized profits of KES 3171.72, which translates to a 65.87 percent return on investment. The average loan size was Kenya Shillings (KES) 15,760.98 but only KES 4814.75 (about 30.55 percent) was used to purchase primary inputs in maize production (fertilizers and hired labor). The remaining 69 percent may have been used for consumption needs, short-term investments in competing enterprises (e.g. dairy), and long-term investments such as education. Results from stochastic frontier production function indicates that group credit improves allocative efficiency but has no effect on technical efficiency. The conclusion that group credit improves allocative efficiency draws from estimates of marginal revenue products and estimates of impact of group credit on factor demands. We found that group credit had a positive and significant effect on demand for nitrogen and hired adult labor. Both inputs had positive marginal revenue products, relative to factor prices, indicating that farmers who received group loans improved their allocative efficiency by using more of these inputs. However, phosphorous and potassium have the largest marginal revenue products relative to factor prices, but access to group credit did not increase demand for these nutrients. We conclude that borrowing farmers could have improved their allocative efficiency even further with increased demand for phosphorous and potassium.
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