The Influence of Micro-finance Institutions on the Growth of Agribusiness Oriented Small Scale Enterprises in Kenya

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Table of Content

Table of Content 2 Abstract 4 Introduction 5 1.1 Background Information 5 1.2 Problem Statement 6 1.3 Justification 7 1.4 Objectives 7 1.5 Hypothesis 7 2.0 Literature Review 8 2.1 Kenya's Horticultural Sector at a Glance 9 2.1.1 Horticultural Leading Products 10 2.1.2 Top Importers 10 2.1.3 Private Sector Drive 10 2.2 Kenyan Contract Farming At a Glance 11 2.2.1 Definition of Contract Farming 11 2.2.2 Contract Groups 12 2.3 Supply of Microfinance 14 2.4 Types of Enterprises Engaged In By Microfinance Clients 15 2.5 Effect of Microfinance Services on Agribusiness-Oriented Small Scale Enterprises 15 3.0 Methodology 16 3.1 Area of Study 16 3.2 The Sample 16 3.3 Data Collection 16 3.4 Demographic Details for both Study Areas 17 3.5 Data Analysis 18 4.0 Work Schedule 19 5.0 Budget 20 6.0 References 21 7.0 Appendices 23 7.1 Appendix 1: Preliminary Data Analysis: Interview Questions 23 7.2 Appendix 2: Thematic Data Analysis 24

Abstract
Micro-financing refers to the provision of financial services to individuals and groups which are not included in the formal financial systems based not only on assets and security but also other demographic, cultural, social, and gender constraints (Sindi, 2008). Microfinance institutions are those informal financial systems offering such services. Studies on Agribusiness Oriented Small Scale Enterprises in Kenya have reported that access to formal finance; supply inputs; and marketing quandaries are the three principal limitations which hamper agricultural growth and development in the country. A recent research carried out in Kenya, established that the majority of agribusiness-oriented small scale enterprises depend primarily on Microfinance institutions for credit and resource inputs (Eaton & Shepherd, 2001). The study further established that the majority of those who seek the services of micro-finance institutions are women. Such women access those services, primarily credit, by forming small groups which are required to be registered under the department of gender and social development. As a result, a majority of agri-business oriented small scale enterprises managed and directed by women, are often more resourceful than those managed by men (Sindi, 2008). The study further revealed that, agriculture is an important engine for economic growth in the country and microfinance is critical to that growth. This research proposal endeavors to establish the influence of micro-finance institutions on the growth of agribusiness oriented small scale enterprises in Kenya.

Key words: Microfinance institutions, agricultural growth and development, critical.
Introduction
1.1 Background Information
Micro-financing plays a considerable role in promoting economic growth and development along with eradicating poverty among poor households through increased access to credit. Microfinance has been defined as the provision of financial services, including credit and resource inputs, to individuals and groups who are exempted from the formal financial system based not only on wealth but also on demographic, socio-cultural and gender basis. Kenya is an agricultural economy, with agricultural sector contributing the largest share of employment opportunities (about 79 percent), 43 percent of annual GDP and over 69 percent of the country’s total exports. Small-scale farms contribute the largest share of total agricultural production compared to large scale or estate farms (Audretsch, 2002). Despite the fact that agriculture is the backbone of the Kenyan economy, formal financial systems’ contribution to the sector was estimated at around 17 percent of the total loans disbursed in 2000. Into the bargain, it has been established that microfinance services play a vital role for agribusiness oriented small scale enterprises and householders of the country.
Recent increase in donor and government funding for the microfinance institutions has led to a massive development of the sector. Such developments have been necessitated by the microfinance’s capacity to reach and assist poor households in their pursuit to meet their basic financial needs, and to develop socio-economic empowerment on a sustainable basis (Jurik, 2005). Microfinance programs in Kenya, just like in any other third world country, have flourished as part of their unwavering attempts to eradicate poverty (Eaton & Shepherd, 2001). A multiplicity of microfinance’s attributes has necessitated this is development. For example, micro-finance aims at: poverty reduction and eventual eradication by empowering low-income individuals to venture in productive business opportunities and providing working capital for the purchase of inputs at reduced security requirements and bureaucracy.
It is common sensual that the Kenyan government is currently experiencing considerable challenges in its attempt to empower a better percentage of its population to attain its basic living requirements from a tapered economic foundation upon which opportunities for self-employment and enterprise development are quite constrained. Kenya does not also feature well at both regional and international trade in any of her industrial products. This is true, considering that the current policy governing industry, trade, industry and employment is not favorable for a rapid growth and development of the sector (Commonwealth Secretariat, 2001). Considering that agriculture remains the chief source of employment, food and revenue, there is a dire necessity to uphold and augment its productivity, and promote other sectors of economy, including the micro, small and medium sized enterprise sector, as an alternative source of employment and source of revenue.
1.2 Problem Statement
National sources of revenue strategies comprise the assets, the capacities and activities vital for securing a means of living. A sustainable source of revenue is the one that can freely cope with and go through considerable stresses and shocks unscathed and maintain its capacities and assets both presently and in the unforeseeable future, while not compromising the integrity and sustainability of the natural resource base. Access to capital and resource input is one of the key determining factors of a household’s aptitude to achieve desirable and sustained well being. Microfinance and its augmented support for agribusiness oriented small scale enterprises offers a promising avenue for such realization.
1.3 Justification Most households in Kenya are low-income earners. They lack the required security for the access of financial services offered by the country’s formal financial systems. Besides, a majority of such households are primarily disadvantaged on the basis of a number of demographic factors, including age, gender, and level of education; social and cultural factors. Increasing microfinance support to agribusiness oriented small scale enterprises will obvious have affirmative consequences on productivity and on a number of households’ livelihoods.
1.4 Objectives
This study will be conducted with the following objectives: a) Evaluate the supply of Microfinance services in Kenya particularly in Horticulture and contract farming. b) To evaluate the influence of Microfinance Institutions (MFI’s) on the growth of agribusiness oriented small scale enterprises in Kenya, particularly in Horticulture and contract farming.
1.5 Hypothesis
1)
a) Ho: Kenya has considerable supply of Microfinance services to agribusiness oriented small scale enterprises, particularly in Horticulture and contract farming. b) Ha: Kenya has no considerable supply of Microfinance services to agribusiness oriented small scale enterprises, particularly in Horticulture and contract farming.

2) a) Ho: Microfinance services improve productivity of agribusiness oriented small scale enterprises in Kenya, particularly in Horticulture and contract farming. b) Ha: Microfinance services do not improve productivity of agribusiness oriented small scale enterprises in Kenya, particularly in Horticulture and contract farming.
2.0 Literature Review
In the early 1960s and throughout 1970s the key concern in agricultural sector was agricultural production. Agricultural credit and resource input was but a subsidiary, just as they were improved fertilizer, seeds and seedlings, tools and machines, and pesticides. The target groups were primarily farmers. The issue was how to distribute agricultural credit to farmers, and particularly large scale farmers. The funds were provided, principally coordinated by the ministry of agriculture, by the Kenyan government and donors. What mattered most was credit disbursement, not repayment. The ministry of agriculture mainly used agricultural development banks and projects as disbursement channels. Agricultural credit was considered a service, rather than a business (Eaton & Shepherd, 2001). The strategy had much to achieve: the green revolution, financed on credit, driven by technology, with subsidized interest rates. The overall produce was purchased by government at guaranteed prices through a number of marketing corporations. The subject of green revolution was given too much attention that the business of the financial service was significantly ignored. When farmers were unable to pay their loans, the banks could not cover their costs and the Kenyan government ran out of funds to finance the services, with the ultimate failure of the banking business and service (World Bank, 2011). As time went by, Kenyan populations continued to grow, increasing the size of rural population could not survive on agriculture alone. They ventured on other numerous activities, including on-farm, off-farm and non-farm activities. Both rural households and rural economies got progressively more diversified. However, access to finance was the only limiting factor (World Bank, 2011). Agricultural credit had been restricted, following the previous incidences of loan defaulting. It barred all those who did not have considerable assets to be used as securities, including those who did not own and till the land, laborers, traders, women, micro-entrepreneurs and a considerable number of smallholders who were too poor to pay the bribes and too illiterate to do the paperwork (Eaton & Shepherd, 2001). The excluded demand prepared the basis for a revolt on the part of supply: microfinance. The emerging concern was now how to connect microfinance to agricultural sector and rural entrepreneurs: principally through comprehensive financial systems development. By early 1990s, the microfinance had been significantly linked to specific agricultural sectors, including estate farming. Horticulture and Contract farming systems had achieved insignificant progress. It was not until early 2003, when the NARC government took office that the two got considerable attention (Malhotra, 2007).
2.1 Kenya's Horticultural Sector at a Glance
Kenya lies across the Equator along the eastern seaboard of Africa and has a landmass of 582,646 square kilometers. This gives Kenya a strategic location to export markets especially in Europe and the Middle East. The country has varied ecological zones owing to its varying altitude, which allows diverse agricultural activities, key among these being horticultural farming. In the past ten years, horticulture has grown in significance to become one of Kenya's key foreign exchange earners and source of employment (McMichael, 2004). Batches of high quality fresh cut flowers, vegetables and fruits are air freighted daily to a multiplicity of destinations around the globe.
2.1.1 Horticultural Leading Products
Horticulture is a compound name that refers to a multiplicity of fresh farm products, including vegetables, fruits and cut flowers. The main flowers exported from Kenya today are Roses, Alstroemeria, Statice, Carnations and a variety of summer flowers. Vegetables include, French beans, snow and snap peas, Asian vegetables such as chillies, karella, aubergines and okra, dominate the list of exported horticultural products. Passion fruits, mangoes, avocadoes, are the most important export fruits (McMichael, 2004).
2.1.2 Top Importers
The European Union (EU) is the chief importer of Kenya horticultural produce. The Britain, Germany, France and The Netherlands are the major importers of fruits and vegetables. Netherlands imports the bulk of flowers for sale through the auction system. The Middle East market provides a vital outlet market for Kenyan fruits (Sacerdoti, 2005).
2.1.3 Private Sector Drive
The horticultural sector is primarily controlled by the private sector, integrating both large and small-scale farmers, and exporters scattered across the country. Although fundamentally controlled and directed by private investors, the Kenyan government has helped in policy, resource support and regulation of the sector (McMichael, 2004).
2.2 Kenyan Contract Farming At a Glance
2.2.1 Definition of Contract Farming
Contract farming in Kenya is practiced in a diversity of models and has been defined in a multiplicity of ways. Some scholars define it as an intermediary institutional agreement that allows firms to contribute to and exert some considerable control over the production process without necessarily owning or operating the farms (Baumann, 2000).
Others define it as a system where a central processing and/or exporting unit buys the products of sovereign farmers and the terms of purchase are agreed upon in advance through contracts. Others still defines contract farming as an arrangement between farmers and processing and/or marketing companies for the production and supply of agricultural products under forward contractual agreements, often at prearranged prices (Sacerdoti, 2005). The agreement normally entails the purchaser companies to provide a certain extent of production resource input through, for example, provision of technical advice, fertilizers, improved seeds and seedlings and packaging services. In order for the agreement to be workable, farmers commit themselves to provide a definite commodity in both quantities and quality standards predetermined by the purchaser company (Baumann, 2000). The company, on the other hand, agrees to offer production support and to purchase the produce. In short, contract farming can be defined as a predetermined partnership between agribusiness oriented companies and farmers.
The strength and legality of the contractual agreement varies in accordance with the profundity and density of its organization. Similarly, purchasers and producers might cooperate erratically based merely on verbal agreements with no extra support regarding resource input supply. A more formal arrangement specifies the terms of transactions and responsibilities of each party in a contract document. The farmer often provides land, labor force and tools and equipment while the purchaser regularly offers resource inputs, extension services such as trainings on grading and is also endowed with the responsibility of marketing and transportation of the farmer’s produce (Chieng, 2005). Moreover, the contract specifies the quantity and quality prerequisites for the final produce, prices, time frame of the contract and technology application.
Nowadays, private enterprises operate contract schemes so as to be able to more closely direct and supervise the farm operations. Contrary to contracted groups, grading centers for horticultural produce in Kenya are managed and financed by contracting firms. The contracting company rigorously regulates the resource input supply and through its constant presence on the ground offers extension services quite regularly (Sacerdoti, 2005). It has been established that well-structured schemes in Kenya can at times reach out to thousands of contract farmers across the country.
2.2.2 Contract Groups
In this procurement category entire farmer groups, mostly Self Help Groups, along with Cooperatives are contracted on a 6 months basis. By 2005, over 5,000 farmers were dealing with Frigoken through this system. For the contract groups, Frigoken pre-finances seeds and pesticides while the farmers are responsible for fertilizer. The group must agree to follow Frigoken approved growing programs. Field staff, acting as monitors, auditors and advisors to the groups. The field staff does the planning on the ground and communicates these data back to Nairobi headquarters.
The produce is picked up 3 times a week at the grading centers of the groups, transported to Nairobi where it is finally graded and thus accepted or partly rejected. Farmers can pick up
The rejected produce in Nairobi but rarely do due to transport problems. Logistical reasons and the involvement of too many farmers prohibit Frigoken of rejecting the produce in the field directly or of bringing back the rejects to the respective farmer groups. Frigoken only takes grade 1 and disposes of the rejects (Stamm, 2003). The involvement of too many farmers prohibits Frigoken of rejecting the produce in the field directly or of bringing back the rejects to the respective farmer groups.
2.2.2.1 Selection Criteria for a Group to Be Contracted By Frigoken * Past performance (if group was contracted already before, experience with the crop). * Good management structure of the group; apart from working with well-established groups, Frigoken also encourages the formation of new groups. * Internal control system, sanctions, by-laws. * Land and water availability. * Logistical issue: grading centre should be next to a good road (central province has an advantage due to its good road infrastructure). * Grading shed and chemical store do not need to exist right from the beginning but should in the long run. * Group needs to “employ” staff: field controller (growing, scouting), centre controller (grading).
2.3 Supply of Microfinance
The Central Bank of Kenya controls the formal financial system of Kenya. The formal system currently comprises of well over 15 commercial banks. Other financial institutions include leasing companies, a discount house, development finance institutions, multiple savings institution and a considerable number of insurance companies and pension funds institutions. Microfinance supply in Kenya takes two forms: Agricultural credit and Business finance (Sacerdoti, 2005). Agricultural credit is more dominant and mostly is in the form of resource inputs of fertilizer, pesticides, insecticides, technical advice and improved seeds and seedlings. Business finance is primarily for small scale entrepreneurs. A few key players are known to dominate the sector and the Government of Kenya has a major stake in the industry. There are considerable legal restrictions that prevent most of the semi formal institutions, with the exception of co-operative societies (SACCO’s), from mobilizing farmers’ savings for on lending (Wambua, 2002). This then results into the sector charging relatively high interest rates for its credit because of its limited opportunity for financial intermediation among other things.
Microfinance services in Kenya can either exist as commercial banks supervised by the Central Bank of Kenya, or as semi formal Microfinance institutions under a diversity of legal forms and ownership structures such as cooperatives, private and public companies, Non governmental organizations and parastatals (Wambua, 2002). The Government of Kenya is working on coming up with a regulatory framework for the microfinance sector.
2.4 Types of Enterprises Engaged In By Microfinance Clients
Most micro credit taken by the clients is invested in off farm activities especially petty trading. Clients engage in this kind of businesses because of the low amounts of credit that they are able to access from the lending institutions (Wambua, 2002). In some instances people get as low as KES 50,000 as capital for a business.
These amounts of credit have not made an impact in the agricultural sector since; most agricultural businesses require big investments and good access to the markets. Despite this recognition the agricultural sector has not been given priority by micro finance institutions. It has been established that only 1.8 percent of all credit given was invested in agribusiness-oriented small scale enterprises as compared to 43.8 percent used for non agricultural businesses (Wambua, 2002).
2.5 Effect of Microfinance Services on Agribusiness-Oriented Small Scale Enterprises Recent studies in a number of agriculture intensive areas reported considerable improvement of agricultural productivity with the advent of microfinance systems in the country. Increased financing was established to have assisted farmers with small farms to lease or even buy extra land parcels for cultivation (Wambua, 2002). This obviously translated to increased volumes of produce. Resource inputs, including fertilizers, tools and equipment, technical advice and improved seeds and seedlings has brought considerable improvement in both the quantity and quality in horticulture and contract farming in Kenya.
3.0 Methodology
3.1 Area of Study
The initial study to evaluate the supply and influence of Microfinance Institutions (MFI’s) on the growth of agribusiness oriented small scale enterprises in Kenya, particularly in Horticulture farming will be conducted in Kiambu County, in particular Thika district. This area is an agricultural intensive area in particular horticulture (pineapples, French beans and snow peas). The town is also home to heavy industries like textiles, and food processing. It also has major industries and vibrant, fast growing activities such as banking, telecommunication, mining and tourism and hospitality, leather manufacturing. It is also a major educational hub. The study will principally target contract farmers who produce pineapples.
The second study will be conducted in Meru Region, particularly targeting Meru Greens Horticulture that is contracted by Frigoken Limited. Meru Region is also an agriculture intensive town, principally producing high quality fresh flowers, predominantly Rose flowers. The target group will be contract farmers who produce fresh flowers.
3.2 The Sample
The interviews will be conducted on 400 volunteers, 200 from each study area, who will be a representative sample of the population under study.
3.3 Data Collection
Accurate data collection is instrumental to the triumph of any research. The data collection methods applied to will be qualitative interviews. Open ended questions will be used in the interview in order to make sure that the respondents give a comprehensive account of their understanding of the underlying issue. The exact questions asked during the interview are listed in Appendix 1.
3.4 Demographic Details for both Study Areas Participants | Age (years) | Education Level | Gender | Marital Status | Group A (40 people) | 25-30 | undergraduates | Male (20 people)Female (20 people) | Single | Group B(40 people) | 31-40 | Secondary education | Male(20 people)Female (20 people) | Single | Group C (40 people) | 41-50 | Primary education | Male(20 people)Female(20 people) | Married | Group D (40 people) | 51-60 | Adult education | Male(20 people)Female(20 people) | Married | Group E (40 people) | 61 and above | illiterate | Male(20 people)Female(20 people) | windowed |

3.5 Data Analysis
Data analysis will entail a methodical thematic analysis so as to ascertain consistency of themes as recorded by all the participants. Initially, preliminary data analysis will be conducted as shown in appendix 2. A thematic data analysis will then follow in order to determine a variety of themes accruing from the participant’s experiences. The thematic data analysis questions asked are included in appendix 2.

4.0 Work Schedule

ACTIVITIES | | | | TIME | | | | | | Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Month 7 | Month 8 | Proposal preparation | | | | | | | | | Proposal submission | | | | | | | | | Data collection | | | | | | | | | Data interpretation and analysis | | | | | | | | | Proposal submission | | | | | | | | |

5.0 Budget Item | Unit Cost | Total Cash | Notepad | 5pcs@200 | 100 | Pen | 20psc@25 | 500 | Pencil | 20psc@20 | 400 | Sharpener | 5Pcs@15 | 45 | Transport | 3months@10,000 | 30,000 | Photocopy | 3copies@200 | 600 | Food and Water | 8months@5000 | 40,000 | Miscellaneous | | 7165 | Totals | | 71645 |

6.0 References
Audretsch, D. (2002). Entrepreneurship: Determinants and Policy in a European-U.S. Comparison. New York City: Springer.
Baumann, P. (2000). Equity and efficiency in contract farming schemes: The experience of Agricultural tree crops. Working Paper 139, ODI, London, UK.
Chieng, C., (2005). The Political Economy of Contract Farming in Kenya: A historical-comparative study of the tea and sugar contract farming schemes, 1963-2002. Unpublished DPhil Thesis, Oxford University, UK.
Commonwealth Secretariat. (2001). Gender Mainstreaming in Agriculture and Rural Development: A Reference Manual for Governments and Other Stakeholders Gender Management System Series. London: Commonwealth Secretariat.
Eaton, C. & Shepherd A. (2001). Contract farming: Partnership for Growth. FAO Agricultural Services Bulletin 145, Rome, Italy.
Jurik, N. (2005). Bootstrap Dreams: U.S. Microenterprise Development In An Era Of Welfare Reform. New York: Cornell University Press.
Malhotra, M. (2007). Expanding Access to Finance: Good Practices and Policies for Micro, Small, and Medium Enterprises. London: World Bank Publications.
McMichael, P. (2004). Development and Social Change: A Global Perspective. New York City: Pine Forge Press.
Sacerdoti, E. (2005). Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies. New York City: International Monetary Fund.
Sindi, K. (2008). Kenya's Domestic Horticulture Subsector: What Drives Commercialization Decisions by Rural Households? Ann Arbor: ProQuest.
Stamm, A. (2003). Value Chains for Development Policy. GTZ Publication – Concept paper, Eschborn, Germany.
Wambua, T. R. (2002). Farm Agribusiness linkages in Kenya. FAO case study consultancy report.
World Bank. (2011). World Development Report 2011: Conflict, Security, and Development. London: World Bank Publications.

7.0 Appendices
7.1 Appendix 1: Preliminary Data Analysis: Interview Questions a) Do you do farming as an individual or in form of a group or partnership? b) Do you get any support from the government? c) Do you contract your farming activities with any contracting farm? d) (If yes) What are the selection criteria for contracting? e) What services do you enjoy from such contacts? f) Are there microfinance institutions around here? g) (If yes) Are u a member? h) What services do you get from such microfinance institutions?
(tick where appropriate) I. Funds. II. Resource inputs (specify where possible). III. Technical advice i) If funds, what do you do with the money? (specify) I. Invest on-farm? II. Invest of-farm? j) what are some of the challenges in accessing the microfinance services k) Incase of funds: I. Do they charge high interests? II. Do they require securities? III. What are the payment procedures?
7.2 Appendix 2: Thematic Data Analysis a) How does microfinance affect the overall agricultural production in this area? b) Do microfinance institutions influence agribusiness-oriented small scale enterprises? i. (If yes) How? 1) ………………………………………….. 2) ………………………………………….. 3) ……………………………………………. 4) ……………………………………………. 5) …………………………………………….