Effect of Semi-Formal Credit Use on Rural Farm Household Income in Kakamega County, Kenya

Abstract

Recently, there has been emergence in the use of semi-formal credit provided by devolved government in enhancing farm and off-farm enterprises. Despite the potential of the credit offered by devolved governments in terms of enhancing rural farm household welfare, little is known about the effect of this type of credit on household income. This study therefore, examined the effect of semi-formal credit use on household income in Kakamega County, Kenya. The study aimed to contribute towards improving farmers’ household welfare by examining the contribution of semi-formal credit offered by devolved government on rural farm household income. Specifically, it sought to profile enterprises supported by the semi-formal credit obtained by rural households; determine factors influencing rural farm allocation of the credit obtained on different enterprise and estimate the effect of semi-formal credit use on household income. The study used primary data that was collected from a sample size of 179 farm households from Malava and Lugari Sub-counties in Kakamega County. The sample size consisted of 83 beneficiaries of the county credit program and 96 respondents who served as a control group for the study. A stratified multiple sampling approach was used to arrive at the sample size. The study used descriptive statistics to profile enterprises which benefited from the credit accessed by households. Besides, Seemingly Unrelated Regression Model (SUR) was used to determine factors influencing the household allocation of credit obtained to different types of enterprises. Finally, the endogenous switching regression model was used to estimate the effects of semi-formal credit use on household income. The results indicated that most farmers allocated the credit obtained on farm and off-farm agriculture related enterprises. Credit allocation on farm enterprises was positively influenced by the gender of household head, land ownership, and the role played by an individual in the socio-economic group. Conversely, allocation of credit on off-farm enterprises was positively influenced by ownership of off-farm enterprises, age of household head, and off-farm income. Additionally, semi-formal credit use had a significant and positive effect on rural farm household income. In counterfactual cases, households that used semiformal credit obtained from the county government have a 17.7% probability of increasing their income, while those that did not use the credit had a 28.9% probability of becoming worse off in terms of household income. Inconclusion, semi-formal credit use contributed towards improving rural farm household income. The study recommends diversifying household income through engaging in sustainable off-farm activities, offering agricultural financial training and promoting the use of semi-formal credit offered by the county government among rural farm households.