The Impact of Group-Based Credit on Demand for Farm Inputs and Productivity in Rural Kenya

This paper evaluates the impact of participation in the Agricultural Finance Corporation of Kenya (AFC) group credit program on a variety of farm household behaviors, including demand for commercial fertilizers and cultivable land, maize production output and the ensuing effect on land productivity.AFC started offering group credit contracts to small farmers in the Uasin Gishu district in Kenya in 2006. By 2007, the program had expanded to include 96 farmer groups. AFC requires the groups to sign a joint liability clause, which means that the group members are responsible for the repayment of not just their loans, but also loans taken by all members in their group. AFC group loans aim to help farmers bridge their working capital needs in purchasing inputs for maize production.Results indicate that the program increased demand for fertilizers by about 40 percent from pre-borrowing levels. Group credit operates in two ways:

• Credit flow relaxes a credit constraint and makes it possible for farmers to bridge working capital needs;
• Joint liability provides mutual insurance against idiosyncratic risk.