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Factors Affecting Effectiveness of Value Chain Financing In Tea Industry: A Case of Smallholder Farmers in Kiambu County, Kenya

Abstract

A dissertation report Submitted to the Chandaria School of Business in partial fulfillment of the Requirement for the Degree of Doctor of Business Administration (DBA)Agriculture occupies a major position in international trade with tea being one of the world’s most popular and lowest cost beverage drinks after water. Its consumption equals ‘all other manufactured drinks in the world – including coffee, chocolate, soft drinks, and alcohol – put together’. Globally, Kenya is the third largest producer of tea after China and India and the biggest producer of standard-compliant tea in the world. In Africa, Kenya is the largest producer of tea and the leading export crop with Unilever Tea as the third largest tea company in the world. Despite the fact that tea is the biggest cash crop in Kenya and a key foreign exchange earner, access to adequate, cost-effective, and timely financial services for smallholder farmers, who produce the bulk of the tea, remains a challenge. Most financial institutions operate in high-density urban and peri-urban markets, leaving rural and agricultural value chains inadequately serviced. Further, lending to the agricultural sector is perceived by banks as costly and risky owing to the lack of physical collateral and high transaction costs due to various operational risks. This study sought to examine how loan application process, risk management, borrowers’ characteristics, governance, cost of borrowing and firm characteristics affect the effectiveness of agricultural value chain financing in the tea industry in Kenya with a special focus on Kiambu county. The general objective of this study was to examine factors that influence effectiveness of value chain financing in Kenya’s tea industry taking Kiambu County as the focus of the study. The specific objectives of the study were to: analyze the influence of loan and overdraft application process on effectiveness of value chain financing in tea industry; examine the influence of governance mechanisms on effectiveness of value chain financing in tea industry; investigate the influence of risk management on effectiveness of value chain financing in tea industry; analyze the effect of borrowers characteristics on credit access in the tea industry value chain financing; analyze the effect of cost of borrowing on credit access in the tea industry value chain financing and examine the effect of farm characteristics on credit access in the tea industry value chain financing. The research study adopted a cross-sectional study design that combines both descriptive and analytical research design. Cross sectional study allows one-off data collection which is considered adequate for the purpose of doctorial research. The population of study was smallholder farmers from Kiambu County who supply tea to the six KTDA factories. Using a systematic random sampling design method and at 95percent confidence interval on a population of 27,801, a sample size of 384 of smallholder farmers supplying tea to 6 KTDA factories which was considered adequate for generalization. Structured questionnaires were administered to smallholder farmers at tea collection points in 6 KTDA factories. The questionnaires were pilot-tested for reliability using Cronbach’s Alpha Reliability Coefficient. The computed Cronbach’s score was 0.888, implying high levels of reliability. The data was analyzed using SPSS Version 22 (Armonk, NY: IBM Corp. USA) and a p < 0.05 value at 95% confidence interval was considered significant for all analysis. A thematic qualitative analysis of the policy environment of current financial services and review of the global trends and how the two affected smallholder farmers in Kiambu County was also carried out. Research ethics were strictly adhered to as were the USIU-A thesis development guidelines. Out of the total of 354 participants interviewed in this study, 66% were males and 34% were females. A majority had secondary school level of education and below (74.5%) and the mean family size was 4 children. 61% of the participants had been planting tea for more than 10 years and the mean acreage was 2 acres. OLS regression results showed a significant relationship between the loan application process and the loan processing duration. High interest rates (79%) was a stand-out factor that impeded the respondents’ access to credit facilities while high transaction costs (59%) and high risk of defaulting loan repayment were considered the least limiting factors in terms of access to financial services. Lack of collateral (64%), lack of information on credit facilities (63%) and the scale of farming operations (62%) were the other considerable factors that limited access to credit facilities by the farmers. According to 67% of the study participants, lending institutions did not give priority to visit to farms to see how the monies borrowed were being used. The risk management mechanism and insurance access had a significant effect on the profitability of tea production. Education level was found to affect both the loan amount and the profitability of tea production. Finally, the acreage under tea affected the amount of loans awarded by a financial institution. In conclusion, despite tea being the biggest cash crop in Kenya and a key foreign exchange earner, access to adequate, cost-effective, and timely financial services for smallholder farmers remains a challenge. Most financial institutions operate in high-density urban and peri-urban markets, leaving rural and agricultural value chains inadequately serviced. Further, lending to the agricultural sector is perceived as costly and risky owing to the lack of physical collateral and high transaction costs due to various operational risks. Farmer’s age, education level, acreage and primary source of income were associated with the success of credit application processes. The study recommends that measures need to be put in place to improve the access, adequacy and utilization of value chain financing for smallholder tea farmers in Kiambu County. A better understanding of risk evaluation based on information such as age, marital status, average income, education level, farm size and expected output per land unit is necessary. There is need for financial institutions that service smallholder tea farmers, to improve loan processing efficiency. More access to insurance should be prioritized to help smallholder farmers to manage risk, enhance investment, and foster the growth in farm productivity. There is need for increased education and training of smallholder farmers to equip them with the necessary information and expertise on agricultural value chain financing as education and training would lead to improved productivity, increased adaptability in the face of climate change and market dynamics, and facilitates diversification of livelihoods to manage risks associated with the tea subsector. The government in conjunction with banks should develop tailored credit facilities that do not only address the larger agricultural sector but those that are specific to small holder farmer needs like non-collateral based loans through signing agreements with tea factories to pay the banks directly after tea processing while providing for a grace period before payment amongst other initiatives that would encourage smallholder credit uptake

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