Moderating Effects of Extraneous Shocks on the Relationship Between Default Determinants and Agribusiness Loan Default Rate in Agricultural Finance Corporation, Mount Kenya Region

M’Muruku Salesio Miriti^1, , Mwirigi Rael Nkatha² and Gathungu Geofrey Kingori³

¹Department of AGEC, AGBM & AGED, Chuka University, Chuka, Kenya

²Department of Plant Sciences, Chuka University, Chuka, Kenya

³Department of Business Administration, Chuka University, Chuka, Kenya

Cite this paper:
M’Muruku Salesio Miriti, Mwirigi Rael Nkatha and Gathungu Geofrey Kingori. Moderating Effects of Extraneous Shocks on the Relationship Between Default Determinants and Agribusiness Loan Default Rate in Agricultural Finance Corporation, Mount Kenya Region. International Journal of Business and Risk Management. 2024; 5(1):1-10. doi: 10.12691/ijbrm-5-1-1

Abstract

Moderating the indicators of default in agribusiness loans presents shifts in the performance of credit markets. Mount Kenya region of Agricultural Finance Corporation (AFC) registered a high default rate of 20.33% in repayment of agribusiness loans, attributable to the moderator effect, inter alia. The comparison of 20.33% with a 10% benchmark set by Central Bank of Kenya for all types of loans is unfavourable. This study aimed at analysing the effects of the moderator (extraneous shocks) on the relationship between the borrower-lender determinants of default and the Agribusiness Loan Default Rate (ALDR), in AFC Mount Kenya region. Using a descriptive research design in the region with 11 branches and a population of 3,002 agribusiness borrowers, 300 respondents was drawn as sample, using a systematic random sampling technique with an interval of ten borrowers. Primary data was collected using a structured questionnaire and analysed using Statistical Package for Social Sciences (SPSS V.27). Use of stepwise econometric regression model on relationship between the borrower-lender indicators and ALDR revealed as follows: borrower’s socioeconomic indicators and the extraneous shocks, with introduction of the moderator, there was 2.8% increase in the prediction power; for enterprise decision making indicators there was 0.1% increase in ALDR; and in lender behavioural characteristics indicators, a 3.7% increase in the prediction power was registered. The ANOVA Analysis on the overall significance indicated the existence of a statistically and significant interaction between respective indicators and the extraneous shocks on the ALDR (F=37.988, F=29.659, F=72.092 and F=56.887; p-value=0.00<0.05). The study contributes to the existing body of knowledge in risk management and agricultural finance by accentuating the far-reaching threats of extraneous shocks in constraining the sustainable production process, thus ALDR. The study recommends that it is strategically imperative to close the risk gaps facing the farming communities thus: players to adopt coping strategies- interventionist policies pointing to partnerships for training, facilitating access to effective technologies and subsidizing relevant agricultural insurance to affordability; besides, policy directions should encourage proactive engagement in good agricultural practices and ubiquitous risk mitigation; borrowers should be proactive and alert by providing for contingencies and eventually absorbing agro-risks; penultimately, lenders should be collaboratively engaged in supervised lending to ensure timely interventions and individualized involvement of borrowers, thus compatible with contemporary agribusiness realities; ultimately, credit stakeholders should craft advocacy and inclusion mechanisms, aiming to cushion the societies from incipient distresses and devastating constraints.

Keywords:
Agribusiness loan default rate moderator extraneous shocks repayment

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