AN ECONOMETRIC ANALYSIS OF THE EFFECT OF FORWARD INTEGRATION CREDIT RISK MITIGATION MECHANISMS OF COMMERCIAL BANKS ON THE PERFORMANCE OF THE AGRIBUSINESS FIRMS IN NYANZA REGION …

Abstract

Credit risk is historically considered the main risk for banks. Commercial Banks apply Forward Integration Credit Risk Mitigation Mechanisms (FICRMMs) to promote credit access, security and productivity for various sectors. Agribusiness contributes 53% to employment in developing countries, and 80% in Kenya, yet credit to the sector shows decreasing trends, ranging from 6.5% to 2.9%, between 2003 and 2012. Purpose of this study is to investigate the impact Forward Integration Credit Risk Mitigation Mechanisms on performance of agribusinesses in Nyanza region. The study adopted a Descriptive longitudinal research design. The target population comprised of agribusiness firms. The sampling technique used was stratified random sampling. Primary data on practitioners’ opinions was obtained using structured questionnaires, while secondary data on credits, capital, FICRMMs and owner equity was obtained from the firms’ financial statements. Means, standard deviation, correlation, and Vector Auto-regression (VAR) was used to analyze data. The results from dynamic models of VAR provides R2 of 0.7349, 0.8131 and 0.6505 for profit, return on equity and capital growth model respectively; all significant at p< 0.05, revealing that over time, the explained variable is affected by its own lagged evolution and the lags of other endogenous variables (FICRMMS), thereby accounting for 73.5% of profits, 81.3% of ROE and 65.1% of capital growth. These results may help in re-