Ordinary Least Square and Vector Autoregressive analysis of Forward Integration Credit Risk Mitigation Mechanisms by Commercial Banks on Capital Employed growth of Agribusinesses in Kenya

Abstract

Capital growth is long-term return expectations on a balanced fund; where time is required to facilitate determination of compounding and diversification functions of Capital Employed on itself; not only for the lender firms but also for the borrower firms.Lack of specific sector based information on employment of Forward Integration Credit Risk Mitigation Mechanisms (FICRMMs) and borrower business capital growth, and the declining credit trends to the agribusiness sector despite its contribution to the GDP; coupled with the fact that credits are critical for business financing and productivity; as an instrument of growth in Capital Employed, set the basis for this paper. Using time series data of 43 firms for 2003-2014, it was established that OLS gives an R2 of 0.532 while the lagged VAR results give an R2 of 0.651 for capital growth, 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, thereby accounting for 65.1% of capital growth. Hence H0: r=0 is rejected and H1: r≠0 is accepted.FICRMMs are significant for agribusiness capital growth, both at single and lagged period; although credit issuance to the sector is generally low