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Abstract
It is widely documented that credit is an important instrument among resource poor farmers in
developing economies. However, accessing loans from formal credit institutions has proved almost
impossible for small and resource poor farmers leading to reliance on the least regulated informal
credit sources such as the Grameen type institutions (Micro-Finance Institutions-MFIs) that peg
lending to memberships in social networks such as groups. In spite of the growing preference to this
type of lending, very little is known on their contribution among farm related productive activities in
Kenya. This paper attempts to illuminate the role of lending via groups on economic performance of
smallholder farmers via changes in purchased factor use between borrowers and non-borrowers. We
employ endogenous switching regime approach (accomplished via heckman selection correction
model) on a sample of 401 respondents made up of 180 borrowers and 221 non-borrowers from two
districts in Kenya. Results show significant effects of group based lending on production via
improved factors such as fertilizer, planting materials and crop chemicals, as well as on investment
in non-farm businesses, hired labour, and in renting in more land. However, descriptive results
indicate high fungibility of this type of credit, with over 20% use on non-productive activities, which
infringe on expected output effects. Supervision and or issuing of credit in form of inputs could
generate expected impact.