Extraneous Shocks Affecting Agribusiness Loans Default Rate in Agricultural Finance Corporation, Mount Kenya Region

Agro-shocks create stochastic disturbances to agribusiness performance, which spills over to the performance of credit markets. Farm loan beneficiaries domiciled in the Mount Kenya Region of the Agricultural Finance Corporation (AFC), have recorded a poor loan repayment rate of 20.33% versus 10%, which is the Central Bank of Kenya benchmark for all types of loans in Kenya. Given that agribusiness is a priority sector for addressing food and employment concerns, the performance of agri-loans is sacrosanct. This study aimed to determine the effect of extraneous shocks on the default rate of agribusiness loans disbursed by AFC in the Mount Kenya Region. The region has 11 branches with a population of 3,002 agribusiness borrowers. A sample of 300 respondents was drawn using systematic random sampling with an interval of ten. In a descriptive design using a structured questionnaire, primary data were collected on the effect of extraneous shocks on the default rate of AFC loans. To analyse the data, the Statistical Package for Social Sciences (SPSS V.27) was used. The effect of variables in predicting the default rate was estimated using regression analysis. To derive the F-statistic to test the adequacy of the regression model, ANOVA was performed. A multiple regression model was used to determine the statistical relationship between extraneous shocks and AFC loan default. The model estimates revealed that the three indicators (agroclimatic extremes, market volatility and biological hazards) of extraneous shocks explained 23.90% of the AFC loan default rate. The findings revealed that the statistical significance of the extraneous shocks was positive and significant at 5% (p values=0.00<0.05), implying that their occurrences presented performance challenges to the funded farming projects, thus plunging the loan beneficiaries into repayment challenges. The level of association of each of the indicators with the default rate is as follows: agroclimatic extremes (21.7%), market volatility (30.6%) and biological hazards (17.3%). This study contributes to the existing body of facts in agricultural finance and risk management by bringing to the fore that agro-shocks are sources of far-reaching menaces that constrain the sustainable production process further hindering the repayment of agricultural loans. The study recommends the need for strategic imperatives pointing to interventionist policies through protectionism, partnerships and the mitigation strategies to internalize the resultant negative externalities; loan actors should provide for contingencies and be alert to absorb risks emanating from shocks; penultimately, credit players should collaborate in pursuit of bespoke insurance schemes that can suitably cover farmer projects; ultimately, credit stakeholders should adopt coping strategies to cushion the societies from emerging distresses and devastating constraints.