Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.10, 2015 141 The Effect of Financial Deepening on the Performance of Smallholder Farmers in Homa Bay County, Kenya Sifunjo E. Kisaka * Ojwang Consolate Adhiambo David Muriuki Ndege Ann Kaindi Muio School of Business, University of Nairobi, P.O. Box 30197-00100, Nairobi *Email of corresponding author: sifunjo.kisaka@gmail.com Abstract Theory shows that financial sector deepening has a positive impact on performance of and could widen access to financial services for the Small Holder Farmers (SHF). However there is no consensus on empirical relationship between financial deepening and performance of SHF. This study aimed at analyzing the empirical relationship between financial deepening and the performance of SHF in Homa Bay County, Kenya. The research covered two years starting from 2011/2012 to 2012/2013 because records for previous periods were not easily accessible. The study used the multiple regression analysis. The dependent variable was performance of SHF while total assets, deposits, loans and share capital were the regressors. The research established that the performance of farmers would still grow by Ksh. 2,155.92 annually independent of any factors determining SHF performance. However, SHFs’ average assets, loans, share capital and deposits do significantly influence the performance of SHF. The coefficient of determination indicated that 65% of variation in SHF was attributed to assets, loans, share capital and deposits. It was found that a 1% rise in share capital would result in 1.74% drop in performance of SHF and that increasing deposits by 1% would lead to 1.71% drop in performance of SHF if all other variables remain constant. Hence, share capital and deposits are negatively related to performance of SHF. It was also found that 1% rise in Loans would lead to 0.96% rise in performance of SHF and that 1% rise in private credit would drive 1.03% rise in performance of SHF. Therefore, loans and other forms of private credit negatively influence the performance of SHF. Thus, it is recommended that strategies to enhance financial deepening be put in place as a mechanism of stimulating performance of SHF in Homa Bay County. Keywords: Financial Deepening, Financial Performance, Smallholder Farmers, Credit Access, Agricultural Finance, Agricultural Development, Economic Growth 1. Introduction Financial deepening is a process whereby financial institutions and markets provide a range of services and instruments that allow for efficient exchange of goods and services (e.g. payments services), effective savings and investment. The financial sector can also create a broad menu of assets for risk sharing purposes. In other words, it can be understood as a process of increasing the efficiency, depth (e.g. credit intermediation and market turnover), breadth (e.g. range of markets and instruments) and reach (e.g. financial access) of financial systems (IMF, 2012). Small Holder Farmers (SHF) have limited resource endowments relative to other farmers in the sector. In favorable areas with high population densities they often cultivate less than one hectare (ha) of land, whereas they may cultivate 10 ha or more in semi-arid areas, or manage 10 heads of livestock (FAO). Agricultural performance can be defined in financial terms as the ability to achieve gross margin efficiency, operating profit efficiency, positive return on equity, positive returns on assets, sales, net income, working capital ratio etc (CAPI, 2009). The agricultural sector is the mainstay of the Kenya’s economy (Kenya Agricultural Research Institute). The sector directly contributes 24% of the Gross Domestic Product (GDP) and 27% of GDP indirectly through linkages with manufacturing, distribution and other service related sectors. Approximately 45% of Government revenue is derived from agriculture and the sector contributes over 75% of industrial raw materials and more than 50% of the export earnings. It is also the largest employer in the economy, accounting for 60 per cent of the total employment. According to Strategic Plan for Homa Bay County 2013-2023, there are approximately 150,000 farming families with an average of 2.2 acres farm per family. The main crops produced in the Homa Bay County include maize, beans, sorghum, millet, kales, sweet potatoes and peas and this is grown in about 6,000 hectares. The vast majority (80 per cent) of the farmers produce maize and beans. This is because maize and beans are considered the staple foods of the county. The average productivity of maize is 0.9 tons per hectare in the County and the total production of Maize was 67,965 tons in 2012, down from 88,143 tons in 2011. Some of the hindrances to smallholder farming success in the County were identified as inadequate financial facilities, lack of farm machineries and poor business management among others. The potential for irrigated agriculture stands at 8,966 hectares with only 13.3% exploited. Small holdings are prominent in densely populated areas of Homa Bay Town, Rangwe, Kasipul and Kabondo Kasipul where the main crops grown are maize, beans, pineapples, ground nuts and potatoes. (Homa Bay County Integrated Development Plan, 2013 –