The challenge of agricultural finance is to securely provide cost-effective financing to rural smallholder farmers with minimum risk of fraud and maximum accountability and transparency. Mobile money payments by farmers can provide the transactional volume economics for creating an ecosystem that can be subsequently leveraged on branchless banking distribution channel for mobile banking credit, savings and micro insurance products. Mobile money is simple, convenient, affordable and disruptively innovative. This study sought to fill the gap in the literature on financial inclusion insights by analysing the contribution of digital financial services among small scale dairy farmers in Nakuru County, Kenya. The study sample comprised of 165 dairy farmers borrowers from Micro Kenya, Focus group participants and key informants who were loan officers in MFIs, where purposive sampling methods was employed. Data was collected through questionnaire, focus groups, and key informant interviews and both qualitative and quantitative methods were used to analyse the data. The study findings made an attempt at predicting current and latent demand for the digital financial products through improve rural livelihoods of small scale dairy farmers by expanding and strengthening social networks; cut down travel costs; increase temporal accessibility; and amplify efficiency of activities. The study findings indicate that mobile phones have significantly changed the way rural businesses are being conducted. In addition to Chama‘s and banks, friends and family, as well as hiding places, remain common avenues for money storage for the dairy farmers, especially for temporary storage. M-Shwari is the best known value-added digital financial service in the Kenyan market. It is also a well-liked product, with nine in 10 farmers saying they will continue using it and will recommend it to other people with new products like KCB-Mpesa and Equitel yet to take root and be used by the small scale dairy farmers. The bulk of current users say they use digital finance to help them manage short-term ups and down in cash flow as well as to save for short-term goals .It is concluded that digital finance can contribute in improving livelihoods by providing rural households with fast and easy modes of payment, thereby increasing their ability to access livelihood assets, undertake diverse livelihoods strategies, and overcome their vulnerabilities.

The biggest challenge facing Kenya today is high levels of poverty among its citizens. Poverty has been persistent in Kenya despite government‘s effort to combat it through national development programs. This is reflected in the rising number of people without access to food, and inadequate access to other necessities Mango et al., (2009). The success of provision of micro credits to poor people previously labelled as unbankable was seen as one way of enabling the low income people to improve their living standards through financial inclusion. Microfinance has been widely hailed as one of the most promising tools for fighting poverty in the developing world UN Department of Public Information, (2005). A common claim is that by allowing poor households to finance basic self-employment activities and/or whether shocks to household production, microfinance loans can act as an important catalyst of economic growth. 

These have been paralleled by a significant expansion of this sector in recent years. For instance in 2007, Microfinance Institutions (MFIs) provided 150 million clients across the globe access to small-scale loans through group lending Daley-Harris, (2006).The focus of microfinance on ―poor‖ clients is almost universal, with varying definitions of the word ―poor‖. This issue has been made more important recently due to legislation from the United States Congress that requires USAID to restrict funding to programs that focus on the poor. Some argue that microfinance should focus on the ―economically active poor‖, or those just at or below the poverty level Robinson, (2001). Others, on the other hand, suggest that microfinance institutions should try to reach the indigent Daley-Harris, (2005). 

Kenya‘s current Poverty Reduction Strategy Paper (PRSP) perceives poverty as inadequacy of incomes and deprivation of basic needs and rights, and lack of access to productive assets, as well as social infrastructure and markets. Poverty is largely a rural phenomenon and prevalence of absolute poverty in rural Kenya is 49.1% GOK, (2007). It is noteworthy that two of the Millennium Development Goals (MDG) targets to reduce the proportion of people whose income is less than $1 a day and who suffer from hunger by halve by the year 2015 United Nations, (2006). 

The dairy industry in Kenya contributes 14 percent of agricultural GDP and 3.5 percent of total GDP GOK, (2008). Milk production is predominantly by small scale farmers, who own one to three dairy animals, and produce about 80 percent of the milk in the country KDB, (2009). Small-scale dairy production systems range from stall-fed cut-and-carry systems, supplemented with purchased concentrate feed, to free grazing on unimproved natural pasture in the more marginal areas Scholtz and Grobler, (2009). Upgraded dairy breeds tend to be kept in stall-feeding units, crossbred cattle in semi-zero-grazing systems, and zebu cattle in free-grazing systems Techno Serve, (2008). 

Kenya‘s dairy industry is a dynamic and plays an important economic and nutrition role in the lives of many people ranging from farmers to milk hawkers, processors, and consumers. Kenya has one of the largest dairy industries in sub-Saharan Africa. Though the last livestock census was conducted in 1966, the current official cattle population statistics come from the ministry of Livestock and development, through its field reports compiled by extension officers. The official statistics place the number of milking cattle at 3.8 million (Government of Kenya, 2008). A survey conducted by Smallholder Dairy project (SDP) asserts that there are approximately 6.7 million dairy cattle in Kenya (SDP, 2005). The Food Agricultural Organization (FAO) on the other hand estimates a figure of 5.5 million milking animals (Techno serve, 2008). 

In Africa, Kenya is the only country, after South Africa that produces enough milk for both domestic consumption and export. Sudan on the other hand is the largest producer of milk in the common market for Eastern and Southern Africa (COMESA), but it does not produce enough to satisfy both domestic and export markets. The dairy industry is the single largest agricultural subsector in Kenya, larger even than tea (Muriuki et al., 2004). It contributes 14 percent of agricultural GDP and 3.5 percent of total GDP (Government of Kenya, 2008). The industry has grown tremendously since its liberalization in 1992. Liberalization led to a rapid growth of the informal milk trade that mainly consists of small scale operators dealing in marketing of raw milk. At that time, there was an emergence of new institutional arrangements in milk collection, 2 processing and marketing, which included hawkers, brokers‘ self-help groups, neighbours and business establishments like hotels (Karanja, 2003). The informal markets controls an estimated 70 percent of the total milk marketed in Kenya (KDB, 2009; Government of Kenya, 2006). This sector is important and is driven by among other factors the traditional preferences for fresh raw milk and its relatively lower cost. 

Raw milk markets offers both higher prices to producers and lower prices to consumers but with several challenges relating to quality control and standards, and the associated health and safety concerns. The informal milk market has in the past faced several challenges. This was because prior to policy change in 2004, informal vendors, including mobile milk traders and bar vendors, and milk transporters, were not recognized under the old dairy policy. As a result, they were frequently harassed as powerful dairy market players sought to protect their interests and increase market share. There were also concerns over food safety and quality of milk sold by the informal sector players. The dairy policy at the time focused on promoting value addition and increasing the market share of pasteurization milk while attempting to address potential public health risks of consuming raw milk. However, since 2004, there has been a major change in policy and practice towards the informal milk market (Leksmono, et al., 2006). 

The dairy policy now clearly acknowledges the role of small scale milk vendors (SSMVs) and contains specific measures to support them. These include: development of low-cost appropriate technologies, training on safe milk handling, provision of incentives for improved milk collection and handling systems, and establishment of supportive certification system. While the Dairy Policy is still in progress, awaiting approval by parliament, there has been a proactive engagement by the Kenya Dairy Board in training and certification of SSMVs, in order to safeguard public health and assure quality of the raw milk (Leksmono, et al., 2006). Nakuru County had many districts. The area has been prone to clashes in the past between the different communities but has now settled down as a productive area with a high potential for dairy farming. The division has a total of 8925 cattle producing 7.5million litres annually (District livestock production annual report 2012). These administrative units: districts and divisions though not currently existent in the current constitution, was used for the purposes of this study. 

Branchless banking through mobile phones (M-banking) is probably the most promising innovation in rural finance in the last few years. Using a network of retail agents and the existing mobile phone infrastructure, potentially even distant and sparsely populated areas can be reached with reliable banking services. The first wave of branchless banking efforts 

focused on providing payment and money-transfer services. The next challenge is to link mobile money with a full range of banking services CGAP, 2010; Pickens, (2010). Safaricom, the Kenyan mobile network operator behind M-Pesa, allows its 13 million customers to transfer money via their mobile phones and through the countrywide network of more than 23 000 agents (Safaricom, 2010). Today, Safaricom, in partnership with a variety of operators (e.g. banks, non-profit organizations, insurance companies, health-service providers and microfinance.) is piloting innovative m-banking products. M-Kesho (Kesho means ―future‖ in Kiswahili), is a savings account provided by Equity Bank that also gives flexible access to loan and insurance facilities Equity Bank, (2011). 

Experience from Kenya, India, Bangladesh showed that small entrepreneurs are prone to default. Sometimes they make wilful default; managerial ability is poor, they do not keep accounts and it is therefore difficult to monitor their operation by the financial institutions Asrat, (1989). Solving the major financial constraint of this important sub-sector of the economy is an important step towards achieving the national development objective of a country. For this to succeed, the problem of high default risk associated with them, which made the financial institutes reluctant to extend loan, has to be solved. Since the late 1970s, development policy has increasingly taken recourse to microfinance to improve the access to financial services for poor households Morduch, (2000). In recent years; however, an increasing number of micro lenders find it hard to maintain high repayment rates. 

Product innovation in microfinance is aimed at responding to the variety of poor clients‘ needs, like to develop and sustain the offer of a range of client-led products. A more market- oriented approach would help the industry both to increase its social impact and to improve long-term institutional sustainability. Indeed, product design can serve as a powerful targeting mechanism for microfinance institutions, because it determines the type of clients attracted and the extent of the benefits clients receives from financial services Woller, 2002; Johnson, 2005; Copestake, (2007). Assessing the needs of a target market segment and designing appropriate products, might help microfinance institution to attain its social mission – for example, avoiding perverse phenomenon known as mission drift (Armendariz and Szafarz, 2010) and guarantee that larger portion of productivity surpluses are attributed to poor clients Labie, (2009); Hudon and Perilleux, (2010). This study focuses on innovative market-oriented products that combine two important features: flexibility and M-banking. 

The poor need flexible products that allow transactions adapted to their cash flow. Such products help the poor to smooth consumption, when income is irregular and unpredictable, and to cover unexpected expenditures. Financial products designed for poor clients should also include sanctions or other enforcement mechanisms to mitigate behavioural anomalies, such as lack of self-control, intra-household disagreement, and attention failure. Enforcement mechanisms enhance control over client‘s budget and assure that payments – savings, loan repayments and insurance contributions – are duly made Collins et al., (2009). Typically, flexibility – for example, in the form of allowance for ex post contract renegotiation – increases the client‘s temptation to renege on his or her commitment, discouraging financial discipline. Conversely, enforcement mechanisms – for example, social sanctions, or the requirement for the client to provide financial collateral – encourage discipline in the client. 

Recent microfinance studies have focused on understanding why rigid enforcement mechanisms in loans contracts are effective. The most discussed mechanism is the regular and frequent repayment schedule ubiquitous in microcredit contracts with repayment starting right after the loan is disbursed Jain and Mansuri, (2003); Field and Pande, (2008); McIntosh, (2008); Field et al., (2011); Fisher and Ghatak, (2010). On the savings side, Ashraf et al., (2003) explore different enforcement mechanisms set in commitment savings contracts in developing countries, and Ashraf et al., (2006) and Karlan et al., (2010) examine their impact on clients‘ behaviour. 

Statement of the Problem 
Dairy farming remains a major concern in rural households especially in Kenya. Most dairy farmers face seasonal income due to agricultural activities; especially dairy farming. However, innovative market-oriented products that combine flexibility features with digital financial services may enhance small scale dairy farmer‘s repayment by smoothening their income flow to the flexible repayment schedule. However, there is no empirical evidence on the effects of flexible repayment digital financial services in MFIs. Thus, this study seeked to fill the gap in the literature on financial inclusion insights by analysing the contribution of digital financial services among small scale dairy farmers in Nakuru County 

General objective of the study 
To determine the contribution of digital financial services, to loan repayment among small scale dairy farmers. 

Specific objectives 
i. To establish how farmers awareness and knowledge on digital financial services affects its usage and repayment 
ii. To determine the general financial attitudes and behaviours of small scale dairy who are users of digital financial services 
iii. To determine patterns of digital financial services use, particularly in relation to saving, borrowing and repayment by dairy farmers 

Research questions 
i. To what extent knowledge and awareness of digital finance services affect its usage among small scale dairy farmers. 
ii. What are the general financial attitudes and behaviours of small scale dairy who are users of digital financial services 
iii. Are there patterns of digital financial services use, particularly in relation to saving , borrowing and repayment by dairy farmers 

Justification of the study 
The dairy industry is the single largest agricultural sub-sector in Kenya, larger even than tea Muriuki et al., (2004). Economic growth cannot be attempted without the active involvement, promotion and development of this sector of the economy. One of the most crucial and leading factors is limited access to financial capital and credit especially from the formal lending agents. MFIs have been reluctant to provide loans to Small Scale farmers because; they consider them as involving high risk factor, not dependable and involve excessive administrative costs. 

Therefore, an analysis of factors affecting loan repayment performance and effects of flexible repayment schedules on loan default of small-scale dairy farmers would help policy makers to formulate successful credit policies and programs that enable them to allocate scarce financial resources to the development of basic sectors of the economy. Revision of its criteria in favour of credit worthy borrowers could also alleviate the financial constraint of small-scale farmers which are potentially efficient but could not be able to fulfil the MFIs lending requirements. 

1.7. Scope and Limitations of the Study 
The study focused on small-scale dairy farmers in Nakuru municipality. This study was limited to one product of MFIs that is the dairy loan. Furthermore, the data did not capture information on sales income or amount of profit/loss of projects since they did not have proper financial recording system. However, the results that were obtained taking case of this specific area could reflect the situation of the small-scale dairy farmers all over the country under normal circumstance.

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