Access to Credit is Limited

COMMON WISDOM # 4: Access to credit is limited

SCORE:  4-Fact

FINDINGS

• The use of credit (formal, informal, tied, and untied) for financing modern inputs is extremely low.
• This applies in all countries, across farm sizes and for food as well as cash crops.
• Farmers primarily finance modern input purchases with cash from nonfarm activities and crop sales.
• Tied output-factor market arrangements with input traders and output traders only play a minor role in financing external inputs, but appear to be relatively widely used for labor credit.
• “Traditional cash crop” farmers selling to processors rarely receive credit from processors, except in a few enclaves, such as larger tobacco farmers in Tanzania.
• Nonetheless, access to loans (mostly informal) has a favorable effect on fertilizer use .
• Nonfarm self-employment is associated with greater use of fertilizers.

POLICY MESSAGES

Rural development policies and programs that spur broad development of the rural nonfarm sector would benefit farm input purchases and thus productivity and food security. These policies and programs would be important complements to credit policies and programs.  

SUMMARY

The issue:

Recent evidence indicates that many farmers in Sub-Saharan Africa purchase external inputs such as fertilizer, seeds, and pesticides and herbicides. However, there is limited information on how the increasing use of modern inputs is being financed. This study investigates empirically how African smallholders finance the purchase of modern external inputs and revisits conventional wisdom about how African farmers finance agricultural activities

The analysis:

There is no current and systematic inventory of how farmers pay for inputs. To fill this gap, the study undertakes a cross-country empirical examination of input finance among smallholders, using recently available, nationally representative Living Standards Measurement Study farm household survey data sets. These data comprise more than 10,000 households in four countries: Malawi, Nigeria, Tanzania, and Uganda. The study focuses on purchases of “external inputs,” that is, nonlabor variable inputs (fertilizer, pesticides, and seeds) and of labor. Relying mostly on descriptive statistics on formal and informal tied and untied credit sources, the study explores the influence of crop types (cash crops versus food crops) and farm size. It also uses econometric regression methods to examine the correlates of input purchases.

The results:

1. There is much variation across countries in modern external input purchases.
2. The use of credit for input purchases is rare.
3. When used, credit is more commonly used for fertilizers than for other external inputs.
4. “Tied credit” is also rare for external inputs. Even traditional cash crop farmers rarely receive credit from processors. Tied credit is common for labor inputs.
5. Earnings from nonfarm employment and cash from output sales are the main sources of input financing. 

POLICY IMPLICATIONS

• Agricultural commercialization and RNFE development are the key sources of input financing, but they are often also relatively concentrated among a subset of households. Making agricultural commercialization and RNFE development inclusive is thus key.
• Further analysis of the factors that explain the limited use of noncash income sources to finance external input purchase is also called for. In addition to credit availability, issues such as the associated interest rates and expected returns to investing in modern external inputs should be explored.