Credit Markets and Agricultural Performance in Sub-Saharan Africa: A Sub-Regional Comparative Analys


Mohammed Shuaibu[1]                                                               Mamello Nchake

mohammed_shuaibu@yahoo.com                                            mnchake@yahoo.com

Department of Economics                                                          Department of Economics

Ahamdu Bello University                                                         National University of Lesotho

Zaria, Kaduna Nigeria                                                                          Maseru, Lesotho

 

Abstract

Agriculture is a significant to output in Sub-Saharan Africa (SSA), accounting for over 30 percent of the total Gross Domestic Product (GDP). It is also an important source of income and employment for the majority of the rural population in the region where about 70 percent of households engage in agricultural activities. However, limited access to credit particularly for rural households that are predominantly engaged in agriculture has hampered the development of the sector in SSA. This has been worsened by the region’s high vulnerability to financial crisis contagion and spillovers in addition to weak financial systems which; in turn make the provision of credit difficult and inaccessible. At the same time, the tight monetary policy stance of most SSA central banks has contributed to constrained agriculture lending and output. Although the issue of agriculture finance has been extensively covered, a large knowledge gap still exists in terms of assessing the elasticity of agriculture output to changes in credit and monetary conditions. Likewise the role of infrastructure which, affects agriculture as well as location and decisions by financial institutions has remained relatively unexplored. This issue is imperative for the formulation and implementation of monetary policy that can stimulate the contribution of credit markets to the agriculture sector. Furthermore enhanced agriculture credit can significantly improve livelihoods and food security especially for the poor and vulnerable groups within the region. 

Despite its tremendous potential, the agriculture sector in SSA lags behind significantly compared with the global average and values recorded by other continents with similar development parameters. For instance, agricultural productivity in SSA stood at $1.22 billion compared with Middle East and North Africa’s (MENA) and Latin America and Caribbean (LAC) State’s $6.28 billion and $7.14 billion, respectively. This evident disparity reflects the inherent weakness of the agriculture sector and the credit shortage that exacerbates this worrisome trend. Commercial bank lending in SSA is generally low, with only 35 borrowers per 1000 people, falling far below the 227 borrowers recorded by MENA and LAC, and 136 global average. In addition, the huge reliance on the import of intermediate agriculture inputs, tight monetary conditions such as high lending rate as well as exchange rate shortage and its volatility continue to impede credit access in the region. Another important constraint arises from weak institutions. Salami and Aramawo (2013) underscore the role of institutional factors towards agriculture credit. However, they fail to account for macroeconomic fundamentals and the crucial role of infrastructure on agriculture productivity. The transaction cost reduction role that infrastructure plays towards unfettered credit access is crucial to accessibility of credit institutions to farmers who are predominantly in remote rural areas with limited access to financial services that are mainly located in urban centers.

Notwithstanding the proliferation of innovative financial initiatives to support the agriculture sector by government, non-government and international agencies, amongst others; progress on expanding agriculture finance has, however not improved the sector to its full potential (Kloeppinger-Todd and Sharma, 2010, p.4). The authors submit that lack of interest in agriculture finance by financial institutions may be traced to a number of factors: (i) high cost of providing cost-effective financial services to many agriculture households that are predominantly located in rural areas; (ii) the preponderance of agro-climatic shocks make it difficult for financial institutions to hedge against risks from poor yields; (iii) limited understanding of agro-related businesses by financial institutions makes it difficult to develop sector-specific profitable financial products; (iv) Low financial literacy of small farmers; and (v) lack of economies of scale and inadequate infrastructure in rural areas. This has prompted the creation of specialized state-owned agriculture financial institutions with a view to broadening credit access. Van Empel (2010) points out that these initiatives have failed due to excessive bureaucracy, poor customer focus, and high risk on one segment of the society. This provides further motivation for a sub-regional comparative analysis given the differences in terms of credit market conditions, level of infrastructure investment and quality as well as agricultural performance.

There is a plethora of literature on agriculture financing in SSA countries. For instance, Anetor et al. (2016) assess the effect of agriculture credit supply on the sector’s output in Nigeria. Using VAR model, the study found that commercial bank loans had a positive impact on the sector while the agriculture credit guarantee scheme of government performed poorly. In the case of Pakistan, Khandker and Faruqee (2003) estimate the effectiveness of the agriculture development bank of Pakistan as a credit delivery institution using a two-stage method that takes the endogeneity of borrowing into account. The results show that the institution contributes to household welfare and that its impact is higher for small holders than for large holders even though the latter receive the bulk of agriculture credit. Jansson et al. (2013) conduct a comparative analysis of agriculture credit markets in European countries. They observed that credit regulations are general with no specificities for agriculture credit market. They also found that loan application rejection was primarily due to economic performance of the farmer while socioeconomic characteristics were less important.

Foltz (2004) use an econometric model to examine the nexus between credit access and agriculture investment and profitability in Tunisia. The results suggest that credit market constraints (rationing) exert a negative influence on farm profitability but not on investment. The evidence suggests that the effects of credit rationing on profits do not operate through lower investment levels, but instead through lower production outcomes from sub-optimal allocations of other factors of production such as land, labour and variable inputs. Mannig (1990) opine that for the agriculture sector to absorb modern technology to increase productivity, credit institutions need to subsidize credit. The study showed that in Pakistan, the informal credit market contributed to keep social tendencies towards polarisation in the agriculture sector within limits and is not accessible to small scale farmers. According to Yaron (1992), the lack of affordable formal credit has been blamed for delaying the timely adoption of new production technology and intensive non-labour inputs. This underscores the importance of efficient formal agriculture credit systems that can bridge the funding deficit that inhibits agriculture growth and development.  

Quartey et al. (2012) analyse the spatial and crop-wise distribution of margins and relate this to the characteristics of the various markets in order to assess the extent to which middlemen affect agricultural financing, farm revenue and poverty in rural areas of Ghana. They found that forward sales exist in agricultural markets in Ghana and this is evidenced in the variations in the prices offered by middlemen to farmers. Pre-harvest contracts leads to lower prices offered to farmers compared to when sold directly to consumers or using other forms of marketing channels which in turn has significant implications for poverty. Swinnen and Gow (1999) evaluates the problems of financing Central and Eastern European agriculture and the role of government in this process. The revealed that transaction costs of credit supply tend to be so high that credit rationing and high interest rates are rational and efficient responses by lenders to imperfect information problems of the agriculture sector. The paper underscores the role of Eastern and Central European governments in form of credit subsidies, loan guarantee and specialised agriculture loans.

Evidently, the studies on this importance have been scarcely pursued especially in the context of Africa and its sub-regions. A regional and sub-regional comparative analysis of how credit markets influence agricultural productivity will shed more light on policies that improve agriculture credit access. An important observation from the literature which has received little focus is the role of credit market conditions vis-a-vis the macroeconomic environment. It has been hypothesized that favourable macroeconomic conditions and financial market policies enhance agriculture output. This is because credit granted to farmers can be mortgaged with expected future yields whose prices are predetermined (seasonal variations). In addition, in view of the fragile nature of agricultural products, the role of adequate infrastructure cannot be downplayed as it brings down the associated increment of farm gate prices. Extant researches for SSA provide very little is known about the elasticity of agricultural productivity to credit market conditions and infrastructure investment and quality at the regional and sub-regional level. Therefore, this study examines the nexus between infrastructure, agricultural output and credit access in SSA. This will permit us to explore, comparatively, to which agricultural financing will influence the sector’s output using a dynamic panel Vector Autoregression (VAR) framework and dynamic panel data model that overcomes the limitations of fixed and random effect models that have dominated extant literature. The paper will provide an overview of the agricultural sector in Africa and related literature. The study will also extensively discuss the methodological framework and empirical outcomes that will empirically explore the role of credit and infrastructure on agricultural productivity in SSA. The conclusions from this study are important for policy implications in underscoring the importance and role of access to credit and infrastructure for small farmers particularly in the rural areas within the region.



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