Collateral Pledge: Does Relationship Lending Matters? The Case of Maize Farmers in Ghana

Abstract

A survey was employed to gather the primary data needed to assess how relationship lending affect the collateral that must be pledged by the maize farmer borrowers when taking credit from financial institutions. The farmers were selected from 8 districts in Ashanti and Brong Ahafo regions of Ghana. Multi-stage purposive and randomized sampling technique was used to sample 380 maize farmers. Descriptive statistics were used to evaluate collateral and socio-economic characteristics of the respondents while logit regression analysis was used to measure the effects of relationship lending on collateral used to secure loans taken by maize farmers. The results revealed farmer’s access to information has a reverse and significant with the collateral used to secure loans .multiple banking relationships is significant and directly related to the collateral used by farmers. The previous loan repayment behavior inversely affects the collateral pledge and is significant. Farmers who have investments with the bank are able to argue for lower or no collateral since those investments are used as securities. This explains the negative relationship with the collateral pledge. Thus farmers are encouraged to build more relationship with their banks in the form of investments, good repayments, getting more information minimizing the number of banks they deal with.