Credit Market Conditions and Agricultural Performance in Sub-Saharan Africa

Abstract

Agriculture is important for Sub-Saharan African development being a major source of poverty reduction, job and wealth creation. However, limited access to credit due to weak financial systems has over the years remained a major constraint for the sector. Extant studies show mixed and inconclusive results, suggesting that the effect of credit market on agriculture is influenced by other intervening variables. Accordingly, this paper examines the extent to which credit market conditions affect agricultural productivity. The study adopts a model that draws inspiration from a standard agriculture household framework that integrates both consumption and production decisions of farm households. In terms of methodology, the paper departs from existing literature because it gives due consideration to technological heterogeneity across countries. The model is estimated using pooled ordinary least square and fixed effect panel data estimator that accounts for omitted variable bias. The study uses yearly panel data for the period 1990-2015 for West Africa (13), Southern Africa (11), Central Africa (6) and East Africa (5); resulting in 35 Sub-Saharan African countries. The findings reveal that credit market conditions in terms of low lending rates and credit to the private sector are important for agricultural development within the sub-regions considered and this result is consistent after controlling for other important agricultural inputs. The empirical analysis further shows that limited credit access particularly in the East and Central African sub-regions compared to West and Southern Africa inhibits productivity. More so, availability of critical factor inputs such as agriculture equipment, fertilizer, infrastructure and precipitation exert a positive and significant impact on agriculture output. The results unexpectedly reveal that the effect of labor on agriculture output is negative and this outcome is traced to the low productivity of agriculture workers. The results are robust using an alternative estimator (fixed effect) and measure of the dependent variable (cereal yield). The results have important policy implications. First, lowering lending rate is a viable option for improving credit to the sector in addition to enhancing agriculture sector programs. Second, intensification of efforts particularly towards rural infrastructure development and indeed the provision of agriculture support systems that promote all-year farming may be considered.