Does peers' credit behavior affect smallholder farmers’ credit and savings decisions? Evidence from the northern region of Ghana

Abstract

Access to credit remains a major challenge in developing countries, leading to increased poverty levels and low savings. Despite the importance of social networks and social support systems, the literature has not considered the link between peer credit on one hand and own credit and savings on the other. This paper examines the effect of peer credit on farmers (own) credit and savings using cross-sectional data from 400 farm households in northern Ghana. The study employed a spatial Durbin model (SDM) and the control function approach to identify the network effects. The results show that an increase in the share of farmers’ peers with credit, increases own credit access but leads to a decline in savings. This implies the presence of endogenous effects on credit, but no evidence of contextual effects was found. The results further show some heterogeneities in the effect of peer credit but with diminishing marginal returns to own credit. The study recommends that to promote credit access, financial institutions must focus on farmers with high-network credit. They should also ensure the sustainability of credit among farmers to improve savings. The study underscores the importance of cohesive networks in promoting credit access among farmers, therefore key stakeholders such as the government, religious and traditional authorities as well as political and civil society organizations must collaborate in their efforts to promote social cohesion by minimizing civil disputes and conflicts. This will ensure that farm households in developing communities continue to benefit from social network support.