Abstract
The purpose of the paper is to determine the influence of different factors used by a formal credit institution to evaluate loan applications in the agricultural sector. The research attempts to capture the actual factors considered by credit institutions rather than the traditional factors found in literature. Loan applications from 128 farmers, predominantly commercial farmers, were obtained from a credit institution with branches situated in various provinces of South Africa. Data consisted of loan application information which is broader than the financial information normally obtained in credit research, and the final decision of the credit provider. Principal component logistic regression was used to investigate the likeliness with which loan application variables influence the outcome of the loan application. Results indicate that loan applications that are more likely to be successful are older more experienced farmers, who can provide sufficient collateral, have more years of business with the credit provider, have an acceptable credit history, request smaller loan amounts, have lower interest expense ratio, higher production cost ratios, and have diversification strategies. This paper contributes to knowledge on information used by financial credit providers (institutions) in classifying agricultural loan applications as successful as guided by actual factors used in credit decision making by the credit provider.
Highlights
Modern agriculture is heavily dependent on debt which is normally provided in the form of credit.Credit permits farmers to assume new investments and technology [1], allowing farmers to increase their productivity and efficiency in agricultural businesses
Other reasons for the high risks include various factors such as the seasonal nature of agriculture, climate change, modernised technology, excessive division of agricultural land, perishable nature of agricultural products, fluctuation in demand, and prices for products [3]. Another aspect that plays an important role in the South African agricultural role is the fact that most subsidies in the agricultural sector has been abolished that existed during the apartheid era of the country
The aim of this research was to determine the influence of different factors used in evaluating loan applications in the agricultural sector by a formal credit institution
Summary
Modern agriculture is heavily dependent on debt which is normally provided in the form of credit.Credit permits farmers to assume new investments and technology [1], allowing farmers to increase their productivity and efficiency in agricultural businesses. Other reasons for the high risks include various factors such as the seasonal nature of agriculture, climate change, modernised technology, excessive division of agricultural land, perishable nature of agricultural products, fluctuation in demand, and prices for products [3]. Another aspect that plays an important role in the South African agricultural role is the fact that most subsidies in the agricultural sector has been abolished that existed during the apartheid era of the country. These subsidies that, during the apartheid era, assisted in modernising the agricultural sector are no longer available and farmers, Agriculture 2019, 9, 243; doi:10.3390/agriculture9110243 www.mdpi.com/journal/agriculture
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