Relationship Lending and Its Effects on Transaction Cost of Obtaining Credit. The Case of Maize Farmers in Ghana

Abstract

This paper investigates the effects of relationship lending on the transaction costs of obtaining credit from financial institutions by maize farmers in Ashanti and Brong Ahafo regions of Ghana. A survey 380 farmers from five and three districts respectively in Brong Ahafo and Ashanti regions of Ghana was employed to gather the data used in this study. Multi-stage purposive and randomized sampling technique was used to sample the maize farmers. Descriptive statistics were used to evaluate transaction costs and socio-economic characteristics of the respondents while multiple regression analysis was used to measure the effects of relationship lending on transaction costs of maize farmers when taking credit facilities. The transaction cost model was estimated using OLS regression. Similar to many financial institutions operating in other developing countries, access to a loan in Ghana imposes high transaction costs upon mostly poor rural households who are engaged in maize production and sale. The results showed that access to financial information, prompt repayment of loans when it falls due and having investments with banks have the tendency to reduce the transaction cost of obtaining credit by farmers significantly. Also keeping non mandatory savings and increase in the number of years of dealing with the bank have the likelihood of reducing transaction cost of borrowing. However dealing with multiple banks increases the transaction cost for the farmer. Thus, any policy aimed at improving farmer-banker relationships would significantly reduce the farmers transaction cost of borrowing.