The impact of microcredit on agricultural technology adoption and productivity: Evidence from randomized control trial in Tanzania

Abstract

Abstract Adoption of technology is indispensable for increased agricultural productivity and poverty reduction in Sub-Saharan Africa. Lack of access to credit is often identified as a constraint on the adoption of agricultural technology. Recently, microcredit has generated considerable enthusiasm and hope for ensuring sustainable financial inclusion of the poor. We conducted randomized control trial (RCT) to examine the impact of microcredit on the adoption of technology and productivity of rice cultivation in Tanzania. Collaboratively with BRAC, a globally-known microfinance institution, we offered microcredit specifically designed for agriculture to randomly selected farmers. We estimate the intention-to-treat effect (ITT) as well as the local average treatment effect (LATE) of microcredit, by using the treatment status as an instrumental variable (IV). Overall, we find no evidence that the BRAC program increases the use of chemical fertilizer. Also, credit use does not result in an increase in paddy yield, profit from rice cultivation, or household income. Our results from sub-sample analyses suggest that credit does not increase the fertilizer use by those who have better access to irrigation water as they have already applied the amount of fertilizer near to the recommended level. On the other hand, credit increases the fertilizer use by those who have limited access to irrigation water and have previously used little fertilizer. However, possibly due to the poor yield response to fertilizer, the increase in chemical fertilizer use does not result in higher yield for them. We also observed similar phenomenon for the comparison between trained and non-trained borrowers before the intervention. Our study suggests that improving credit access may not be enough to increase small-scale farmers’ technology adoption, agricultural productivity, and welfare.