The agricultural financing gap in Zimbabwe: rationing, sustainable credit access and participation in rural financial markets
Kuipa, Prince Jonathan Tutsirai
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The study is an examination of agricultural finance for smallholder communal farmers in Zimbabwe. It is accepted as reality that generally in Africa and particularly in Zimbabwe there exists a gap between the supply of and demand for credit among communal rural farmers. There have been previous attempts by governments to close the finance gap through supply of cheap credit but these efforts have neither been successful nor sustainable. The gap has been sustained by arguments that financing rural agriculture has high transaction costs, low returns on investment and is risky business. Formal financial services providers prefer to provide loans to well established urban businesses, rather than numerous small loans to scattered rural farmers in remote areas where transport, communication, energy and farm infrastructure are underdeveloped. The result is a serious and long lasting rural finance gap that keeps the economic potential of agriculture underused. Banks require collateral security from farmers but this is a major constraint due to land tenure restrictions. There have been some studies around the subject of rural financing and rural financial markets. A review of literature reveals that not much has been invested in studying the determinants of access to rural financing and of credit rationing for smallholder farmers by formal financial institutions in Zimbabwe. The empirical methods used in this study have not been employed in Zimbabwe to identify and recommend policy options to close the finance gap. The specific objectives were to i) to identify and examine the determinants of access to agricultural financial markets for smallholder farmers in Zimbabwe, and ii) to assess credit rationing as a result of the demand for loans exceeding the supply, by identifying and examining the determinants of credit rationing among smallholder farmers in Zimbabwe. Objective (iii) would draw from objectives (i) and (ii) to recommend policy options and financing models to close the rural agricultural finance gap for sustainable and smallholder inclusive rural financing for agricultural value chains in Zimbabwe. Cross sectional data was collected from a random samples of smallholder farmers residing in purposively selected wards and used for empirical analysis. The analysis used the double huddle model to determine the determinants of access and intensity of participation of farmers in rural financial markets. The seeming Unrelated Regression (SUR) model was used to analyse the determinants of credit rationing. Credit rationing was sub classified into quantity rationed, risk rationed and price rationed farmers. The analysis of credit rationing in three different categories using the SUR model shows the effects of the explanatory variables in a more critical manner that provides a better understanding of the determinants of credit rationing among small-scale farmers. Smallholder farmers’ perception of risk affects access to agricultural financial markets. Rain-fed agriculture has a high risk of crop and livestock failure due to variability and unpredictability in weather patterns and climate change related extreme weather events including droughts and floods. The results also showed that farmers in remote areas that are distant from the formal financial markets have less access to credit facilities. Communal smallholder farmers in Zimbabwe face significant levels of credit rationing in various forms. Credit demand is in excess of supply at various interest rates. Credit availability is a more critical issue in Zimbabwe than interest rates. Key policy interventions that can improve access to agricultural financial markets include improving extension contact in order to improve crop and livestock productivity, which in turn will improve farmers’ profitability and ability to repay farm credit. Infrastructure development including the development of rural growth points in remote areas can attract financial service providers to decentralise and reduce the distance to the financial services markets, transaction costs and interest rates. There is need for the Government of Zimbabwe (GoZ), to formulate and implement a Rural Finance Policy and Strategy to address the access and credit rationing challenges. The policy should facilitate development of financial sector infrastructure that enables broadening outreach in remote areas through establishment of effective payment systems, credit reference bureaus, warehouse receipts, collateral management and weather indexed insurance. Linkages between community based Member Owned Financial Institutions (MOIs) and formal financial services providers will contribute to addressing the rural finance gap.