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Informal Credit and Factor Productivity in Africa: Does Informal Credit Matter?

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  • Owuor, George
  • Shem, A.O.

Abstract

It is widely documented that credit is an important instrument among resource poor farmers in developing economies. However, accessing loans from formal credit institutions has proved almost impossible for small and resource poor farmers leading to reliance on the least regulated informal credit sources such as the Grameen type institutions (Micro-Finance Institutions-MFIs) that peg lending to memberships in social networks such as groups. In spite of the growing preference to this type of lending, very little is known on their contribution among farm related productive activities in Kenya. This paper attempts to illuminate the role of lending via groups on economic performance of smallholder farmers via changes in purchased factor use between borrowers and non-borrowers. We employ endogenous switching regime approach (accomplished via heckman selection correction model) on a sample of 401 respondents made up of 180 borrowers and 221 non-borrowers from two districts in Kenya. Results show significant effects of group based lending on production via improved factors such as fertilizer, planting materials and crop chemicals, as well as on investment in non-farm businesses, hired labour, and in renting in more land. However, descriptive results indicate high fungibility of this type of credit, with over 20% use on non-productive activities, which infringe on expected output effects. Supervision and or issuing of credit in form of inputs could generate expected impact.

Suggested Citation

  • Owuor, George & Shem, A.O., 2012. "Informal Credit and Factor Productivity in Africa: Does Informal Credit Matter?," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126624, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaae12:126624
    DOI: 10.22004/ag.econ.126624
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    References listed on IDEAS

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    1. Zeller, Manfred & Sharma, Manohar & Ahmed, Akhter U. & Rashid, Shahidur, 2001. "Group-based financial institutions for the rural poor in Bangladesh: an institutional- and household-level analysis," Research reports 120, International Food Policy Research Institute (IFPRI).
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    3. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    4. Rosemary Atieno, 2001. "Formal and informal institutions’ lending policies and access to credit by small-scale enterprises in Kenya: An empirical assessment," Working Papers 111, African Economic Research Consortium, Research Department.
    5. Huppi, Monika & Feder, Gershon, 1990. "The Role of Groups and Credit Cooperatives in Rural Lending," The World Bank Research Observer, World Bank, vol. 5(2), pages 187-204, July.
    6. Conning, Jonathan & Udry, Christopher, 2007. "Rural Financial Markets in Developing Countries," Handbook of Agricultural Economics, in: Robert Evenson & Prabhu Pingali (ed.), Handbook of Agricultural Economics, edition 1, volume 3, chapter 56, pages 2857-2908, Elsevier.
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