Heterogeneous credit constraints and smallholder farming productivity in the Senegal River Valley

ABSTRACT

Credit constraints come in various forms, to the extent that they translate ex ante into market entry barriers (mostly transaction cost, price, and risk constraints) or ex post into credit application rejection (quantity constraints). This article is concerned with the underlying generating mechanisms of such heterogeneity in credit constraints and the implications for farmers’ productivity in the Senegal River Valley. Results from an endogenous switching regression model based on farm-level data indeed indicate that both pre- and postapplication constraints are holding back farmers’ performance, with differential impact depending on whether the latter is based on the average treatment on the credit beneficiaries or on the nonbeneficiaries and on the productivity measure. This is in addition to significant differences in the generating factors of market entry barriers and credit application outcome. These results are suggestive of various policy options that would not only increase market participation and bring about its beneficial impact, but also contribute to improve smallholder farmers’ credit-worthiness.

KEY WORDS:

• credit constraints
• productivity
• Senegal River Valley
• switching regression

Notes

1. Ministry of Agriculture and Rural Equipment of Senegal, and World Development Indicators Online.

2. Despite a detailed discussion of the various forms of credit constraints, Ali, Deininger, and Duponchel (2014) also seems to follow this categorization of ex ante and ex post, by focusing on quality constraints that materialize at the postapplication stage.

3. A map indicating the location of the study zone (Figure A1) is shown in the appendix.

4. Société Nationale d’Aménagement des Eaux du Fleuve Sénégal et des Vallées du Fleuve Sénégal et de la Falémé – SAED (see http://www.saed.sn/Presentations.html for a detailed description; accessed in September 2017).

5. Source: Direction of Horticulture, Ministry of Agriculture and Rural Equipment of Senegal.

6. For a typical credit used in the production, the subsidized interest rate is 7.5 percent.

7. A detailed listing of the variables and their definition and specification are provided in the appendix (Table A1).

8. The data also indicate that microfinance institutions are the main source, with 63 percent of applications, against 42 percent for regular banks, and 3 percent for government and nongovernment institutions.

9. For business firms in Senegal, Seck et al. (forthcoming) indicate a rejection rate of 46.4 percent, and an application rate of only 18.7 percent.

10. This figure sums up the shares of farmers facing any type of credit constraints, as listed in Table 1. It is a sheer coincidence that it turns out to equal the share of credit-applicant farmers.

11. The survey did not unfortunately ask for the credit use, or equivalently, whether moral hazard was an issue.

Additional information

Funding

This work was supported by the African Economic Research Consortium [RC15830].