An economic assessment of the factors influencing smallholder farmers' access to formal credit: a case study of Rwamagana district, Rwanda
Farm credit enhances productivity and promotes standard of living by breaking vicious cycle of poverty of small scale farmers. It is usually considered as an essential input to increase agricultural productivity. Agricultural credit is indeed an integral part of the process of modernization of agriculture and commercialization of the rural economy. Credit is a necessary input if agriculture intensification and agricultural growth is to be achieved. Despite financial institutions having been established to offer agricultural credit in Rwanda, access to credit in many rural households in Rwanda remains limited. This study assesses the factors influencing smallholder farmers' access to credit in Rwamagana District, Rwanda. The study sought to establish the relationship between formal and informal credit use and to assess the factors that influence smallholder farmers' access to formal credit. It was hypothesized that informal credit participation is negatively associated with formal credit use and that access to credit is not determined mostly by household socio- economic and institutional factors such as land, agricultural extension service, gender. Both primary and secondary data were used in the analysis. Multi-stage sampling technique was used. A sample of 185 smallholder farmers stratified by access to formal credit was drawn. The data for the survey was collected in the month of May, 2011. Both t-test and Chi-square test statistics were used to compare users (33 percent) and non users of formal credit (67 percent) with respect to the explanatory variables hypothesized to influence access to formal credit. Binary Logit is applied in assessing the factors influencing smallholder farmers' access to formal credit. Descriptive statistics show that farmers' credit users and non users were significantly different by gender of household head, keeping farm records head, off-farm incomes at5 percent level of significance. Moreover, education of household, agricultural extension service, participating in informal credit was significantly different at 1 percent level of significance. However, other variable such as age of household head and land size of household head were not significant different between users and non-users. Results from the logistic model showed that, participating in informal credit increased the likelihood of participating in formal credit by 29.2 percent. It also found that off-farm income, agricultural extension service, participating in informal credit and education level of household head were statistically significant at 1 percent level of probability. The farmers earning more off-farm income increased the likelihood of participating in formal credit by 4.6 percent. In addition, farmers with higher levels of education and those who receive technical advice from agricultural extension services are more likely to use formal credit (14.9 percent versus 14.5 percent respectively). The study recommends the following policies aimed at improving farmers' access to formal credit. The government should emphasize on policies aimed at increasing opportunities for off-farm activities, not only focusing on increasing agricultural production. The policy should also promote agricultural extension services geared towards increasing training to the farmers and redouble efforts to improve education levels at Rwamagana District since education makes people arrive at informed decisions about loans.