Is agricultural microcredit really more risky? Evidence from Tanzania

Is agricultural microcredit really more risky? Evidence from Tanzania Purpose – Using a unique dataset of a commercial microfinance institution (MFI) in Tanzania, the purpose of this paper is to investigate first whether agricultural firms have a different probability to get a loan and whether their loans are differently volume rationed than loans to non‐agricultural firms. Second, the paper analyzes whether agricultural firms repay their loans with different delinquencies than non‐agricultural firms. Design/methodology/approach – The authors estimate a Probit‐Model for the probability of receiving a loan, a Heckman‐Model to investigate the magnitude of volume rationing for all loan applications and an OLS‐Model to examine the loan delinquencies of all microloans disbursed by the MFI. Findings – The results reveal that agricultural firms face higher obstacles to get credit but as soon as they have access to credit, their loans are not differently volume rationed than those of non‐agricultural firms. Furthermore, agricultural firms are less often delinquent when paying back their loans than non‐agricultural firms. Research limitations/implications – Even if the authors can show that access to credit and loan repayment is different for agricultural firms, the current regional focus of the MFI only allows for lending to agricultural firms in the greater Dar es Salaam area. Thus, these results might change in a rural setting. Besides general differences of the rural economic environment, the production type of agricultural firms might also differ in rural areas. Also, these results might change in different country contexts. Practical implications – The findings suggest that a higher risk exposition typically attributed to agricultural production must not necessarily lead to higher credit risk. They also show that the investigated MFI overestimates the credit risk of agricultural clients and, hence, should reconsider its risk assessment practice to be able to increase lending to the agricultural sector. In addition, the results might indicate that farmers qualify less often for a loan as they do not fit into the standard microcredit product. Originality/value – To the authors' knowledge, this is the first paper which simultaneously investigates access to credit and the repayment behavior of agricultural firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

Is agricultural microcredit really more risky? Evidence from Tanzania

Agricultural Finance Review, Volume 72 (3): 20 – Nov 2, 2012

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
0002-1466
DOI
10.1108/00021461211277268
Publisher site
See Article on Publisher Site

Abstract

Purpose – Using a unique dataset of a commercial microfinance institution (MFI) in Tanzania, the purpose of this paper is to investigate first whether agricultural firms have a different probability to get a loan and whether their loans are differently volume rationed than loans to non‐agricultural firms. Second, the paper analyzes whether agricultural firms repay their loans with different delinquencies than non‐agricultural firms. Design/methodology/approach – The authors estimate a Probit‐Model for the probability of receiving a loan, a Heckman‐Model to investigate the magnitude of volume rationing for all loan applications and an OLS‐Model to examine the loan delinquencies of all microloans disbursed by the MFI. Findings – The results reveal that agricultural firms face higher obstacles to get credit but as soon as they have access to credit, their loans are not differently volume rationed than those of non‐agricultural firms. Furthermore, agricultural firms are less often delinquent when paying back their loans than non‐agricultural firms. Research limitations/implications – Even if the authors can show that access to credit and loan repayment is different for agricultural firms, the current regional focus of the MFI only allows for lending to agricultural firms in the greater Dar es Salaam area. Thus, these results might change in a rural setting. Besides general differences of the rural economic environment, the production type of agricultural firms might also differ in rural areas. Also, these results might change in different country contexts. Practical implications – The findings suggest that a higher risk exposition typically attributed to agricultural production must not necessarily lead to higher credit risk. They also show that the investigated MFI overestimates the credit risk of agricultural clients and, hence, should reconsider its risk assessment practice to be able to increase lending to the agricultural sector. In addition, the results might indicate that farmers qualify less often for a loan as they do not fit into the standard microcredit product. Originality/value – To the authors' knowledge, this is the first paper which simultaneously investigates access to credit and the repayment behavior of agricultural firms.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: Nov 2, 2012

Keywords: Agricultural finance; Access to credit; Loan repayment; Microfinance institutions; Credit; Loans; Agriculture; Tanzania

References

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