Last week, Eswatini Economic Policy Analysis and Research Centre (ESEPARC) Researcher Thembumenzi Dlamini shared some insights with colleagues from around Africa at the 56th Agricultural Economic Association of South Africa (AEASA) Annual Conference.
The conference was held on 25 – 27 September under the theme, ‘Practicing Agricultural Economics in an Uncertain Neighbourhood’, at the Lord Charles Hotel in the Western Cape, South Africa.
Thembumenzi presented a research paper on the ‘Determinants of Choice of Credit Sources by Eswatini SMEs: A Focus on the Agriculture Sector’, which seeks to find out what factors influence small and medium enterprises (SMEs) in the agriculture sector to choose or use any of the three available sources of credit in the country, that is, formal (commercial banks); semi-formal (development finance institutions and NGOs); informal (rotating saving and credit associations, and stokvels).
Thembumenzi explains that understanding the factors that influence farmers’ choices of credit will help improve and prioritise financial services that are most frequently used by SMEs, in order to improve domestic food production and make a significant contribution to the country’s gross domestic product (GDP).
The study used FinScope 2016 Survey data comprising 3,024 Eswatini SMEs selected through the two stage stratified random sampling method. The researcher noted that the study found that out of these SMEs, 87 of them in the agriculture sector were able to access credit from either informal, semi-formal, and/or formal service providers in 2016, hence the study focused on them.
Using a multinomial logistic regression, the study finds that keeping financial records, start-up capital, the size of business, age of the business owner, and interest rates are significant factors that influence the choices between informal, semi-formal, and formal credit providers influence the choice of credit by SMEs in the agriculture sector.
“Suffice to say that as the agricultural enterprise expands, its appetite for capital also increases. The study results show that as the capital needs of the business increase so does the appetite for formal sources of credit. Also, as the age of the business owner and interest rates offered by credit sources increase, the more likely the SME will choose informal sources of credit. SME owners who do not keep financial records and do not have business plans prefer informal sources of credit,” she says.
Adding, Thembumenzi points out that the study also found that SMEs in the agriculture sector mostly use informal sources of credit compared to semi-formal and informal sources. Also, she says, they further prefer semi-formal sources of credit compared to the formal sources.
“This shows that formal and semi-formal credit sources still do not benefit a majority of the SMEs found in the agriculture sector. Despite the existence of local semi-formal credit sources, such as development finance institutions that have a mandate to provide credit to SMEs, agricultural SMEs still prefer to use informal sources of credit. Therefore, since informal institutions have taken the centre stage, we need to recognise and invest in them,” suggests the researcher.
Meanwhile, a participant at the conference wanted to know why Eswatini does not apply the sugar model to finance other agricultural value chains. “Actually, Eswatini is heading in that direction. The same method will be applied in high value crops; however, this requires extensive funding for the project to be applied in all agriculture value chains. Hence it is important to look at other sources of finance, which are currently doing well and are taken for granted, such as stokvels as well as rotating and savings associations known for less red tape and interest rates,” Thembumenzi explained.
Another participant wanted to know how the issue of onerous documents that SMEs do not have and yet are required by formal credit institutions could be solved. In response, the researcher noted that there was a need to conduct thorough research on informal credit sources and to devise strategies to assist in developing domestic stokvels or rotating credit and savings associations or savings and credit cooperatives to provide agriculture solutions and manage risks.
Also, she tackled the issue of more women than men being found to use informal sources of credit, explaining that studies show that more women have adopted the culture of saving and they are already involved in stokvels and other informal credit sources.
“In general, women lack collateral. For instance, in some traditional households, the wife has no ownership rights to land or any assets in the home, hence these women are obliged to use informal sources of credit,” added Thembumenzi.
The conference was attended by delegates from international research organisations, the private sector, academia, and governments. Organisations that were represented included the International Food Policy Research Institute (IFPRI) – Washington DC; Southern Africa Food Lab; Bureau for Economic Research (BER); Bureau for Food and Agricultural Policy (BFAP); Agriculture Research Council; National Agricultural Marketing Council.
Others were from the Hawassa University in Ethiopia; University of Aberdeen in Scotland; James Hutton Institute in Scotland; University of Cape Town; University of Pretoria; University of Kwazulu Natal; University of Zululand; University of Fort Hare; University of Stellenbosch; Mangosuthu University of Technology; Institute for Rural Development and Community Engagement; The Agricultural Research Council; and many other organisations.
Some of the study recommendations:
- Identify the different informal sources of credit, prioritise, and strengthen those that have a potential to serve a wider share of smallholders, particularly those in rural areas who lack collateral and sophisticated methods of financial record keeping.
- Design strategies to invest in locally customised stokvels, cooperative savings schemes, and rotating and savings schemes – this would be a good starting point for smallholders.
- Improve the SME policy and ensure that semi-formal financial institutions do not morph into pseudo-formal institutions.