Agricultural credit and the mobilization of resources in rural areas

AGRICULTURAL CREDIT

THE MOBILIZATION OF RESOURCES AND

IN RURAL AREAS

j

UNITED NATIONS

LIMITED

E/ECA/PSD.4/7 19 February 1986 Original: ENGLISH

ECONOMIC COMMISSION FOR AFRICA

Fourth Session of the Joint Conference of African Planners, Statisticians and

Demographers

Addis Ababa, Ethiopia, 3-12 March 1986

AGRICULTURAL CREDIT AND THE MOBILIZATION OF

RESOURCES IN RURAL AREAS

Fiscal, Monetary, Financial Policy and Institutions Section Socio-Economic Research and Planning Division.

7 February 1986

This study of Agricultural Credit and the Mobilization of Resources in Rural Area was commissioned by the Third Session of the Joint Conference of African Planners, Statisticians and Demographers held at Addis Ababa Ethiopia, in March 1984 for submission to it's fourth Sessico to be

in March 1986.

E/ECA/PSD.4/7

: TABLE OF CONTENTS

INTRODUCTION ■

I. The situation today

II. Agricultural development and sources of funds

(a) Commercial banks

(b) Specialized agricultural banks (c) Co-operatives

Interest rate policies

The default question ■

Investment '

Producer prices and marketing mechanisms

Distribution and storage •

Input supply

Extension '

(d) The informal sector Resource mobilisation III. CONCLUSIONS AND RECOMMENDATIONS

Page

1

2

4 4 10 12

13 16 19 22 ,24 25 26

28 31

35

INTRODUCTION

the total population of the region

livelihood on agriculture! i^

5i«iT^t^hs^^.2^i^r,rB"'are avaiiabie- ~*

Although the continent's in,Po"ll for food hT^ °f ?* a8ri-ltural sector

♦1.9 billion in 1970 to $12 4 billion Z W85 (7? rlSe" drafati«lly, from

1974 World Food Conference that in a £,l* ■ ° l-V 6)° the vision of tl>e

no family Would fear for its next dav's hr Y° Shlld.would 8° to bed hungry,

^ould be stunted by malnutrition iffar fr™ hi " in? vid-l'« Potential 'hunger list' or - as it has been reffrr4 °o thf ^?Used- In f^=t the

than ever. And unless «th<. r,,nM rererr.-«Jr ta - the 'list of shame' is larger

the average Africa^willt 11^1%^^Z& '" ^r"611 ^ eff-tively

became independent* (72, p. 6) e Was at the time his country

mobilization efforts. Yet Africa?, ^ V- ? reUx ltS own "source

natural and huEan ... «^at Is ^eded frTnJHpH COnsidfab^ ".oorce. - both

of the capacity to tap these resources for th^ K "f?.**£• is the development

to create an environment that encouraLf LI <6.. P- 15). encourages enterprise, innovation and ingenuity. •" Xt °f the Po^lation and

i^d1t^:

is accumulating, however thltZ o.- cald at least have beenXnnelled corf And in almost every case the agricultural L most pronounced, is expected S ^tS

than it receives in either direct or

sector!

eff°" has been ""guid ' in °ther directions.

°f ^S6CtOrs

Page 2

5 A serious difficulty in preparing this study has been the shortage of data on a number of crucially important features of the a8*xcultur*i **""

in individual African countries. The very fact that many Governments cannot

produce figures on, for example, the respective contributions of large-scale

and smallholder farming to national agricultural production strongly

suggests that the operation of the sector has not yet been brought into

sharp focus in the administrative mind. ■

6 The original intention of the authors was simply to investigate the effects of current institutional credit policy on agricultural production and progress. They believe, however, that they have found that agricultural credit, in the absence of correct policies, has little impact on rural

development. It is but one component among several that must be carefully coordinated to have any effect on production and development. After all, credit is not an end unto itself but a tool for policy. . (. ...

7 An enquiry into agricultural credit, must, therefore, consider the , policies credit seeks-.to■ further. It has. emerged during this study that the effectiveness"of credit policy is largely determined by#the land tenure, price, interest rate, marketing, extension,taxation and savings policies applied with it. Addressing the complex problems connected with rural development in a compartmentalized manner is of little use.

8 This enquiry into the workings of aSricultural credit challenges numerous

misconceptions on which past policies have been based. It shows that the interests of farmers, governments and.credit institutions are often ™tually

inconsistent. It suggests that, pricing policies inmost African countries are disincentives to small farmers.. It provides evidence that production has been impeded, and an impossible burden imposed on the small farmer, by ill-advised policies and regulations.

Io The situation today

'9 • ■ The burden of taxation in Africa falls on the farmer, while the modern

sector is favoured with fiscal incentives. Farmers' taxes are often used

to support urban-oriented infrastructure rather than the promotion °J

agriculture. Nowhere in the world have the urban,sectors been fed such large chunks of 'meat' at the expense of the rural sector. "In contrast, African

"nts still callow in their backwardness. They are dispersed unorganized,

unschooled,' ill-housed, ill-equipped arid ill-nourished (44, p.. .67). It is

the rich farmers who get tne cheap loans and the fertilizer subsidies and

they often relend the money to swell the flow of moneylender «edit, if subsidies get through to the small farmer, he often sensibly uses to in partial repayment of money lender debt. In either case, inadequate agency

F . r ■: _ ., _ ,-*-*. i~ (/■« « ^nn^ uviat: is more* the

off the agricultural surplus to build villas, apartment houses and other

luxury items.

Within limitss public and business savings can be channelled into investment for agriculture. If one remembers, however9 that these savings are brought about by suppressing farmers' disposable incomes through taxation or raising the prices of agricultural inputs and keeping down the prices of outputs, the net inflow of funds to rural areas may be far less than is reported in official figures (70, p. 14). Data on Kenya reveal that between 1966 and 1972 «there was a large net capital outflow from the agriculture sector*, an outflow which in fact represented an average of 79 per cent of the country's gross fixed capital formation ( 92, pp. 560-62),

11. The institutional infrastructure - viz. banking, insurance and finance - has tended to be less and less village-oriented and more and more drawn to the urban seats of powers authority and financial patronage (53). Not only are credit co-:operatives fundamentally weak in both financial strength and economic impact but they have tended to rainforce existing social structures or even to aggravate class division rather than acting as vehicles of

equitable change. And failure has been a common denominator under civilian, military, capitalist and socialist governments (49, p. 205).

12. In each year of drought, the number of countries seriously affected has been escalating; 12 in 1974: 27 in 1979; 35 in 1984. This, however, offers no grounds to assert that the problems of African agriculture begin and end with nature. Rain alone will not wash away hunger. Radical change

"will come only if there is a genuine resolve to correct what is wrong at

home -what has failed to work - what' has worked to produce greater unfairness and alienation - models that have proved unsuitable to Africa's people. This is not a plea to move to the left or to the right, but to move in those

directions that the needs of real development dictate > (86, pp.' 20-1).

13. Modest efforts have been made to improve the institutional credit system. However, African peasants arc- not yet sufficiently motivated to

invest time, money and effort in .a risky effort to increase agricultural production. International donor agencies and Governments have a tradition of granting credit to the more commercially oriented producers rather than to production of food crops. And cheap and abundant credit cannot offset low incomes or low returns on investment in agriculture (5). Development of other institutional systems, particularly land tenure, input supply and output marketing has lagged seriously behind. «A development strategy that opts for the provision of agricultural credit without a prior removal of the obstacles that adversely influence its outcome, is using a straw for a

battering ram. The ,qate will not yield, but the straw gets broken* (24, p. 202)

E/ECA/FSD.4/7 Page 4

U Agricultural development in Africa has not significantly departed from

he ffiSTSLmUl export profile, T*e main ^f-^^^tt«

has until recently at least, been to ensure a supply of raw "^erials to

nascent industry. Whether political leaders have Espoused capitalism or

ToSSUthey^have generally given low priority to ^^f^cted

crops. To avert the prevailing mass hunger and to uplift the neglected .majority, a radical revision of policies is called for.

II Agricultural development and sources of funds

liiiiiiiillir and development institutions, co-operatives and the ^formal sector.

(a) Commercial banks

concentrate on funding large ***mx*&p« «93 and 1979 only 494 batik branches

and tbe teeign tt^ -ector-jet«« 893 and 1979^ y ^ ^

m

product) from rural to u.ban areas, depriving agriculture one of the major ingredients tor sustained economic growth. The opportunity to lend to larpe creditworthy clients in the towns leaves them no incentive to tackle the ' much harder job of getting credit to small-scale farms (^ ).

17. ^ The advantagea of commercial banks as sources cf credit derive from their.^diversities, competitiveness, international connections, magnitudes of

Th^Vn^1;1*7? fhxjbiUty and reasonable terns cf speed of response* (55).

Thanks to the territorial spread of their branches, commercial banks are

well placed to mobilize deposits, and more indigenous banks are gradually

being established to widen the scope of banking activities. In Nigeria .for example, the Central Bank decided in 1977 to identify «unbanked» areas

through a survey,, and in fact found the need to provide 1,126 new rural branches. In the first phase, which covered the period 1977 to 1980

lit nran?hf ^re °Pened 9*' PP' 57"9)'- blowing a decree made through

the Rural Banking Scheme (Phase II), 260 branches in specified countryside

locations were to be opened within 40 months starting from August 1980 (8 p 93

A total of 45 per cent capital allowance has been granted to banks on capital

expenditure incurred in implementing the rural banking schene. Tl;e allowance

is split as follows: (a) investment allowance"- 20 per cent; (b) initial

allowance - 15 per cent; (c) annual allowance - 10 par cent ( * - 372)

Under sectoral credit guidelines,' all commercial banks- are required to

lend at least 15 per cent of their loan portfolio to agriculture C' , In

Cameroon technical and financial institutions were set up in 1983 to'promote tne development of small-scale industries. In the Central African Republic,

the banks are being reorganized to play a greater role in making agricultural

and artisan credit available to the rural sector. In an effort to promote

agricultural development and tne growth of the banking industry, a rural ?■

bank known as the «Youni Rural Banks was set up in Sierra Leone %

February 1985. The commercial banking system needs to be involved in a :

more integrated planning process than has often been the case in the past

In many countries, the potential now exists for the more effective"

utilization of a more developed banking infrastructure (i-^;, p. 140)

Unfortunately, for the bulk of the developing African countries, the

.potential xor usir.£ their network of bank branches to finance smallholder

E/ECA/PSD.4/7 Fap,e 6

agriculture has not been effectively harnessed.*

lfi Table I shows the structure of commercial banks' credit ^selected

18 laDie bi Mahli^hted above, commercial banks are loath to

PlillliiiiiL

between 1973 snd 1^84 s and tne «h=^ ^ respectively of their total

ill IsiSHsSi

the shara of credit going to agriculture is -abysmally low

",:; SI rs

agriculture. The focus of an Agricultural "^v ^ £ 1976 t0 inciude

initial years wa5 on agricultural "^f'^?^^^ ijrural arts and

cottage and small. a?ro-based industries ^if^Ttriie. Apart from these

as

agencies, and a build-op of "PP°f .f^^ei^tion of villages for adoption

calamities and easy accessibility.

Development, India, 22 July to 11 August,

risks are marginal In {L

Pattern of l'LtS

sovernoent bonds where

1 ""

Share and Average Annual Compn^d Growth Rat.p nf and Trade Credit in Total T.o.n

Country

Botswana-2/

Burkina Fasoi''

Gaboni/

Gambia^

Ivory Coast-

Kenyai'' Lesotho^

Liberia^9/

Period

1982-84 1982-84 1982-34 1983-84 1980-84 1979-83 1973-84 1973-83 1982-84 1973-84 1930-85 1980^-84 1973-77

Agricultural Agricultural credit in credit ave- total loan rage Annual portfolio of Compound Commercial

Banks

(X shares)

24.5 10.0 9.0 2.3 4.3 6.4 47.5 12.5 6.7 15.4 1.1 7.4 2.3

Growth Rates

^-fW_h»

4.5 -2.6 26.9 43.0 -1.3 15.1

7.7 45.5 2.4 20.3 5.0 -25.9 78.2

Domestic and foreign trade in total loan portfolio of Commercial Banks

shares) 46.7 27.3 57.5 43.0 56.0 31.5 22.2 28.6 54.2 21.5 5?. 5 28.2 25,9

Domestic and foreign trade Credit Average Annual Compound Growth Rates

-1.5 41.0 -2.44 22.5 ,-2.3 14.fi 23.4 28.8 257.2 15.9 19.0 -11.3 25.8

2/

J I

1

Bank of Botswana, Annual Report (1981-G4)

^entral.Bfnk of Egypt, Annual Report (1983/84)

T^L^ f ^^^^=0^ (1980-84)

Gambia RM^^^ fioyvfj^ '

s January-March 1985

/^ of Lesotho, Quarterly Review.

Vol

. Vol. XXiV No ?!q "t , e

aaiv, wo. 7-9, July-September 1984.

' °' 7"12'

E/ECA/PSD.4/7 Page 8

Table I. Share and Average Annual Compound Growth Rate of Agricultural and Trade Credit in Total Loan Portfolio of

Commercial Banks (Cont'd)

Malawi—

. . 12/

Mauritius—

Niger—

• 13/

Nigeria—

Senegal—

V 14/

Sierra Leone—

Somalia—

Swaziland—-

. 17/

Tanzania—

«. . . 18/

Tunisia—

Ugandi 19/

n V 20/

Zambia—

Zimbabwe—

1973-84 1984 1973-81 1982-84 1973-82 1982-84 1973-84 1973-80 1973-84 1973-82 1982-84 1973-82 1980-84 1973-83 1973-84

40.5 13.4 21.4 10.2 5.1 3.6 2.9 17.6 31.5 4.2 6.0 8.4 35. S 7.5 14.0

33.9

20.9 37.3 49.0 1.3 65.9 24.7 10.8 11.2 1.4 22.4 -2.35 22.6 10.1

19.1 39.3 19.2 58.2 23.2 78.5 52.4 58.7 13.9 63.9 65.4 17.6 34.0 17.2 18.3

3.7

9.7 4.9 24.0 -14.5 16.9 10.4 12.6 11.5 -2.25 21.1 62.0 9.9 8.2

Sources: 11/

13/12/

14/

15/

IS/

17/

20/

21/

Reserve Bank of Malawi, Financial and Economic Review, Vol. XVI,

No. 4, 1984

Bank of Mauritius, Annual Report (1973-81) ; Economic and Financial Review, Vol. 21, No. 3, September 1983 BanV nf sierra Leone, Annual Report and Statement of Accounts

(1973-84)

Central Bank of Somalia, Annual Report (1973-80) Central Bank of Swaziland, Quarterly Review (1973-84) Bank of Tanzania, Annual Report (1973-82)

Statistiques financieress Hovembre 1984 Bank of Uganda, Annual Report (1980-84)

Bank of Zambia, Quarterly Financial and Statistical Review, Jiine 1984

Quarterly Digest of Statistics, March 1985.

projects* m, p. 311)

countri- ^f^y.bills.etc.) is excluded nl n , raffl3tlCally underextended -

sending to all sectors, ««#- ;,.„- .__•sectors, not just ,.

seeking viable

that <*™ Govermnent

in several

C0TCr

Selected African

■"■ i ■

(1984)

Ethiopia ... w i/

Ghana .... ' "' 87'5*

Lesotho ., -■.'.'.\\'.'.'.".'.'.':;;: 80t8%

Mauritius * 63'5%

Sierra Leone ... *■■'- **■' 92?3Z

Sudan .'J.".".\'.\".'.'"'#":.'? ' 63t5%

Swaziland b> " * V " * " 81"9*

Uganda _ * *":"•'•*"'_* "■*;_ -•-'.--. 76.1%

...;... 76>8%

Source:

A3.8%

33.1%

65.3%:

25.5%

78.9%

72-7%

72.7%

2/ Excluding Government.borrowing.

E/ECA/PSD.4/7 Page 10

(b) Specialized Agricultural Banks ,

21 Specialized agricultural'banks have distinctive functions and,requirements

include the supervision of the production activities which include the supervision of the.production activities

of their clientele, a rigorous project appraisal exercise, heaviiv

criteria and different skill requirements for their staff. They »£>££*.

on foreign loans and Government contributions. They are financial intermediaries in tne vfry restricted sense in that they extend credit but rarely mobilise

savings ^heir fixed interest rates barely.cover their average operating

and are rarely revised to allow for .prevailing levels of inflation, as

ana are rarexy ^ ^ ^_# ^*«n«a t-^Hs to diminish. Their

an/the woefully slow loan recovery cycle erodes their capital base for onward

lending to a diversified set of customers (^, p. 7!>;.

22 Debt service and kaortizat ion consume large portions of any new

banks (26, p. 308).

23. The operational effectiveness of development b^k^

industryPrather than the distributional effects of their

smbm

agriculture in 1984 (16)

by "theMucitrofCtZad:tTba°feth6V^:ff™anC£ °f•devel<™ "«*• is hindered loan, cLssifLd by typP^f f^er sL, of'r^1" T^ infon"ati°n

Bank, The Lsotho National™ ~t ££"£11

n

of services inching ^STi^^

to 9.5 ^r^ttT"^xZl (7% °T °rt the \otal lo- Portfolio, Liberia which earmarks alargeshSe of

agricultura! sis^c h^seS?^natT ,

credit and re§ettleraent'cred t L of "9I4 "the ^""tV*' SDlaU farm

the different schemes totally 1 ' 41

scnemcs totalled ^2, and were valued at Z$ 1022 million (17)

3 3 ' ' ,number of loans granted under ,number of loans granted under

and were valued at Z$ 102.2 million (17)

nmmmm

PPpuiation had been re^hed^L '" 76 STS^ SmalJ:Sca^ fa™^S

Agricole* in Morocco became a relatively'ef^i^3 ? /atlOnale ^Credit largely through the a™1 icatinW i* u * tnder to smaU farmers Credit to smafl far^vs isS ,' "™beJ °f "Sanizational innovations, fattening. In 1977 67 perS ^'T• f°T C"rfal Production and livestock

24 per cent of ,> i' °^ the Calsse's 323,830 borrowers- holding

(P! ^{P 24)!} ! XSC"^^"-1'^ 11 f

Agricultural Finance Company in Lbi hN ' Credit Programme. The

Bank and the Tanzanian Rural Development K& j^Senan Agricultural Development

total lending to small farmers. ^ ^ *U Slgnificantly increased

Page 12

(c) Co-cperatives, ... : ...

29 With rare exceptions, the co-operative movement, which was intended to

±± \sss^ Sirs sr~

cater.for export crops

L op and

iy tra

und r""anfHZl) inexverieLed management (Zambia = ^

Zimbabwe); (c) uneconomic units that cannot support themselves J™"*""'

(Tanzania Zambia); (d) lack of -Parting infrastructure especially trainxng

Zimbabwe), -suffic• ^ interference (Zanbi Tanfnia and EChxopxa) (45) In'Ghana the formation of co-operatives based on family relations, plus poorly

controlled account, political, interference and the limited supply of xnputs

(there a^e S co-operatives for cocoa farmers but not for farmers producing

* raLfof staple and highly perishable food), account for the slow Progress of the movement m, p. 69). A study of farm-level «^One^H°Sr

farmers in Nigeria (0yos Ondo and Ogun states) suggests that one

Only 39.4 per cent of the total funds borrowed was used for farming by the

co-operative farmers (60, P- 269). , -.

31. In some parts of Africa, co-operatives have become the preserve of the upper

strata in the village. . The. fact that i8nd-holdii.B» »« of varying size and fertiUty has been contributing factor. As one study has most appropriately observed'of contemporary Asia, "the notion that --operation «1^ «ave an fundamental alterations in property rights and economic obligations

Iii

effect is to create more, not less i

African society becomes: more differentiated and a new form of social

solution to Africa's rural dev (58 O/;

institutions to mobilize saving ™f- the ablllty of financial

funds, the Govern^budget and internltio^l^-f reUanC6 °n Central bai*

defxcits but exacerbates the J^^T^ "" "^ SWellS W8et

ifferent^St^irrrt ^e^^ \frica have had different origins

Rapid expansion in the'credit^Sfd^ the" ^.^^ has be- widespread.

Governments imposed ^ restraints resulted in sec*?r'.^en though most countries. Shorties. of foodstuffs f™ • ,1 *CBSS ll(!uidity in many

raised the prices of essential^mmodit^r^e'xabled""?ht"f"?k- countries,

short aised the prices of essential^mmodit^r^e'xable"?htf"?k- countrie Zl^l * ? Fi shortages compelled many Governments to Zrl^l * ?' Forei8n exchange had abated in the developed cou^tr,-»=/• lmp°VtS before Price inflation

because imports were not'only ™ sh"t sZTt ffrcfn P""^ therefore rosf

credit is well below H,ff«8 lnterest rate charged for

countries for .ich data are^^.T^i^ed^^al^ 2

^Sf n^f ^rrinSre^^r^l ^ ^"^ ^-^

to hold a large proportion of their saving in ff* hav\encou"ged the public precious metals, gems and art works the fl,V^ T^ S"Ch 3S cons™« goods, these inflation hedges has red^H It, 8ht °f doEestic currency into

for fixed capita! Nation! £ Lint 'for" °f f^^"31 Savi«&° «*•».".

1980, interest rates never exceeded 13'D!°,fPi-,' d^ing the Perio<J "76- near the three-digit range ^e st™!? " ^U inflation wasrunning

a precipitous fufht frof^^g S.T^ r\al interest »te causfd

savxng ps fufht frof^^g S.T^ \ ljTSST i est »te caus savxngs were at a low 6bb, as shljTtto'.tSSTf.u" P^iOd' financial

broad money (59, p. 67). This asserti™ !h TTV

inis assertion should, however, be interpreted with a

the real leveI of

TableIII Country loBotswana 2.Egypt* 3OEthiopia 4.Gambia* 5.Kenya 6.Lesotho 7°Liberia 8.Malawi* 9oMauritius 10.Nigeria 11.Swaziland 12.Tanzania 13.Tunisia 14.Uganda* 15.Zaire 16.Zambia 17.Zimbabwe

Averagenominal InterestRate YearforAgricultural loans

Rateof1, inflation- 1983 1983 1984 1984 1984 1984 1984 1984 1981 1984 1984 1980 1982 1984 1982 1980 1984

16.0-16.5 11.0-13.0 9,0-9.5 9.0-19.0 14,0 12.0 12,0 10.0-20.0 8.5-13=0 6.0-7.0 12.0-21.0 7.5 6^0 24.0V 30.0 12.5 13.0

10.3 16.1 -7.5U 10.42.1 11.55/ 17.35/ 2.85/ 15.45/ 13.9 1L.75/ 11.65/ 30.2 13.7 75.05/ 37.2 11.7 23.1

RealRate of Interest 5.7-6,2 -5.1--3.1 16.1-16.6 -1.4-8.6 2.5 -5.3 9.2 -5.4-4.6 -5.4-0.9 -5.7-r4.7 0.4-9.^ -22.7 -7.7 -51o0 -7.2 0.8 -10.1

Cerealproduction Exponentialgrowth Rate2/ (1973-1984)

Claimsongovernment CompoundAverageAnnual GrowthRate3/ (1973-1984) Source:Figurespublishedbynationalcommercialanddevelopmentbanks. *Rateschargedbycommercialhanks »»«.,1/S.r.«vof

26. -5. 0, -7. 9. -2. -1, -0 ■11 2 -7 -4 0 -8 -2

4 7 ,8 ,6 ,6 ,9 ;6 .4 .1

t-i

^{.5 .2 .2 .9 .9}

1.ifrlcIM0-19M.2/

31. 23. 32. 36. 31. 22. 39. 31. 48. 36, -0, 46, 21 35 50 27 20

8-^ 8 7 9 ,4 ,3 ,3 ,8 ,0 .5 .8 .5 .1 .0 .5 .2 .0

r 6/ 1/ 8/

fl

10/ 10/1979-1984.

„»

1"?F'

rsia =?is r=s. stairs ^^S Si (5,

in Nigeria ranked low interest charges on iZJStSth on tZ li^of VU !?e

attributes of institutional credit (79 p. 180) °f positlve

E/ECA/PSD.4/7

Page 16

recent of a Government in Cameroon it was

A

su^y revealed that 37 P«.«*£ 'ta^ nWesS'cbos. the rapid

' flexible' use of loan funds as most important,^^ ^ ^^ ^ Qnly 5 per cent

disbursement of funds, 27 per cent chose ^ their borrowing decisions chosethe level of interest rate as a major „ cheap credit to adopt

! (6'2,"p. 716), .Most farmers do not^et° market for farm output and

profitable innovations if there is a satist•» ^ h c(Juld induce the

if the extension workers recognize that if^ey «y, '^.^ t^r own

farmers to finance th. purchase^of ^^J ^ ^ thei production ,

r, expeditoue and dependable.

ill benefit if the subsidized

41. It has often been alleged that^rarine^ *■■ ^^ ovetlooks the

Safe.SF^i^

therefore unrealistic to think that b

the productive capability of farmers (V02 ^

^addition,

. variy

«Sr^SlS that the beneficial Effects

be better directed elsewhere-

42. Low interest rates have^,

.sWe equipnent, which «?^8

production presupposes the

X^ CapSi

capital^nd'foreign exchange

credit and fbrelg* exchange (U).

s

prevalence p£ default.

The default question

43. High delinquency rates plague Africa. No comprehensive survey has

appears that the arrears ratio ^Sb

, African developing counjw.

is being driven up by the ' for example, the arrears

33.5 per cent at the end of

Toans'conducted by the

$&J^

Wly in the bulk of the

so^her^ Afkca, tl«e ar^rs ratio

of the early 1980s, ? In Zimbabwe, commercial fanners .reached

Hudy of arrears on Agricultural

in Ethiopia reveals

In 19S0 to 70., per cent in

«■-•t as araS?JEEHO

y undertaken on loan EIwLffathe" ^ *" debt (88< P" 294) •

in Kwara State', Nigeria, reveals that a l£ mUltl-PWe Co-operative Union are in good landing with "-operatives ttl^ P"port^n ■<" P« cent) that share tenants comprise a larse prooortinn Uandowners; °" the other hand, borrowers (7, pp.267-73). pr°pOrtlon (53 Per cent) of delinquent

drf«lt ^—

^{hanks are}

practice of herding other people's Even if sections of the rural

have access to the. hT

! c°"f"sion anses from the

* the CUStOm known as «Kusioa»

considered to be grants rather Government grants and subside,

villages, loans arfoften thg

farmers readily honour their in this it

ily honour t

^

in this instance default ^ld result

x-the rural community in which they 1 328 borrowers were asked their reasons

y could

Tanzania, because large

t0,se«leiDent «cheraes and Ujaraaa

J^l' 'I ?' P> ^' In c°««", Tl^ tP T" Un^S' beCa"se los^f

( ? 263)

l-er first in orLr to

Faso,

>l»

get the necessary farm inputs «?i P™ cent) (lir TLt ^ inabi1

the arrears of the Agricultural **.* t j \. • , )- In Etl>iopia, many of

fundamental operatinfand fin^ncia" nr^i. aVfel°Pment Bank «"«t up without equity capital anHre entirelv d^h, £"' f!n??/ Which were s

Zambia and Botswana weak loan u erv ™\! ' r (34)* In ZaIre'

arrears ratio (108, 109- 106) PerV1S1On ^ development banks raises the

E/ECA/PSD.4/7 Page 18

warn. Hore effective indicator of internal financial performance .{25. PP, 41-2)

il mmm:

SwiK2isv shortfall is raade "P by drawing on the security fund

„: in sOme countries f^^^^^^^^

° ^ Srds'the recovery of loans and institutions

Sorrowers Mostly the s^all-scale

ture. Table IV shows, in millions of locJf^ actmtles ot«« than agricul-

co-ercUl banks' money available for lendinfin^ TSV*' tOtal *«»

-^countries agriCul^re

*^ ^i"canS^

some regressions (using data f™

and long-term credit ft current

was however found that siifi

lnvest"»nt in agricul

could be additional explanatory factors? ?

aPP~Priate season riculture Credit on Volump of

Investment in Kenya

Year

Kepublic

INVfc -

a = b = R2=

a + b CR -17.43

.551 .83

Capital Formation in Agriculture at

current prices

(monetary economy)

New Medium and Long-term Agricultural Loans

£_! Where INVfc denotes investment in tin>e t

UKi-_i_t-l ls tne new medium a-nA i«.«^—*.

is ^he new medium and long-term

agricultural loan -..■■■

a+b are the parameters.

E/ECA/PSD.4/7 Page 20

Table IVs Share of Agriculture Credit in Total Volume of Resources at Corcnercial Banks in- 1984

(in millions of local currency)

Country

(A) (B) (C)

Total - Borrowings Total Deposits— frod

Central Bank

Resources

A + B :"

Credit Extended

1 tp '-. j, . "

Agriculture

D as Percent

' .' of C *

Botswana Pula Ethiopia

Birr Ghana

Cedi Uganda 2/

Shs.

Swazilajia Emalangeni Lesotho .

Maloti Kenya

Shillings Zimbabwe

^ Kwacha Malawi

Kwacha Tanzania 3/

Shillings Burkina Faso

CFA

Ivory Coast CFA

Mali CFA Niger CFA Senegal

CFA Togo

CFA

321

2 266

14 4C9

34 502

223

239

21 712

1 678

1 237

322

18 177

877

6 329

697

860 2 239

1 222

165

413

96

4 493

69

209

1 560

67

321

2 266

14 4G9

34 502

11 ■ 223 239

21 877

1 678

1 237

322

18 590

973

10 822

766

1 069 3 799

1 289

16

41 1 198

1 548

19

0.4

2 729

107 65

141

447

30 267

69

32

74

12

5.0

1.6 ,

' 3.3

4.5 .8.5 -0.2

12.5 6.4

5.3 43.8 2.4

3.1

2.5

9.0

3.0

1.9

0.9 Source: International Monetary Fund, International Financial Statistics,,

Vol. XXXIX, No. 1 (Jan. 1936).

1/ Includes Government deposits. . ;

1/ Data for 1983.

3/ Data for 1982.

and 5 per cent However

established that only asricultural purposes, C33, pp. a-^w. Thus

endeavoured to 3 It?ell

d

betWeen 2 *

*» "75. it was

£a"en <=<* ™re used for

Table Purpose for vhirh loan is

a sample survey given by 134 farmers

Percentage of

Total

Children's education

Farming Retail trade Helping relatives Family maintenance Festivals

Others

Source: Savings and Deve^pcent, No. 3

VII p. 288, (Milan, 1983).

r^e^rouoh^de otf2? \ bop. of for borrowing ^ei loJ^TlZnTo '"T SC3le 3r6 -*"* the

marriages and festivals" (-n\ ml ■ , 1 aeet exPenses for funerals

beyond inputs for their f™L\ bu°TSLS1!^>T ^"-Ptioa.:^ *

aub.idx.«I directly or obliquely th'ourh delaul^ a?ricult^ (whether

loss-making lendin8 agencies) is „„ " * dsfault. guarantees and support to

Undirected credit may^ven work against""fr"«lve way of meeting them.

a»U loans earmarked for the provision of vZTT* °£ th U bank may end up strengthening hTt d?f L

Such outside credit, fspeciafly if subsided

who is often a local money lender, tod outsit /■ S the bi» farmer,

beyond covering production cost" fr^f the Lnev^, *? 10 "" Cent» above an

to increase consumption lending at - 0 ert ^nder's cash and enables him go to the small farmer, it is much more w"hS ^ lf °Utside credit does who then uses it to lend out again to v™l Fepay the m°neylender -

'interest forever and capital never' Irh P ff P6°Ple wh° exPect '" Pay of institutional credit, used for uliJnL Small-scaleS °"tside injection traditional money-lenders i p „« ' ° pLTS^ reinforcing the theory -supervised-, to W^^S^^a

ng them.

°£ the SmaU faraier- Cre<Ut by a rural r"™ °f C~er

tOWardS the ,

*? 10 "" Cent» above and

_d

&-e:o1e^lSt^

does from agricultural operations U IS million its operti h

seems also co^non. For

p*?."? invest^ts than it Banh s ^"ment h il

s from agricultural operations Sftileth! p?.

IS million its operations show'a deficit ofBanh s ,^

period (67). In Ghana, in an effort tl «! me ';.123'000 °ver a 5 year

rate of 13 per cent was set £ with^vf agriculture» a lower lending

Per cent return, banks invested in ^^T ££ ^^^i

has yieldedit

'000 °ver a 5 year

ur l

E/ECA/PSD.4/7 Page 22

which carriec Sreater risl, and lower returns. In 19C1 the total investment

nf n,rAl banks (beinp mainly in Government securities) was nearly nair cne

llaTltJs and dances approve, (12). The Swasi Saving and Dave ooment

Bank en«a«s ir foreign exchange transaction to cover operating losses. In S aitudy of the composition of the clientele of the National Development

Bank in Botswana revealed that in none of the 35 cases xn which information

a£ut oc^atlon w^ ?;iven, was the client said to be a full time farmer. The

main types of occupations were;

Type of Occupations No. of Clients

Police Prison ^

Debswana/it&fC/lXX 7

Oriver/Salesnan/Accountant '

Teacher a

Ministry of Agriculture *

Health Care 2 ;

Cook/Hawker 2

Bank Employee *

Church Leader 1

Department of Taxes *■ ^^

Source: National Development Bank, Review of Regional

! Office Loan Appraisal (1985).

the above, it can be observed that investment in agriculture is not

distribution and stora8e, input supply and extension (research is not only unsuccessful but could also be counter-productive. Consequently, for the rccesHf a credit progtan.e .ore than money is needed. ««il »o»«~t.

realize this point and act accordingly, money will continue to be lent to

farmers without a corresponding increase in production.

Producer prices and marketing mechanisms

57 For all the evidence that realistic farm-gate prices encourage farmers to'increase production, policy-makers in nany African countries are still isnoring the point. Cereal producer prices have been showing a rising trend in the. last feW years, but have not kept pace with cereal import P"«s In

^Magascar, for example, the producer price of a kiloRrm™ of rl" "* "^

was about 55 francs, far below the import-parity of 90.95 francs. In Botswana,

the official price paid to producers is so low that most producers prefer to keep their Crain (sorchum) or,to sell it to private traders (61 . "^» a two-year study in 1980-81 has shown that it costs farmers 83 Italian francs to produce a kilo of rice but the Government paid farmers only 60 Malian francs

ner V-ilo (63, p. 1G0).' "Koes it seem irrational for the rice farmers to

smuglie rice'across the border into Senegal, Niger ,nd Burkina Faso where they

can secure 108 to 128 ilalian francs per kilo?' (4S, p. 160>.

to stabiliZe prices or to transfer

Their high operating costs havT

drafts. The Agricultural a filing Corporation KS

credit extended by the Commercial

facilities. The lHI

i left to assist

' T""* h"*" been unable

S SUrpluS to deficit regions.

pefpetually dependent on bank over-

t~» ^ B?»P" •»* the National t/* Pff * S1§nlfi"«t share of the

" 01* h

assist fa^rTo^^^ ^(^p ^ j fT' ^ little

Natxonal Karketing Board and the ProvincialV" ■ " ^hia' both the

as uncreditworthv in the eves of ™™ Co-operative Unions are regarded

Board fails to pay thfun^n ,°fndX "iT" ^--""*

strategic grain reser^Tf

further the prices thev can °Perate and

pr°duc"

extent to which 1

but not all in^anC e"

duction or t

™rld

60. It canal.,1

representative i6 "f" _d°mestic

^countries.

a country ^{«? »eing}

oldity

stron,

E/ECA/PSD.4/7 Page 24

Table VI: Producer prices of key African crops in relation to

world average prices

Country

Currency overvaluation

average

1978-80

Producer Price as Ratio of a Representative World or Border Price at the Official

Exchange Rate Average .19.73-60

1970 - 1.00 Maize Rice ^Ground_nuts ^{Coffee Cocoa Seed}_Cotton

Ghana 3.96

Zaire " 2.34

Nigeria 2.43

Ivory Coast 1.37

Niger 1.32

Cameroon 1.75

Senegal ! 1.68

Somalia 1.67

Central Afr. Rep. 1.6&;

Tanzania 1.42

Kenya 1.42

Upper Volta 1.40

1-Iadagascar 1.40

Zambia 1.24

Malawi 1.15

Zimbabwe 1.11

Sierra Leone \ 1.05

4.67 2.94 1.67 0.78

1.67 1.10 0.81 1.07 0.74 0.72 1.23 0.76 0.98 0.43 0.61 0.47

6.32

1.34 1.1s 0.S7 1.87 0.7G

1.27 0.70 0.77

0.70

0.47

O.B0

6..09 2.22 1.70 0.33 0.65 1.40 0.59 0.57 0.41 1.40 0.59 0.41 0.66 1.40 0.60 1.01 0.59

0.45 C.06 0.69 0.44

0.46

0.23 0.47 1.01

0.31

0.27 0.'33 0.59

0.34 0.34 0.38 0.43

0.43

0.32

0.07

0.66

C.73 1.23 0.35 0.53 0.80 0.35

C.35 0.50 0.63 0.38 0.58 0.83 0.38 0.75

Sources FAO, Agricultural Price Policies in Africa (ARC/34/4) (Hay 1984).

Distribution and storage

62. The evidence available seems to indicate that the distributional and marketing aspects of food crops have been somewhat neglected relative to the attention given to irrigation, farm managements breeding high-yielding varieties, and protecting plants and livestock from, diseases. Most developing African

countries are making great efforts to establish marketing infrastructure-roads, transport, storage arid marketing institutions. In spite of these efforts9 however, fans-level storage would seem to involve losses of from 10 to 30 per cent a year. Not all grain is held for the full year, but farm-level losses may well still average 15 to 20 per cent (66S p. 116). In Senegal, growers who are not close to the road network are compelled to leave their surplus sorghum to rot; maize is left to rot in Tanzania because of a lorry shortage

(43, p. 21).

63. Much has been written on giving incentive prices and providing credit and i inputs, but the issue of storage has never been emphasized to the same degree.

For instance, if post-harvest losses could have been reduced by 5 per cent,

tection against sun and r n ? Slm?le sbed is *Wired for pro-

to wasting ir^^^fr "G er~ted

training, these building are difficult to If *?'*" services ^ staff

A review of 70 nnnino "eoxincuu to modify later as needs evolve

Afric/anfsubs X"; fa^^rV^1^ plants "t-blLirf in

thorough consideration of the mark!11 " P18ks °f disaPP°i"tn.ent if a more is committed" (1, pp. 4-5) nt " nOt unde««kP.n before investment

Marfcetin?

8 ' Se"eral and Benin

sri^forsri

experience of Zimbabwe, where 8rain from vAich valuable lessons can be

begun to promote networks of

⁽⁵⁷⁾

Input supply

meet the ^put recuiren.ents the

at the right place and in

^

'""' nOt been able to

the rlght

g advance of final sal,. m*

for tendering, contract"e^tiation

distribution. The operations of ?

by the familiar problem ofT^L _{m a"}

purchases

haS tO be

port clearance and

i been dogged

;v

Nation S?%«SrSr

and carry-over stocks amount UN ! S

respectively. The undesirable consequences nf

hard: to,di8cem. In the case o L ' ° « waste, of foreign exchange which ttey l ZltT'

undertakings durinE the year they

3VeraSe f«tiliz°r sales '

^ 22*8 thousand to™^'

carry-over stocks are not reP«sent a

inputs^^ti^^h

courages unproductive consul

^of

several landlocked countries inlrrirf?7« severely limited fertilizer

transport and handling accountelfor over IS <75)> In 1IaUlrf' for «■»!•.

fertili2ers delivered in 1982/63 (52) PPr Cent °£ the total c°« of

E/ECA/PSD.4/7 Page 26

tnfpresent system of input distribution in many developing countries is one

source of waste that must be attended to.

Extension

•71 Many of the problems cited above can partly be mitigated if there is an

efficientVarketinl extension service The »«ld-l«vel n«*.tui| «t«-»»

worker will (a) advise farmers on product planning, 0 ) assist farmers in

lecurinl a market- (c) advise them on improved marketing technologies and Practices! such as improved grading, packing, storing, hand ing transport, ;

(d) promote farmers1 group organizations for marketing; and (e "range...

marketing credit for the farmers (65). To have a far-reaching impact on _

:S"Uur^developmeht, input supply, marketing,credit and P»« £"£££;

have to be integrated with extension services. Yet in nany developing African

countries! efiorts to integrate these supporting services have been -and

unco-ordinated. Extension workers are thinly spread, ill-equipped and HI ^ trained to spread technological innovations among farmers. They spend * large

part of their time on accessible villa.es, but they also sufer from inadequate operating funds. Trucks are often immobilized because of a lack of fuel or

soa" Parts In such cases, extension agents cannot even use bicycles because

extension services. And in.>pite of an increasing awareness of theirc^

tion to the agricultural development effort, women are not being sufficien

motivated to serve as agents of change*

72 Extension activities in Africa are primarily oriented towards promoting the production of export crops. In Zimbabwe, for example, the estate and

plantation subsectors providing export crops have easy access to extension. _

services. In contrast, the traditional crops grown by subsistence farmers are largely ignored by the research establishments (54, p. 6.8). In Gambia,

insufficient attention is given to crops grown by subsistence^armers sue as

millet, cassava and sorghum although they account for about 40 per cent of the

total cropped area. Partly owing to poor technoloSical guidance and weak extension services, Zambia used 74 000 tons of nitrogenous and nhosphatic fertilizers in 1981, slightly below the 79 000 tons used by Kenya m the same year, but its grain production was only 30 per cent of Kenya s (10, p. 15;.

Also disquieting is the disparity, in the number of agents between countries.

Table VII reveals the ratio of agricultural extension workers to agricultural

famUy units! These ratios range from 1,3934 in Mozambique to 1:82 in Mauritius.

73 Given the low density of extension agents among countries, it is very unlikely that they can adequately cover both credit activities and agronomic advice. It is therefore of paramount importance to ensure that extension

staff are not overburdened by credit handling. One means of helping to do this is by phasing out individual credit and promoting group credit on a permanent basis. According to one study, credit groups have the following impact on extension and credit (C7).

Country

Ratio of the number of agriculture extension workers to the nuraber of agricultural family

units.

Seychelles

Dj ibouti Cape Verde Comoros Mauritius Liberia

Equatorial Guinea Mauritania

Swaziland The Gambia Lesotho Congo Rwanda Somalia Ghana Burundi Benin Togo Botswana Guinea

Sierra Leone Libya : Kenya

Central African Republic

Mali '" - - Malawi

Zimbabwe Madagascar Burkina Paso Egypt

Cote d'lvoire

I'iQZ am bique

Tunisia ; Niger Chad Uganda Tanzania Zambia Senegal Zaire Cameroon Algeria Morocco Sudan Ethiopia Nigeria

"i ^luuuon du Personnel Agrlcole"

Pour la Conference regionale de

16-25 juillet 19C4S p. 13.

571 769 507 927 32 540 600 043

1 3

1 2

133 195 947 214 2 908 335 233 2 706 441 720 236 183 424 45 725 550 476 737 606 634 911 83 007 904 200 372 020 2 217 1 008 833 318

2 129

2 298 507 332

Source:

3SS 713 66G

Number of hectares of arable land per extension agent

71 26 521 1 364 161 326 5 200 842 321 394 1 028 1 475 2 369 478 232 4 353 2 705 3 234 ■-■■< ■'■■,- 2 725 '

367 1 942 359 532 2 576 2 300 1 438 1 302 1 113 2 071 59 2 721 8 559 1 263 5 649 10 950 3-795 1 290 4 857 5 477 -.

3 474! .,

10 172 1 715 1 386' 4 475 4 300 2 728

f!o

^pourpouren Atrique, document prepare

r 1 Afrique, Harare, Zimbabwe,

E/ECA/PSD.4/7 Page 28

-" Since extension workers may delegate part of their administrative duties to the group, they save time previously required for individual Visits to fill in credit application forms, distribute letters of

authorizations etc.

- The existence of a group gives extension worker the chance to use group meetings for extension advice, demonstration of techniques and

the dissemination of messages;

- A common problem between extension and credit may be seen in the concentration of extension advice to credit farmers in comparison to farmers buying their requirements for cash. Groups may help to shorten the extension time required for credit farmers and thus save time for advice to other farm categories;

- There is a growing tendency among extension staff to convert groups

into multi-purpose institutions which could be used, on the local level, to organize regular discussion, demonstrations, exchange of ox-drawn implements and mutual assistance in problem situations.

74. Apart from better and cheaper access to credit9 credit groups can considerably reduce the administrative costs of credit and extension staff_

time spent in loan follow-up and recovery. Unlike co-operatives, which_typi cally have several hundred members, credit groups have limited membership and rely on unpaid management. This keeps lending costs low (09, pp. 331-37).

Malawi now has more group borrowers than individual borrowers, operating in

flexible, unbureaucratic groups of from 10 to 30 members. The Government "assists but does not interfere." The amounts of credit channelled through these groups have grown steadily, and the repayment record in recent years has been outstanding.

Credit is also administered through rather larger "farmers1 clubs ' of close to 100 members at a tiae, but only twenty or so members of a club will take out loans in any given season. The services of the clubs have gradually expanded to include crouP input supplies and some communal projects. Club members not taking up credit still continue to participate in group extension.

(d) The informal sector

75. Encouraging as the experience of some African countries has been in improving extension facilities and access by the small farmer to agricultural subsidies and credit, informal private lending (by moneylenders, relatives, etc.,) is a far more important source of funds for farmers. One study published in 1977 has shown that out of 302 fanners in West Kwara States of Nigeria about 82 per cent of the available credit came froia non-institutional sources: 58 per cent from friends and relatives and 24 per cent from money-lenders (73). In Ethiopia, a non-institutional form of group controlled, pooled capital known as Ekub brings savings and credit facilities down to the very poorest segments of the population. The 1968-73 Development Plan estimated tt>e annual savings volume involved to be equivalent to 3 to 10 per cent of GOP (23, p. 255). In Babanki village in Cameroon, in 1971, 740 djanggi members together accounted for a turnover of CFA 11 million, or $US90 per member (24S p. 183).

76. The fact is that the great bulk of the African population makes little use of formal savings and lending institutions. Banking services are largely urban- based, and even in urban areas, the number of people using modern banking services

unimportant also is the fact that fo™?- ?T* lnstl£utions. Not

transferred from abroad with imStT2 »"it«i«»- are structures average African saver. The inability of for!, *h\?eed? and Preferences of the as and when needed, without elaborate paJr3 lnStltu^ons to Oliver credit requirements, would probably be sufficient To t^ COmplicated collateral

formal sector (74, p. 702)! And in addition \h m-ny-°f "^ aWay frO!a the

lingering distrust of Sovernemnt and W&*?-'- "* " ln SOrae """tries a

which dissuades people°from e^osxW Seir assets 3SSOciated Vith government,

might invite interference, control taxation f' I*-\^ Which' they fear»

result of this is that the rural secto^ of Af^r8' ?onfiscati°"- ^e

undermonetized, depriving countries th f economies remains severely

entities of develo^en^ i^11tL°KytOt

^ar^hele^^ ™^

potentlal and where the increase i^both real aL f?" *1?-? t0 anythi«e Hke its

development need (40, p. 159); Ieal and f^n=ial capital is an acute If savings are to be enhanced eTl, ™" attendant structural reforms.

Not even a well thought-out ^Jl^Tl-^"^'■libouU' of necessity, rise?

income stagI1ates. A^ra^in "foS ^t1^,1".^?1" "*" succeed ^ Personal

infrastructure and selective tectoolog a contributf? ma*etiaZ ™* P^ical

incomes (70, p. 18). By contribute to raise agricultural

■»■

for so much ecological dL^ptifn f J"*' herd Which is now g

continuing potency to the fact tW 1 L ^ continent» ™ay owe some of its

reliable alternative method of ga^erinfttffid"«1h5« n-er been offered a good effect. The cachet of a "™ crfdit c'lrT '-^ °f disPlayin8 it to threatening than a hundred cows - will nfver hf " env^onn*«ally much less

— — no kind Of fomal> lL^^r^^'^^ZL*

80. One

economies L thTvo^ T^Z^?™^?*™ °* the African

provxdes this information for 20 African f ^.^^g system. Table VIII

that, since commercial bank branchtTin" C0Untries- " can generally be stated

not yet sufficiently diffused in nra?*1*1**™^1 of Afr"an countries are'

represents the savings of urban households ' " MJOr P3" °f these "sources