Major constraints that constitute the limitations of access to agricultural credit faced by small scale commercial farmers in Gondola District in Mozambique mainly transaction costs and risks in the lending process
Assessing the access to credit by small scale commercial famers in gondola district, mozambique
1. i
CATHOLIC UNIVERSITY OF MOZAMBIQUE (UCM)
FACULTY OF ECONOMICS AND MANAGEMENT
GRADUATE SCHOOL OF BUSINESS
MASTER OF BUSINESS ADMINISTRATION
ASSESSING THE ACCESS TO CREDIT BY SMALL SCALE
COMMERCIAL FARMERS IN GONDOLA DISTRICT,
MOZAMBIQUE (2008-2010)
MBA Thesis by
Benjamim Luís Vilanculo
Student Reg. No: MBA/09/C09
Supervisor: Dr. João Luís Ferrão
Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of
Master of Business Administration (MBA)
Chimoio
March 2011
2. ii
DECLARATION OF AUTHENTICITY
This study, entitled “Assessing the Access to Credit by Small Scale Commercial Farmers in
Gondola District, Mozambique – 2008/2010” was done by the author at Catholic University of
Mozambique (UCM) in Chimoio in 2011. The study is the authorship of the author and it has
never been presented in any other institution for obtaining any academic degree, and the
references are duly cited in the study. No part of this work can be reproduced without the
permission of the author or by Catholic University of Mozambique (UCM).
3. iii
DEDICATION
I would like to dedicate my MBA thesis
To my wife Ancha Sunte Amaral Mel and my sons Nelson, Ivan and Malaica, in gratitude for
their support and encouragement.
To my parents, Luis Manguze Vilanculos and Ana Wetela, who taught me ABC of life.
4. iv
ACKNOWLEDGEMENTS
I would like to thank my supervisor, Dr. João Luís Ferrão for his unreserved help, advice,
directing, and insight guidance, critical review of my thesis, valuable guidance and
suggestions. Without his professional help it would have been difficult to successfully
complete this thesis.
My thesis was written based on primary data collected in Chimoio and in Gondola District
involving participation of two groups of respondents: financial institutions and small scale
commercial farmers. I am thankful to all managers of these financial institutions for creating a
complete atmosphere in terms of facilities and assigning their assistance during the whole
process of data collection. To all farm households, who participated in the survey, I express
my sincere gratitude for their kindly collaboration.
I am greatly indebted to all my lecturers and administrative staff of Catholic University of
Mozambique (UCM) in Chimoio, who made arrangements for various lecturing and
administrative requirements.
I am in particular grateful to Eng. Nascimento Nhantumbo and Dr. Friedeborg Bammel for
assisting me in defining the title and objectives which decisively helped me in following the
topic and for their critical review and comments on my thesis.
I would like to thank my classmates and friends, João Maunze, Paulo Dias Sandramo, João
Baptista Randinho and Eduardo Sande for our frequent discussions in all steps of our MBA
5. v
studies at Catholic University of Mozambique (UCM) in Chimoio which has significantly
contributed in improving my critical way of thinking.
I am grateful to my wife Ancha Sunte Amaral Mel, who always provided me with love and
moral support. I am also grateful to the little girl Malaica for serving me coffee, and to my
boys Nelson and Ivan for assisting me with the computer issues during my writing up.
Finally, I would like to appreciate the moral support and encouragement received from my
relatives, in particular my brother Pascoal Vilanculos and my cousins Dinis Mabocuane
Vilanculos, and Lourenço Daissuane Vilanculos.
Thank you so much and may God bless all of you.
6. vi
ABSTRACT
From November 2010 to March 2011, through quantitative and qualitative research methods, a
survey research was carried out in Gondola District in Manica Province, in order to find out
the major constraints that constitute the limitations of access to agricultural credit faced by
small scale commercial farmers. Primary and secondary data were collected using personal
interviews and non-probability sampling, specifically purposive sampling for 25 small scale
commercial farmers, 11 financial institutions and 4 input suppliers. The research was aimed at
finding the main credit packages available in Manica Province, the costs and risks faced by
lenders and farmers and the main requirements and documents demanded by lending
institutions for small scale commercial farmers to get loans.
From the research results, the study concludes that there is a great number of private
commercial moneylenders offering a wide range of short, medium and long term loans for
agricultural activities namely crop production, livestock, forestry, agro-industry, agricultural
marketing and services; It was also concluded that, beside the perception that it is too costly
and risky to lend or to borrow funds for farming activities, the requirements demanded
constitute the main constraints in lending process, in that small scale farmers should have to
present collateral in fixed assets, pay high interest rate, co-participation, to submit or to
present more than ten (10) documents, following at least eight (8) steps from the farmer‟s
contact with the bank officials to the disbursement of loan. Concerning benefit of agricultural
credit, the results of the study have indicated a wide range of ways in which farmers and
society can benefit, namely farmer‟s acquisition of agricultural infrastructure, equipment and
inputs, as well as the improvement of agricultural productivity, creation of employment and
status of households and welfare of rural people.
Finally, the study concluded that, in the existing financial market set-ups, there are constraints
of access to credit by small scale farmers in the District of Gondola and, for this purpose, the
study suggests measures to reduce transaction costs and risks in the lending process, and how
to strengthen the farmers‟ willingness to request loans and capacity to repay them.
Key Words: Small scale farmers, financial institutions and agricultural credit.
7. vii
LIST OF CONTENTS
DECLARATION OF AUTHENTICITY....................................................................................ii
DEDICATION...........................................................................................................................iii
ACKNOWLEDGEMENTS.......................................................................................................iv
ABSTRACT...............................................................................................................................vi
LIST OF FIGURES .................................................................................................................... x
LIST OF TABLES.....................................................................................................................xi
LIST OF APPENDICES...........................................................................................................xii
LIST OF ACRONYMS AND ABBREVIATIONS.................................................................xiv
CHAPTER 1: INTRODUCTION .............................................................................................. 1
1.1. Rural financial sector overview in Manica Province ....................................................... 1
1.2. Justification of the Study................................................................................................. 4
1.3. Problem Statement .......................................................................................................... 9
1.4. Research Questions .......................................................................................................... 9
1.5. Objectives of the Study .................................................................................................. 10
1.6. Research Hypotheses.................................................................................................... 11
1.7. The Scope of the Study ................................................................................................. 12
1.8. Outline of the Chapters................................................................................................... 12
CHAPTER 2: LITERATURE REVIEW ............................................................................... 14
2.0. Introduction .................................................................................................................... 14
2.1. Theoretical Literature Review...................................................................................... 14
2.1.1. Credit....................................................................................................................... 14
2.1.2. Saving...................................................................................................................... 15
2.1.3. Interest rate.............................................................................................................. 15
2.1.4. Farmer‟s collateral .................................................................................................. 16
2.1.5. Small scale commercial farmers ............................................................................. 16
2.2. Empirical Literature Review ........................................................................................ 17
2.2.1. Reasons for agricultural credit ................................................................................ 17
2.2.2. Types of agricultural credit ..................................................................................... 20
2.2.3. Sources of credit for agriculture.............................................................................. 23
2.2.4. Risks and costs of lending to agriculture ................................................................ 25
2.2.5. Requirements of conventional moneylenders to get credit..................................... 30
8. viii
2.2.6. Procedural formalities to get credit with conventional moneylenders.................... 34
2.2.7. Choosing a credit financial institution .................................................................... 36
2.2.8. Credit management and financial market policies.................................................. 37
2.3. Focused Literature Review and Analytical methods...................................................... 41
CHAPTER 3: RESEARCH METHODOLOGY ..................................................................... 44
3.0. Introduction .................................................................................................................... 44
3.1. Description of the field research site.............................................................................. 44
3.2. Research approach.......................................................................................................... 45
3.3. Sampling......................................................................................................................... 45
3.3.1. Sample frame and sample size............................................................................... 45
3.3.2. Sampling technique................................................................................................. 46
3.4. Data collection tools....................................................................................................... 47
3.4. 2. Personal observation .............................................................................................. 47
3.4. 3. In-depth and personal interviews ........................................................................... 48
3.4. 4. Questionnaire ......................................................................................................... 48
3.5. Sources of data ............................................................................................................... 49
3.5.1. Primary sources and type of data ............................................................................ 49
3.5.2. Secondary sources and types of data....................................................................... 50
3.6. Data processing and analytical framework..................................................................... 51
3.7. Criticism ......................................................................................................................... 53
CHAPTER 4: INTERPRETATION OF THE RESULTS ........................................................ 54
4.0. Introduction .................................................................................................................... 54
4.1. Degree of farming scale among commercial farms........................................................ 54
4.2. Credit institutions available for small scale commercial farmers in Manica Province .. 60
4.3. Credit packages available for small scale farmers in Manica province ......................... 61
4.4. The main requirements demanded by lending institutions to get loans ......................... 69
4.4.1. Requirements demanded by lenders for small scale farmers to get loan................ 69
4.4.2. Documents demanded by lending institutions ........................................................ 70
4.4.3. Steps followed in lending process........................................................................... 72
4.5. Costs faced by lending institutions and commercial farmers in the lending process..... 74
4.5.1. The costs incurred by lenders in lending process ................................................... 74
4.5.2. The costs incurred by mall scale commercial farmers in lending process.............. 75
4.6. Sources of risks faced by both lenders and farmers in the lending process ................... 76
4.7. The benefits of rural financial services for small scale commercial farmers................. 78
10. x
LIST OF FIGURES
Figure 1: Existing farm business categories in Gondola District (2010).................................. 55
Figure 2:Gender of small scale commercial farmers in Gondola District (2010)..................... 55
Figure 3: Age of small scale commercial farmers in Gondola District (2010)......................... 56
Figure 4: Small scale farm‟s ownership in Gondola District (2010) ........................................ 57
Figure 5: Small scale farm production activities in Gondola District (208-2010).................... 57
Figure 6: Small scale farm‟s annual turnover in Gondola District (2008-2010) ...................... 58
Figure 7: Output sold from the total production by small scale commercial farms in Gondola
District (2008-2010).................................................................................................................. 59
Figure 8: Agricultural technology usage by small scale farms in Gondola District (2010) ..... 60
Figure 9: Types of credit offered in Manica Province (2010) .................................................. 63
Figure 10: Financial institutions supporting to agriculture in Manica Province (2010)........... 63
Figure 11: Types of credit preferred by small scale famers in Gondola District (2010) .......... 65
Figure 12: Loan‟s request by small scale farmers in Gondola District (2010)......................... 66
Figure 13: Lenders and percentage of credit offered in Gondola District (2008-10) ............... 67
Figure 14: Rate of failure to repay loans................................................................................... 68
Figure 15: Time duration for bank loan disbursement in Chimoio (2010)............................... 74
11. xi
LIST OF TABLES
Table 1: Sample frame and sample size of small scale commercial farms in Gondola District46
Table 2: Summary of the analytical framework on “The access to credit by small scale
commercial farmers in Manica”................................................................................................ 52
Table 3: Input and financial institutions available in Chimoio (2010) ..................................... 61
Table 4: Types of credit offered in Manica Province (2010).................................................... 62
Table 5: Types of credit preferred by small scale famers in Gondola District (2010).............. 64
Table 6: Credit services awareness ........................................................................................... 68
12. xii
LIST OF APPENDICES
Appendix 1: Classification of farm business categories in Mozambique --------------------- 95
Appendix 2: Smallholder farmers‟ credit needs in Mozambique ------------------------------ 96
Appendix 3: Demand for rural financial services in Mozambique ----------------------------- 97
Appendix 4: Features of agricultural lending ----------------------------------------------------- 98
Appendix 5: Constraints to Upgrading and financial services solutions for Manica--------- 99
Appendix 6: Small scale farming activities in Gondola District -------------------------------100
Appendix 6A: Area (ha) and Number of Farmers per Crop in Gondola District in 2000 ---100
Appendix 6B: Sample Frame of Small Scale Commercial Farmers in Gondola
District-Manica Province ----------------------------------------------------------- 101
Appendix 7A: Service providers of financial intermediation ----------------------------------- 102
Appendix 7B: Type of financial institutions and proportion of agricultural credit ---------- 103
Appendix 8: Types of credit available in Manica Province ----------------------------- 103
Appendix 8A: Credit available at Pro Credit Bank -----------------------------------------------103
Appendix 8B: Products and services available at SOCREMO Bank -------------------------- 104
Appendix 8C: Credit available at Banco de Oportunidade --------------------------------------105
Appendix 9: Documents and Requirements demanded by lending institutions in order
for the small scale commercial farmers to get loans in Manica Province- ---- 106
Appendix 9A: Documents and Requirements demanded by GAPI ---------------------------- 106
Appendix 9B: Documents and Requirements demanded by Pro Credit Bank --------------- 107
Appendix 9C: Documents and Requirements demanded by Barclays Bank ------------------108
Appendix 9D: Documents and Requirements demanded by BCI ------------------------------ 109
Appendix 9E: Documents and Requirements demanded by Banco Tchuma ----------------- 111
Appendix 10: Interest Rates and Preparation Rates demanded by GAPI --------------------- 112
Appendix 11: List of interviewees ------------------------------------------------------------------113
Appendix 11A: List of Small Scale Commercial Farmers -------------------------------------- 113
Appendix 11 B: List of Financial Institutions – Chimoio -------------------------------------- 114
Appendix 11C: List of Agricultural Input Suppliers – Chimoio --------------------------------114
Appendix 11D: List of Government supporting institutions – Chimoio and
Administrative Posts --------------------------------------------------------------- 115
14. xiv
LIST OF ACRONYMS AND ABBREVIATIONS
ABC African Bank Corporation
AGRIDEV CONSULT LDT Agricultural Development Consultant, Limited
ATM Automatic Teller Machines
BCI Banco Comercial Internacional
BIM Banco Internacionl de Moçambique
BI Bilhete de Identidade
BR Boletim da República
DUAT Direito de Uso e Aproveitamento da Terra
FAO Fund for Agriculture Organisation
FDD Fundo de Desenvolvimento do Districto
GAPI Sociedade de Investimentos, SA
GDP Gross Domestic Product
ID Identity Document
INE Instituto Nacional de Estatistica
IPEME Instituto para Promoção de Pequenas e Médias Empresas
IFAD International Funds for Agricultural Development
MT Metical
MAE Ministério de Administração Estatal
MINAG Ministério de Agricultura
MLT Mozambique Leaf Tobacco
NGO‟s Non Government Organisations
NUIT Número Único de Identificação Tributária
PANNAR Empresa de Sementes
SDAE Serviço Distrital de Actividades Económicas
SOCREMO Sociedade de Crédito de Moçambique
SEMOC Sementes de Moçambique
TV Television
15. 1
CHAPTER 1: INTRODUCTION
The development of Mozambique‟s economy depends mostly on the performance of
agricultural sector. But very little has been done to help this sector of the country‟s economy,
particularly with regards to the provision of agricultural credit for small scale commercial
farmers, who are the one of providers of the agricultural produce. Therefore, this chapter
provides an overview of the rural financial sector in Manica Province, including the problem
and justification of the study on the constraints of access to credit by small scale commercial
farmers as well as questions, hypotheses and objectives of the study are also outlined. The
chapter also presents the scope under which the study was carried out and the organisation of
the following chapters.
1.1. Rural financial sector overview in Manica Province
According to Kula and Farmer (2004) and Manganhele (2010), in Mozambique, the financial
sector is comprised by two types of financial institutions, namely regulated and non-regulated
financial institutions (Appendix 7A). Regulated financial institutions include formal banks
and non-bank financial institutions. Formal banks are deposit-taking institutions that accept
and manage deposits and make loans, such as, for example, commercial banks. Non-bank
financial institutions do not have full banking license but they carry out financing activities
and they do not accept deposits or handle accounts like traditional banks. This designation
comprises insurance companies, leasing companies and investment funds.
16. 2
Unregulated financial institutions include a wide range of micro-finance institutions which
includes self-help groups, credit unions or associations and others (Manganhele, 2010). The
finance systems of the country are supervised by the central bank, known as “Banco de
Moçambique”.
In Manica Province, the financial sector is highly concentrated in Chimoio, the capital of the
Province. In the province, the financial sector comprehends banking sector and non-bank
financial institutions. The banking sector or commercial banks comprise Millenium Bim,
Barclays Bank, Standard Bank, Banco Comercial Internacional de Moçambique, Banco Pro
Credit, Banco Terra, Banco Tchuma, Banco Socremo, ABC Bank, and Banco de
Oportunidade de Moçambique. The biggest banks are Millenium Bim, Barclays Bank,
Standard Bank and Banco Comercial Internacional de Moçambique. The Millenium Bim is the
largest bank of all banks.
The commercial banks are profit driven banks and most of them are controlled by foreign
parent banks that clearly might have a different agenda from that of improving access to credit
for small scale commercial farmers in Manica Province. The majority of these banks have
centralised credit departments in Maputo. This centralisation may have been increasing
lending costs and delays, because in Chimoio, the branches of these banks can only analyse
loans and give their opinions, but they cannot make decisions for certain amounts of loans.
Non-bank financial institutions include finance companies, like GAPI and micro-finance
institutions, such as Kwaedza Simukai and Cresce which offer small loans to individuals,
groups and associations. GAPI is the largest non-bank financial institutions that have been
17. 3
committed to expanding agribusiness lending since 1990‟s in Manica Province, particularly in
the District of Gondola.
In the Province of Manica there are also financing alternatives namely input financing,
supplier and buyer financing, family financing, and others (Kula and Farmer, 2004). Input
supplier and buyer financing have been providing access to capital for small scale commercial
farmers in horticulture, paprika, tobacco and oilseeds, particularly to trusted clients against
future post harvest repayment.
Some of financing alternatives are, for instance, Mozambique Leaf Tobacco (MLT),
PANNAR, SEMOC, DENGO COMERCIAL and others, have been promoting the production
and marketing of raw tobacco, maize, beans, ground nuts, etc. with small scale commercial
farmers, by means of supplying inputs and provision of technical advice. The contracting
companies are responsible for buying the produce output from the small scale farm borrowers.
Most often contracting companies have been appointed as providing inputs at high cost and
offering low prices for produce by practising unfair grade. As result, small scale commercial
farmers are not getting enough benefits from these contracting input suppliers, but in most
cases, in the rural area, a considerable number of small scale commercial farmers rely mainly
on contracting schemes to access credit for cash cropping activities (Manganhele, 2010).
Although financing alternatives are the one dominating the rural financial market, they seem
not to be able to address the credit needs for farming purposes, particularly construction of
infrastructure facilities, mechanised and irrigation equipment.
18. 4
As can be seen, there is quite great number of lending institutions for agriculture in Manica
Province, comprised by commercial banks and non-bank financial institutions as well as
financing alternatives.
1.2. Justification of the Study
It is estimated that more than 500 million poor active people in the world operate with small
business enterprises and they have no access to financial services, but they represent a vast
potential of commodity producers (IFAD, 2000; and Quinhentos, 2010). According to
Manganhele (2010), millions of smallholder farmers worldwide and many of the rural
entrepreneurs in developing countries world have little or no access to financial services. The
lack of access to a broader set of financial options seems to be one of potential constraints for
agricultural entrepreneurship. Therefore, these small business enterprises need to be supported
by finance services through a saving and credit systems.
Mozambique is a large rural country with 800,000 Km2, and population of 22 million of
inhabitants. The economy of Mozambique is strongly dependent on agricultural sector, which
employs more than eighty percent (80%) of the total population, mostly on small scale
farming level (MAE, 2005). In Mozambique the contribution of agricultural sector to the
Gross Domestic Product (GDP) is about 27.5%, and many Mozambicans gain their livelihood
or principal income through agricultural activities, but less than 18% of the country‟s
farmable land is cultivated, which is estimated in 36 millions of hectares (Pearce and Reinsch,
2004).
19. 5
This is one of the reasons why in recent years the country‟s trade balance has been recording
huge staple foodstuff deficits and Mozambique has been importing at high level. Since the
majority of the population depends mostly on agriculture and this is the backbone of the
economy of Mozambique, the agricultural sector needs to be supported by financial sector
services. This requires addressing the financial credit constraints faced by small scale
commercial farmers, which is the purpose of this study.
According to Manganhele (2010), in Mozambique, between the years 2000 and 2001, the
formal banks provided credit to only 0.27% of farmers, while government rural credit
institutions or programmes provided credit to about 5% of the total credit (Appendix 7B). In
2002, loans to agriculture, livestock, fishery and forestry comprised to only 19.5% of the total,
and in addition, all those loans were allocated to large scale commercial famers and
processors. Therefore, access to agricultural credit from formal banks is really a cumbersome
issue and small scale commercial farmers can not rely on commercial banks. They not only are
denied access to credit from these formal financial institutions, but also because their branches
in the rural areas are too scarce or non-existent. For example, of the total of 227 bank
branches in Mozambique, 103 are in Maputo while the remaining bank branches are operating
in the provincial capitals (Manganhele, 2010). This means that commercial banks remain
reluctant to extend their credit services to agricultural production purposes, and the access to
credit by small scale commercial farmers is still inadequate and poor. As a result, the absence
of commercial banks in the rural areas is significantly notable.
Although microfinance operations began appearing in the recent years, their main activities
remain concentrated in urban centres. In addition, despite the widespread demand from
20. 6
producers for financing agriculture, Mozambique‟s financial system remains poorly
developed, and bank credit is extremely weak or non-existent in many rural areas (Appendices
2, 3 and 5). Moreover, since formal banks are lacking in the rural areas, small scale
commercial farmers also do not have facilities through which they can mobilise their savings
to investment capital for inputs, for improved and appropriate irrigation equipment and for
cold storage facilities or borrowing capital for production needs. Nevertheless, little can be
done by small scale commercial farmers if investment in rural financial markets is limited.
A study conducted by AGRIDEV. CONSULT LDT. (2006) on credit facility in Manica
Province concluded that the commercial agriculture stakeholders have limited access to
finance services. Another study carried out by Manganhele (2010) on improving access to
credit by small scale commercial farmers in Mozambique has also come to the same
conclusion that there was limited success in achieving access to credit by small scale
commercial farmers; and that the majority of farmers face serious limitations in terms of
access to credit and this causes the small scale commercial farmers to depend more on rainfall
than irrigation and other technology. According to Mate (2010), one of the causes of the
vicious cycle of poverty in developing countries is a lack of access to financial services.
Hence, for agricultural development, there is a need for agricultural credit systems that support
small scale commercial farmers. Without rural credit, agricultural development would proceed
very slowly. If credit is not available or it is difficult to get, the rate of agricultural investment
in inputs would be low and consequently, farming activities would depend upon the farmer‟
savings (Stevens, 1988). So, there is a need to explain the reasons why small scale commercial
farmers‟ credit needs are not being adequately served by formal financial services in Manica
Province, particularly in Gondola District.
21. 7
The demand for loans is very considerable nowadays. The characteristics of this demand (type
of service, amounts, loan repayment schedules, types of guarantees available, etc.) are
extremely diverse and vary according to the agro-ecological zone; the degree of diversity and
intensity of production systems; the type of stakeholders (men, women, youths establishing
their own farms, agricultural entrepreneurs, farmer organizations, etc.); and the degree of
market integration (IFAD, 2002). All these factors call for the study of factors that make up
the constraints for agricultural finance services in the District of Gondola.
Agricultural credit for small scale commercial farmers is vital in an environment where many
farmers lack the resources to invest in inputs like land preparation, seeds, fertilizer, pesticides,
labour, etc. at the beginning of the season, or to pay for transportation of their harvest for sale
several months later. In Mozambique, the predominant source for this agricultural credit has
been agribusiness and trading companies (Pearce and Reinsch, 2004) such as Mozambique
Leaf Tobacco, PANNAR, SEMOC, and others. These sources of credit have been providing
farmers with cash or in kind credit for crop inputs, in which the farmers agree to sell their
crops to the company at pre-arranged price. Nevertheless, it has been reported that either small
scale commercial farmers or agribusiness credit institutions incur serious risks. For instance,
agribusiness credit institutions have been known to decline purchase of contracted crops,
leaving small scale commercial farmers with no buyers at the end of a growing season; and on
the other hand, small scale commercial farmers sometimes divert the harvested crop and sell it
to other buyers who offer good price. Therefore, it is necessary to explore what is behind of
these agricultural sources of credit for small scale commercial farmers.
22. 8
Production from agriculture normally comes at a few concentrated periods of harvest, while
consumption occurs almost steadily throughout the year (Mellor, 1980). In addition, unusual
events such as crop failure reduce the small scale commercial farmer´s income, and this has
been more frequent in recent years due to global climate changes. Furthermore, capital items
with long life span must be financed through credit. Another consideration is that small scale
commercial farmers need to innovate, modernize and improve their productivity constantly.
Moreover, according to IFAD (2002) among household‟s various economic activities,
agricultural activities are often less profitable and more risky than non-agricultural activities
(Appendix 4). Thus, among other motives, the provision for consumption and production
inputs requires a saving process and credit borrowed. Therefore, it is important to examine
more reasons why small scale farmers are not supported by formal finance services.
In order to run the farm business, farm managers of small scale commercial farms have to
raise the needed capital through savings that have been generated in the previous years and
borrowings. Own savings retained from past harvests of the previous seasons sometimes are
not enough for small scale commercial farmers to cope with their own consumption and to
acquire production inputs. For many small scale commercial farmers, credit is a sine-qua-non
condition in running the farm business (Reddy and Ram, 1996). Hence, there is need to
identify the main problems that undermine the access to credit for small scale farmers.
As can bee seen, financial institutions, policy makers, academics and researchers need to know
the factors that make up the constraints for agricultural finance services, in order to analyse
strengths and weaknesses and to reformulate financial lending strategies in Manica Province,
particularly in the District of Gondola.
23. 9
1.3. Problem Statement
Saving and credit schemes play an important role in agricultural development (Chimedza,
1994). One of the main reasons for low agricultural production has been the lack of
investment in inputs such as fertilizer, improved seed, pesticides and tractorization due to the
limitations of access to credit by farmers mainly small scale commercial farmers. In contrast,
small scale commercial farmers are inadequately served by formal credit schemes. Therefore,
it seems important to understand why small scale commercial farmers lack access to credit for
farming purposes, particularly from formal financial lending systems.
The financing of agricultural activities has specific characteristics and constraints or factors
that explain the difficulty which financial institutions have in meeting the demand for credit.
Therefore, there is a great need to find out the major factors that constitute the limitations to
credit faced by small scale commercial farmers in Manica Province, particularly in the District
of Gondola, that is:
What are the major agricultural credit constraints faced by small scale commercial
farmers and agricultural lending institutions in the District of Gondola?
1.4. Research Questions
This study provides information on the type of financial lending institutions and credit
packages available for farmers and the requirements demanded by the existing financial
market set-ups on access to credit. The information is obtained through answering the
following research questions:
24. 10
Major question:
Which of the existing financial market set-ups are affecting negatively the access to
credit particularly by small scale commercial farmers in the District of Gondola, in
Manica Province, from year 2008 to 2010?
Specific questions:
How is the degree of farming scale in the District of Gondola?
What type of credit institutions and credit packages are available for small scale
commercial farmers in the Province of Manica?
What are the requirements demanded by financial lending institutions for small scale
commercial farmers to get loans?
What are the costs and risks faced by both lending institutions and small scale
commercial farmers in the lending process?
What are the benefits of financial agricultural services to small scale commercial
farmers and rural society in general?
Which recommendations can be drawn from the existing financial market set-ups
regarding the access to agricultural credit in the Province of Manica by small scale
commercial farmers?
1.5. Objectives of the Study
General objective:
The main objective of the research is to investigate the major constraints of access to
credit by small scale commercial farmers in Manica Province, particularly in the
District of Gondola, from year 2008 to 2010.
25. 11
Specific objectives:
In order to achieve the above general objective, the following specific objectives were drawn:
To find out the degree of farming scale in the District of Gondola;
To identify the type of credit institutions and credit packages available for small scale
commercial farmers in the Province of Manica;
To find out the main requirements demanded by lending institutions in order for small
scale commercial farmers to get loans;
To identify the main costs and risks faced by both lending institutions and small scale
commercial farmers in the lending process;
To assess the benefits of financial agricultural services to small scale commercial
farmers and rural society in general;
To draw recommendations from the existing financial market set-ups regarding the
access to agricultural credit in Manica Province by small scale commercial farmers.
1.6. Research Hypotheses
The hypotheses to be tested in this study are the following:
Null Hypothesis (H0): In the existing financial market set-ups, there are constraints of
access to credit by small scale commercial farmers in Manica Province, particularly in
the District of Gondola.
Alternative Hypothesis (H1): In the existing financial market set-ups, there are no
constraints of access to credit by small scale commercial farmers in Manica Province,
particularly in the District of Gondola.
26. 12
1.7. The Scope of the Study
The study seeks to find out the major constraints that constitute the limitations to credit faced
by small scale commercial farmers in Manica Province, particularly in the District of Gondola
in the last three years (2008-2010). In addition, the research recommends strategies to ensure
not only access to credit for small scale commercial farmers but also the borrower-farmer‟s
willingness to repay loans.
The District of Gondola was chosen as the field research site for the reason that it is one of the
strongest agricultural districts in Manica Province; and the City of Chimoio is surrounded by
Gondola District and it is where many lending institutions are concentrated, including banks,
microfinance institutions, input suppliers, equipment dealers, supportive government agencies
and others.
It is expected that the findings can be used by financial lending institutions to analyze their
strengths and weaknesses and to reformulate financial lending strategies which in turn can
benefit the farming community, not only in Manica Province but also throughout the whole
country. Farmers in general, financial policy makers, academics and researchers can also
benefit from the research results.
1.8. Outline of the Chapters
The remaining Chapters of the study are structured as following in the next paragraphs.
Chapter two reviews the literature and it focuses mainly on the types, sources and risks of
credit for agriculture and also on financial market policies and the reasons why credit is
needed for agricultural development. It also reviews analytical methods that other researchers
27. 13
have used to conduct the research on credit for agriculture in Manica Province and other parts
of Mozambique.
Chapter three outlines the research site and it gives an overview of the research approach that
was used in primary and secondary data collection. It also covers the data analysis methods
that were used in the research as well as criticism of factors that might have caused inaccuracy
in the analysis and interpretation of the results.
Chapter four presents the main findings of the study and its interpretation, mainly on the
degree of farming scale, type of credit institutions and credit packages available for small
scale commercial farmers in Manica Province. The chapter presents also the main constraints
for access to credit, and the main costs and risks faced by both lending institutions and small
scale commercial farmers in the lending process in the District of Gondola.
Finally, Chapter five provides the summary or conclusions of the main findings of the study
and it draws recommendations regarding the access to agricultural credit by small scale
commercial farmers in the District of Gondola, mainly farmers‟ willingness to request loans
and strengthen the farmers‟ capacity to repay loans.
This introductory chapter has defined the main objectives and justified the reasons for carrying
out the study. The following chapter concentrates on reviewing findings of other researchers
on the same subject matter, mainly analytical methods that they have used.
28. 14
CHAPTER 2: LITERATURE REVIEW
2.0. Introduction
The literature reviewed in this chapter focuses on the types, sources and risks of credit for
agriculture and also on financial market policies and the reasons why rural credit is needed for
agricultural development. The chapter reviews analytical methods that other researchers have
used to conduct the research on credit for agriculture.
2.1. Theoretical Literature Review
This part of literature review presents definition of some terms used in this study. Some of
these terms are: credit, saving, interest rate, farmer‟s collateral and small commercial scale
farmers.
2.1.1. Credit
The literature presents so many concepts of credit. According to Abbott (1979), credit means
access to capital for which payment will be made at a later date. Credit is a certain amount
provided for certain purposes on certain conditions with some interest rate which should be
repaid sooner or later (Reddy and Ram, 1996). Credit is an operation through which a bank put
certain amount of financial resources at someone‟s disposal with an obligation to pay interest
rate and to repay the equivalent amount that the borrower has received from the bank (Branco,
and et al (1996). For Bannock, and et al. (1998) credit is the use or possession of goods or
services without immediate payment.
29. 15
This study uses the concept of credit according to Abbott (1979), Branco, and et al (n), and
Reddy and Ram (1996), since through credit, small scale commercial farmers are enabled to
use capital at the right time they need it in order to derive maximum productivity out of it, but
with an obligation to pay the interest rate and to repay the principal in a specific future date.
2.1.2. Saving
Saving means foregoing current consumption (Upton,1996). For Branco, and et al (n), saving
is that part of someone‟s income that is not utilized for current consumption. This means that
borrowed capital is the outcome of someone‟ saving. That is, saving represents a cost to the
saver, namely, the cost of waiting. While waiting, the money saved will have been used by
farmers to expand their production.
2.1.3. Interest rate
Interest rate is the price a borrower has to pay to enjoy the use of cash which he/she does not
own, and the return a lender enjoys for deferring his/her consumption (Bannock, and et al.,
1998). Similarly, for Manganhele (2010), interest rate is the cost of borrowing and it is
determined by the law of supply and demand. The interest rate is levied as a percentage of the
amount of the debt.
The study uses the concept of interest rate according to Bannock, and et al (1998) and
Manganhele (2010), since in order to use someone‟s money for a specified period of time, a
small scale commercial farmer needs to pay for it.
30. 16
2.1.4. Farmer’s collateral
Farmer‟s collateral is the portion of the farmer‟s own capital or farmer‟s asset that can be
offered in exchange for financing, so that the lender can keep if the loan is not repaid (Upton,
1996); that, is, it is the own capital of a farmer that serves as a guarantee for the use of loan
capital, if things go wrong. According to Quinhentos (2010), in Sofala Province, farmer‟s
collateral has been a great limiting factor to small scale commercial farmers to obtain loans
and it is one of means that the financiers use to select borrowers.
2.1.5. Small scale commercial farmers
The definition of farm business categories is a controversy. Some individuals like to base their
definition of a small scale farm on how many hectares a farmer has. According to de Beyer
(1999), farms with 5-20 ha are quite common to be considered as small scale farms.
In Mozambique, the farm enterprises are classified into three categories: small, medium and
large scale commercial farms. This study concentrates on small scale commercial farms; that
is, the farm enterprises which, according to Manganhele (2010), are more oriented to serve
the market and have progressed in the scale of their operations and they have demonstrated an
ability to manage improved technology; and, in addition, they are less risk-averse and more
prone to demand financial services.
In Mozambique, according to the Ministry of Finance and in line with Ministry of Industry
and Commerce, small scale enterprises employ not more than 25 workers and they have an
annual turnover of not more than 2 500 000 MT (IPEME, 2009). Following the consideration
of National Institute of Statistics and the Ministry of Agriculture (INE and MINAG, 2009),
31. 17
small scale commercial farms have an irrigated land of less than 5 ha or non- irrigated land of
less than 10 ha (Appendix 1).
This study concentrates on small scale commercial farms, that is:
The farm enterprises owned by Mozambicans;
The farm enterprises that have proof of land ownership, considered as DUAT (Direito
de Uso e Aproveitamento da Terra);
The farm enterprises with an irrigated or non-irrigated land less than 10 ha,
The farm enterprises that practice crops and/or livestock or other agricultural activities
for household consumption and/or for marketing.
The farm enterprises that use or do not use tractorization.
2.2. Empirical Literature Review
Besides types, sources and risks of credit for agriculture, this subsection also presents financial
market policies and the reasons why credit is needed for agricultural development.
2.2.1. Reasons for agricultural credit
Concerning the reasons for agricultural credit, various aspects are discussed in literature. In
agriculture, credit is necessary to meet seasonal cycle of production which is superimposed on
a steady pattern of consumption (Mellor, 1980). In addition, capital items with long life span
and unusual events such as crop failure must be financed through credit. Farmers require
credit that enables them to acquire more and efficient productive assets and also to meet the
increased cash outlay for the procurement of larger amounts of technical inputs (Hayami,
32. 18
1980). According to Manganhele (2010), improved access to agricultural credit and savings
can help those with limited assets to invest in agricultural technology or land improvements,
such as high-yielding seeds and chemical inputs that can increase incomes. Therefore, access
to safe and flexible credit and savings services play a critical role in poor people‟s strategies
for minimizing risks, mitigating income fluctuations and building a small asset base over time
(IFAD, 2002).
There is little doubt that credit can improve the productivity, incomes and welfare of rural
people. According to Stevens (1988), improvement in financial markets facilitates economic
growth in a number of ways:
Loans enable improved resource allocation and this occurs when a farmer who has a
high return investment opportunity available is able to borrow from a local financial
institution where savings have been deposited by farmers who happen to have surplus
cash;
Loans enable farmers to better manage the common risks of farming such as the
vagaries of weather, prices, bad crop, livestock diseases, etc.;
Besides facilitating the purchase of large investments, loans may alleviate the farmer‟
seasonal needs for working capital, or the problem arising from crop failure, sickness
or unexpected farmer‟ social commitments;
Loans ameliorate life cycle problems, in which the young people need to acquire farm
and household assets;
Loans enable borrowers to use someone else‟s savings, for productive purposes.
33. 19
Without credit, agricultural development would proceed very slowly (Stevens, 1988); that is,
if credit is not available or it is difficult to get, the rate of agricultural investment in inputs
would be low. On diversified farms that practice intensive production systems and where there
is labour constraint, greater access to credit can facilitate hiring additional labour, thus helping
to create employment and improving security status of many households. According to
Manganhele (2010), many farmers in developing countries need credit for different purposes:
For procurement of input package such as provision of fertiliser, seed, pesticides and
other inputs;
To hire labour force, for planting, weeding on crop yield and food production;
To assist farmers with animal draft power (donkeys, oxen) and animal drawn
implements (ploughs, cultivators, harrows) or tractor service rent;
For acquisition of durable and valuable assets such tractors, building, and others;
To harvest, process, market and transport their produce;
To assist farmers with household requirement demanding liquidity for personal
purposes namely household consumption, emergence, education, as well as funerals,
weeding and initiation ceremonies.
On the one hand, rural finance is one of several areas for investment in poverty reduction. That
is, rural finance is a vital tool in poverty reduction and rural development in that, access to
financial services affects the small producer‟s productivity, asset formation, income and food
security (IFAD, 2000). Credit is a cost effective weapon to fight poverty and it serves as a
catalyst in the overall socio-economic development (Yunus, 2004). By expanding the credit to
commercial agriculture stakeholders, the credit creates the conditions for inexperienced
34. 20
entrepreneurs to develop their capacity to manage resources efficiently (AGRIDEV
CONSULT LDT, 2006).
On the other hand, getting and using credit is an important part of money management, and
good money management can help the farm business to grow. Borrowed money or extra
capital coming from outside sources, can be used to increase both farm production and wealth
(Makeham, and Malcolm, 1986) in that no substantial increase in operating profit will occur
unless extra capital is injected into the farm through bush clearing, better equipment, and
buildings, fertilizer, crops and water supplies.
This research also investigates the benefits that small scale commercial farmers are getting
from financial services in Gondola District, comparing with findings from Hayami (1980),
Makeham and Malcolm (1986), Stevens (1988), IFAD (2000) and Manganhele (2010).
2.2.2. Types of agricultural credit
Several types of agricultural credit are available. For this purpose, many authors classify
agricultural credit broadly basing on various criteria such as time, purpose, activity, and
others. According to the time of capital requirements, Abbott (1979), Makeham and Malcolm
(1986), Zyl (1999) and Managanhele (2010) mention three types of credit as following:
Short term credit, which covers one production season and used to meet the constant
demand for working capital or ongoing agricultural operations on the farm like sowing,
payment of wages, stock-feed, seed, packaging materials, fertilizer application, plant
protection measures, rentals, etc. and daily domestic farmer expenses or living costs
(such as food, cloth, school fees, medical treatment, etc.) while waiting for crops to
35. 21
mature and to be sold; these loans are to be paid back within a period ranging from six
to eighteen months and sometimes up to two years;
Medium term credit, that covers up to three or five years, which is needed to extend the
farm enterprises as it is used to buy irrigation pumps, planting pasture, purchasing
fencing, working animals, breeding stock, agricultural machinery and equipment;
Long term credit, which covers up to 10 or 20 years or even longer, normally it is used
to expand or to purchase mechanised technology, making fixed or permanent land
improvements, establishing tree crops and pasture, constructing buildings such as
house for livestock, storage facilities, terraces and major irrigation scheme facilities.
IFAD (2002) presents similar classification to that of Abbott (1979), Makeham and Malcolm
(1986), Zyl (1999) and Managanhele (2010), pointing out that the financial needs of small
scale commercial farmers require various types of loans, both shorter and medium term for
the following reasons:
Short-term loans to finance the crop year (inputs, labour, fattening on pasture, storage,
initial processing of agricultural products, etc.);
Medium-term loans for financing farm equipment.
Basing on contact with the farmers by the financial institutional agencies, Makeham and
Malcolm (1986) categorise loans into:
Direct loans, those which are advanced directly to the farmers by the financial
institutional agencies;
Indirect loans, in which the financial institutional agencies directly do not finance the
farmers, but indirectly benefit the farmers by financing enterprise activities, such as
36. 22
financing fertilizer manufacturing companies, financing construction of warehouses,
dams, market yards and others.
Taking into account the purpose and nature of articles to be purchased, Mellor (1980),
Makeham and Malcolm (1986) and Bannock, and et al. (1998) present another important
classification of credit as following:
Consumer credit, defined as unproductive loans that is used to purchase items for daily
family consumption or living expenses, such as food, cloth, school fees, medical
treatment, and many others;
Production credit, referring to loans used to purchase instruments of production,
intending to increase the production of crops and livestock;
Marketing credit, those for helping the farmers to overcome distress sales and to
market the produce in better way.
According to credit needs of small scale farmers in Mozambique, Manganhele (2010)
distinguishes four types of credit as following:
Consumption credit to finance basic needs in terms of food products and social
expenses (school fees, marriages, health care, etc.) that is usually short term, from two
to eight months;
Working capital credit needed each year to finance annual inputs for economic
activities such as fertilizer, seed, pesticides and labour in agriculture, raw materials in
agro-processing and the purchase of goods in trading. It is short-term, from six to
twelve months;
37. 23
Investment credit needed for capital equipment for economic activities that is by nature
reimbursed in the long run, depending on the type of activity and the overall amount of
investment; this type of credit is important for purchasing labour-saving technology,
such as mechanised equipment, animal draft power (donkeys, oxen) and animal drawn
implements (ploughs, cultivators, harrows) or tractor service rent, as well as
construction of storage for agricultural products, greengrocer storage and small shop;
Credit for trading activities that small scale commercial famers need to buy agricultural
and non-agricultural goods, with the purpose of selling them and earning income in
short period as a strategy to obtain finance for other production and consumption
activities.
This study uses both classifications based on time and purpose as presented by Abbott (1979),
Mellor (1980) and Makeham and Malcolm (1986) and Manganhele (2010), in order to clarify
the objectives of agricultural credit.
2.2.3. Sources of credit for agriculture
With regards to the sources of credit for agriculture, most literatures mention a wide range of
sources to which farmers can go for credit. Abbott (1979), and Makeham and Malcolm (1986),
report the following sources of credit:
Family, relatives and friends, considered as the most immediate sources of credit;
Private moneylenders, including banks, which in some countries have played a vital
role in financing the purchase of agricultural inputs and produce;
38. 24
Input suppliers and marketing agencies, in which the cost and risks of lending are
reduced. They may agree to sell their produce through the lender and they deduct the
loan repayment from the sales proceeds;
Farmer‟s credit cooperatives, which act as lending and collection channels for credit
supplied by a centrally sponsored cooperative or agricultural cooperative bank;
Agricultural banks, which usually use government capital.
Mellor (1980) divides sources of financing to agriculture into two groups:
Internal financing, which is through direct investment from the income stream of the
individual farm family and;
External financing, which is made of gifts, interest free-loans and credit.
Besides this classification, Mellor (1980) and Devino (1981) mention other classification used
in India and Columbia similar to that presented by Abbot (1979) namely agricultural
moneylenders, commercial banks, banks for farmer‟s cooperatives, government agencies, and
others.
In less developed countries, Stevens (1988) classifies sources of credit to agriculture into two
groups with very little difference to those presented by Abbot (1979) and Mellor (1980):
Institutional lenders, such as government agencies, agricultural cooperatives or farmer‟
associations, rural banks and commercial banks and;
Non-institutional moneylenders like landlords, merchants, moneylenders, informal
groups and individuals.
39. 25
In an assessment of rural financial services in the Beira Corridor in Mozambique, Kula and
Farmer (2004) found the financing of farmers divided into banking and non-bank financial
institutions. The non-bank financial institutions comprise insurance companies, leasing
companies, and finance companies.
The research considers formal institutional moneylenders, such as government agencies,
farmers‟ associations, banks and input suppliers.
2.2.4. Risks and costs of lending to agriculture
This subsection discusses some problems that have led small scale commercial farmers to be
neglected by almost formal and semi-formal rural financial operators (private sector, NGO‟s
and commercial banks). The literature review concludes that the main factors that contribute to
marginalisation of small scale commercial farmers in the provision of rural financial services
are mainly risks, cost and interest rate (Appendix 4). In agriculture, mobilizing savings and
lending imply risks and costs, and place specific responsibilities on rural finance institutions,
donors and governments (IFAD, 2002). As such, in low-income countries, risks and costs of
lending to agricultural activities are extremely considerable.
One aspect with great relevance is the risk and uncertainty involved in financial services for
agriculture. The risks in agriculture impact negatively on small scale commercial farmers and
operating lending institutions (Manganhele, 2010). According to IFAD (2002), the financing
of agriculture is characterized by a high level of risks, both climatic and economic (price
fluctuations, difficulty in selling harvests, etc.). These risks are often highly covariant (Zyl and
etal, 1999), in that they affect all borrowers in a given zone at the same time (drought, floods,
40. 26
epizootic diseases, etc.). In addition, farm budgets are closely integrated with farmer
household budgets, and financing for agricultural and non-agricultural activities, consumption
and household investments are closely linked (Appendix 4). Furthermore, among a
household‟s various economic activities, agricultural activities are often less profitable and
more risky than non-agricultural activities.
Moneylenders face major possibilities of losing the principal and interest as they are lending to
low-income persons who are subject to considerable income instability, that is, the borrower
may default and the loan may not be repaid. In the review of credit facility for commercial
agriculture stakeholders in Manica Province, AGRIDEV CONSULT LDT (2006) found the
risk to be high because prospective borrowers lacked adequate collateral, and because of
inherent risks associated with commercial agriculture. Highly variable prices and production
are the main explanatory factors of widely held perception of commercial agriculture as high
risk venture. As a consequence, commercial banking sector is extremely reluctant to expand
their financial activities into agricultural sector.
In addition to price uncertainty discussed by Zyl (1999) and IFAD (2002), there are other
types or sources of risks in farming found in India (Reddy and Ram, 1996). The main types or
sources of risks found are production risk, technologic risk, institutional risk, weather
uncertainty, risk caused by illiteracy and ignorance, and inefficiency by sickness of the farmer
or personal risk. Apart from these types of risks, Manganhele (2010) discusses in details other
credit risks in lending to agriculture, namely:
Credit or loan default risks, referring those risks that occur when borrowers are unable
or unwilling to repay the loan principal and to service the interest rate charges;
41. 27
Liquidity risks, that occur when farm is not able to meet its cash requirements;
Interest risks, in which there is decline in the value of the loan due to changes in
interest rate;
Foreign exchange risks, as determined by the exposure of the bank to changes in
exchange rates, which affect international borrowings dominated in foreign currency;
Market and price risks, due to long period between the decision to plant a crop or to
start a livestock enterprise and the realisation of the output, meaning that the market
prices are uncertain at the moment when the loan is granted;
Moral hazard risks, that are caused by natural calamity (flood or drought) have
impeded borrowers of repaying their loans, requiring loan rescheduling, forgiveness of
debt and loan insurance schemes;
Risks from changes in domestic and international policies, such as government
interventions, structural adjustment programmes that can have damaging impact on
lenders and borrowers;
Risks of high default rates in lending to agriculture, since lot of credit programmes for
small scale farmers have been widely reported as being characterised by high default
rates;
Risks caused by factors impacting negatively on lending to agriculture such as lack of
good sources of information among both lenders and borrowers, deficient markets and
infrastructures, low level of human capital found in agriculture, and others.
Another aspect of great importance in lending process is the cost that is incurred. The nature
of costs involved in lending to small scale farmers tend to be high (Manganhele, 2010).
According to Mellor (1980) and Manganhele (2010), farm loans are costly to administer
42. 28
because the average loan per farm is too low and the process of seeing the borrowers and
collecting the interest and the principal takes so much time that only a small total sum of
money on loan can be handled. Also Stevens (1988) presents findings that confirm the high
transaction and administrative costs for small loans, because small scale commercial farmers
apply for small loans and they are scattered. In turn, borrower‟s transaction costs are affected
by time and travelling costs to negotiate the loans, application fees, bribes, service fees and
forced purchases of other services provided by lenders. Again Manganhele (2010) discusses in
details the main factors that have been contributing to raising the costs of lending to small
scale commercial farmers, as following:
Dispersed locations of clients and the low population density of clients in many
developing countries make the provision of the rural finance services too costly to
monitor the farmer-borrower;
Financial transactional costs of institutional credit are too high in that the borrower
may need to travel several times to the bank which requires not only a long time for
processing, but also money to cover travelling costs to negotiate the loans;
The seasonal nature of agricultural production and the long gestation periods before
crops are harvested and sold, have direct influence on the financial transaction costs,
as this fact makes lending more difficult than providing loans for non-farming
activities;
Lending to small scale commercial farmers implies that monitoring of repayment
capacity and willingness to repay the loan is much more difficult, and an uneven
distribution of agricultural lending operations over the year increases the fixed costs of
personnel; therefore, lending activity for agriculture may not be sufficient to cover
these costs;
43. 29
The diversity of farming and non-farming income-generation activities is more
difficult to deal with in rural areas than in urban areas; it extends the bank staff‟s time
and expenses needed to carry out the appraisal and it is likely to increase the lending
costs.
In addition to these risks and costs, the impact of interest rates is another important aspect in
financial services. Interest is regarded as the cost involved in using capital (Zyl and etal,
1999). In low-income countries, Hayami (1988) considers the interest rates as stereotyped
high, because in these countries:
Capital is scarce;
Farm loans are costly to administer;
The uncertainties of agriculture result in considerable loss through default;
Demand for credit is seasonal.
The size of interest charged depends upon how desperately the borrower needs the funds, the
risk the lender takes in lending the money, and the expected rate of inflation (Makeham and
Malcolm, 1986). In South Africa, in the case of cooperatives and commercial banks, interest
rates are charged on loans, while general banks levy finance charge for providing credit or
financial services (Zyl and etal, 1999). For Upton (1996), interest rate that is charged should
cover:
The opportunity cost of funds, that is the base rate of interest;
Administrative costs, which are proportionately higher the small is the loan, the more
remote is the borrower‟s location and the greater is the need for personal contact and
supervision;
44. 30
Losses due to default, for which a risk premium is included;
Inflation, which effectively means a fall in the value of money.
Likely Upton, (1996), in the assessment of rural financial services in the Beira Corridor to find
out the degree to which private sector investment is constrained, Kula and Farmer (2004)
found other reasons for maintaining too high interest rates in the lending system in
Mozambique, namely:
High overhead costs;
Wide profit margin due too lack of completion in the sector;
Lack of credit-worthy projects;
Weak repayment culture.
All these aspects make the access to credit more difficult and costly. One of objectives of this
research is to find out also the risks and costs of lending faced by lending institutions in
Manica Province, particularly in Gondola District.
2.2.5. Requirements of conventional moneylenders to get credit
Credit should always be granted on sound principles. When a farmer is trying to obtain credit,
it is important to know how financiers evaluate credit applications and which factors are
important when applying for credit. This is because there are certain aspects of financing
which are important to both financier and the applicant. Discussing conventional banking
behaviours in Bangladesh, Yunus (2004) concludes that
Conventional banking is based on the principle that the more someone has, the more
he/she can get. To put it simpler, if a farmer has little or nothing, he/she gets nothing.
45. 31
Consequently, more than half of the population of the world is deprived of the
financial services of the conventional banks;
Conventional banking is based on the farmer‟s collateral. That is, it is based on
assessing the material possession of a farmer, not on his/her potential;
The overarching objective of the conventional banks is to maximize profit, not to help
the poorest to fight poverty, stay profitable and financially sound;
In conventional banks charging interest does not stop unless specific exception is made
to a particular defaulted loan. Interest charged on a loan can be multiple of the
principal, depending on the length of the loan period;
In conventional banking there is a legal instrument between the lender and the
borrower. There is a stipulation that a client will be taken to the court of law to recover
the loan. There is a provision to enforce a contract by any external intervention;
In case of death of a borrower, conventional banks require the family of the deceased
to pay back the loan. There is no insurance programme which pays off the entire
outstanding amount with interest. The liability is transferred to the family of the
borrower.
According to van Reenen (1995) and Zyl (1999), in South Africa usually the providers of
credit take into consideration six very important factors when evaluating a farmer‟s
application for credit:
The applicant: Who is the person? What is the person‟s credit history? Does the person
has a good reputation or he/she is someone completely unknown to financing
institution?
46. 32
Repayment capacity: What is the farmer‟s ability to clear off or to repay the loan
obtained for production purposes under the given conditions, at the given interest rate
and within the prescribed time stipulated by the bank? Note that the repayment ability
refers to the amount of money that the business has available annually for meeting
loans obligations; that is, the amount available after making provision for all current
and household expenses.
Security: Should things go wrong, what security would the financier have? In this case,
security refers to the own capital of a farmer that serves as a guaranty for the use of
loan capital, or to the collateral (portion of own capital or asset) that can be offered in
exchange for financing, so that the lender can keep if the loan is not repaid (Upton,
1996).
Conditions: What are the conditions needed for obtaining a loan as regards interest
rate, repayment, formalities, and others?
Investment: What will the credit be used for? Will it reduce or increase the value of the
asset? Is the loan profitable? Is the right type of credit?
Risk bearing ability: What are the risks involved in the planned project in respect of
product price risks, production risks and probability of financial failure? For this
purpose, Reddy and Ram (1996) consider risk bearing ability as the ability of the
farmer to withstand the risks that rise due to financial loss.
Besides repayment capacity, conditions and risk-bearing ability which have been discussed by
van Reenen (1995) and Zyl (1999), in South Africa, Reddy and Ram (1996) present other
financial aspects to be assessed by bankers that are used in India, when studying the economic
viability of a loan, as following:
47. 33
Returns from investment, through which the banker analyses the returns likely to be
obtained from the proposed investment and the farmer‟s demand for credit can be
accepted only when he is able to generate returns that will enable him to tide over the
costs;
Character, as the trust that has greater say in the mind of the banker on his borrowers,
before he takes a decision in considering the proposal. In this context, the borrower
should exhibit moral qualities like honesty, integrity, commitment, hard work,
promptness and others;
Capital, which implies availability of money with the farmer-borrower after character
and repayment capacity have been proved to be inadequate;
Commonsense, that relates to perfect understanding between the lender and the
borrower in credit transactions.
A review carried out by Manganhele (2010) found the following conditions that are required
by Agricultural Bank of Zimbabwe, in order for small scale commercial farmers to have
access to credit:
Proof of legal age to borrow and identification of particulars;
Proof of land ownership: communal land holders and resettlements;
Programmes of action, in which the small scale commercial farmer indicates the size of
land, what he/she wants to grow and other relevant information;
Credit track record, in which small scale commercial farmer has to explain that he/she
has been performing in terms of credit repayment;
The small scale commercial farmer should belong to a group committee of 10 to 30
members, whose responsibility is to mobilise loan repayment from the group.
48. 34
Studying the contributions of microfinance in the reduction of poverty in Sofala Province,
Quinhentos (2010) concludes that credit policy is inaccessible to small business entrepreneurs
due to the lack of real collateral which is demanded by financial institutions. The researcher
found collateral as a great limiting factor to small scale farmers to obtain loans but it is one of
means that the financier uses to select borrowers.
This research reviews also the requirements of moneylenders to get credit as it has been
discussed by Reenen (1995) and Zyl (1999) in South Africa, Reddy and Ram (1996) in India,
Quinhentos (2010) and Manganhele (2010) in Mozambique, comparing with those conditions
demanded by lending institutions in Manica Province.
2.2.6. Procedural formalities to get credit with conventional moneylenders
Financial institutions are vested with the powers either to accept or reject the farmer‟s loan
application. Reddy and Ram (1996) reports procedures and formalities for loan processing in
order to get credit in India:
Interview with the farmer, in which the banker studies the farmer borrower regarding
credit characteristics such as honesty, integrity, frankness, progressive thinking,
indebtedness, repayment capacity, etc.; and also this helps the banker to understand the
genuine credit needs of the farmer. In the interview, the banker explains the farmer the
terms and conditions under which the loan is going to be authorised;
Submission of loan application, in which the farmer fills the details regarding the
farm‟s location, purpose of the loan, cost of the scheme, credit requirements, farm
budgets, financial statement, etc.;
Scrutiny of records, by the officials of the bank verifying the ownership of the land;
49. 35
Visit to the farmer‟s field before authorisation of loan, which is made by the bank
officials to verify the particulars given by the farmer, such as bounders of the land,
farmer‟s managerial capacity in farming, farmer‟s attitude towards latest technology,
credit and trust worthiness of the farmer, allied enterprises, feasibilities for
implementing the plan, etc;
Approval of loan, in which the banker official authorises the loan taking into
consideration the technical feasibility, economic viability and bankability of the
project, including repayment capacity, risk bearing ability, etc.;
Disbursement of loan, through which the loan amount is credited to the borrower‟s
account in a phase manner to ensure that the loan is used by the farmer properly,
following a framed plan in view of the income flow of the proposed project;
Post-credit follow-up measures, by paying a visit to the farmer, in order to certify the
proper use of the credit and to develop a close rapport between the farmer and the
banker, and to give technical advice and underlying the obligation of the farmer to
repay the loan when it falls due;
Recovery of loans, in which appropriate measures (meetings, reminds) are taken in
advance to persuade the farmer borrower to repay loans in time. In case of failure, the
reasons are ascertained to find out whether the borrower is deliberate defaulter or not.
The present research tries to find out the procedural formalities applied by financier in Manica
Province when sanctioning the farmer‟s loan application, relating to findings from other
researchers in other countries.
50. 36
2.2.7. Choosing a credit financial institution
Choosing a credit financial institution is one of the most important steps which a farmer takes.
According to Devino (1981), there are several factors that are considered when deciding where
the farmer is going to get loan in Columbia. The main factors are:
The farmer‟s equity base: for instance, some lenders require higher percentage of
equity than others;
Lender‟s ability to lend the amount of money which the farm requires; that is, some
lenders may limit the amount that the famer requires;
Lender‟s understanding of agribusiness and how agribusinesses operate;
Type of service which the lender can provide: for example, an agribusiness may need
bank services for checking accounts, investment advice, etc.;
Cost of borrowing funds, such as percentage rate, additional costs to be paid on
borrowed funds (service fee, stock purchase, compensating balance, etc.).
Manganhele (2010) reports the lending parameters that are followed by National Development
Bank of Botswana as following:
Owner‟s contribution or equity of a minimum of 25% of the total project costs to spend
on the project, either in cash or in kind;
Interest rates: are negotiable, that is, they can be fixed or floating, depending on the
risk profile;
Repayment frequency depends on the project‟s or clients‟ repayment capacity; in this
case, loans are repayable monthly, quarterly, annually or biannually;
51. 37
Loan repayment period depends on the purpose and magnitude of the loan and the
project repayment or cash generation capacity; the loan repayment is from one to
fifteen years;
Grace period for medium and long term loans is given before the loan starts to be
repaid, but must be justified by the project;
Penalty interest is charged on loans cleared after the schedule repayment period over 6
to 12 months.
Taking into account the factors and lending parameters reported by Devino (1981) in
Columbia and by Manganhele (2010) in Botswana, this study seeks to find out the major
factors that are considered by small scale commercial farmers in Manica Province in order to
select the suitable financier for credit.
2.2.8. Credit management and financial market policies
The role of financial institutions on the agriculture front lies in developing principles of farm
finance which are expected to bring not only commercial gains to the bankers but also social
benefits to farming communities. According to Manganhele (2010), in designing viable rural
finance institution policies, financial technologies are crucial; and, in order for them to be
appropriately adopted and implemented, organisational design also matters. For Abbott
(1980), institutional credit to small scale commercial farmers should be integrated with a
whole set of services through an effective production credit systems which are:
Marketing systems that provide a regular supply of inputs to farmers, and specific
outlets for their produce with fair prospects of assessing price they obtain;
52. 38
A rural extension service which can show small scale commercial farmers how to use
credit to the best advantage under their conditions;
A system of land tenure which assures stable occupancy and enables a farmer to
benefit from improvements he/she makes on the land;
A legal basis for using credit that is fair to both lender and borrower quickly and
simply;
Recognition by the farmers themselves of the importance of business character as a
basis for credit, that is, the prompt payment of interest and instalments and the
development of ability to handle borrowed funds wisely;
Insurance of farmers against the loss of crops or livestock due to drought, floods or
disease in order to reduce repayment risks.
Stevens (1988) views farmers and lenders as rational in their savings and credit bahaviour, that
is, if rural financial markets are to grow, savers and lenders have to receive sufficient rewards
from their savings and credit activities to make them worthwhile. With regards to this purpose,
Stevens (1988) proposes the following policies:
Identifying financial market problems, such as misconceptions surrounding the
operation of rural financial markets;
Assuring interest rate flexibility to attract savings; in order for savings and credit
institutions to operate without loss and for saver to earn positive and real interest rates,
the rates offered on savings accounts and on loans must be adjusted with inflation;
Subsidizing credit to agriculture, through government agricultural credit programmes
that charge low real interest rates;
53. 39
Reducing costs of financial intermediation; in other words, the successful expansion of
institutional credit in rural areas depends on reducing the costs of credit and saving
transactions both for the farmer and for the lending institutions.
Basing on the experience with various stakeholders, IFAD (2000) came with the conclusions
that many poor are bankable, that is, many of them are able to save, invest and repay their
loans and bear the full cost of credit and other financial services; and adds that what they need
is the access to financial services, mainly:
Deposit facilitates for accumulating and safely keeping their savings, consumption
smoothing and self-financing of economic operations;
Credit for consumption smoothing and external financing of their operations;
Insurance for social security and loan protection.
According to IFAD (2000), in order to reduce transaction costs, to make their resources grow
dynamically, to allocate resources efficiently and to manage risks, financial institutions should
follow principles of sustainability such as:
Viability, by covering their costs from the margin;
Self-reliance, through mobilizing their own resources;
Financial self-sufficiency, by being profitable and preserve the value of their resources;
Outreach, by broadening their services for the clients;
Impact, through helping clients to help themselves.
54. 40
In terms of a sound credit policy, van Reenen (1995), Reddy and Ram (1996) and Zyl (1999)
report the general rules of credit used in South Africa and India, that are followed when
obtaining or granting credit. Some of these rules are as following:
The loan should be lucrative, if the loans are acquired for production purposes;
Credit should be used only after choosing the most lucrative investment, and it should
be used for that purpose only;
Borrowed funds should be utilized properly for the purposes for which they have been
advanced, for the mutual benefit of the banker and the borrower;
Credit which is advanced is not just a mean for increasing production from that
enterprise alone, but it should be able to increase the productivity of other
complementary factors employed in the respective production activities;
Ensure that interest and capital repayments to be paid from income will not have an
adverse effect on the cash position of the business;
Conservative plan and budget should be used when negotiating a loan;
Credit needs should be determined in advance; money should therefore only be
borrowed when it is really necessary; the right amount should be borrowed;
The loan should be repaid during lifetime of the asset for which the credit is obtained;
The loan amount need to be distributed in phases in order to make it productive and the
banker can also make himself/herself sure about the end use of the borrowed funds;
Credit risks should be insured and credit linked with marketing to make the banker
quite safe in recovering the loan;
The loan capital must be complementary to the own capital; that is, loan capital can not
replace own capital and one must therefore first make sure of sufficient own capital
All credit arrangement should be confirmed in writing.
55. 41
Comparing with proposed policies presented by Abbott (1980), Stevens (1988), van Reenen
(1995), Reddy&Ram (1996), Zyl (1999) and IFAD (2000), this research draws some
recommendations regarding the improvement of access to credit in Manica Province and
particularly in Gondola District, for small scale commercial farmers.
2.3. Focused Literature Review and Analytical methods
This section reviews analytical methods that other researchers have used to conduct studies on
credit for agriculture in some countries and in Mozambique, particularly in Xai-Xai, Beira
Corridor and Manica Province.
To begin, using a combination of secondary data sources through multiple case study and
primary data, collected through in-depth interviews with key informants from farmer‟s
associations and government-funded financial institutions from Thailand, Indonesia,
Botswana, Zimbabwe and Mozambique, Manganhele (2010) conducted a study on improving
access to credit for smallholder farmers; the study concluded that, in Mozambique, there has
been limited success in achieving access to credit for small scale farmers.
In order to investigate the impact of social ties and group leader roles on loan repayment in
group-base lending programs in Xai-Xai, Mate (2010) conducted a survey among 141
participants of borrowing groups. The finding was that either group leaders or non-group
leaders, the social ties do not affect loan default, but what matters is the institutional approach
adopted by lending program which determines the performance.
56. 42
Assessing the contributions of microfinance in the reduction of poverty in Sofala Province,
Quinhentos (2010) conducted an interview to a sample of 100 beneficiaries of credit from
three formal financial institutions. The result found that microfinance services may bring
benefits especially in the area of food consumption, health care, education, and other areas.
Through a series of meetings and interviews with 35 key stakeholders (input suppliers,
smallholder farmers, large scale farmers, banks, NGO‟s, etc.) in Manica Province, Kula and
Farmer (2004) conducted an assessment of rural financial services in the Beira Corridor
through horticulture and oilseeds value chain analysis, in order to find out the degree to which
private sector investment is constrained by a lack of financial service access. The study found
the following results:
The existent of enormous potential for growth in incomes and trade through investment
in horticulture and oilseeds;
The increased investment in the horticulture and oilseed value chains is transforming
smallholder agriculture and it is generating significant increases in income for
smallholder farmers;
The improvements in the enabling environment have been attracting domestic and
foreign direct investment in the Beira Corridor and this investment has triggered
demand for a wide range of services leading to emergence of an agribusiness cluster;
However, the level of investment still far short of amounts needed to take advantage of
existing market opportunities;
The financing gap requires increasing the supply of both equity and debt capital, short
and long term, tailored to the cash flow of agriculture enterprises.
57. 43
In order to carry out a review of credit facility for commercial agriculture stakeholders in
Manica Province, AGRIDEV CONSULT LDT (2006) used key informants interviews and
focus groups style meetings with farmers, as well as field visit to farmers. First of all, the
consultant prepared a guide questionnaire for interviewing farmers and another for
interviewing farmers lending institutions. From the case study, the researcher found that
commercial agriculture stakeholders have limited access to finance which is the result of
prospective borrowers being perceived by bankers as too risky, mainly the inherent risks
associated with commercial agriculture and lack of adequate collateral.
Using questionnaire with mainly closed questions, Chaile (2010) interviewed a sample of 30
borrowers from GAPI in the districts of Gondola, Manica and Sussundenga in Manica
Province in order to find out the socio-economic impact of credit given to small and medium
scale farmers between 2002 and 2005. Using descriptive analysis with SPSS, Chaile (2010)
found that farmers have increased the farm‟s income through the use of credit from GAPI.
This study also follows the research methods used by Kula and Farmer (2004), AGRIDEV
CONSULT LDT (2006), Mate (2010), Chaile (2010) and Manganhele (2010) since the
methodologies they used are cost effective and they allow inferences to be made from a
sample to a larger population. The next chapter explains how some of these analytical methods
are applied in the study.
58. 44
CHAPTER 3: RESEARCH METHODOLOGY
3.0. Introduction
This chapter outlines the research site and it gives an overview of the research approach that
was used in primary and secondary data collection. It also covers the data analysis methods
that were used in the research as well as criticism of factors that may have caused inaccuracy
in the analysis and interpretation of the results.
3.1. Description of the field research site
This study was carried out from November 2010 to March 2011 in Chimoio City and Gondola
District in Manica Province in Mozambique. The District of Gondola is located in the east
center region of Manica Province and it has a total population of 238 000 distributed in seven
Administrative Posts, namely Inchope, Amatongas, Gondola, Cafumpe, Macate, Zembe and
Matsinho. The district has total area of 5.740 square kilometers, of which 315.700 hectares are
arable land, and only 1.140 hectares can be irrigated. The Gondola District receives an
average annual rainfall of 1000-1500 mm (MAE, 2005).
The district of Gondola was chosen as the field research site for the reason that it is one of the
five strongest agricultural districts in Manica Province namely, Sussundenga, Manica, Barué
and Mussorize. Besides this fact, the Gondola agro-ecological conditions are suitable for the
production of the majority of the food and cash crops, fruits, forestry and animal husbandry
produced in Manica Province. The agricultural activity of the district is dominated by family
sector (Appendix 6A).
59. 45
The City of Chimoio was also chosen due to the fact that it is surrounded by Gondola District
and it is where many lending institutions are concentrated, including banks, microfinance
institutions, input suppliers, equipment dealers, supportive government agencies and others.
3.2. Research approach
Through quantitative and qualitative research methods, a survey was carried out in Gondola
District and Chimoio City, in order to find out the major factors that constitute the limitations
to agricultural credit faced by small scale commercial farmers.
Quantitative research was used to deal with descriptive information. In this case, in order to
understand the respondents‟ attitudes and assess their opinion and reaction, survey method
based on non-probability sampling and questionnaire, using multiple choice and open-ended
questions, were designed, pre-tested and then administered for lenders and farmers.
Qualitative method was also employed in order to gain an in-depth understanding of the
manner in which the funds (credit or grants) are used by the small scale commercial farmers.
The data were collected from both primary and secondary sources.
3.3. Sampling
3.3.1. Sample frame and sample size
As far as the sample size is concerned, in Chimoio City the survey was conducted in 11
financial lending institutions and 4 input lending institutions. In Gondola District, the survey
was conducted in 25 small scale farms in 7 Administrative Posts (Appendix 11: A-D).
60. 46
3.3.2. Sampling technique
In Chimoio City 11 financial lending institutions and 4 input lending institutions were
contacted; and in Gondola District 25 small scale commercial farms were also contacted
(Table 1). Due to the small size of sample frame and in order to minimize costs and time of
survey, the researcher used non-probability sampling, specifically purposive sampling for
small scale commercial farmers. With the purposive sampling, the researcher targeted
the farm enterprises owned by Mozambicans;
the farm enterprises that have proof of land ownership, considered as DUAT (Direito
de Uso e Aproveitamento da Terra);
the farm enterprises with an irrigated or non-irrigated land less than 10 ha (INE and
MINAG, 2009);
the farm enterprises that practice crops and/or livestock or other agricultural activities
for household consumption and/or for marketing;
the farm enterprises that use or do not use tractorization.
Table 1: Sample frame and sample size of small scale commercial farms in Gondola
District (2011)
No Gondola
Administrative
Posts
DUAT‟s* per
Administrative
Post in the District
Unsuitable
DUAT‟s for
the study
Sample
Frame
(N)
Sample Size per
Administrative
Post (n)
1 Amatongas 15 13 2 2
2 Cafumpe 60 56 4 4
3 Gondola 13 13 0 0
4 Inchope 27 23 4 4
5 Macate 29 25 4 4
6 Matsinho 45 40 5 5
7 Zembe 47 41 6 6
Total 236 211 25 25
Source: The Author (2011)
*DUAT= Direito de Uso e Aproveitamento de Terra (Right to Use the Land)
61. 47
3.4. Data collection tools
On one hand, in order to collect primary data and to be more flexible, the researcher came into
direct contact with the respondents, going from door-to-door using personal observation, in-
depth and a personal interview as well as questionnaire. On the other hand, an extensive
reading of existing literature on the subject matter was done to collect secondary data. The
following subsections detail how the data were collected.
3.4. 1. Reading
In order to gain in-sights and contextual familiarity with the present subject matter, the
researcher conducted an extensive review of some existing literature related to rural finance
services from United State of America, Bangladesh, India, South Africa, Zambia, Zimbabwe,
Mozambique and other countries. Internal written documents such as reports and pamphlets
from the two groups of respondents (banks and farms) were also consulted by the researcher.
3.4. 2. Personal observation
The personal observation was used in order to gain in-depth insight into the manifestations of
reality of each informant. The main focus was on the everyday and natural experiences of
small scale commercial farmers accessing credit from different credit institutions and how the
officials of lending institutions assist clients. The main issues were to gather the feelings,
impressions and experience of the real world through direct observation.
62. 48
3.4. 3. In-depth and personal interviews
In-depth and personal interviews were also used in the contact with small scale commercial
farmers and officials of input and financial lending institutions in order to gain more in-depth
data about the perspective of small scale commercial farmers regarding how they are being
served by lending institutions and what improvement can be done in rural financial services.
Through face-to-face interaction, respondents were encouraged to talk freely about their
activities, attitudes and interests. Informal discussions with colleagues, guides and some
experts in the area of agricultural credit were also conducted.
3.4. 4. Questionnaire
Serving as a useful guide for the communication process with the respondents, questionnaires
were designed, pre-tested and then administered for the two groups of respondents: small scale
commercial farmers and agricultural lending institutions, following the research objectives
(Table 2 and Appendix 12: A-B). The researcher designed semi-structured questionnaire with
a mix of multiple choice and open-ended questions. Multiple choice questions were
administered since they are easier and quicker for both interviewer and respondents to ask and
answer, and tend to reduce interviewer bias caused by varying levels of respondent‟s
articulation (Rampal and Gupta, 2001) and their analysis is straightforward (Nachmias and
Nachmias, 1981). Open-ended questions were used to allow the respondents to freely express
their own perceptions, attitudes and views and to provide the researcher with insights through
side comments and explanations (Averbeke, 2005).
Pre-testing the questionnaire with five (5) small scale commercial farmers and two (2)
financial lending institutions was done for the researcher to have an opportunity to experiment
63. 49
the selected research approaches and to both examine the effect of question sequences and
potential insight into the existence of bias or shortcomings of the questionnaire.
Using Portuguese language, the researcher himself conducted the process in order to have an
opportunity to ask respondents any additional relevant questions.
3.5. Sources of data
A combination of both primary and secondary sources of information were used to identify
conditions required in order to obtain loan, risks faced by lending institutions and factors that
affect the access to agricultural credit and to assess the benefits of financial agricultural
services.
3.5.1. Primary sources and type of data
The primary sources of data basically included the following groups of respondents:
Eleven (11) financial lending institutions and four (4) input lending institutions were
contacted to collect data such as beneficiaries, credit packages available for farmers,
how much demand about credit, conditions required to get loan, interest rate, collateral,
failure to pay principal and interest, costs of lending, and others; and also to collect
information regarding the internal and external obstacles the financial institutions face
in delivering financial services in the rural areas(Appendix 11:B and C);
Twenty five (25) small scale commercial farmers were interviewed to obtain
information on the production lines, turnover, degree of technical assistance needed
and provided by the lending institutions and other data similar to those collected from
lending institutions (Appendix 11:A);
