Financial Inclusion and Agricultural Growth

In Africa south of the Sahara, lack of access to financial services and products poses a serious challenge for agricultural growth and productivity. Many smallholder farmers are cash-poor; it is common for farmers in the region to sell their crops immediately after harvest in order to meet their immediate cash needs rather than waiting for prices to go up and thus increasing their profits. This lack of available capital, coupled with the difficulty smallholders often face in accessing credit, limits their ability to invest in their farms and in other incoming generating activities.

In November 2016, Innovations for Poverty Action (IPA) co-organized a conference along with IFPRI, Michigan State University, and the Northwestern University in Ouagadougou, Burkina Faso to examine the link between financial inclusion and agricultural intensification in rural areas. The conference included a capacity-training event along with the presentation of results from projects in agricultural microfinance, inventory credit, and the adoption of agricultural inputs.

Around 120 representatives from NGOs, governments, farmer cooperatives, universities and research organizations, and the private sector (including banks and agrodealers) participated in the capacity-training portion of the conference. Focusing on impact evaluations, experimental studies, and randomized control trials, the training discussed why and when each method is used and covered how to collect data and design a randomized evaluation. Participants learned about different types of impact evaluations, including natural, quasi-experimental, and experimental; the training also covered the importance of needs assessments, effective outcome measurement, quality control, and monitoring.

The discussion of RCTs highlighted the method’s reliability and effectiveness in evaluating programs and drawing causal inference. The training concluded with a review of case studies to allow for better comparison of RCTs and other evaluation methods, as well as a better understanding of the biases inherent in non-experimental methods. Participants also had the opportunity to practice the different evaluation methods covered in the training.

The second portion of the conference presented recent research outcomes. In one of the studies presented at the conference, Clara Delavallade of IFPRI examines how inventory credit, or warrantage communautaire, can help increase consumption, savings, and investments in agricultural inputs and education as well as promote income diversification in rural Burkina Faso. Using a randomized evaluation conducted in 38 villages in southwestern Burkina Faso from 2014-2015, the study aims to determine how the availability of inventory credit impacted farmers’ consumption, savings, credit, and food security behavior.

Inventory credit, or warrantage communautaire, allows farmers to store part of their harvest in a warehouse for several months and to use the stored bags as collateral for loans. By helping smallholders wait to sell their crops until prices rise in the lean season and giving them access to credit to invest in agricultural inputs for the next season, this system can help both increase households’ savings and smooth annual food consumption.

In the study area, three large farming cooperative unions and their partners established an inventory credit system in 2007; this system has expanded into COPSA-C, a large agricultural cooperative. The study used a public lottery to randomly assign the 38 villages to either the inventory credit program or to a comparison group that was not offered the program. Households that were assigned to the program were allowed to deposit a previously determined number of bags of grain in warehouses located outside of their villages. The crops could be stored for up to six months. At the same time, participants were offered loans of up to 80 percent of the value of the crops they had stored, at an interest rate of 7 percent; there was also a fee of 600 FCFA (USD 1.14) per bag stored that was paid to COPSA-C after the storage period was over. Loans could be repaid at any point over the six-month storage period, and COPSA-C provided advisory services to farmers to help prevent default and promote investment of the loans in income-generating activities.

Of the households offered the program, 36 percent chose to store grain; of these households, 39 percent took out a loan. At the end of the storage period, only one household had an outstanding loan, which it repaid by selling its stored crops to a buyer. In terms of consumption, households with access to inventory credit spent an average of 13,449 FCFA (about USD 26) more per year than households in the comparison group; most of this spending appears to have gone to non-food items. Education in particular saw a significant increase investment.

In terms of savings and investment, the program appeared to have no impact on savings behavior but did significantly increase treated households’ investment in livestock. Households with access to the inventory credit program saw a 24 percent increase in the total value of livestock purchased than households in the comparison group; treated households were also 70 percent more likely to purchase pigs than the comparison group. No impact was found on the value of loans that farmers took out between harvest and the end of the six-month storage period, or in farmers’ outstanding loan amount or the overall number of loans taken out during this period.

The program increased treated households’ spending on agricultural inputs by 107 percent; the amount of seeds purchased by program households was 66 percent higher than that purchased by households in the comparison groups. While the program appeared to have a positive impact on households’ food security two months after storage, that impact was no longer detectable by the start of the lean season. More research is needed to better understand the impact of inventory credit on food security.

Overall, the study suggests that inventory credit can be an effective way to increase important agricultural and non-agricultural investments in rural areas. Says Delavallade, “Warrantage can be a trustworthy system, which allows farmers to diversify and boost their incomes by taking advantage of fluctuations of agricultural prices, thus fighting food insecurity, as well as bolster children’s education.”

The November conference has received strong positive feedback, particularly regarding its interactive format that allowed for in-depth discussions of the topics presented. Three news articles were released following the events, and a fourth article covering lessons learned is planned for the coming months. 

By: Sara Gustafson, IFPRI

Photo credit:Sarah Diederich / SIM