Credit and Agricultural Productivity: Finding the Connection

Although Uganda has favorable agro-ecological conditions for farming, the country’s agricultural yields remain lower than the global average. For example, Irish potato yields in Uganda average 4.7 mt/ha, only 23 percent of global average yields; rice productivity is also low at 2.5 mt/ha, half the global average. A new study from the Uganda Strategy Support Program (USSP) on rice and potato farmers finds that increasing farmers’ access to credit can improve agricultural productivity – but not necessarily through the channels one might expect.

It is a commonly held belief that many farmers in developing countries do not use modern inputs like fertilizers or improved crop varieties because they cannot afford it; this suggests that if farmers have access to credit, they would be better able to afford such inputs and thus to improve their agricultural productivity.

The USSP study suggests, however, that having access to credit does not necessarily mean farmers will invest more in inputs like fertilizers and pesticides. The study’s findings regarding input use due to improved credit access are mixed. For the rice farmers surveyed, there appears to be no connection between reported access to credit and fertilizer use; however, a significantly higher share of rice farmers who report having access to credit use pesticides than those who report not having access. On the other hand, potato farmers who report having access to credit use slightly more fertilizer than those who do not, but access to credit does not seem to impact pesticide use for potato farmers.

According to the study’s authors, these findings point to the fact that farmers who receive credit may not spend that credit exclusively on agricultural investments such as fertilizers or pesticides. In fact, most farmers surveyed used credit to pay school fees; use of credit to pay for agricultural inputs came second, followed by use of credit to pay farm labor, buy or hire land, and pay for household consumption expenditures or medical costs. Finally, a significant share of farmers use credit to start a business, such as light agro-processing, or to pay for social ceremonies like weddings and funerals.

While many of these expenses do not seem directly related to agriculture, the study suggests that they may still lead to increased agricultural productivity. For example, schooling can be used to increase households’ agricultural knowledge by transferring information from literate school-aged children to illiterate parents. The study posed a series of questions regarding recommended agricultural practices and used farmers’ responses to calculate a standardized knowledge score; using linear regressions, the authors found a positive relationship between the number of a household’s members who were in school and the overall household knowledge about recommended agricultural practices; however, this finding only held true among potato-growing households.

Similarly, using credit to pay for social ceremonies such as weddings and funerals can enhance agricultural productivity through social learning. The study found that farmers who reported no access to credit knew, on average, about six other farmers who were using improved crop varieties and between three and four other farmers who were using fertilizers; these numbers jumped to more than 20 and more than 10, respectively, for farmers who reported having access to credit in both rice-growing and potato-growing households. This suggests that having access to credit expands farmers’ networks, giving them more peers from whom they can learn. Importantly, the study also found that having a larger social network can result in having larger agricultural yields – for every one additional person in a farmer’s network of fertilizer-using peers, yields increased by about 35 kg; for the network of farmers who use improved crop varieties, this increase was about 10 kg. Overall, having access to credit was associated with 515 kg higher yields due to social learning effects.

The study’s findings have several important implications for programs that aim to increase access to and use of credit in developing countries. Most importantly, the authors suggest that micro-finance and commercial banks should be more open to providing generalized credit rather than credit that can be used only for agricultural inputs; this would enable households to take ownership of decisions about how to use credit, including for schooling fees and societal commitments. Organizations will also need to recognize and accept that these secondary pathways to increased productivity will often take longer to produce results than the use of agricultural inputs.

Second, credit providers can take advantage of these secondary pathways to increase the likelihood that increased access to credit will translate into increased productivity. For example, organizations could sponsor school courses that teach proper agricultural intensification techniques and best practices in order to optimize the information transfer between schoolchildren and their households.

The authors conclude by pointing out that further detailed study is needed to understand exactly how, and how much, these secondary pathways truly impact agricultural productivity. 

By: Sara Gustafson, IFPRI

Photo credit:Flickr: C.Schubert