Estimating farm-level financing gap: a technical efficiency approach

Abstract

Purpose

Much attention has been paid to farm credit access with less focus on determining the actual credit amount needed to bring about a specified increase in productivity relative to the finance being sought. The paper aims to discuss this issue.

Design/methodology/approach

Using 2016 cross-sectional data of plantain farmers, the authors employ the Cobb–Douglas stochastic frontier production function to determine the technical efficiency (TE) of each farmer. Current plantain quantity produced by farmers and the TE are then used to estimate plantain quantity at a target efficiency. The finance needed to produce at the target efficiency is estimated using the Harrod–Domar (HD) growth equation and the authors then subtract the farmers’ savings from the estimated amount to determine the financing gap of the farmers.

Findings

Results of this study show that the actual amount required to improve the productivity of farmers to target levels of TE can be estimated and that credit amount granted to farmers can be tied to a specific production efficiency. Credit schemes with interest rates below 9 per cent are more beneficial to farmers while access to credit is determined by interest rate, education, credit process duration, land ownership and asset value in the study area.

Research limitations/implications

The implication of this research is that it opens up the possibility of further exploring the application of the HD theory at the micro level.

Practical implications

The findings in this study have important implications on the provision of agricultural credit to small farmers. The first is that the TE of farmers plays a very critical role in determining the actual amount of credit needed to bridge the farm-level financing gap and impact positively on productivity. Second, while it is important to bridge the farm-level financing gap, this can only be beneficial to the farmers at single-digit interest rates below 7 per cent. Finally, granting of credit to farmers can be tied to specific production increase target to reduce indiscipline and mismanagement in credit use.

Social implications

The findings of this study will go along in helping to prevent mismanagement and indiscipline in the use of scarce financial resources in agricultural production.

Originality/value

This study is the first of its kind, using TE and bringing the HD equation down to the farm level to estimate the exact amount required by farmers to bring about specific increase in production, determining the credit amount beyond which mismanagement may set in.

Citation

Ojo, M.P. and Ayanwale, A.B. (2019), "Estimating farm-level financing gap: a technical efficiency approach", Agricultural Finance Review, Vol. 79 No. 2, pp. 174-191. https://doi.org/10.1108/AFR-02-2018-0008