Is there discrimination against the agricultural sector in the credit rationing behavior of commercial banks in Ghana?

Abstract

Purpose The purpose of this paper is to examine if credit rationing persists even in the era of financial liberalization, the extent to which individual, firm and loan characteristics influence the rationing behavior of commercial banks and whether the agricultural sector is discriminated against in the commercial bank credit market. Design/methodology/approach The study employed a probit model with marginal effects and a generalized Blinder-Oaxaca decomposition estimation on a randomly selected data of 1,239 entrepreneurs from eight commercial banks’ credit records about their individual, firm and loan characteristics. Findings The study revealed that credit rationing persists and that applying for a relatively longer payment period, providing collateral and guarantor, being illiterate, being relatively older and being in the agricultural sector increases the likelihood of being credit rationed, while having some relationship with the bank, having non-mandatory savings and applying from a bank with relatively high interest rates reduce the likelihood of being credit rationed. The study also revealed a credit gap of 17.77 percent and a positive discrimination against borrowers in the agricultural sector as the gap was largely being influenced by unexplained factors. Research limitations/implications The research was intended to cover a large number of commercial banks in Ghana. However, most of the banks were unwilling to provide such information about their borrowers; hence, the research was limited to only eight commercial banks who provided the author with the information needed for the study. Practical implications The study concludes that policies that enhance human capital, women, and older access to credit and agricultural-oriented financial services and others, will go a long way to reduce rationing and increase access to credit, especially to the agricultural sector. Social implications The research proposes the use of group lending as a form of collateral and monitoring to ease risks and default, and hence supports sustainable funding to increase access and outreach. Originality/value The paper looks at the comprehensive way about the various factors determining credit rationing in that it considers not only the individual, economic/firm and loan characteristics but also the extent to which discrimination toward the agricultural sector exists in the commercial banks credit market.

Analysis of extent of credit access among women farm-entrepreneurs based on membership in table banking (TB)

“…Younger women farmers are more aggressive hence it is much easier for them to access credit facilities for their farm enterprises compared to the elderly farmers. According to Abdul-Jalil (2015) and Sackey (2018), the age of a farmer reduces the tendency to borrow loans since individuals might be physically weak to be able to work hard enough to generate the income needed to repay loans. However, it is also argued that older farmers tend to have relatively more accumulated wealth which they can use as capital to invest in their agribusiness enterprises instead of taking loans.…”

Microcredit and technology adoption

“…However, the percentage of farmers who accessed credit was low, which accounted for about 23 percent. Only a few farmers have access to formal financial institutions due to lack of collateral and/or guarantee that limits those farmers from attaining sufficient capital (Sackey, 2018). The formal channels including microfinance banks and other non-bank financial institutions can enhance their outreach by relaxing the collateral conditions and the procedural documentation.…”

Inclusive finance and agricultural development in Africa

“…The direct and indirect costs of interest rates and distance negatively affected participation. Sackey (2018) finds that credit rationing persists and that applying for a relatively longer payment period, providing collateral and guarantor, being illiterate, being relatively older and being in the agricultural sector increases the likelihood of being credit rationed, while having some relationship with the bank, having non-mandatory savings and applying from a bank with relatively high interest rates reduce the likelihood of being credit rationed. Asante-Addo et al (2017) find that farm households participate in credit programs because of improved access to savings services and agricultural loans, yet fear of loan default (risk rationing) and lack of savings are reasons for non-participation in credit programs.…”