Use of credit and its impact on small-scale farmer development in KwaZulu-Natal.

Abstract

In 1995, the Strauss Commission of Inquiry was appointed to investigate rural financial services in South Africa. The inquiry was premised on the traditional view that the provision of financial services is a key strategy for rural development. New Growth Theory correctly emphasises that emerging farmers may face other, more binding constraints than liquidity. The first part of this study attempts to identify and prioritise liquidity and other constraints facing small-scale farmers. Credit becomes a relevant issue when low levels of liquidity are identified as an important factor constraining small-scale farmers. The second part of the study investigates factors responsible for external and internal credit rationing by small farmers. Data for the analysis were gathered from farm households in two districts of KwaZulu. A logit model is used to examine the extent of liquidity constraints relative to other constraints inhibiting small-scale fanning in KwaZulu-Natal. These other constraints include poor access to land, labour and information, and high transaction costs. The results suggest that liquidity is very important, while imperfect land markets, information, and high transaction costs are also significant inhibiting factors. The Heckman two-stage procedure is used to identify and rank the determinants of internal and external credit rationing in rural households. The results show that high transaction costs faced by rural households' limit their access to formal credit markets. Income and savings levels are significant determinants of the level of credit obtained, with savings acting as a substitute for credit rather than a source of information and collateral for lenders. Ownership of livestock does not contribute significantly to the level of credit used, but this is not surprising in view of their high collateral-specific risk. Better access to credit markets in rural areas will require public investment in infrastructure, literacy and vocational training, and legal reform in order to reduce transaction costs, improve income levels, and facilitate the efficient use of collateral.