Working Paper 192 - Empirical Analysis of Agricultural Credit in Africa: Any Role for Institutional Factors

A strong and efficient agricultural sector has the potential to enable a country feed its growing population, generate employment, earn foreign exchange and provide raw materials for industries. It is however ironical that despite the great potentials Africa has in agricultural production; the continent is a net importer of food. Aside the problem of poor access to land and modern technology, the major bane of Africa’s agricultural development commonly cited in the literature is low investment or credit. It is in the light of the above that this study examined the extent of agricultural credit and the factors responsible for the level of agricultural credit in Africa. The agricultural credit model was estimated using the panel data covering 1990-2011 generated for ten countries selected across the five sub-regions in the continent. Both fixed and random effects models were estimated and compared with the Pooled OLS. Our finding reveals that higher savings rate produces greater agricultural credit in the continent. Although, savings rate is generally low in Africa, the impact of savings on agricultural credit is still massive. All the four governance variables- Corruption index, Rule of Law index, Regulatory quality index, and Government Effectiveness index- have negative impact on agricultural credit in the continent. The interest rates being charged by the various financial institutions especially commercial banks have adverse effects on credit to the agriculture sector. Land available for agriculture has positive significant impact on agricultural credit in Africa. Overall, governance issues are crucial to addressing the challenges of low and dwindling agricultural credit in Africa.