Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
Impact of Donor Organizations’ Intervention on Agricultural
Banking in Africa
Giorgi Kharshiladze
JEL Codes: Q14, G21, F35, F53
Introduction
The major part of the population of African countries live in the rural areas and the
agriculture is main source of such dwellers’ livelihood. Access to agricultural credit is a
milestone in the context of rural development of these countries. As Duong and Izumida
(2002) state agricultural credit is expected to play a crucial role in agricultural
development. Farmer needs access to financial resources for enhancing his capabilities.
Igben (1987) states that the great majority of farmers depend on “external” financial
sources for executing their business activities.
“In recent years, there has been much discussion about the causes of the slowdown
in growth of agricultural production, especially in the context of the world food crisis, which
severely hit developing countries in 2007 and 2008. The decline in agricultural investment,
including a decline in the share of the agricultural sector in the aggregate investment, was
considered to be a major contributing factor to this crisis. Two components of investment
in agriculture have drawn particular attention as being of vital importance in this context.
One is the trend in foreign aid to agriculture, and the other is the trend in domestic public
expenditure on agriculture.” (Islam Nurul (2011)).
As Ayoola and Oboh (2000) mention that availability of sufficient capital is vital for
each segment of agricultural production. Capital determines access to all other relevant
resources on which farmers depend. There is evidence that well applied farm credit
stimulates capital formation and agricultural diversification. enhances productivity of
resources, enlarges farm operations, fosters innovations, increases marketing efficiency,
incomes and value added (Nwagbo et al., 1989).
Access to financial services in rural areas of developing countries continue to be a
vexing problem and the debate still rages of what would be the best institutional format for
improving access. Pervaiz Urooba et al. (2011) emphasizes credit availability issue and
states that “Making credit available and ensuring its productive use should therefore form
the basic planks of any credit policy to foster agricultural productivity…”.
On the other hand international donor organizations play one of the important role in
fostering agricultural sector’s development and prosperity worldwide and especially in
Africa where this sector has vital importance as it is the major mean for poverty reduction.
Besides donors give some banks impetus to direct their loans to the agricultural sector.
“Eventually, donors aim to transform producers’ organisations into private co-operatives
which may possess higher credibility in business negotiations, in particular those with
private banks… Access to credit is another important area where donors provide support.”
(Yoshiko, Matsumoto-Izadifar (2008)).
_______________________________________________________
Giorgi Kharshiladze, Università degli studi di Roma Tor Vergata, e-mail: giorgikh_87@yahoo.com
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
As in CGAP report Douglas Pearce (2003) mentions “Donor agencies have
traditionally equated rural finance with agricultural credit, seeing it as an “input” to achieve
agricultural production targets or other project objectives.” In some cases this target was
achieved but in some cases with moderate effects.
This study tries to make motion about analyzing micro consequences of donors’
intervention in a number of banks of observed African states as well as macro influence of
such intervention in African countries in terms of agricultural loan volumes. In particular I
want to analyze selected banks that provide agricultural loans. Donors were related with
some banks in different ways: like providing relevant resources for financing agricultural
loans, making projects with them, training staff, giving assistance in various raised needs
and etc. My purpose is to identify such banks and those with no or moderate nexus with
donors and to compare their agricultural loan portfolios how were changed over time.
Statistical analyses will show whether donors’ role was significant in issuing agricultural
loans or other factors were more important. On the other hand I’ll try to analyze how
donors’ assistance to agricultural sector on macro level impacted issue of agricultural
loans on aggregate country level.
Selected macroeconomic and bank specific variables will be used for empirical
analyses.
Literature Review
Literature review on donor aid:
Obviously literature about foreign donors’ aid refers to macroeconomic analyses.
Most of studies focused on how they affected economic growth and other country level
macroeconomic aspects. There are plenty of such studies and analyses that provide
empirical evidence about donor’s importance and the consequences of their impact. The
topic is interesting worldwide for several countries as such interventions play a role of
catalyst in different areas of economy and social or other fields.
In the work of Feeny Simon (2005) some evidences are shown about the positive
impact of foreign aid on economic growth in Melanesian countries. Differently from other
papers regarding the impact of foreign aid that mostly focus on economic growth this study
investigates how foreign aid affects rural sector. Based on the findings of the report author
suggests that higher proportion of foreign aid should be directed to the rural sector. Similar
issue was studied by Alabi, Reuben Adeolu (2012) where he analyzed how foreign aid
affects various sectors of Nigerian economy. In particular he paid attention on the impact
of foreign aid on agricultural sector. He concludes that the proper aid coordination and
management is needed to have welfare impacts on the Nigerians. Kaya Ozgur et al.
(2008) found empirically that the relationship between growth in the agricultural output and
agricultural aid for rural development is positive and statistically significant. Authors
conclude that developmental aims of foreign assistance can be obtained if aid is targeted
for the agricultural sector of the developing countries.
More wide analyses was done by Loxley, J., Sackey, H.A. (2008). They examined
the effect of aid on growth in Africa. Authors found that aid has positive and statistically
significant impact on growth in African states. Aid-growth linkage was analyzed also in the
paper of Chowdhury Murshed and Das Anupam (2011). Authors results illustrate positive
long run relationship between growth rate of per capita real GDP and aid as a percentage
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
of GDP for four out of five observed countries. As a conclusion they mention that this
analyses tends to contribute the aid effectiveness hypothesis for South Asian states.
Inanga Eno L. and Mandah Etah (2008) in their paper find that in spite of difficulties to
distinguish the impacts of foreign aid finance from those of other growth-stimulating
factors, if foreign aid finance availed efficiently and effectively it can induce growth in a
stable macroeconomic environment. Similar liaise was studied by Gounder Rukmani
(2001) who found that total aid flows and its various forms has a significant impact on
economic growth in Fiji.
Contrary results was shown by Mallik Girijasankar (2008). He found that there exists
long run relationship between per-capita real GDP, aid as a percentage of GDP,
investment as a percentage of GDP and openness. However, the long run effect of aid on
growth revealed to be negative for most of the observed countries. Previous author’s
arguments were strengthened by the paper of Tiwari, Aviral Kumar (2011) who estimated
the effectiveness of foreign aid, foreign direct investment, and economic freedom for
observed 28 Asian countries. Also he found that aid had a negative impact on economic
growth in these countries if the aid flows were high.
Javier Rodríguez and Javier Santiso (2007) in their OECD discussion paper
mention that “over the past decade it was witnessed a double convergence. Aid donors
developed an increasing interest in the private sector. At the same time private banks have
managed formation of corporate social responsibility programs, sustainable lending and
microfinance programmes. As a result, there can be observed intensification of dialogue
between private banks and aid donors that itself opens new horizons for collaboration.”
Further Pearce Douglas (2003) mentions that “Donors can work with governments, the
private sector, NGOs, and communities to build an enabling environment for productmarket credit providers and for formal and informal financial institutions.”
Donor intervention in general has played an important and positive role in
strengthening and promoting financial system incorporating agricultural lending activities in
Sierra Leone as it is illustrated in the Sierra Leone Financial Sector Development Plan
(2009). As it is mentioned in the same report one of important debility of commercial banks
there was “The weak flow of finance to the rural and agricultural sectors” that was one of
the subject of donors’ intervention too.
It is considerable paper of Jacobson Jessica and Abduraimjanov Shavkat (2011)
where authors investigated how specific donors’ partner banks in Kyrgyzstan adopted new
product - microagricultural loans. In this case the donors’ assistance was carried out in two
directions: provision of credit lines and giving technical assistance in the process of
developing specific credit technologies. This is not an empirical paper but there is an
evidence that overall development of agri-crediting was a success and each participating
bank improved its own rates.
It is worth noting that “The backbone of financial systems remains micro-level, or
retail, financial institutions that provide services directly to clients. A wide range of financial
and non-financial institutions are required to serve the needs of poor people. Financial
sustainability is essential to reach significant numbers of poor people and to realize longterm social returns.
…
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
Donors have a long history of supporting the delivery of credit to specific target
groups. They have also helped build individual microfinance institutions, primarily (but not
exclusively) NGO microcredit organizations. But the range of retail financial institutions
with potential to serve poor people is much broader than NGOs and includes private and
state-owned commercial banks, postal banks, credit unions, savings and credit
cooperatives, member-owned community organizations, and other non-bank
intermediaries like finance or insurance companies.” (CGAP/The World Bank (2004)).
Thus it can be underlined that there is a dearth of studies that analyze the impact of
foreign donors’ aid intervention on agricultural banking. I’ll try to fill an empirical void
between the relation of agricultural banking and donors’ aid. Lukwago Daniel (2010)
mention the fact that “The government and donors recognize the need to increase the
availability of credit to farmers…”. But it is also worth noting that “The complicated
environmental, material, and production features of agriculture inhibit the demand for and
supply of credit and insurance, making it especially difficult to create sustainable financial
institutions to serve the sector.” (Meyer Richard L. (2011)). We can say the fact that
donors assistance for particular banks have influence on their functioning and performance
and is promoting financial expansion in terms of credits is theoretically clear but there is no
empirical evidence that provides with more deep analyses of bank by bank features of
such intervention.
Donors’ aid had quite noticeable attention from scholars but it was studied from the
other point of view rather that I am going to study in my paper. Present work thus attempts
to bridge this obvious gap in the literature. So it can be stated that the type of the research
questions that I am going to analyze was not tested before.
Literature Review on Agricultural Credit:
Most of the existing literature on provision of agricultural credit has focused mainly
on the lack of providers of rural financial services and the household demand for the
agricultural loans with little attempt to explore bank specific peculiarities that are
determinants of agricultural credit supply. More attention was directed to demand side
factors rather than supply side ones. “The factors affecting the demand for credit can be
categorized into two: the individual/household characteristics and the attributes of the
financial institutions. The individual/household characteristics include level of income, sex,
age, education and marital status. Attributes of the financial institutions that may affect an
individual’s/household’s decision to demand credit from that source include interest rate,
other terms of the credit, and distance to the provider.” (Mpuga Paul (2010)).
Majority of literature about determinants of agricultural credit supply are more
household and farm side analyses. Many authors studied socio-economic and
demographic factors that were influencing and significant factors for agricultural credit
provision. One of such studies is done by Oboh, Victor Ugbem., Ekpebu, Ineye Douglas.,
(2010) who analyzed how the credit allocation rates to the farm sector by arable crop
farmers in Benue State, Nigeria is influenced by socio-economic and demographic factors.
Authors found that the most significant factors were: age, education, farm size, household
size, length of loan delay and visitation by bank officials. The similar type of study was held
by Kumar Anjani, Singh K. M. and Sinha Shradhajali (2010). Results demonstrate that the
amount of institutional credit used by the farming households is influenced by a number of
socio-demographic factors such as: education, farm size, family size, caste, gender,
occupation of household, etc. Rahji. M .A.Y, Adeoti A.I (2010) tried to identify the factors
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
affecting Commercial banks decision to ration agricultural credit in South-Western, Nigeria.
Results show that the the factor having positive and significant impact on the probability of
being credit constrained by the banks was the number of dependents of household. More
factors were negatively and significantly affecting the banks’ decision to ration credit, these
were as follows: farm size of the farmers, previous year’s income, enterprises type,
household net worth and level of household agricultural commercialization.
Farmers access to formal credit was studied by Ibrahim, Saifullahi Sani., and Aliero,
Haruna Mohammed., (2012). The results of their study provide empirical evidence that the
farmers’ access to formal credit was significantly positively influenced by the collateral,
level of income, educational attainment and marital status. While age and sex have
insignificant positive influence. Significant and negative factors were interest rate and
transaction cost. Sholpan Gaisina (2010) studied the determinants of the credit access to
banks and also investment activities of agricultural enterprises in Kazakhstan. Results
indicate that access to subsidized credit has a significant importance. Besides credit
rationing is majorly determined by the size of arable land possessed by the agricultural
enterprise and the cost of equipment, expressing an ability of borrower to use them as
collateral.
As already mentioned availability of credit is also considered as crucial factor for
agricultural lending that was analyzed in the paper of Okerenta, S.I. and Orebiyi, J. S
(2005). Paper assessed the crucial factors that are taken into account by financial
institutions in provision of credit to farmers in the Niger Delta area of Nigeria. According to
results credit availability is vital in the supply of agricultural credit to farmers. On the other
hand transaction costs had least importance.
Onoja, Anthony O. et al. (2012) in their paper provide econometric analysis
demonstrating that stock market capitalization, interest rate and immediate past volume of
credit guaranteed by ACGSF had significant influence on the quantity of institutional credit
supplied to the agricultural sector over the observed period.
Agricultural credit from both bank and farm side features was analyzed in the work
of Betubiza, Eustacius N. and Leatham, David J. (1995). They developed the model to
examine the effect of selected demand and supply factors on nonreal estate agricultural
lending by commercial banks in Texas, USA. Results show that banks have reduced their
agricultural loan portfolios in response to increased use of interest sensitive deposits after
deregulation. Demand and supply side factors affecting agricultural lending was also
studied in the paper of Oluwasola O. and Alimi T. (2008). Here authors found that the
interest rate, farm expenditure, the amount borrowed from alternative sources, farm size
and savings were the main determinants of credit demand, while interest rates charged,
the level of savings of respondents, the amount of loan demanded and the proportion of
previous loans repaid were the major determinants of credit supply by the credit
institutions in south-western Nigeria. Akudugu M. A. (2012) tried to estimate supply and
demand side determinants of agricultural credit and found that in Ghana upper east region
age of farmers, gender and political affiliations among others are the main determinants of
credit demand by farmers. Some determinants of credit supply by the Rural Banks are
farm size, type of crop grown and the amount of savings made.
The impact of agricultural loan policies on agricultural loan volume change from
commercial banks was analyzed by Ladue Eddy and Thurgood John (1991). An
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
econometric model of changes in agriculture loan volume of New York commercial banks
indicates that interest rate spread, borrower analyses criteria and marketing policies
explain
a
significant
portion
of
loan
volume
changes.
In the paper of Afangideh (2010) is studied also bank lending to agriculture in
Nigeria. The results show that domestic credit to the private sector, stock market
capitalisation, real income and previous period bank lending to agriculture are affecting
directly and positively bank lending to agriculture but value traded ratio has a direct but
negative effect. Danilowska (2008) examined the impact of macroeconomic determinants
on the number and value of agricultural investment preferential credits in Poland. The
variables that were statistically significant were the index of price relations of sold
agricultural products to goods and services purchased by private farms, interest rate of
central bank and real interest rate paid by farmers. Hassan (2012) analyzed factors
affecting demand of agricultural credit in Pakistan. He found that climate change, interest
rate, investment in micro irrigation system and credit worthiness were statistically
significant factors influencing demand for credit in agricultural sector of Pakistan.
We can say that agricultural credit provision is quite problematic and complex for
banks because of several reasons that was analyzed in the paper of Pervaiz Urooba et al.
(2011) They found that in Pakistan majority of the small farmers are deprived of getting
loans, because almost all the financial institutions extend loans on grantee and
capacity/ability to repay. Hence, larger is the farm size the chances of access to loans
increase.
Research Objective
The overall objective of this research paper is to examine the impact of donor
organizations’ intervention on agricultural banking in African countries.
The following are the research questions:
1. Do donors’ loans for agricultural financing purposes to banks increase supply
of agricultural credit from banks?
2. Does the donors’ technical-vocational (education, training, etc.) assistance to
banks stimulate provision of agricultural loans from them
3. What effect has donor organizations’ intervention in agricultural sector on
countries’ agricultural lending in terms of volume?
The first two research question refers to the analyzes of the impact of donors
intervention on the supply of agricultural credit from banks in particular commercial banks.
Actually the point is to analyse bank related characteristics affecting issue of agricultural
loans. On the other hand the third question refers to more broad analyses, in particular I’ll
try to analyse the impact of donors’ other type of intervention on the agricultural lending on
the country level.
The first research question refers to the issue whether financing of loan capital of
commercial banks by preferential credits and subsidies increase provision of agricultural
loans from them. Donors were assisting several commercial banks in Africa to pave the
way in untapped agriculture market. Most banks there were experiencing problems with
relevant resources to enhance agricultural credit portfolio. For this aim they were providing
preferential loans for agricultural lending purposes. There were credit line on the annual
basis. Like in the case of Kyrgyzstan where international donor organizations provided
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
credit lines for agricultural lending that is illustrated in the paper of Jacobson and Shavkat
(2011). In the same paper it is stated that “What made the banks competitive was the
speed of disbursements … and the ability to offer a loan without placing real estate as
collateral…”. This is worth noting fact that because of donors’ intervention banks were
disbursing agricultural loans without requiring collateral and as a result clients were asking
more loans. As a conclusion “While the overall development of agri-crediting has been a
success, with a growth of 333 per cent by number and 335 per cent by volume in the past
year, each bank has developed at its own rate.”
The second one refers how technical, vocational and related support from donors to
the banking and financial system stimulates agricultural credit provision from banks.
Donors sometimes provide special assistance for some banks for improving agricultural
credit technologies. For instance: sending agricultural credit specialists, training staff,
providing relevant assistance for microagricultural lending activities, etc. As in the paper of
Jacobson and Shavkat (2011) is stated regarding the aforementioned assistance “The
programme worked with the banks to roll out the new product through the following
process. After a bank decided that it wanted to offer agricultural loans, programme
consultants would meet with the credit experts to explain agricultural lending and how it
differed from the other loan products and analyses. Credit experts were also told about the
importance of agriculture to the bank's future growth.” Further “all new loan officers were
fully trained in credit technologies on the job, both by programme consultants and by
experienced bank staff.” As a result of such intervention from international donors “Each
bank launched and developed the product depending on their interest in developing
agricultural finance.” This variable will be incorporated in the model as a dummy variable.
Starting from the year when there occurred such type of donors’ assistance it will be 1,
otherwise – 0.
The third research question is about if agricultural sector’s development fosters
borrowers to take agricultural loans. This assumption is based on the theoretical view of
Patrick Hugh T., so called “demand-following” phenomena that was originally introduced in
1966 and argues that “such an approach places emphasis on the demand side for
financial services; as the economy grows it generates additional and new demands for
these services, which bring about a supply response in the growth of financial system.” He
also mentions that “The nature of the demand for financial services depends upon the
growth of real output and upon the commercialization and monetization of agriculture and
other traditional subsistence sectors” (Patrick 1966). Following this hypothesis my
assumption is that due to the donors’ intervention in agricultural sector that will promote
the farmers to generate more income and thus become wealthier stipulating in turn higher
growth rates in agricultural sector. Hence, as a consequence of agricultural economy’s
growth we will have relevant financial development on face. I conjecture that donors’
intervention in agricultural sector that will make households and farmers better off will
increment the demand for pertinent financial sources – agricultural loans. The initial
hypothesis was studied afterwards by several scholars, some of them made strong
contribution, others support was moderate and some even refused such theory.
Methodology and Data
Previous researches on agricultural lending has mainly focused on the quality of
agricultural loan portfolio. A number of studies have investigated various credit evaluation,
credit risk and credit determinants on household or macro level. There is ample literature
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
about socio-economic and household determinants of agricultural credit supply by banks.
Less literature can be observed regarding bank specific determinants of agricultural credit
supply. And most of the studies about aid effectiveness were concentrated about how
foreign aid was affecting economic growth. However the effect of different types of donor
aids directed to agricultural and banking sector and their influence on the one hand on the
agricultural banks particularly on the size of the agricultural loan portfolio on bank level and
on the other hand on the country level was particularly neglected. Thus there is a need to
shed light on the impact of donors’ aids’ on agricultural loans extension on the bank and
country level.
There will be constructed two models related to the supply and demand of
agricultural credit. Impact of the donors’ intervention on the supply side will be analyzed on
the bank level, while the same impact on the demand side will be analyzed on the country
level.
Both demand and supply side factors affecting agricultural lending were analyzed in
several papers. I’ll try to take initial model that will be a subject of modifications, in
particular
including
there
variables
related
to
donors’
intervention.
So the impact of donors’ intervention on the supply of agricultural credit from banks
will be based on the papers of Betubiza and Leatham (1995) and Ladue Eddy and
Thurgood John (1991). Who analyzed supply as well as demand side factors affecting
agricultural lending from banks. One note: my model will not incorporate sociodemographic factors determining agricultural credit supply that were present in initial
models of some aforementioned researchers.
My assumption based on the previous researchers is following that there is the
linear relationship between the agricultural credit supply from banks and its determinant
factors. Thus the model can be formed in a following way:
BLi,t = α0 + α1DBi,t + α2DLi,t + α3IRi,t +α4BDi,t + α5BEi,t+ ɛi,t
α0 – constant and α1, α2, α3, α4 and α5 are coefficients, ɛ is error term.
Each i,t observation reflects the value of the dependent and explanatory variables in
terms of i bank for t year.
Agricultural banking is represented by banks’ Agricultural lending (BL) that is
assumed to be a function of Donor technical aid for banks (DB), Donor loans and
subsidies for banks (DL), Lending Rate on Agricultural Credit (IR), Bank Deposit (BD),
Bank equity (BE).
Dependent variable:
BL - Bank’s agricultural loan amount
Independent variables:
DB - Donor technical aid for banks
DL - Donor loans and subsidies for banks
IR - Lending Rate on Agricultural Credit
BD – Bank Deposit
BE – Bank equity
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
The demand side will be analyzed based on the paper of Afangideh, U. J. (2010)
and Oluwasola O. and Alimi T. (2008). The model will be as follows:
ABi,t = α0 + α1DAi,t + α2IRi,t +α3AGi,t + α4BBi,t+α5NSi,t + ɛi,t
α0 – constant and α1, α2, α3, α4 and α5 are coefficients, ɛ is error term.
Each i,t observation reflects the value of the dependent and explanatory variables in
terms of i country for t year.
Dependent Variable:
AB - Agricultural loan amount in the country
Independent variables:
DA - Donor aid for agriculture
IR - Lending Rate on Agricultural Credit
AG - Agricultural GDP per capita
BB – Density of bank branches
NS – Gross national saving
Our interest variables are three types of donors’ interventions: Donor loans and
subsidies for banks, Donor technical aid for banks and Donor aid for agricultural sector. All
other variables are control variables.
I introduce important explanatory variables in this model that is Donor aid for
agricultural sector, donor technical aid for banks and donor loans and subsidies for banks.
These three variables will be based on annual information, the first one is easily obtainable
from World Bank Africa Development Indicators but the latter ones need more endeavors
to obtain.
It can be distinguished two types of impact of donors’ intervention on the agricultural
banking in terms of loan volume. Firstly donors may provide direct loans with very low
interest rate or subsidies to some agricultural banks. (There are credit lines as already
mentioned before and also in some cases governments are as mediators in the loan
provision process from donors to target banks). Secondly, donors’ projects and
intervention in the agricultural sector development are promoting the boost of this sector
and it has adverse effect on the volume of agricultural loans as mentioned previously. It
can be stated that one of the most noticeable gaps that is hindering development of
banking services in rural Africa is poor infrastructure - for instance: electricity provision
problems, bad roads and lack of communications systems - which create impeding factors
for effective outreach to customers. As better infrastructure, better irrigation system, better
accessibility to the agricultural market and etc. are themselves impetuses for the growth in
agricultural sector and that means more income for farmers and rural population. This will
be the important factor for the banks not to be reluctant while giving loans for agricultural
purposes. The prosperity of agricultural sector creates favorable situation for farmers’
accessibility to agricultural loans. Also donors have different training and educational
activities the aim of which is to train bank staff in microfinance best practices in order to
back
up
more
effective
microfinance
components
in
bank
projects.
As Feeny (2005) states “The Relationships between Foreign Aid and the Rural
Sector: Foreign aid can have direct impacts on the rural sector and indirect impacts.
Foreign aid can impact directly on the rural sector by assisting growth in agricultural output
by providing agricultural research, education and training, irrigation and extension facilities
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Proceedings of European Business Research Conference
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and flood control schemes. Providing access to credit in rural areas will also help expand
agricultural production. Foreign aid will also impact positively on the long run productivity
of the rural sector by ensuring the availability of basic social services such as education,
health and sanitation facilities in rural areas. Further, the construction of rural roads will
allow the cost effective transportation of goods and can assist in building important
linkages with marketing centres and other rural communities. A good transportation
network will ensure that domestically produced agricultural products reach the market,
reducing dependency on more expensive imported foodstuffs.”
In the World bank Africa development indicators through metadata the introduced
Donor aid for agriculture is explained as follows: – agricultural policy and administrative
management; agriculture development; agricultural water land resources; agricultural
water resources; agricultural inputs; food crop production; industrial crops/export crops;
livestock; agrarian reform; agricultural alternative development; agricultural extension;
agricultural education/training; agricultural research; agricultural services; plant and postharvest protection and pest control; agricultural financial services, agricultural cooperatives and livestock services. As we can observe the area of intervention of donors’
on agricultural sector is quite broad. We can see that this variable includes also aid for
agricultural financial services that is quite important for our research objectives.
On the other hand another variable representing donors’ intervention can be
explained as follows: donors sometimes provide consulting services and training to the
banks in how to establish microlending departments, and how to develop and add
products targeted toward microenterpreneurs to their array of financial services. Better
skilled bank staff, better management board and improved skills by training would enable
banks to adjust their loan portfolios on the specific needs, make more targeted
advertisements, broaden their products, etc. Besides Jacobson Jessica and
Abduraimjanov Shavkat (2007) mention that “Agri-lending can be successful if the staff are
trained and interested in agriculture.” The fact that the assistance in agricultural lending
activities for banks is important have underlined some scholars like Levonian Mark E.
(1996) who underlines that “...a particular type of lending can require specific investment in
systems and staff, leading to quasi-fixed costs that must be incurred regardless of the
quantity of lending done.”
It is noteworthy that “Long-term donor commitment (greater than five years) in the
form of technical assistance and financial investment has been a crucial ingredient of
success for many of these institutions.
Flexible, high-quality technical assistance can help financial institutions successfully
adapt their loan and savings products to rural client needs and market opportunities.”
(CGAP (2006)).
So the fact that donors’ intervention have influence on the agricultural sector are
analysed in a number of works as in the work of Simon Feeny (2005) about “The Impact of
Foreign Aid on the Rural Sector in Melanesia”. Thus the impact of foreign aid on the
agricultural sector is obvious. The light should be shed on the other side of impact of
donors’ intervention that is how they affect agricultural finance in particular the amount of
agricultural loans.
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Proceedings of European Business Research Conference
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Thus we are going to study agricultural loans of the African countries and their
commercial banks. It should be mentioned that “the only systematic data available for aid
flows across different countries over time have been compiled by the Organization for
Economic Cooperation and Development’s Development Assistance Committee
(OECD/DAC).” (Nurul Islam (2011)). Such data can be found in World Bank Africa
Development Indicator Database.
The macroeconomic country related data for our analyses is freely accessible on
World Bank Africa Development Indicators web site. The part of bank specific data
(deposits, equity) will also not be a problem to get from individual financial statements.
Rest of the data (annual amount of agricultural credit by banks, agricultural lending
interest rate, donors loans to banks, Donor technical aid for banks) requires more
endeavors to obtain.
Model Estimation
Ultimately researchers use panel data analyses as it gives larger data set and both
spatial and temporal analyses. Panel data analysis has gained high importance in
econometric analyses. It gives possibility to take the macro and micro observations at the
same time. Our data is containing macro and also micro information on annual basis. As
data will be on annual basis we will see the impacts of different types of donors’ aids in
long run perspective as it already will be occurred the consequences of intervention.
General panel data model form is:
Where
is a vector of explanatory variables not including a constant term,
is a
vector of coefficient of explanatory variables,
is heterogeneity or individual effect
where vector contains constant term and a set of individual or group specific variables,
which may be observed or unobserved and vector describe the effects of each individual
or groups and this effect considered to be constant over time t .
For each specified economic models I am going to carry out several estimation
techniques and robustness checking:
Pooled OLS regression model is most common and simplest version of the panel
data models. In this type of model we provide assumption that
contains the same
constant term and don’t change over i - over each of group. The model will be specified
this way:
Here, we have constant term instead of
as long as individual or group effect
does not exist by assumption. After application of regression we will carry out Breusch and
Pagan’s LM Test the null hypothesis of which is the irrelevance of unobservable individual
effect. In the case of rejecting the null, pooled OLS regression model will be considered
irrelevant, otherwise, we can use it as one of the relevant model for explaining the
interdependence to be studied.
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Proceedings of European Business Research Conference
Sheraton Roma, Rome, Italy, 5 - 6 September 2013, ISBN: 978-1-922069-29-0
Then the Random Effect Panel Data regression and Fixed Effect Panel Data
regression has to be conducted as far as the group effects between our dependent and
explanatory variables is considered to be exist over the countries/banks. Both Model
specification can be written same way:
Here has been changed here by
regression model.
which is a group specific constant term in the
Fixed Effect Panel Data regression model implies that the unobservable
individual effect exists, but correlated with
Random Effect Panel Data regression implies that the unobservable individual
effect exists, but uncorrelated with
We will use Hausman test and Sargan-Hansen Over-Identification Test for testing
the existence of correlation between unobservable individual effect and explanatory
variables. The null hypotheses of both tests are absence of correlation between
unobservable individual effect and explanatory variables and alternative hypothesis is
existence of correlation. If the null hypothesis is not rejected, we can consider Random
Effect Panel Data model most appropriate way of carrying out the analysis. If the null
hypothesis is rejected, Fixed Effect Panel Data model will considered as most relevant.
Besides will be done dynamic panel data regression. Several tests will show us
which of these model is appropriate for our type of data analyses and upon which base we
will make some conclusions about agriculture lending determinants.
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