Interlinked Credit and Farm Intensification: Evidence from Kenya

Publication Details

Agricultural Economics, October 2002, vol.31, iss.2–3, pp.209-218. Available From:

Link to Source
Author
T. S. Jayne, Takashi Yamano, James Nyoro
Institutional affiliations
None specified
Grant-holding institution
None specified
Country
Kenya
Region
Sub-Saharan Africa (includes East and West Africa)
Sector
Agriculture and Rural Development
Subsector
Agricultural Credit, Agro-Industry & Marketing, Rural Livelihoods
Subsector
Agricultural Credit, Agro-Industry & Marketing, Rural Livelihoods
Equity Focus
None specified
Evaluation design
Instrumental Variables (IV)
Status
Journal Article

Methodology

Interlinked credit (ILC) programs in Kenya consist of loans of fertilizer given to farmers by firms that purchase and process commercialized crops such as coffee, tea, and sugarcane. The farmers can use the fertilizer to grow these cash crops, which are then sold back to the firms. Farmers face a trade-off between the income-enhancing cash crops and their typical food crops (non-ILC crops), which they use for subsistence. In this article, the authors attempt to study the potential spillover effects of ILC programs. They argue that participation in the ILC program increases fertilizer usage on food crops, either because farmers directly use ILC fertilizer on non-ILC crops (if physically possible) or because farmers use their ILC-earned income (from the sale of crops grown with ILC fertilizer) on non-ILC fertilizer.
The authors use a two-year panel of rural household surveys conducted in 1997 and 2000. The households had been selected randomly using a sampling strategy devised by the Central Bureau of Statistics. The authors restrict their analysis to areas in which ILC is available, leaving them with 825 households.
Given their panel structure, the authors incorporate household and village fixed effects to account for unobservable heterogeneity. Since ILC-credit status may still be correlated with un-observables, the authors use the interaction between village-level ILC-crop prices from the previous year with ILC-village dummy variables as the instrument. This is because traders use past production information from farmers to select borrowers and choose credit limits.

Main findings

The results from regressing whether a household receives ILC credit on the instrument show that the instrument is valid for certain ILC crops. There is a significant, positive relationship between village-level prices for coffee and tea and whether a household receives ILC credit. The opposite relationship holds for sugarcane prices. The IV estimation shows that the impact of ILC credit significantly increases farmers' use of fertilizer nutrient use on non-ILC crops. However, this result is significant only at the 10 per cent level. Farmers receiving ILC credit use 15.05 kilograms more of fertilizer nutrients than do similar farmers who received no credit. Given that the average level of fertilizer-nutrient use among non-borrowers is 18.6 kilograms; this is almost an 81 per cent increase in use among those who do borrow. The authors conclude that ILC credit programs have the potential to increase not only farmers’ incomes but also farmers’ production of food crops. This runs counter to the view that subsistence-level farmers would not grow cash crops, since time and land constraints would leave them unable to provide for their household. However, the authors note that this program would be sustainable only if firms are able to recoup their up-front costs when they buy back the cash crops from the farmers.

Policy Lessons

The results from regressing whether a household receives ILC credit on the instrument show that the instrument is valid for certain ILC crops. There is a significant, positive relationship between village-level prices for coffee and tea and whether a household receives ILC credit. The opposite relationship holds for sugarcane prices.
The IV estimation shows that the impact of ILC credit significantly increases farmers' use of fertilizer nutrient use on non-ILC crops. However, this result is significant only at the 10 per cent level. Farmers receiving ILC credit use 15.05 kilograms more of fertilizer nutrients than do similar farmers who received no credit. Given that the average level of fertilizer-nutrient use among non-borrowers is 18.6 kilograms; this is almost an 81 per cent increase in use among those who do borrow.
The authors conclude that ILC credit programs have the potential to increase not only farmers’ incomes but also farmers’ production of food crops. This runs counter to the view that subsistence-level farmers would not grow cash crops, since time and land constraints would leave them unable to provide for their household. However, the authors note that this program would be sustainable only if firms are able to recoup their up-front costs when they buy back the cash crops from the farmers.
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