Digital credit for smallholder farmers: Evidence from Madagascar
by Yaw Sarfo
Date of Examination:2023-07-13
Date of issue:2023-08-16
Advisor:Prof. Dr. Oliver Musshoff
Referee:Prof. Dr. Stephan von Cramon-Taubadel
Referee:Prof. Dr. Meike Wollni
Persistent Address:
http://dx.doi.org/10.53846/goediss-10059
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Abstract
English
The limited credit access for farmers compared to non-farmers in low-income countries, particularly in Sub-Saharan Africa (SSA) has been discussed broadly in literature. A recent innovation that has the ability to improve the credit access situation of farmers in SSA is digital credit. Digital credit are mobile delivered loans that are disbursed promptly following application, credit decisions are determined by algorithms, and it involves limited human interaction. Previous studies have highlighted the ability of digital credit to improve credit access to individuals in low-income countries, however, empirical research on individuals’ awareness, preferences and willingness to pay (WTP) for digital credit is largely limited, particularly for rural farmers. This cumulative dissertation – consists of three papers – contributes to the understanding of farmers’ awareness, preferences and WTP for digital credit by using primary data collected from smallholder farmers in rural Madagascar. The first paper “Farmers’ willingness to pay for digital and conventional credit: Insight from a discrete choice experiment in Madagascar” has two objectives. First, to investigate farmers’ WTP for digital credit compared to their WTP for conventional credit. Second, to investigate if credit attributes (e.g. loan duration) have a different effect on farmers’ WTP for digital credit compared to conventional credit. Using a discrete choice experiment (DCE), we find that for the same credit amount, farmers are on average willing to pay a higher price (interest rate per month) for digital credit compared to conventional credit. We also find that longer loan duration has a higher effect on farmers’ WTP for digital credit compared to conventional credit whereas higher additional credit cost has a lower effect on farmers’ WTP for conventional credit compared to digital credit. Additionally, we find that offering instalment repayment condition reduces farmers’ WTP for digital credit whilst increasing their WTP for conventional credit. The second paper “Farmers’ preference for digital credit: Does the delivery channel matter?” focuses on farmers’ preference for digital credit attributes provided by a financial institution and a mobile network operator (MNO). The second paper has two objectives. First, to investigate farmers’ preference for digital credit attributes. Second, to investigate the effect of credit characteristics provided by financial institutions and MNOs on farmers preference for digital credit. Using a DCE, we find that farmers generally prefer digital credit that has a lower interest rate per month, longer loan duration, and offers flexible repayment conditions adapted to their production needs. Furthermore, we find that interest rate per month has a higher effect on farmers’ preference for digital credit provided by a financial institution compared to digital credit provided by an MNO. Also, we find that loan duration has a higher effect on farmers’ preference for digital credit provided by an MNO compared to digital credit provided by a financial institution. Additionally, the findings also show that offering flexible repayment condition (instalment repayment) adapted to farmers’ production needs has a higher effect on farmers’ preference for digital credit provided by a financial institution compared to digital credit provided by an MNO. The third paper “Farmers’ awareness of digital credit: Does financial literacy matter?” has two objectives. First, to investigate the relationship between financial literacy and farmers’ awareness of digital credit. Second, to investigate the determinants of farmers’ awareness of digital credit. Using probit models and instrumental variable (IV) approach, we find that farmers who are financially literate are more likely to be aware of digital credit relative to their counterparts who are not financially literate. We further find that farmers’ age, monthly income and their access to remittance during the past 12 months are also important predictors for their awareness of digital credit in the study districts. In summary, this dissertation highlights the potential of digital credit for rural farmers in Madagascar and can be helpful for digital credit lenders and policy makers in the country to design suitable digital credit products and provide appropriate legislation to increase the adoption of digital credit in the country.
Keywords: Discrete choice experiment; Digital credit; Madagascar; Preferences; Smallholder farmers; Willingness to pay
