Formal And Informal Credit Demand By Rice Farmers In The Northern Region Of Ghana

ABSTRACT Limited access to credit is one of the fundamental problems faced by rice farmers in the Northern Region of Ghana. As such, it is the aim of government and other organizations such as the Food Security and Rice Producer Organization (FSRPOP) to increase rice farmers‟ access to credit. However, studies on the demand side of the credit market of rice farmers that would help formulate appropriate policies essential for increasing rice farmers‟ demand for credit are missing. The study provides evidence on the demand side of credit market of rice farmers by identifying the sources of credit to rice farmers, estimating the demographic as well as socio-economic factors that affect rice farmers‟ demand for formal and informal credit, and ascertaining whether formal and informal credit are substitutes or complements using survey data of 200 rice farmers. The study adopts the probit estimation method to estimate the overall determinants of credit demand and the bivariate probit estimation technique to jointly estimate the determinants of demand for formal and informal credit and to ascertain whether formal and informal credits are substitutes or complements. The results of the study revealed that formal sources of credit to rice farmers comprised of universal banks, rural banks, and other formal credit sources. Informal credit sources on the other hand comprised friends and relatives and money lenders. Specifically, formal credit demand is significantly influenced by the gender of the farmer, household size, education, agricultural commercialization and location. Informal credit demand on the other hand in addition to being negatively influenced by age and education, is positively influenced by household size, level of agricultural commercialization, engagement in other economic activities in addition to rice farming and value of assets. The result of the bivariate probit suggests that formal and informal credits are perfect substitutes to rice farmers. iv The study recommends that formal banks should be motivated to grant credit to farmers, policies should be designed to encourage farmers become more commercially oriented, credit schemes provided by government should target those farmers with high level of agricultural commercialization since they are more likely to demand credit, the government and policy makers should initiate specific policies that will either mandate or motivate formal financial institutions to get representatives in rice producing villages educate farmers on their lending procedures, assist farmers fill loan application forms, thereby making the access and use of formal credit more convenient to farmers.