The Dynamics of Rural Credit and Its Impacts on Agricultural Productivity : An Empirical Study in Rural Ghana

Rural households in developing countries continue to have limited access to credit although credit is thought to play a vital role not only in agricultural activities but also in poverty reduction through improving the economic and social wellbeing of the people. Existing studies on rural credit do not allow us to clearly understand the relationship between agricultural production and credit. The main objective of this study is to investigate the relationship between access to credit and agricultural productivity using Ghana as a case study. Data were collected with structured questionnaire from 109 farm households who were categorised into borrowed and non-borrowed households. The results revealed that 66% of the sampled households (109) do not have access to credit. Non-borrowed households on average spend more (GHc675.6) on variable inputs than borrowed households (GHc652.6). However, the yield productivity (cassava, maize and yam) of borrowed households is larger than that of non-borrowed households and the difference is statistically significant at 5% confidence level. Average profit of borrowed households (GHc468.14) is also larger and statistically different from that of non-borrowed households (GHc323.48). The main factor that distinguishes borrowed households from non-borrowed households is livelihood diversification. The reason is that financial institutions prefer given credit to diversified households because of their ability to spread risk across a number of income generating activities. Results of the study imply that for a household to access credit, they must first improve agricultural productivity and this can be achieved by crop diversification. Access to credit will then help the household to diversify the livelihood more and diversification further, will allow such to have access to more credit. We argue that borrowed households with diversified livelihood have the potential to reduce vulnerability and enhance resilience even though using credit for non-farm activities is seen as risk taking strategy. We conclude by proposing an innovative development transitional model with the potential to increase productivity and enhance resilience