Microfinance and agricultural productivity - A study exploring the relationship between access to credit and agricultural productivity

Abstract

This thesis establishes a macro-level analysis of how credit and microfinance affect agricultural productivity. We use fixed effects regression for panel data with countries as the cross-sectional variation from 2000 to 2018. We also use income categorization of countries from the UN to better understand for which income categories microfinance has an effect. The model consists of cereal yield as the dependent variable and disbursement to agriculture, fertilizer consumption, secondary school enrollment, and population growth as the independent variables. The research question of the study is: In what respect does access to credit affect agricultural productivity on a macro-level?

Our results show a significant effect of disbursement to agriculture on cereal yield, indicating that credit and microfinance have a positive effect on agricultural productivity. Secondary school enrollment has a positive effect on cereal yield, higher enrollment in secondary school leads to higher cereal yield. Population growth is also significant; higher age-dependency ratios lead to higher productivity. The results indicate no significant relationship between fertilizer and cereal yield.

The thesis adds value to the existing body of literature regarding development economics, especially credit and microfinance's effect on the well-being of the developing countries. Based on our results, access to credit leads to higher agricultural productivity. However, for low-income countries, no relationship is established. It supports earlier studies indicating a mismatch between microfinance and agriculture. Therefore, efforts to construct microfinance to better match the needs of farmers are required to promote higher agricultural productivity in low-income countries.