Lending to Agribusinesses in Zambia

Microfinance has been celebrated in the last decade as a new paradigm shift in lending that has achieved immense success in improving the living standards of the poor through the provision of financial services. Institutions involved in microfinance around the world have used innovative loan contract mechanisms to profitably lend to the poor and achieve very high repayment rates while allowing the borrowers to profit and grow their enterprises. While high repayment rates have been realized by microfinance institutions focused on lending to consumers and to retail-type micro enterprises, few microfinance institutions focused on lending to agricultural producers have achieved comparable success. This article compares the mechanisms employed by major microfinance institutions with a successful lending institution in Zambia that serves agricultural businesses. Findings are: ZATAC uses progressive lending and group lending contracts adapted in some ways to suit seasonal agricultural production credit requirements. The institution also uses various forms of collateral substitutes like other microfinance institutions. We also find that ZATAC uses other mechanisms such as automatic loan repayments tied to production, cooperative sanctions, contracted production and provision of business development services that eventually improve loan repayments significantly and enable the lender to lower interest rates.Agribusiness,

Financing smallholder agribusiness in Zambia: an economic analysis of the ZATAC model

This study investigates the case of a Zambian institution providing credit for smallholder agribusiness commercialization and compares this lender’s model with the major microfinance institutions, to identify specific mechanisms employed by the lender and how these have been adapted to suit seasonal agricultural production credit requirements. Econometric models are developed to examine the influence of key economic factors such as nominal and real interest rates, loan fees, and loan term on the supply of credit by the lender. Other important factors considered relevant in the lender’s market include availability of contract markets for financed production and the type of borrower (cooperative or investor-owned agribusinesses). The study uses loan-level and firm-level loan data aggregated from an electronic loan database of individual loan files kept by the lender. Cross sectional data over three years (2005 – 2007) are used in the study. The study finds that loan fees, loan term and availability of contract markets to borrowers are the key determinants of credit supply. In addition, the study finds that interest rates do not significantly influence the lender’s credit supply decisions, a finding that is consistent with literature on credit rationing in markets with asymmetric information. The study finds no evidence of economies of scale benefit to the lender being passed along to borrowers through lower loan fees. The study contributes to the literature and development needs of agricultural lenders and smallholder agribusinesses in Zambia through the analysis of different factors that influence the lender’s credit supply decisions

Lending to Agribusinesses in Zambia

Microfinance has been celebrated in the last decade as a new paradigm shift in lending that has achieved immense success in improving the living standards of the poor through the provision of financial services. Institutions involved in microfinance around the world have used innovative loan contract mechanisms to profitably lend to the poor and achieve very high repayment rates while allowing the borrowers to profit and grow their enterprises. While high repayment rates have been realized by microfinance institutions focused on lending to consumers and to retail-type micro enterprises, few microfinance institutions focused on lending to agricultural producers have achieved comparable success. This article compares the mechanisms employed by major microfinance institutions with a successful lending institution in Zambia that serves agricultural businesses. Findings are: ZATAC uses progressive lending and group lending contracts adapted in some ways to suit seasonal agricultural production credit requirements. The institution also uses various forms of collateral substitutes like other microfinance institutions. We also find that ZATAC uses other mechanisms such as automatic loan repayments tied to production, cooperative sanctions, contracted production and provision of business development services that eventually improve loan repayments significantly and enable the lender to lower interest rates