The role of a credit guarantee in alleviating credit constraints among coffee farmers' cooperatives in Ethiopia

Abstract

This study explored the role and effectiveness of a credit guarantee scheme targeting coffee farmers’ cooperatives in Ethiopia. The study, among other things, aims at exploring how provision of a credit guarantee influences supply of institutional credit to coffee farmers’ cooperatives as well as examines cooperatives guaranteed loan utilisation, the resultant changes/impacts and intervening factors. Credit guarantee schemes largely trace their roots in the liberal and neoliberal economic and social contexts. One of the key issues the current study tried to address is examining how a credit guarantee scheme operates in a partially liberal capitalist context where there is pervasive state intervention in the key sectors of the economy, including financial and coffee sectors. The study was conducted in eight zones of the two major coffee producing regions of Ethiopia – Oromia and Southern Nations, Nationalities and Peoples’ regions. A mixed method with structured questionnaires (at two stages), key informant interviews, focus group discussions and extensive observation were used to collect data from primary cooperatives, financial institutions, coffee extension and cooperative experts. Qualitative analytical methods, descriptive statistics and econometric model were used in analysing the data. The study reveals that most primary cooperatives have weak institutional, business and financial capacities, and limited access to institutional services including credit. The findings show that cooperatives generally have limited role in the coffee production end, but they play an important role in its marketing. The study suggests that coffee or multipurpose cooperatives are not ideally suitable to serve as intermediaries for bank loans. The study reveals that the vast majority of the study cooperatives have potential demand for loans, but revealed low actual demand. Different sets of internal (demand side) and external factors influence cooperatives’ potential and actual demand for loan in different ways. The assessment of the guarantee scheme under analysis shows that though most of its design and operational features are in line with international practices, there are some obvious limitations. Low risk coverage level, limitation in the total volume of the guarantee fund, lack of capital enhancement mechanism for the lending banks, short life span of the scheme, lack of flexibility and adaptation and reliance on a single lending bank are among the notable limitations. In terms of utilisation of the guarantee fund and outreach of the lending activity, the scheme attained limited achievements with a low leverage ratio. However, substantial financial additionality was attained among the borrower cooperatives, but the intervention had little impacts in improving the terms and conditions of loans. The positive effects on the economic/business activities of beneficiary cooperatives include acquisition of processing facilities, increase in member size, increased volume of coffee processed and dry cherry traded and improvement in the income generated from such business activities. However, the scheme had limited effects on cooperatives’ human resources and type of management. A number of internal and external factors appear to influence effectiveness of a credit guarantee targeting farmers’ cooperatives. Several recommendations were made. First, there is a need to integrate attractive features into the scheme that can be periodically revised and adapted. These may include raising the risk coverage level especially at the initial stage, including liquidity boosting mechanism, lowering guarantee fee level, devising longer-term arrangement, integrating strong capacity building and technical support and other incentive packages. Second, the lending banks need to develop suitable loan products, revisit and improve their lending terms, requirements and approaches. Third, if they are to effectively demand for and make proper use of such guaranteed loans, cooperatives need to be supported so as to enhance their organisational, business and technical capacities. Fourth, there is a need for the government to further strengthen provision of a more supportive and enabling legal and institutional environments and relax some of the regulatory frameworks so as to facilitate the lending-borrowing activities.