The role of bank credit on agricultural output of small-scale farmers in South Africa

Abstract

There has been an on-going debate on the relationship between bank credit and agricultural output, especially in developing countries. Several studies conducted have mainly found that credit has a significant positive impact on the agricultural output. Access to bank credit is very important in improving the living standard of the rural people in agricultural communities. The small-scale agriculture sector has been identified as a weapon which can be used to fight unemployment and poverty. With increased access to credit, small-scale farmers have a role to play in bettering this situation. Though literature has emerged on the impact of bank credit on agricultural output, there appears to be limited literature on the effect of bank credit on agricultural output among South African small-scale farmers and thus present a research gap in this respect. In order to empirically investigate the long-run relationships and short-run dynamic interactions between the agricultural gross domestic product of small-scale farmers and bank credit, as the focus of the study, the Johansen and Juselius (1990) co-integration method and the vector error correction model (VECM) were employed. Capital investment, labour and rainfall are the control variables. The VECM was used to establish the long-run and short-run relationship. Annual time series data from 1978 to 2020 was used. In the long run we found that bank credit, capital investment and labour have significant positive impact on agricultural output of small-scale farmers in South Africa while rainfall has significant negative impact on agricultural output. In the shortrun, we discover that capital investment has a significant positive impact on agricultural output in the short-run whereas bank credit and other control variables reflect negative impact on agricultural output. Nevertheless, the ECM coefficient is negative and highly significant, showing that agricultural gross domestic product rapidly adjusts to short-run disruptions. Based on these findings, this study recommends an increase and continuous supply of long-term bank credit to small-scale farmers since it has ability to accelerate agricultural output and expand farming operations. The study promotes policies that will increase and maintain the availability of bank credit for small-scale farmers at low interest rates.