Factors affecting Tea credit utilisation and its impact on farm income in Nyaruguru District, Rwanda

Abstract

The role of agricultural credit is unquestionably a factor in improving farm outputs. In Rwanda, the efforts to lessen barriers for smallholder farmers to accessing credits are clear to improve farmers’ professionalisation and farm productivity. Tea production is among value chains selected in the National Agriculture Policy and the Sector Transformation Strategy. In addition, it is significantly contributing to the monetisation of the Country’s economy and raised income for households in the rural areas. Since 2012, tea expansion program has contributed to the increased demand for credits by tea farmers. Despite this growth, the sub sector is still challenged by the low production of green tea leaves which affect the production of tea processing factories and the targeted tea exports’ volume. Poor tea credits performance is amongst the challenges. The main objective of this study was to contribute to the sustainable management of tea credits by investigating the factors that influencing credit utilisation in tea production areas and its impact on farm income in Rwanda. A survey was conducted on 358 tea growers selected randomly from two cooperatives operating in Nyaruguru District in Southern Province of Rwanda. Three econometric models; Multivariate Probit, Fractional Logit and Endogenous Switching Regression models were used to analyse factors of credit sources selection, credit utilisation and its impact on tea farm income respectively. The results showed that informal sector remained predominant to lend tea farmers with 81% against 31% of the formal sector. Borrowing from formal sources was influenced by the disposable collateral asset (85.5%), interest rate (85.0%), size of owned tea plantation (24.8%), and household composition (10.5%). The utilisation of informal sources increased if farmers needed small credit (83.2%), participating in training on technical production (76.9%) and is they accept to borrow in groups (46.9%). Combining sources of credit was also common (86%) to top up the balance. Utilisation of accessed credits for tea production was influenced by receiving credit in groups (p<0.01), training on tea production and credit management (p<0.01), production costs (p<0.01) and credit from informal sources (p<0.01). Off-farm businesses (p<0.01) and larger credit amount (p<0.01) both increased incidences of credit diversion. The causal effect of credit was a 7% increase in tea income for farmers who utilised credit for tea, while its potential effect was up to a 55% decrease in income for those who diverted credits. Framers’ cooperatives have a positive on credits performance when they are involved in lending and credit management. Credits in form of inputs and procuring farm inputs in bulk should be vigorously pursued to discourage credit diversion. Finally, there is need of policy actions that harmonise financial interventions and integration of other socio-economic attributes that have real-valued utilities for households to sustain living needs.