How financial inclusion would benefit smallholder farming in Senegal
This working paper (PDF) by the Institute for Economic and Social Studies (IEES) analyzes the extent to which farmers are credit-constrained and the underlying generating mechanisms in the specific agro-ecological region of the Senegal River Valley. Additionally it looks at how financial inclusion through the elimination or the reduction of credit constraints would benefit smallholders. Credit constraints are among key challenges to unlocking the great economic and social potentials of small farm agriculture in sub-Saharan Africa. It is recognized that credit constraints come in different forms to the extent that they translate into market entry barriers at the pre-application stage or contribute to deteriorate the credit profile at the post-application stage. The results suggest that credit constraints, mostly originated from high transaction costs and high risk, are harming farmers’ performance, and access to credit leads to increased yields and labor productivity. As far as improving access to credit is concerned, the results suggest to first distinguish between the initial, pre-application stage of removing the barriers to credit market entry (mostly in the form of transaction cost constraints and risk constraints), and the post-application stage that consists of tackling mostly quantity constraints associated with inadequate collaterals or insufficient returns. It is expected that easing these constraints would promote financial inclusion, and help tap into the great potential of farming activities through increased performance and improved livelihoods for a large share of the population, especially in rural areas.