An econometric analysis of bank lending and agricultural output in South Africa: A survey approach

Abstract

This paper analyses the role of credit on the performance of smallholder farmers in South Africa. Applying survey data involving 362 respondents from North West and Mpumalanga provinces the study utilises the Ordinary Least Squares to estimate the Cobb-Douglas production function with agricultural output as the endogenous variable and bank credit, land, labour and rainfall as the independent variables. Credit is observed to have a positive and significant influence on the agricultural output of smallholder farmers at the 1% level of significance. A 1% increase in the amount of credit yields a combined incremental effect of 0.375% on output. When disaggregated, short-term credit contributes 0.14% while long-term credit induces output growth of 0.231%. The coefficient for land was found to be positive and significant at 5%. Labour and rainfall, albeit positive were insignificant. The paper concludes that availability of both bank credit and land stimulate growth in the agricultural sector. Therefore policies directed at increasing the supply of credit to smallholder farmers are recommended.