The effect of access to finance on commercialisation of smallholder maize farmers in Eswatini

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Phiri, Isaac
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African Economic Research Consortium
Agricultural commercialisation is defined as the increase in the amount of produce sold relative to the amount produced. Therefore, agricultural commercialisation leads to more efficient production, economic growth, food security, and urbanisation in the agricultural sector. Agricultural commercialisation plays an important role in the sustainability of any country’s economy. However, financial investment and support is necessary for commercialisation to be achieved. Finance is one of the major key economic factors that can boost agricultural commercialisation. Understanding the effect of finance on the commercialisation of the agricultural sector is important for all relevant stakeholders; and specifically among smallholder farmers who produce under difficult conditions. The study determined the effect of finance on the commercialisation of rural smallholder farmers in Eswatini. The main focus was on agricultural finance and the commercialisation of smallholder farmers. The main hypothesis of the study was that access to finance positively influenced the commercialisation decision of smallholder farmers. The data used in this study was collected from 150 households in the Hhohho and Lubombo regions of Eswatini. Due to the simultaneous causality of the financial variables, the study faced a potential endogeneity bias problem. There were other smallholder farmers who chose not to access any form of finance, but still managed to commercialise. This attribute revealed the endogeneity bias problem; thus it was important to address it using the endogenous switching regression method.First, the analysis of variance (ANOVA) results suggested that only farmers who accessed credit and household savings were significantly associated with a commercialisation decision. Further analysis using the endogeneity switching model revealed that credit was not significant; off-farm income, household savings, and insurance were significant in the commercialisation decision. When financial instruments were combined, the effect of finance on commercialisation became weaker and not statistically significant enough to influence the commercialisation activities of smallholder farmers. The key findings of the study showed that financial instruments were partially correlated and interdependent, and affected the commercialisation of smallholder farmers. This implied that finance alone could not bring about agricultural commercialisation, and it might not be enough to make agriculture sustainable and resilient. Any financial investment in agriculture needs to be accompanied by other factors – such as adequate farm size, conducive climate, adequate farm training, available and affordable labour, and smaller households – to significantly influence the commercialisation of smallholder farmers. The study also identified the problem of endogeneity and how it could produce false results if not considered. The study recommends that different combinations of financial instruments should be implemented when stimulating commercialisation of smallholder farmers. The financial instruments should be implemented together with other non-financial interventions.