Contract farming’s credit schemes as an alternative credit source for the smallholders : a case study from Mozambique

Most of the rural population in Mozambique operates totally outside the reach of any financial sector operator. Nearly all of the rural districts have no formal banking facilities at all. The microfinance sector is small and has an urban and peri-urban orientation, while both the community-based financial arrangements and development credit institutions have a very limited outreach in rural areas. This institutional situation makes it very difficult for the financial sector to respond to the increasing demands for rural financial services in the country and today practically all seasonal agricultural credit to smallholders is provided by marketing and processing companies under interlocking arrangements. These interlocking arrangements vary from the contract farming to the farmers’ cooperatives. This study focuses on the contract farming type of coordination. It refers to a situation where the contractor agrees on providing inputs and extension services, and expects that the farmer in return provide the input for the agro-processing industry. The contractor can be from the small commercial entity to the enormous agro-processing industry. This arrangement has the potential, according to the literature reviewed, to alleviate the problems arising in the contractual arrangements, like moral hazard and asymmetric information that generates market failures. It also is considered as potential credit channel to the smallholders in rural areas, once they are targeted by the credit market failure. The operations and traditional production technology of the typical family farm, and its associated credit needs, are too small to warrant the economic extension of the formal credit system. In the short term it can not be expected that the commercial banks would reconsider their strategies of market expansion into agricultural commerce. This study aims to assess to what extent contract farming can be considered as one attenuating instrument of the hindered rural financial sector. The study draws upon the contract farming scheme practiced by the MLT – Mozambique Leaf Tobacco Ltd and DIMMON – Tabacos de Moçambique, in the Tete province. The data was collected using standard and simple, but credible, methodology. The data was obtained through the Ministry of Agriculture, Centro de Promoção de Investimentos (CPI) and some private institutions and individuals. For the confirmation and additional information on the CF scheme, the company’s management were contacted. In terms of the data analysis three main approaches were taken to gradually increase confirmation of the proposed hypothesis. One was a triangulation of positivism, post positivism and logical empiricism in order to consider both quantitative and qualitative information. Secondly, Econometrics approach was used. It helped to inspect the sample, through sample mean tests, student t-test and one-way analysis of variance. In addition to this, regression analysis were also used, namely Linear and Logistic (Logit), in order to assess the hypotheses derived for the topic of the study. And finally the case study method which allowed the analysis of a specific case from Mozambique, already mentioned above, being the case of the Tete province’s tobacco agro-industrial companies. The results it’s of the regressions ran, suggest that the location (district), the land proportion reserved for each type of crop, the hand tools endowment, level of credit in terms of value are important determinants for the success of the CF’s credit scheme as alternative source of credit for the tobacco growers of Tete province. The regressions showed also that there is a relation between the income per member of the household and their characteristic, but it is not as strong to support the idea that their characteristics explain why they are better off under the CF scheme. But it also does not reject the idea that growers characteristics, like the household size, their core activities, whether is farming or/and outside farming, do show some important effects on their well being. As to conclusions, the agro-industrial CF scheme was shown to be a good alternative to alleviate the credit constraint problem. The results also suggest that CF can be used as a way to link small-scale farmers with agribusiness, on condition that the correct governance structures, good relation between the parties and reduction of transaction cost are taken into account. But at the same time it is also clear that company credit is not, and does not aim to be, a substitute for the operations of the financial institutions. The range of financial services provided by the marketing companies is very narrow, consisting in most cases only of small in-kind seasonal loans. From different alternatives of coordination options that came up, it was clear that not a unique one of them could be considered as the most appropriate one in order to attenuate the problem analysed. The problem of the agriculture development goes beyond the credit issue to inputs and technology availability, access to markets, transportation and stocking facilities are few among the many existents. Thus there should by an integrated analysis of these issues in order to compute a strategic plan comprising both sectors, financial and agricultural, for the development of the agricultural sector