Financing smallholder agribusiness in Zambia: an economic analysis of the ZATAC model

This study investigates the case of a Zambian institution providing credit for smallholder agribusiness commercialization and compares this lender’s model with the major microfinance institutions, to identify specific mechanisms employed by the lender and how these have been adapted to suit seasonal agricultural production credit requirements. Econometric models are developed to examine the influence of key economic factors such as nominal and real interest rates, loan fees, and loan term on the supply of credit by the lender. Other important factors considered relevant in the lender’s market include availability of contract markets for financed production and the type of borrower (cooperative or investor-owned agribusinesses). The study uses loan-level and firm-level loan data aggregated from an electronic loan database of individual loan files kept by the lender. Cross sectional data over three years (2005 – 2007) are used in the study. The study finds that loan fees, loan term and availability of contract markets to borrowers are the key determinants of credit supply. In addition, the study finds that interest rates do not significantly influence the lender’s credit supply decisions, a finding that is consistent with literature on credit rationing in markets with asymmetric information. The study finds no evidence of economies of scale benefit to the lender being passed along to borrowers through lower loan fees. The study contributes to the literature and development needs of agricultural lenders and smallholder agribusinesses in Zambia through the analysis of different factors that influence the lender’s credit supply decisions