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    This blog highlights effective ideas in the fight against poverty and exclusion, and analyzes the impact of development projects in Latin America and the Caribbean.
  • Credit or no credit? Is that really the question?

    27
    Jan
    2015

    By

    By Mario González Flores* & Leonardo Corral**

    Is access to credit enough to improve welfare indicators at the firm or farm level?

    Mario Leonardo Credito EngIn recent years, a great deal of hope to promote development has been placed on the potential transformative power of financial access (World Bank 2007; Karlan and Morduch 2010).  At the firm or farm level, having access to credit can facilitate the purchase of necessary inputs in a timely manner, it can increase investments and adoption of new or improved technologies, it can decrease risk, and overall, it has the potential to improve production, productivity, and ultimately welfare for those receiving the credit.

    Yet, using credit to invest in a greater use of inputs or to invest on new machinery and equipment does not necessarily lead to the desired or optimal outcomes.  For example, farmers with no prior knowledge on the proper use of inputs—such as fertilizers or fungicides, may over or under use these in a way that their use leads to no improvements on yields or no improvements in damage abatement.  Similarly, a farmer that invests in a new technology, such as a modern irrigation system, may not obtain the optimal results in production or water usage (efficiency) if the farmer is not well trained on the appropriate way of using and maintaining her new irrigation system.

    Thus, if financial access facilitates input use, technology adoption, and investments in new machinery, the only way that greater financial access can have a development impact is by assuring that complementary training on the correct use of new inputs and technologies is provided to those unfamiliar with their use . This, in fact, is one of the key findings of a recent meta-evaluation published by IFC focusing on private sector interventions in agribusiness using Access to Finance (A2F) and farmers/business training.

    This IFC meta-evaluation focuses on interventions in two agribusiness-related sectors: Access to Finance (A2F) and Farmers/Business Training. This is one of IFC’s strategic areas of interest, and the main objective of the evaluation was to identify what has been learned and the remaining gaps pertaining to these types of interventions. To our knowledge, this is the most exhaustive meta-evaluation that looks at the impact of A2F and farmer training.  The report is based on 22 previous meta-evaluations and 44 impact evaluations.  The latter, include 9 evaluations using RCTs for A2F (10 used quasi-experimental methods) and 6 for farmer training (20 used quasi-experimental methods). The evaluations included in the report were conducted between 2000 and 2012.

    As noted, one of the key findings for A2F interventions is that the provision of credit alone is not enough to improve adoption, production, productivity, income or profits (For these indicators, the results were mixed and not conclusive ): credit has to be combined with some training or other complementary interventions.  This seems to hold true also for farmer/business training: training in conjunction with other interventions, such as credit, will enable farmers to adopt the technology being taught. The report notes that this approach of providing training for the credit recipients is becoming a standard way of ensuring success.  Yet, the report also notes that although IFC is a leading provider of A2F to the private sector in developing countries

    “no quality impact evaluation has been conducted by IFC to measure its impact in provision of A2F in Agribusiness”

    and a similar pattern is seen for farmer/business training interventions.

    Given the high expectations we have put on financial access to promote development, the IFC meta-evaluation is an eye opener from the point of view that in and by itself A2F may not be enough to obtain development outcomes! A2F interventions might need to be designed with additional training or other complementary interventions.

    *Mario González Flores is a Consultant for the Office of Strategic Planning and Development Effectiveness at the Inter-American Development Bank, and an Adjunct Instructor at the School of International Service of American University in Washington, D.C.

    **Leonardo Corral is Principal Economist in the Office of Strategic Planning and Development Effectiveness at the Inter-American Development Bank. His research interests focus on rural factor markets and natural resource management.

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