Characterization of smallholder farmer households and financial institutions in the southern province of Rwanda

Improving financial inclusion and access to agricultural credit for smallholder farmers in Africa is vital in meeting the challenges of increasing global food demands. Various international organizations and governments on the continent have increased budgetary allocations to agriculture to encourage private sectors and financial institutions to invest and make agricultural loans available. However, access to credit among smallholder farmers remains suboptimal, with one of the most significant barriers being information asymmetry. This study aims at better understanding smallholder farmer and financial institution typologies in the southern province of Rwanda to close the gap in the asymmetry of information that may exist between parties. The study utilized a cross-sectional, province-wide random sampling design of farmers and financial institutions, and data collected from structured interviews were analyzed using multivariate techniques. Results show that the largest group of farmers (defining 45% of the clusters) represents smallholder farmers who own less than an acre of land, practice terracing, do not use agricultural inputs, have been in agriculture for at least four years or more, and have two children below five years of age. The largest cluster amongst the financial institutions (defining 82%) have refinancing, rescheduling, or collateral release as measures for managing loan defaults, with loan variable (not fixed) payment periods and targeted credit schemes for farmers. The length of the payment period is the most pronounced defining characteristic for this cluster. Hence, there is need to strengthen and augment efforts to increase agricultural inputs used by smallholder farmers. That will enhance agricultural productivity and enable the farmers to access more significant amounts of credit from institutions with loan ceilings based on farmers' agricultural productivity. Finally, we recommend that financial institutions adopt more refinancing and rescheduling mechanisms for managing loan defaults rather than collateral release or foreclosures for the more resource-constrained farmers. This is particularly relevant as they can be a significant barrier to credit access among farmers for whom a loss of land would be too great of a risk.
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East Africa
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