Determinants of loan default in agro-based credit schemes in the tobacco industry of Zimbabwe

Abstract

The tobacco industry is a major driver of Zimbabwe‟s economic growth. It is currently on the rebounds after years of massive collapse. The scarcity of credit on the financial markets has seen the reintroduction of contract farming in the sector. However, this noble arrangement is being threatened by the high levels of loan repayment default. This study used a binary logistic regression model to analyse the major determinants of loan default in agro-based credit scheme in Zimbabwe‟s Tobacco Industry. Low Crop yield, poor quality tobacco, low market prices, poor loan supervision, time spent by farmer on farming activities, affiliation to farmer association and agro ecological differences were found to be key determinants of loan default among tobacco farmers in Zimbabwe. Data for the study was collected through two structured questionnaires. One was administered to 138 tobacco contracted farmers while the other one was given to 16 contracting firms‟ extension officers. Stratified random sampling was used to select the farmers‟ sample and purposive sampling was used for the extension officers. The study recommends that policies to address default should focus on the empowerment of the farmers with the skills rather than the know how alone. It was also found out that persuasive measures were more effective than threat related measures and contracting firms should aim to be as transparent as possible, while improving their communication with farmers. Group lending was found to be inappropriate until the farming community adopts relatively high levels of entrepreneurship and professionalism in addition to the development of a specific legal framework. Government should consider supporting contract farming by either addressing farmers‟ social issues or providing incentives to the contractors.