The risk in extending agricultural credit is the probability that future payment by the beneficiary will not be made. Moreover, past studies on agricultural credit repayment among farmers stressed that high default rate is a growing concern, and hence, lending to farmers by financial institutions is beginning to prove very difficult. However, past studies showed increasing focus of attention on socio-economic characteristics as factors that explain repayment rate. The nexus between repayment rate and credit rationing has not been fully analyzed. The effect of credit rationing on repayment rate was therefore investigated.
Structured questionnaire was used in gathering data for the study and a three-stage method of sampling technique was employed to make a selection of 240 respondents in the study area. Data analysis was done using descriptive statistics to account for the socio-economic characteristics of the respondents while instrumental variable tobit (ivtobit) model was employed to analyze the effect of credit rationing on repayment performance. The result showed that majority (70.83%) of the respondents were males, the mean age was 51 years with an average education years of 12.65.
The result of the instrumental variable tobit regression confirmed the endogeneity of rationing rate (Wald test of exogeneity= Wald Chi2 (1) =67.26; Prob >chi2 =0.000) at 1% level of statistical significance. The result with a Log-likelihood function (265.62459) revealed that ration rate, household size, years of farming experience, amount granted, cost of credit, disbursement lag and net farm income with coefficients of 0.4335, -0.0163, 0.0025, 1.61e-06, -1.18e-09, -0.0045 and 1.29e-07 respectively were crucial factors in ascertaining the repayment rate at various level of significance of the arable crop farmers in the study area.
The study concluded that the significance of credit rationing in influencing the likelihood of repayment rate points to the vital significance of adequacy in rationing borrowers.
Keywords: Agricultural credit, credit repayment, credit rationing, endogeneity, tobit, productivity