In developing countries, improvement in productivity
through investment in productive ventures, especially in
the agricultural sector where majority of the population
derive their livelihood is necessary for accelerated
economic growth. At low levels of income, the
accumulation of savings may be difficult. Under such
circumstances, access to loans can help poor farmers to
undertake investment and increase productivity.
Agricultural household models suggest that farm credit is
not only necessitated by the limitations of self-finance,
but also by uncertainty pertaining to the level of output
and the time lag between inputs and output (Kohansal
and Mansoori, 2009). Also, facilitation of access to credit
for the rural poor plays a role in alleviating rural poverty.
Despite these advantages, small scale farmers have
mostly been locked out of the formal financial system.
This is primarily due to the lack of ‘bankable’ collateral,
high administrative costs and perceived high risks
associated with agricultural and small scale farmers
(Awoke, 2004).
Thus, in order to increase agricultural productivity
especially among the rural poor and to assist rural households
in maintaining food security, many governments in