THE EFFECT OF CREDIT-USE ON THE PROFITABILITY OF SMALLHOLDER MAIZE-FARMING IN GHANA

The study assesses credit-use and its effect on profitability among smallholder maize farmers in the Bono region of Ghana. A multistage sampling technique involving the purposive, stratified and simple random sampling techniques was employed in the selection of the Bono region and two municipalities within the region as the study area, as well as the selection of 200 smallholder maize farmers respectively. The study considered both formal and informal sources of credit such as friends and relatives, susu (traditional thrift groups), farmer groups, trade creditors, rural banks, money lenders, and NGOs. The factors influencing the decision of a farmer to use credit, the determinants of farmers’ credit-use intensity and the indicators of profitability among smallholder farmers were investigated. The study employed the use of a binary probit model to estimate the factors influencing the decision of a farmer to use credit, and a Tobit regression model to estimate the intensity of credit-use by smallholder maize farmers. Indicators of profitability such as Gross margin, Net revenue and Return on Investment were used to estimate the profitability of the smallholder maize farmers. A mean test for significance was conducted to estimate the statistical differences among the maize farmers’ profitability. The probit regression results revealed that age, gender, experience in farming, farming objective, collateral, farm size, and membership to farmer associations significantly influence maize farmers’ decision to use credit. Results from the Tobit model revealed that landownership, educational level of farmer, production cost per hectare and interest rate had a significant impact on farmers’ credit-use intensity for maize production. The result from the Gross Margin analysis showed an average total revenue of GH¢ 1644.95 for credit users and GH¢ 975.31 for non-credit users, while the average net revenue among credit users and noncredit users were GH¢ 312.23 and GH¢ 192.42 respectively. The average return on investment for credit and non-credit users was GH¢ 0.2503 and GH¢ 0.1567 respectively. These results imply that the use of credit has a significantly positive effect on smallholder maize farmers’ gross margins, net revenue, returns on investment, and on their profitability in general. The paper recommends that stakeholders in agriculture include in their sensitization programmes ways of enhancing credit-use by especially smallholder maize farmers as this has positive implications for their profitability. Financial institutions must better facilitate access to credit by commercial farmers, and also develop innovative financing packages that favor farmers and better manage risk to these financial institutions. GSJ: Volume 8, Issue 5, May 2020 ISSN 2320-9186 1049 GSJ© 2020 www.globalscientificjournal. com BACKGROUND Agriculture is a crucial sector in the development of most low-income countries. Ghana is a largely agrarian economy with most of her citizens relying heavily on agriculture for survival (Antwi et al., 2017). The agriculture sector is very essential and dominant in Ghana’s economy as it accounts for over 50 percent of foreign exchange earnings by the country (MoFA, 2011). Farmers in most developing countries are smallholders operating on a limited scale and often relying on family land and family labour. The Ghanaian agriculture sector, for instance, is dominated by small-scale farmers who cultivate less than two hectares of land each and are mostly located in rural areas. These farmers are often constrained logistically, having difficulty accessing farming accoutrements such as inputs, machinery, skilled labour and other requisite factors of production. These constraints are mainly as a result of inadequate financing. The resulting low yield leads to low productivity which adversely affects their profitability. Maize production in Ghana requires a lot of investment in productivity-enhancing factors such as fertilizer, agrochemicals and other farming inputs. Farmers who produce on a small scale and cannot afford most of these productive resources require financial support in the form of credit. Credit-use enhances the ability of the farmer to access requisite factors of production, enabling them to access adequate farm lands, afford both skilled and unskilled labour and also giving them the opportunity to deploy modern farm technology to boost production which in turn increases their efficiency of production, enabling them to be and/or stay profitable (Antwi and Onumah, 2020; Antwi, 2020). The dominance of smallholder farming in Ghana seems to suggest that policy enacted to enhance agricultural development should target smallholder farmers more. Policies such as the GPRS II, FASDEP II, METASIP and financial institutions such as the Agricultural Development Bank were designed and set up to help facilitate access by farmers to input resources and markets by making credit available and accessible to them. The motivation for these policies and institutions was to improve farmers’ productivity to enhance increased farm income and improve living standards (World Bank, 2008). Current rural development strategies outlined in FASDEP II are converging on agricultural modernization through the transformation of the subsistence smallholder farmer to one that produces for the market. The purpose is to achieve commercial orientation and the adoption of productivity-enhancing technologies and associated inputs like credit. To improve farmers’ access to credit, it is important to strengthen the capacity of operators in the credit management system, educate farmers on the merits of credit-use and the procedures for access, and also seek to link formal and informal financial service delivery systems. In view of this, the Ministry of Food and Agriculture (MoFA) seeks to improve farmers’ income and improve their living standards by enhancing the cultivation of staple crops through the use of a credit instrument (Olwande & Mathenge, 2012). According to Bashir et al. (2010), farmers’ ability to use inputs efficiently is often streamlined by their access to credit. This assertion is buttressed by studies by Girabi & Mwakaje (2013) and Ashaolu et al. (2011) that credit users are more productive than those without credit. Research findings by Al-Hassan et al. (2006) and Omiti et al. (2009) highlight higher profit and prospects of curbing poverty to ensure sustainable livelihoods, expanded production and the adoption of productivity-enhancing technologies for credit users. Accessing credit is however difficult for smallholder farmers because most of them do not have the required collateral to signal guaranteed credit worthiness. According to Onumah & Acquah (2011), credit sustainability in low-income countries is riddled with many challenges and this poses a major development obstacle. The Bono region of Ghana remains the major maize crop producer of the country (MoFA, 2011). Among the major cereal crops produced in Ghana, maize production accounts for 50-60%, being volumetrically the second most produced crop after cocoa (MiDA, 2010). It is estimated that about 70% of smallholder farmers in Ghana produce maize. Unfortunately, a large proportion of these farmers lack the necessary financing for input resources to attain optimum production and profit levels. This study investigates how smallholder maize farmers access and use credit and how this directly or indirectly affects their farm profitability. THEORETICAL FRAMEWORK The theory underlying this study is based on individual investment behavior and their respective profit maximization. The microeconomic theory on producer profit maximization is an area of economic research that has been studied extensively, where investments, individual choice, prices and quantities, among several other exogenous variables, influence an individual’s (farmer’s) output level. Being a rational producer, a farmer would choose the best yielding options given that production inputs are substitutable goods, like GSJ: Volume 8, Issue 5, May 2020 ISSN 2320-9186 1050 GSJ© 2020 www.globalscientificjournal. com fertilizers, credit, improved seed, and technology. As posited by Mansfield (1991), producers maximize profit by producing a quantity of goods that indicate the level of combination of production inputs. Based on the theory of production maximization (for producers), farmers derive satisfaction from the utilization of the inputs they use in farming to maximize output levels. Assuming a farmer has access to credit as an intermediate good, then the farmer’s expected production output, according to Greene (2012), is represented mathematically as shown: Qij = qi(Yj ,Xj, eij) where Qij is the Output level of farmer i by good/input j, Yj is the household income for farmer j, Xj is the vector of the observed characteristics of the farmer and of the given choice of the farmer, and eij is the unobserved error term of the indirect production (profit) function. The farmer will agree to adopt an input only if the output (profit) derived from the improved state is greater than the profit derived from the status quo. That is, if Qi �Yj − Yi,Xj , eij� > Qj(Yj ,Xj , eij) where Yi denotes the farmer’s income (profit margin). The probability that the jth farmer’s response ‘yes’ is an indication that he or she has access to credit is given by: Pr (yes) = Qi �Yj − Yi,Xj , eij� > Qij(Yj ,Xj , eij) A common formulation of the Production Maximization Model is the Additive Profit Model (Cameron & Trivedi, 2005). The Additive Profit Model assumes that the production (profit) function is additively separable into deterministic and stochastic preferences. This is presented mathematically as: Qij = Qi(Yj ,Xj) + eij Hence, the probability statement that a respondent’s answer is ‘yes’ to access to credit is illustrated as: Pr (yes) = Qij �Yj − Yi,Xj � + eij > Qij(Yj ,Xj) + eij Now let Pi denote the dependent variable in which the study