Effects of Agrarian Policies on Access to Agricultural Finance in Zimbabwe

Zimbabwe is an agro-economy with agriculture contributing about 12% of the country’s GDP in 2023 and more than 60% of inputs to the manufacturing sector [1]. In the premises, food security, employment creation and poverty alleviation are closely related with the development of agriculture [1]. Access to financial services particularly by smallholder farmers, however, remains a major bottleneck to agricultural performance in Zimbabwe [1].

According to the 2022 Finscope consumer survey [2] only 4% of farmers access credit from formal finance institutions, 53% do not borrow at all, 25% access credit from family and friends and the remaining 18% access credit through informal sources like savings and credit clubs and other formal non-bank sources like mobile money and micro finance institutions (see figure 3).

The demand for financial services critically depends on the provision of some of the most basic public goods and physical infrastructure: including roads, telephones, mail services, literacy and electricity [3]. On the clients’ end, the most practical problem is the very low absorptive capacity of the majority poor in rural areas, greatly constraining the potential positive impacts of access to finance programmes [4]. The other barriers to accessing finance include fear of debts (58%), worry about ability to pay (32%). These barriers result from past experiences and unfavourable credit terms, including high interest rates [2].

Literature reveals that approaches to agricultural financing for poor smallholder farmers has evolved overtime as a result of the improved understanding of the underlying challenges. Beginning in the 1960s, subsidized agricultural credit programs were popularized as a way to correct the market failures thought to be the cause for the small amount of credit allocated to agriculture [4,5,6]. These programs usually imposed a rather naïve supply-leading approach of interest rate ceilings that undermined the health of the mostly government financial institutions delivering credit [7]. Inmost African countries it has been documented that governments, in the quest to address poverty and food insecurity as top priorities, have always intervened in agricultural markets, including in finance [8,9,10]. For the same purpose international development partners, such as the World Bank (WB), African Development Bank (AfDB), and International Fund for Agricultural Development (IFAD), provided credit lines to national central banks or ministries of finance, who in turn refinanced local banks at concessionary interest rates [10]. This approach was largely declared a failure, including by [11], in their work ‘Undermining Rural Development with Cheap Credit’, which is a widely cited critique of this credit led approach.

Governments, as policy makers, provide frameworks for processes that lead to the promotion of financial inclusion and these policy frameworks also articulate clear operational modalities to achieve national financial inclusion objectives [12]. The Reserve Bank of Zimbabwe (RBZ) is pushing for financial inclusion through National Inclusion Strategies I (2016-2020) and II (2022-2026). In addition to putting in place consumer protection regulations, governments can facilitate innovative models for financial inclusion, including promoting ease of entry of new entrepreneurs into the financial sector [13]. Instead of providing financial services directly, the role of government is to maintain macroeconomic stability and provide appropriate regulatory and supervisory frameworks [14].