Determinants of participation in village banks and effects on the welfare of smallholder farmers in Ngaka Modiri Molema District, North West Province, South Africa

Abstract

Smallholder farmers are recognised worldwide, for the key role they play in ensuring food security. However, their viability is constrained by many challenges with access to microfinance as one of such challenges. These barriers have contributed to the exclusion of smallholder farmers from formal credit markets. Thus, the project of village banks has been initiated in order to improve savings habits and increase the chances of access to credit by farmers. However, the objective of village banks has been deviated and has now become business-oriented. This study analyses the impact of participation in village banks on the welfare of smallholder farmers in Ngaka Modiri Molema District Municipality, North West Province, South Africa. A multi-stage sampling procedure was used to select both the participating and nonparticipanting farmers in village banking. The first stage involved the purpose selection of 3 banks out of the five available using the vertical and horizontal analysis. The second stage entail the random selection of 100 farmers from the list of farmers who participate in village banking with the three selected banks, while a similar approach was used in selecting 100 farmers who did not participate in the district where each of the three banks located to serve as control group. Primary data on socio-economic and demographic variables were collected using a household questionnaire. A simultaneous equation model (SEM) and propensity score matching technique (PSM) were used for data analysis. It was found that variables such as gender, level of education, farming experience, size of the land, per capita income and distance from office of a village bank were associated and significant for decision by smallholder farmers to join a village bank. The findings from the Simultaneous equation model (SEM) and propensity score matching (PSM) are consistent across the two methods. The results reveal that the effect of village banks on smallholder farmer’s per capita expenditure is strong. The results also indicate that participation increased per capita expenditure by 83.85% and variables such as marital status, dependency ratio, main occupation and distance are negatively significant for per capita expenditure while only income per capita and technology applied positively influence per capita expenditure. The PSM results showed that the Average treatment of treated (ATT) with kernel matching, nearest neighbor matching and radius matching was 0.58, which is an indication that if a smallholder farmer participates in a village bank, his annual per capita expenditure will increase by 58%. In conclusion, non-members of village banks had better socio-economic characteristics which could assist in enhancing their welfare better than those who belong to village banks. The null hypothesis that socio-economic and demographic factors do not influence a smallholder farmer’s decision to join a village bank was partially rejected and participation in a village bank positively affects the annual per capita expenditure of smallholder farmers. However, more needs to be done in terms of providing expertise training, improving saving behaviour, developing a specific curriculum on micro-finance, empowerment on land, promoting the participation of more women, creation of more community-based initiatives in terms of village banks in order to meet the expectations and initiatives of village banks in South Africa.