Rural financial intermediation and agricultural investment: Evidence from the rural finance expansion programme, Zambia

Publication Details

Author
Markus Frölich, Niels Kemper
Country
Zambia
Region
Sub-Saharan Africa (includes East and West Africa)
Sector
Agriculture and Rural Development
Subsector
Agricultural Reform, Agricultural Extension, Agro-Industry & Marketing, Agricultural Research
Gender analysis
Yes
Equity Focus
Gender, Poverty
Evaluation design
Randomised Control Trials (RCT), Mixed Methods
Status
3ie Funding Window
Agricultural Innovation Thematic Window

Synopsis

The study aims to assess the impact of financial intermediation and availability of loanable funds on the level of agricultural investment and welfare of farmers in the eastern, northern and western provinces of Zambia. 

Context

The Rural Finance Expansion Programme (RUFEP) in Zambia aims at improving the livelihoods of the rural poor through sustainable economic growth. RUFEP has set up Village Savings And Loan Associations (VSLAs) to foster rural financial intermediation. VSLAs are democratic, member driven self­help groups in which members pool savings and give loans to other members at reasonable rates of interest.

The study evaluates the relative effectiveness of the approaches of linking VSLAs with formal financial institutions.  It can offer useful evidence to inform decision making of key actors responsible for the creation of new VSLAs under RUFEP, and if found successful, can be replicated in other contexts. 

Research questions

•    Can the VSLAs’ capacity for the intermediation of loanable funds be increased? Will this result in more intermediation of loanable funds? 
•    Can the VSLAs’ capacity for the intermediation of risks be increased? Will this result in more risk intermediation? 
•    Can VSLAs stimulate agricultural investment and increase the incomes and consumption levels of VSLA members?

Methodology

Intervention design

The study evaluates the relative effectiveness of two approaches of linking VSLAs with formal financial institutions. Firstly, it evaluates the linkage of VSLAs to a subordinate financial institution (“centrals”). In the context of Zambia, centrals accept deposits from and make loans to member VSLAs, permitting each VSLA to be a net­lender or net­debtor. Secondly, it evaluates the linkage of VSLAs to formal insurance providers in a two­step procedure: the social fund possessed by each VSLA is upgraded with a set of recommendations concerning insurance (self­insurance at the VSLA level). Then, it is proposed to link the social fund to a formal insurance provider in a second phase (co­insurance between VSLA and formal insurance provider). 

Theory of change

It is expected that better availability of funds at the VSLA level will result in more intermediation of loanable funds and risks. This will lead to a higher agricultural investment among VSLA members, reduced vulnerability to economic losses and increased income from agriculture, which in turn would trigger increased household consumption, and overall well-being and welfare.  

Evaluation design

The study is a randomised controlled trial (RCT) with VSLAs being assigned to one of the four treatment arms: (a) Offer to link VSLAs to a Central, (b) Set of recommendations for VSLA self­insurance only, (c) Set of recommendations for VSLA self­insurance and offer to link to a formal insurance provider, and (d) Offer to link to formal insurance provider only.

The randomisation will be based on a matching procedure, where baseline data is used to randomly assign VSLAs as similar as possible into the different treatment groups and the control group. The sample size includes 1000 villages in the eastern, western and northern provinces of Zambia. A sample of five members per VSLA is required, i.e. 5000 households in total. The qualitative data will be drawn from in-depth interviews and focus groups discussions of VSLA members, both new and old (those who have been a part of VSLAs for a long time), and non-members. The study will also explore the heterogeneity of treatments by gender, age group and poverty levels. 

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