Institutional Credit and Farm Technical Efficiency: Evidence from a Field Experiment Using Stochastic Frontier Analysis

Abstract

This study examines the impact of access to formal credit on the technical efficiency of farms. The stochastic frontier analysis (SFA) is used to estimate technical efficiency by utilising primary survey data collected through a multi-stage random sampling technique. The results reveal that technical efficiency scores range from 0.56 to 0.97. There is a relatively high level of technical efficiency among borrower households (score 0.88) compared to non-borrower households (score 0.67), which implies that credit access enables farmers to use better technologies and optimise input use. The major inputs, such as labour, chemicals, machinery and farm size, are positively associated with farm technical efficiency, whereas land tenancy, seed price and fertilisers tend to decrease farm efficiency. The gamma coefficient (0.76) justifies the application of SFA, implying that inefficiency in the farm inputs is more likely than random shocks. In addition, the age of the household head, farming experience, education, occupation, membership, farm size, household assets and access to credit are the primary factors determining efficiency. These findings highlighted the requirement to have policy interventions in order to improve the socio-economic environment, institutional support, access to credit and managerial skills of farmers, which would increase productivity and achieve sustainable agricultural development.