1. UNIVERSITY OF PRETORIA
Financial literacy, components of a business
plan & marketing plan
BY: Christopher Fakudze
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2. Outline
• Reflect on agribusiness plan (the business plan)
• Problem statement
– Known & unknown
• Research objectives and hypothesis
• Theoretical and conceptual frameworks
• Methods and procedures
• Contribution of study
• Expected results & output
• Proposed plan and budget
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3. The general problem: background with stylized
facts
• Owing to challenges hindering smallholder farming i.e.
cost of production generally limiting
• Access to credit dominates rural development & research
agendas
• Dating as far back as 1950s,conventional wisdom
favoured government targeted credit intervention
• However, poor record of subsidised/targeted credit
leading to liberalisation
• Emphasis on less targeting of loans; reduction of
transaction costs; and improving viability of market
3

4. Cont’
• Paradigm shift: microcredit-microfinance &
commercialisation >>1990s;
microfinance-financial inclusion >>2000s
• Access to credit for smallholder farmers in SA is
crucial
• Urgency motivated by a trio of long-standing
circumstances
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5. The general problem cont’
-a need to lead the poor out of poverty
-interventions introduced
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6. Interventions implemented
• Micro-finance Apex fund
• Micro Agricultural Finance Schemes of South
Africa (MAFISA)
– MAFISA piloted (Limpopo, Kwazulu Natal &
Eastern Cape)
• Comprehensive Agricultural Support Programme (CASP)
under the Department of Agriculture, Forestry and
Fisheries (DAFF)
• Small Enterprise Foundation (SEF) – revived Tshomisano
credit programme (TCP) and microcredit programme MCP
(SEF, 2012)
– Helps poorerst in Limpopo to start income generating
businesses
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7. Policy direction becomes…
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8. Problem statement
• General acceptance: smallholder farmers are credit constrained
– But size & significance of these constraints unknown
• True whether looking at number without or size of gap between
demand for & supply of formal credit
• Unknown how demand & supply vary according to type of credit
• Even more important, little is known about contribution of
programmes and policies in narrowing gap
– assessment of effectiveness & efficiency of government
programmes on credit receiving less attention
• CASP & MAFISA Evaluation studies reveal systematic weakness
but, no empirical
– Specific programme coverage; efficiency & effectiveness
unknown
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9. Problem statement cont’
• Paucity of information/knowledge on problem significance &
variation means:
– Those interested to improve access, do not know how much
help
– Difficulty in focusing effort to improve access to specific
credit type
• Focusing on specific types of credit to ensure formal credit has
greatest impact on smallholder agriculture growth
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10. Research Questions
• What is the size of the gap between demand for & supply
of different types of formal credit for smallholder farmers?
• Which type of formal credit is in more demand?
• What is the proportion of credit constrained smallholder
farmers?
• What is the coverage of the programmes implemented to
improve access to formal credit for smallholder farmers in
SA?
• Are these programmes, policies and strategies efficient
and effective?
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11. What do we know about the problem?
• Debate whether government targeted and subsidized credit is
(not) a solution (Duesenberry & McPherson, 1991; Buttain, 1995;
USAID,2007)
• Programmes showing failure unless Grameen principle adopted
(Cohen, 2010) i.e. Compulsory savings, Debt management &
Budgeting training e.g. Bukidnon
• Government credit increase farmers’ risks of over indebtedness
(Real et al., 2010; Bert et al., 2011)
• Seen as resource misallocation, worsening condition (Buttain,
1995; USAID,2007)
• How to measure access, demand constraints are known
(Machethe, 1997; Diagne et al., 2000)
• Credit-temporary substitute for savings (Briquette, 1999;
Yehuala, 2008)
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12. Cont’
• Government driven credit lead to excess demand
(Gonzalez-vega, 1984; Binswanger & Rosenweig, 1986;
Braverman & Stiglitz, 1989; Disney et al., 2010)
• BUT others contend financial institutions not getting
qualifying borrowers (Adams et al., 1984)
• Despite popularity of credit, majority of target population
still not reached (Ellis, 2000; Maxwell & Heber-Percy,
2001; Gine & Karlan, 2006, Llanto, 2007)
• Cohen (2010) claims farmers take credit as handout
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13. What is not known about the problem?
• Why is take-up of formal credit low, despite interventions?
• What is the preference of credit over short, medium &
long term credits
• In spite of bankers’ claims, do government credit
programmes find qualifying borrowers?
• Does theory still hold that government-led credit is
inefficient?
– How to make formal credit programmes work for the
poor
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14. Therefore this study will …
determine the extent of the problem of lack of access to formal
credit for smallholder farmers in South Africa and to assess
effectiveness and efficiency of post-apartheid interventions to
improve access
Specifically to:
I. determine the gap between demand for and supply of the
different types of formal credit;
II. determine the proportion of smallholder farmers that are credit
constrained according to the type of formal credit;
III. Examine government policies, programmes & strategies since
1994 to improve access to formal credit for smallholder farmers;
and
IV. To determine the effectiveness & efficiency of policies,
programmes & strategies to meet demand for short-term,
medium term & long term credit in South Africa.
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15. Hypothesis
• H1: Government policies, programmes and strategies
implemented since 1994 have been ineffective and
inefficient in improving access to credit for smallholder
farmers in South Africa.
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16. Theoretical & conceptual frameworks
• Strands of financial liberalisation theory a basis to
vindicate credit targeting and subsidization (Buttain, 1995)
• However, criticism arise from failure in credit market
• Various constructs that:
– market failure can be addressed head-on through
policy and institutional reforms;
– Government can play a strong financial role but not to
provide cheap credit
• In response governments have taken over credit
provision due to the market-failure, but this is not
efficient (Stiglitz, 1981; Hoffs & Stiglitz, 1981)
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17. Cont’
• Role of government is institutional, otherwise lack
accountability, arbitrary & political (Duesenberry &
McPherson, 1991; Buttain, 1995)
• Role:
– develop legal framework
– Enhance market information availability
– Proper regulation
– Supervision
– Enforcement in financial market
• SA has a Microfinance Regulatory Council since 2001,
prohibits reckless lending
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18. Empirical measurement
• Assessment: credit demand and supply using credit limit
variable Ebmax and bmax (Diagne et al., 2000)
• Measuring effectiveness: checklist, if performance target
met (Wangstaff, 2004)
• Measuring efficiency: using parametric, non-parametric
and cost control of admin.management (accounting)
– Traditional accounting uses cost-to-income ratio,
efficiency ratio
• traditional accounting never used government programme
on credit (or financial service)
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19. cont’
• Ncube (2009) used parametric frontier for efficiency of SA
banks
• Chortareas et al., (2010)use both accounting and DEA in
EU financial
Efficiency ratio = Non-interest expenditure
Net operations revenue
– Method also applied by Barthe et al., 2006; Demirgue-
Kunt et al., 2004; Beck et al., 2006, FDIC, 2012
– FDIC (2012) for instance found that community
bankers were more efficient than other banks
• As such, study forms a benchmark for interpreting this study
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20. ANALYITICAL FRAMEWORKS
OBJECTIVE I: determine the gap between demand for and supply
of the different types of formal credit;
1st: Descriptivestatistics to characterize demand for and
supply of formal credit,
• Step 1: estimate effective demand & effective supply from
smallholder farmers who participate in credit
• Measure statistically the differences between the two, to
establish unsatisfied demand
– using cumulative analysis of gap
• Further ascertain variance i.e. If bmax < Ebmax
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21. Objective II determine the proportion of smallholder farmers that
are credit constrained according to the type of formal credit
• Estimate statistically proportion of the sample who;
– Did not have access to formal credit since bmax = 0 [SEVERE CASE
OF A SMALLHOLDER FARMER BEING CREDIT CONSTRAINED]
– Those who were credit constrained by choice i.e. b* < bmax [SELF
INDUCED]
– Credit constrained because credit limit is strictly less than expected
credit i.e. bmax < Ebmax [BINDING CREDIT CONSTRAINED]
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22. ANALYSIS
objective III: Examine government policies, programmes &
strategies since 1994 to improve access to formal credit for
smallholder farmers
• Qualitative analysis
• Identify the programmes
– Investigate why they were established
• analyse how (and where)they were implemented
• Analyse expenditure pattern
• Capture the following attributes:
– Goal attainment relevance to credit for smallholder
farmers i.e not arbitrary? criteria not political?
– Contract enforcement mechanisms in place
(frequency of implementation)
– Accountability (and who are stakeholders?)
– Information dissemination to stakeholders
This analysis will produce a typology and description
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23. ANALYSIS
objective IV:To determine the effectiveness & efficiency of
policies, programmes & strategies to meet demand for short-term,
medium term & long term credit in South Africa.
• Effectiveness
– Using results in objective I, compare size of gap in types
– Compare time for processing (bank and programme)
– Proportions of intended & actuals
• E.g. achieved objective to planned; beneficiaries to
sample
• Use graphs & figures to present results
• Efficiency
Step 1: assess composition
– Breakdown of credit amount to identify and quantify :
• Interest rate
• Length of repayment
• Size of credit
• Deductibles
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24. Cont’
Step 2: assess cost reduction per transaction i.e.
cost-to- returns on a unit credit (Rand)
Compute:
• Efficiency ratio as used by Chortareas et al., (2010)
and FDIC (2012)
Efficiency ratio = Non-interest expenditure
Net operations revenue
Where: net operations revenue = net interest income +
non interest income
Interpretation
Ratio must range between 0 & 1. If more than 1, it means
the cost of issuing credit is more than return and
therefore not efficient
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25. Proposed method in brief
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26. Figure 1: Limpopo Province Districts
Source: Demarcation Board (www.demarcation.org.za)

27. Data & data sources
primary & secondary including:
Smallholder farm household head:
• Demographic
• Participation in credit ( borrowed or not, credit size expected &
credit size received; general comments)
Programme attributes:
• credit type (specify components)
• cost to client (time, interest)
• credit limit
• advances (loans issued)
• non-interest operating expenses
• net revenue, fixed assests
• other
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28. Contribution of the proposed study
• Study is original in content & design
– First to apply efficiency ratio methodology in
government credit programmes
• efficiency method a useful tool to
qualify/disqualify credit interventions in
rural finance discipline
– Makes policy contribution
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29. Expected results and outputs
Outputs
• Published paper in an accredited Journal
• Description and empirical reports (Dissertation)
Results
• Improved service delivery
• Expand body of knowledge, ultimately to either validate or
reject ‘theory’ (i.e. Government programmes to provide
credit are inefficient)
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30. Proposed plan & budget
Activity Duration Budget Target Date
Data collection 4 months ZAR 30 000 September
2012
Data entry & 1 month “ October 2012
analysis
Production of 6 months ZAR 5 000 February 2013
paper
publication in
journal
Compilation of 6 months ZAR 15 000 June 2013
PhD
Dissertation
TOTAL ZAR 50 000 2013
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31. Thank you!
Your input is value-
adding