Contract Arrangement With Credit Services By Agricultural Leading Enterprises And Its Role On Reducing Farmers' Credit Constraint

Fund is one of the most important factors in agricultural production, but most farmers, restricted by low level of income and wealth accumulation, often rely on credit for investment in agricultural production. However, taking into account the farmers'characteristics as credit demanders, formal financial institutions tend to supply credit prudently, because, to provide credit to farmers not only has to bear the high transaction costs, but also to face great risks. Although the government has mad a lot of efforts to reform rural financial systems over the years, and has adopted many policy measures to strengthen the rural financial institutions'ability and will to support rural clients, but the results are not good. Farmers are still faced with serious credit constraint.Contrary to formal financial institutions, many agricultural leading enterprises have put credit services into the agricultural product contracts, such as providing suretyship for farmers to apply for loans, allowing farmers to use the contracts as collaterals for loans, directly supplying inputs to farmers on credit or lending money to farmers to buy the inputs. Based on the investigation and analysis of this phenomenon, this paper is in an attempt to answer two questions: Formal rural financial institutions that are professional in the lending services are reluctant to lend to farmers, why would the leading enterprises be willing to provide agricultural product contracts with credit services to farmers? How can such contract arrangement reduce farmers'credit constraint?Firstly, the relevant researches are reviewed, including the researches on farmers'credit constraint, and on credit transaction in contract farming. The results showed that there are few literatures paying attention to the questions raised by this paper.Secondly, based on the research review, this paper constructs the theoretical frameworks to analysis the questions and put forward hypotheses.For the first question, based on the analysis about the production-choice behaviors of farmers, this paper first identifies the causes why farmers choose not to participate in agricultural production contracts, and then explains how contract arrangement with credit services can affect farmers'production-choice behaviors. If farmers choose to grow/raise the products required by the enterprises, they have to confront higher cost of pre-production investment and many kinds of greater risks which are caused by the differentiation of agricultural products. However, farmers are lack of fund, have poor access to credit, and weak capabilities to prevent and deal with risks, therefore, they have neither will nor ability to participate in contract production. As a result, the leading enterprises can not improve the availability of raw materials. On the contrary, contract arrangement with credit services can deal with these issues effectively. It could motivate and ensure farmers to participate in the contract production, so as to improve the enterprises'availability of raw materials. This is exactly the reason why the leading enterprises provide contract with credit services to farmers.For the second question, beginning with analyzing the causes of farmers'credit constraint, this paper explains how contract arrangement with credit services can reduce farmers'credit constraint. The fundamental reasons for farmers'credit constraint are as follows: the greater risks of agricultural production and management, the low cost of farmers'strategic default behaviors, the serious information asymmetry between farmers and financial institutions, as well as the high cost of financial institutions to lend to farmers. By providing agricultural product contracts with credit services to farmers, the leading enterprises can take full advantage of this institutional arrangement in many aspects, such as price security, technical services, collateral substitutes, dynamic threat, reputation mechanism, interlocking arrangement and on-lending mechanism, all of which help the leading enterprises deal with the problems which cause the credit constraint. In result, such contract arrangement can either improve the credit-supply will of formal financial institutions, or make the leading enterprises effectively replace the role of formal financial institutions. Finally, farmers are released from credit constraint.Lastly, in the empirical-analysis section, this paper selects 5 representative cases, which are all coming from the field surveys, to do the multiple-case studies. Using the method of literal-replication, all the hypotheses get demonstrated and verified.