Provision of loans and credit by cocoa buyers under non-price competition: Cocoa beans market in Ghana

Abstract

The introduction of partial liberalization into Ghana’s cocoa market in 1992/1993 encouraged competition among cocoa buyers. However, since the government determines prices of cocoa bean and thus prohibits price-based competition among Licensed Buying Companies (LBCs), LBCs rely on building relationships with cocoa farmers by providing incentives like credit and loans to cocoa farmers to encourage them to sell to them preferentially. These LBCs employ non-price strategies including the provision of loans and credit to cocoa farmers. This study analyzed the effects of non-price competition on loan and credit provision by cocoa LBCs. Descriptive analysis revealed that LBCs offer credit and loans to cocoa farmers, with 37.4 and 54.7% of cocoa farmers who received loan and credit respectively citing LBCs or purchasing clerks as their main source. Our regression analyses, however, did not fully support the standard intuition that competition promotes credit and loan provisions. This indicates the limited effectiveness of the use of credit and loan provisions as a non-price competition strategy among LBCs in Ghana’s cocoa market. Additional analyses offer valuable insights, suggesting that loans and credits may serve different functions when considered as means of competition for LBCs despite being essential forms of advanced payments.