Farmers’ cooperatives and smallholder farmers’ access to credit: Evidence from China

Abstract

Farmers’ cooperatives serve as effective means of transforming smallholder farmers’ production methods in the process of agricultural modernization in developing countries. This paper aims to examine the credit effects of farmers’ cooperatives by employing a framework based on institutional finance theory. Based on the 2021 China Household Finance Survey data, an endogenous switching probit model is employed to explore the impact of cooperative membership on smallholder farmers’ access to credit. The research findings indicate the following: i) Farmers’ cooperatives possess information advantages, as financial institutions gain access to smallholder farmers’ information through the organized value chains of farmers’ cooperatives, leading to a direct reduction in transaction costs and an improvement in access to credit. ii) Farmers’ cooperatives can promote smallholder farmers’ agricultural investments, increase household income for smallholder farmers, enhance the liquidity of farmland, and further improve access to credit for smallholder farmers. Therefore, farmers’ cooperatives represent an inevitable trend in the agricultural modernization of developing countries. Rural financial institutions should alter their financial models and resolve adverse selection and moral hazard issues in the credit process through organizational approaches, thereby enhancing access to credit for smallholder farmers.