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What Is the Impact of Decentralized Financial System (DFS) on Agricultural Growth in Senegal?

Journal of Financial Risk Management, 2016, 5, 1-6
Published Online March 2016 in SciRes.
How to cite this paper: Diop, S.I., & Cabral, F.J. (2016). What Is the Impact of Decentralized Financial System (DFS) on Agri-
cultural Growth in Senegal? Journal of Financial Risk Management, 4, 1-6.
What Is the Impact of Decentralized
Financial System (DFS) on Agricultural
Growth in Senegal?
Serigne Ibrahima Diop
, François Joseph Cabral
Doctoral School Sustainable Development and Society (DSSDS), University of Thiès, Thies, Senegal
Cheikh Anta Diop University, Dakar, Senegal
Received 3 August 2015; accepted 27 January 2016; published 30 January 2016
Copyright © 2016 by authors and Scientific Research Publishing Inc.
This work is licensed under the Creative Commons Attribution International License (CC BY).
The objective of this article is to analyze the tie between the financings of the Decentralized Fi-
nancial System (DFS) and the agricultural growth in Senegal. We use a linear equation model. The
survey covers the active period of 1999 to 2013. Results show that the Decentralized Financial
System has a positive and significant impact on the agricultural GDP in Senegal.
Impact, Decentralized Financial System, Agricultural Growth
1. Introduction
Agriculture is becoming a strategic sector because of food insecurity. Hence, Government of Senegal has identi-
fied it as a priority sector in Senegal Emerging Plan (SEP). However it faces many issues among other related to
the production, marketing and financing. According to Van de Walle (1990), access to funding and opportunities
for productive investment is required for the participation of the poor stratums to the growth. When poor farmers
have land, necessary inputs such as seeds, fertilizers and pesticides, and access to water for irrigation, they can
improve the productivity of their culture. This idea is confirmed by the document of the SEP, which says that
prerequisites are necessary to contribute to economic growth, among which include 1) water control, reinforcing
the quality of soils; 2) the modernization of equipment; 3) improving access to quality inputs (certified seeds), to
land, to markets, to adapted funding; 4) the development of chains of values; 5) technical support and agricul-
tural advice and; 6) sector structuring and strengthening of inter profession (SEP, p. 55). Marketing is a key
element for the development of the
agricultural sector. Since, for a particular product, distribution channels re-
S. I. Diop, F. J. Cabral
flect to some extent the structure of the power of negotiation of suppliers and customers (LPD die Peanut, April
2003, p. 5). To protect their farmers and their agricultural economies, African countries have a tendency to pro-
tect their products or to apply preferential rate.
But this strategy was becoming less and less possible since the Treaty of the West Africa Economic and Mone-
tary Union (WAEMU), in particular including the agreement on common external tariffs that took effect in 2000,
had effect of greatly reducing tariff protections for which our agriculture took benefit. Therefore, Senegalese
agriculture has to face increased competition in its home market and in the markets of the countries members of
the West Africa Economic and Monetary Union (WAEMU. According to the World Bank (World Bank, 1998),
in Saharan Africa, agricultural areas shelter three quarters of the population, generate 70 to 80 percent of em-
ployment, 40 to 60 percent of National Gross Income, 80 to 90 percent of export earnings and 80 to 90 per-
cent of the food supply. This does not allow the agricultural sector to benefit fully from funding financial
The relationship between agriculture and financial system is often marked by many bottlenecks. The study of
the relation between financial development and economic growth shows that there can be mutual interaction
between the two phenomenons. An efficient financial system can contribute to economic growth, which even in-
fluences the type of the financial system as the economy can bear. Thus, the interaction and efficiency become
intimately linked (Ayoub, 2003: p. 31). But Jude C. Eggoh and Patrick Villieu (2011) think
the interaction be-
tween the real sectors and the financial shows multiple balances, which can produce an nonlinearity of the rela-
tionship between growth and financial. In particular, two balances may coexist: a first equilibrium where finan-
cial development and economic growth are weak, and a second equilibrium where financial system is developed
and economic growth is strong. In addition, there is an indeterminacy of the relationship between financial de-
velopment and growth beyond a given threshold (Jude C. Eggoh, Patrick Villieu, 2011: p. 21-22). That is why
Ang (2008) thinksan efficient financial system contributes positively to economic growth (J. B, 2008: p. 38) for
Ould Sidi (2008), the main contribution of financial sector to the economic growth comes from its ability to
generate cash and restored an effective payment system, reliable and progressive. The development of financial
system must be assessed in a positive way, since it improves the efficiency of the financial system and expands
the range of financing and investment. An efficient and developed financial system is now essential to a
long-term economic growth Ould Sidi, 2008: p. 1). These different analyzes show the importance that our policy
makers must attach to the access to financing because of the issues of economic growth, development, poverty,
job creation, that represent challenges for developing economies.
In this specific context, access to financial services, including credit should be
considered as a significant
need to satisfy (Meliani & Aghrout, 2009: p. 9). The participation of agriculture to economic growth is much
more felt in sub-Saharan countries. According to Niyongabo (2008), in sub-Saharan Africa, agriculture and rural
areas shelter more than three quarters of the population and contribute for the largest share to employment, GDP,
export earnings and food supplies. Therefore, funding for activities that develop in these areas is a key factor for
growth and poverty reduction. The prediction in terms of economic growth in Senegal show thatthe contribu-
tion of agriculture to growth and poverty reduction will be significant, both at national and rural levels for the
next 10 to 15 years. A contribution of recent trends in agricultural sector growth would reduce the national po-
verty rate of 28.6 percentage points in 2015 compared to its estimated level in 2005 for the country (50.7 percent)
(Cabral, 2010). To support the development of the agricultural sector and thus encourage its impact on growth, it
is important to foster the institutional framework since the potential contribution of financial development to
economic growth is considerable but it depends on the development of appropriate institutional structures.
The liberalization of the financial system could increase the efficiency of the economy by enabling better re-
source allocation (Deisting, Makhlouf, & Naaman, 2012: p. 19).
This leads us to ask questions about the effectiveness of
a financial system. An efficient financial system is
undoubtedly an engine for economic growth. However, its efficiency is subject to an unresolved academic de-
bate (Ayoub, 2003: p. 31). Therefore, the question is raised to know what is the impact of the funding of Decen-
tralized Financial System on agricultural growth in Senegal.
The essential question that the GDP asks is that the improvement of the conditions of life of an individual
cannot be feared that through the increase of his/her/its personal incomes of one period T1 in relation to
his/her/its incomes in T0. However the microfinance reverses this reasoning while widening the horizon of the
individuals gains (Kamalan, 2006: p. 8). Today, it is admitted generally For Meliani Hakimsétif Ahmed Ag-
S. I. Diop, F. J. Cabral
hroutthat if the micro finances arrives to reconcile the social and economic objectives, and to benefit from a
suitable legislative setting, it can constitute a means efficient of poverty reduction, his/her/its fundamental prin-
ciples being based on the confidence, solidarity and the mutual help(Meliani & Aghrout, 2009: p. 9). The fi-
nancial system grants little importance to the agricultural financing although agriculture greatly contributes to
the development of the country. This problem seems to be world, because in Latin America it leaves from the
agricultural credit wallet is negligible. On the 108 institutions of financial of development, only 32 intervenes in
the sector of the farming financing and or agricultural (Travellli, 2007). In Mali the quasi-totality of the produc-
ers has of exploited them Domestic Agricultural, very often of small and middle sizes, under equipped and
without access to no system of financing outside of the zones of cultures to big potential (rice, cotton) (Couliba-
ly, 2008).
According to Doligez (2002), the institutions of micro finance have the capacity to widen the markets of cre-
dit at a time in terms geographical (cover territorial) and social. For Guiheneuf (2000), the credit plays a big role
in the development of the agricultural activities in the world, but these are varied very and the systems of credit
greatly bound to history, to the importance of the state and the collective organizations. For Guérin on the social
plan the micro finances contributed to emancipation and the woman’s promotion, she/it is susceptible to
courage the autonomy of the women, even poorest while helping them to start or to consolidate an activity and
to avoid some dependences (Guerin, 2010). But Labiate thinks that the micro finances arrived with microcrédits
to finance funds of rolling of short term and small credits of investments. For Henintsoa (2008), the promotion
of the microfinance presents itself like a previous condition to the farming growth through the access to financ-
ings. Indeed, the financial liberalization encourages the increase of the credit offer and consequently, the de-
crease of the costs of access to this financing notably for the poor peasants.
The objective of this article is to analyze the link between Decentralized Financial Systems (DFS) and the
agricultural growth in Senegal.
In the developments that follow, facts stylized on the financing of agriculture will first be put in inscription
(part 1). The methodology is exposed then (part 2). The results and findings of economic policies will finally be
pulled (part 3).
2. Agricultural Sector Financing
The financing of agriculture reveals increasingly the financial sector despite high risks. The tables below and the
graph give us the distribution of funding by the financial sector.
The analysis of Table 1 shows that the decentralized financial system grants meadows 7.36% of its financing
to the agricultural sector. This rate improved during the last two years. It is respectively of 11.59% and 11.01%
in 2012 and 2013. The share of funding allocated to the agricultural sector is very low. This situation is ex-
plained by the higher level of risk in agriculture.
The analysis of Figure 1 shows that the DSF have parts of outstanding credits that are very weak. This part
had increased between 2006 and 2008. This period coincided with the setting in work and the adoption of the
new regulation of the sector of the micro finances that had as between objective to purify the sector. From 2009
year of application of the law, the rate of unpaid lowered strongly, what improved the wallet of the DFS.
3. Methodology
3.1. Analysis Period
The study was conducted over a period of fifteen (15) years (1999-2013) and from data consolidated agricultural
portfolios of the three largest networks of Senegal that are the Federation of Mutual Credit Offices of Senegal
(FMCS), the Union of the Mutual Credit and Savings Alliance for Production (UM-CSAP) and the Union of
Mutual Partnership for Mobilizing Savings and Credit in Senegal (UM-PMSCS) These three networks re-
present 79% of savings deposits and 76% of the total outstanding sector credit DRS-DFS Report, 2008).
3.2. Model Specification
There are two types of variables in the economic model: exogenous variable or explanatory variables and endo-
genous variables, or variables to explain. The exogenous variables are the explanatory variables of the studied
S. I. Diop, F. J. Cabral
Table 1. Part of agriculture in the financing of the DFS in 1999-2013.
DFS credits to the agricultural
sector (in thousands)
DFS total credits
(in thousands)
DFS agricultural
credits/total DFS credit (%)
1999 1,485,586 12,193,932 12.18
2000 2,025,323 16,651,724 12.16
2001 1,413,576 18,413,970 7.68
2002 1,115,317 22,930,098 4.86
2003 2,231,925 31,376,966 7.11
2004 2,705,148 45,682,468 5.92
2005 2,909,894 66,630,160 4.37
2006 2,409,963 73,585,832 3.28
2007 3,158,481 92,122,131 3.43
2008 3,702,016 111,479,912 3.32
2009 7,647,740 119,894,014 6.38
2010 9,956,902 137,240,009 7.26
2011 12,984,360 155,132,741 8.37
2012 18,332,865 158,208,571 11.59
2013 18,274,606 165,916,801 11.01
Sources: Calculations from data FMCS, UM-CSAP and UM-PMSCS.
Figure 1. Part credit outstanding DFS of 2000 to 2013 in thousands. Sources: calculations from BCEAO data FMCS,
1) Endogenous variable
o Agricultural GDP (AGDP)
Agricultural GDP represents the share of agriculture in the Gross Domestic Product (GDP) during one year.
2) Exogenous variables
The variables are:
o Agricultural Credit sector DFS (ACDFS)
There are short credits, medium and long terms granted by the three networks that are FMCS, the UM-CSAP
S. I. Diop, F. J. Cabral
and UM-PMSCS to the agricultural sector.
o Agricultural GDP per farmer (AGDP/F)
Agricultural GDP per rural living
o Rainfall (PLUV)
Average precipitation level
o Gross Capital Formation in the agricultural sector (GCFA)
Gross Capital Formation in the agricultural sector includes the assets used in the production process, namely
the developed land, irrigation works, structures, machinery and tools.
o Degree of educational development (DED)
Gross primary enrollment
o Percentage change in the consumer price index (PCCPI)
o Subsidy granted to the agricultural sector (SUBA)
This is the annual subsidies for seeds, fertilizers, pesticides, agricultural equipment and the price to the pro-
3.3. Econometric Estimation of the Model
Several models have been developed to study the relationship between financial development and growth. But
as part of our study, we draw the linear equation model developed by Levine (2005). The relationship between
the variables of financial development and economic growth will be studied using a linear equation model.
To study the relationship between financial development and agricultural growth in the long term, we esti-
mate the model specified in the following equation:
( )
( ) ( )
( ) (
) ( ) (
12 3
t t1
4 56
=++ +
+ ++ +
where C is the constant, the coefficients are the parameters of the different variables to estimate, DF degree of
financial development or credit DFS to the agricultural sector (ACDFS), “AGDP/F” Agricultural GDP per rural
living, PLUVaverage precipitation, GCFA Gross Capital Formation in agriculture, “DED” Degree of educa-
tional development, “PCCPI” Percentage change in the consumer price index and ε a random variable that
measures the error term.
The estimation will be made by the ordinary least squares method.
The original model will be transformed into model for estimating Log in Eviews 4
3.4. Estimation Including Variable “Subsidies
A second test will be performed with the same model that will integrate the variable subsidy. Indeed, the subsidy
s started from the year 2000, to see its impact on the quality of results, it is considered necessary to repeat the
tests with the same model that in addition to the above variables are used incorporates variable grant. The speci-
fied model is the following:
( ) ( ) ( ) ( ) ( ) ( )
( ) ( ) ( )
12 3 4
t t 1
56 7
=++ + +
++ + +
4. Results
The results of the estimation show that credits allocated by the Decentralized Financial System (DFS) have a
significant impact on the agricultural growth. A 10% increase in credit granted by DFS to the agricultural sector
(ACDFS) leads to a growth of 0.72% of the Agricultural GDP. The microfinance sector is characterized by mi-
cro credit dedicated to agricultural producers. These financings are mostly cash loans. These credits in addition
to promote the purchase of inputs, allow producers to buy welding supplies. Producers and traders in harvest pe-
riod are financed. So they can buy the production. The Decentralized Financial System (DFS) mostly finance
pluvial crops and farms for seasonal loans. Financing is more efficient in the absence of subsidy.
Grants allow producers to acquire equipments. The savings are achieved in the acquisition of subsidized in-
puts and can be reinvested in the production equipment, which positively affects growth. On the other side, the
S. I. Diop, F. J. Cabral
equipment grant facilitates the renewal of obsolete farm equipment.
An increase of 10% of the Gross Capital Formation in the agricultural sector (GCFA) causes a increase by
13.15% of Agricultural GDP. This shows that funding can have important effects on accumulation and hence
agricultural growth.
5. Conclusion and Policy Lessons
DFS finance small producers by ensuring the production of grain and other commodities are derived from pluvi-
al in view of food security. The improvement of the financial mechanism, through the establishment of guaran-
tee funds, would be necessary to increase the volume funding for the agricultural sector. These small grants do
not allow huge investment in agriculture, but they incite to emergence of small and medium enterprises and
hence to contribute on agricultural growth.
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