CREATING INCENTIVES FOR REPAYMENT

If the borrower has a strong incentive to repay the loan, strategic default is less likely. The most common incentive to the smallholder will be the maintenance of a working relationship with the lender. If smallholders recognize the benefit of entering into an agreement with a commercial enterprise, then they have an incentive not to jeopardize the future benefits of maintaining that relationship. The chief concern of a smallholder household is to achieve a sustainable livelihood. For this, the household needs to ensure that it has access to sufficient food and other basic necessities. One part of a household's strategy may be to grow a cash crop. If so, and particularly if it is a non-food cash crop, they need to ensure that their produce will be purchased. In this respect, any company which guarantees legally binding prices before the start of the growing season gives smallholders a strong incentive to maintain good relations with the company. Smallholders know that the arrangement provides a safe and predictable income, and they can plan household expenditures with confidence.