5. TRADER FINANCE AND CREDIT ARRANGEMENTS

Information captured by trader interviews in this regard include sources of finance to set-up the livestock trade business, use of formal institutions (banks) to borrow or to transfer money, type of credit obtained (money or commodity) and interest rate on loan. The result revealed that, in general, the cross-border livestock trade is cash based and is financed from own funds. (See Table 23.)

Table 23. Source of Start-up Capital for Livestock Trade Business (in percent)

SOURCE: Survey Result, 1999

Livestock traders in the area were also asked the amount of their start-up capital. Most of the traders responded that they had less than Birr5000 (Table 24). Given the limitation of formal and informal sources of credit and dependence on own financing, the values seem reasonable. Moreover, due to fear of detection by tax authorities, traders are unlikely to provide the accurate information in this regard. This becomes more suspicious when we see the modal value of Birr 5000 for which 14 responses were found out of 100 traders interviewed in the border catchment.

Table 24. Business Start-up Capital by Livestock Traders (in Birr)

SOURCE: Survey Results, 1999.

Average (mean): 4153

Mode: 5000 (14 responses out of 100 traders interviewed)

Standard Deviation: 4091

Range: 30-20000

It is found in our survey that the role of formal sector credit to finance the cross-border livestock trade is insignificant. Availability of trader finance from very few formal sector banks branches in the area is challenged from several aspects. One is that cross-border trade is not licensed and traders do not have legal bases required by formal financial institutions to enforce contracts. Formal sector financial institutions in the pastoral areas are underdeveloped. External financial capital is scarce and financial intermediation within the system is absent.

The other is the limited distribution of financial institutions in the area. This factor affects other commercial banking services such as money transfer. Other services rendered by the formal sector financial institutions where licenses are not required such as money transfer and deposit are not provided adequately. For instance, the northern catchment of livestock that supply northeastern Kenyan markets and adjacent Somali markets is Wadera, which is 60 kms from Negelle where there is a branch of the Commercial Bank of Ethiopia. Negelle is about 362 km and 400 km from the Ethiopia-Somalia and Ethiopia- Kenya borders respectively.

Table 25. Banking Service Use Formal and Informal Money Transfer by Livestock Traders

SOURCE: Survey Result, 1999

Limited access to formal sector credit and services due to the reasons mentioned above are partly substituted by informal credit sources. Different types of loans from clients, friends and relatives as well as informal ways of money transfer using merchants are used by cross-border livestock traders. Informal ways also substituted other commercial bank services. For instance, merchants in different places are also used as intermediates of the buyer and the seller and are contacted through radio communication. A livestock trader at Dollo-Ado told that he received money at Dollo-Ado for the animals sold at Mogadishu and Baidoa markets and informal radio-communications between Mogadishu and Dollo-Gedo (Northern Juba, Somalia) were used.7 He also told that this is a common practice especially when it is difficult to come with the money or other goods due to security problems in the area. Money brokers operate in Mandera and Moyale and have taken the role of banks.

Table 26. Traders' Responses to Availability of Different Types of Loan

SOURCE: Survey Result, 1999

Three types of informal loans are available to the trader. One is loan in kind from a supplier or a client. This is the most important type of loan available to the traders. This type of loan in some studies it is referred to as commodity loan (see for example, Cook et al, 1990). In this case the trader buys animals on credit and returns the loan after the animals are sold. Interest rate is not accounted explicitly for this type of loan. However, preliminary interviews with livestock traders indicated that the opportunity cost of capital is regarded and trader often buys animals above the cash based price. These loans to the traders are facilitated by clientele relationship.

From Table 26 we see that traders who sell on credit are larger in percentages than traders who buy on a similar mode of transaction. This implies that this type of loan is easily available for traders, than other traders who purchase animals from pastoralists. This is due to the fact that traders at various levels could easily establish trust from repeated trade contacts than a trader with a number of pastoralist suppliers.

Second is loan from relatives or friends. This type of loan is interest free and gives the trader more options in the type of livestock he buys and markets. However, only few traders responded that they took such loans from friends and relatives (Table 23). Primary traders or collectors from pastoralists require these loans than higher level traders, as commodity loans are limited to the former groups than to the latter. Due to the gaps between primary traders and their suppliers (pastoralists), the missing capital market is unlikely to be substituted at this level of transaction. In interest free loans, the opportunity cost of capital is considered but compensated by social indebtedness (see Cook et al, 1990). Traders responded that such loans require close relationship and good reputation.

The third type of loan is profit sharing. In this relationship, the loan provider can be better regarded as the partner for that particular period or transaction. In this type of loan risk of loss is distributed between the partners. This type of loan was available to very few traders. This arrangement could suffer from a principal-agent problem due to multiple ownership of capital and moral hazard due to incomplete information about the profit by the loan provider or the partner.