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Causes and implications of credit rationing in rural Ethiopia : the importance of spatial variation

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  • Ayalew Ali, Daniel
  • Deininger, Klaus

Abstract

This paper uses Ethiopian data to explore credit rationing in semi-formal credit markets and its effects on farmers'resource allocation and crop productivity. Credit rationing -- both voluntarily and involuntarily -- is found to be widespread in the sampled rural villages, largely because of risk-related factors. Political and social networks emerge as key determinants of access to credit among smallholder, peasant farmers. Significant regional variation emerges as well. In high-potential, surplus producing areas where credit is largely used for agricultural production, eliminating credit constraints is estimated to increase productivity by roughly 11 percentage points. By contrast, in low-productivity, drought prone areas where loans were rarely used to acquire inputs for crop production, the authors find no relationship between credit rationing and agricultural productivity. To be effective, efforts to improve agricultural productivity not only need to increase credit supply, but also explore the reasons for credit rationing and the availability of productive opportunities.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6096.

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Date of creation: 01 Jun 2012
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Handle: RePEc:wbk:wbrwps:6096

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Keywords: Access to Finance; Economic Theory&Research; Debt Markets; Bankruptcy and Resolution of Financial Distress; Financial Intermediation;

References

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  1. Jonathan Conning & Christopher Udry, 2005. "Rural Financial Markets in Developing Countries," Working Papers, Economic Growth Center, Yale University 914, Economic Growth Center, Yale University.
  2. Foltz, Jeremy D., 2004. "Credit market access and profitability in Tunisian agriculture," Agricultural Economics, Blackwell, Blackwell, vol. 30(3), pages 229-240, May.
  3. Petrick, Martin, 2003. "Empirical measurement of credit rationing in agriculture: a methodological survey," IAMO Discussion Papers 45, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
  4. Bell, Clive, 1988. "Credit markets and interlinked transactions," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 16, pages 763-830 Elsevier.
  5. Gamal Ibrahim & Abbi Kedir & Sebastian Torres, 2007. "Household-level Credit Constraints in Urban Ethiopia," Discussion Papers in Economics, Department of Economics, University of Leicester 07/03, Department of Economics, University of Leicester.
  6. de Janvry, Alain & Fafchamps, Marcel & Sadoulet, Elisabeth, 1991. "Peasant Household Behaviour with Missing Markets: Some Paradoxes Explained," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(409), pages 1400-417, November.
  7. Freeman, H.A. & Ehui, Simeon K. & Jabbar, Mohammad A., 1998. "Credit constraints and smallholder dairy production in the East African highlands: application of a switching regression model," Agricultural Economics: The Journal of the International Association of Agricultural Economists, International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 19(1-2), September.
  8. Carter, Michael R., 1988. "Equilibrium credit rationing of small farm agriculture," Journal of Development Economics, Elsevier, Elsevier, vol. 28(1), pages 83-103, February.
  9. Michael Lokshin & Zurab Sajaia, 2004. "Maximum likelihood estimation of endogenous switching regression models," Stata Journal, StataCorp LP, StataCorp LP, vol. 4(3), pages 282-289, September.
  10. Stefan Dercon & Luc Christiaensen, 2007. "Consumption risk, technology adoption and poverty traps: evidence from Ethiopia," CSAE Working Paper Series 2007-06, Centre for the Study of African Economies, University of Oxford.
  11. Stephen R. Boucher & Michael R. Carter & Catherine Guirkinger, 2008. "Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 90(2), pages 409-423.
  12. Eswaran, Mukesh & Kotwal, Ashok, 1986. "Access to Capital and Agrarian Production Organisation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 96(382), pages 482-98, June.
  13. Feder, Gershon & Lau, Lawrence J. & Lin, Justin Y. & Xiaopeng Luo, 1991. "Credit's effect on productivity in Chinese agriculture : a microeconomic model of disequilibrium," Policy Research Working Paper Series 571, The World Bank.
  14. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  15. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 219-34, February.
  16. Klaus Deininger & Daniel Ayalew Ali & Tekie Alemu, 2008. "Assessing the Functioning of Land Rental Markets in Ethiopia," Economic Development and Cultural Change, University of Chicago Press, vol. 57(1), pages 67-100, October.
  17. Kochar, Anjini, 1997. "An empirical investigation of rationing constraints in rural credit markets in India," Journal of Development Economics, Elsevier, Elsevier, vol. 53(2), pages 339-371, August.
  18. Catherine Guirkinger & Stephen R. Boucher, 2008. "Credit constraints and productivity in Peruvian agriculture," Agricultural Economics, International Association of Agricultural Economists, International Association of Agricultural Economists, vol. 39(3), pages 295-308, November.
  19. Freeman, H. A. & Ehui, Simeon K. & A. Jabbar, Mohammad, 1998. "Credit constraints and smallholder dairy production in the East African highlands: application of a switching regression model," Agricultural Economics, Blackwell, Blackwell, vol. 19(1-2), pages 33-44, September.
  20. Andre Croppenstedt & Mulat Demeke & Meloria M. Meschi, 2003. "Technology Adoption in the Presence of Constraints: the Case of Fertilizer Demand in Ethiopia," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 7(1), pages 58-70, February.
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