Multiple Credit Constraints and Borrowing Behavior of Farm Households: Panel Data Evidence from Rural Ethiopia

Publisher
Ethiopian Economics Association (EEA)
Author
Hailu Elias

Abstract

Promoting an inclusive rural credit market in developing countries is a reemerging
and pressing development agenda, given its importance in the poverty
reduction and economic growth process. Existing literature mainly focuses on the
supply side of the market with little or no attention given to demand aspects. This
paper analyzes both the demand and supply side factors affecting credit
constraints and borrowing behavior of farmers. Two waves of survey data, which
included about 1,200 randomly selected households from four zones of the
Amhara region in Northern Ethiopia, were used for the analysis. The Generalized
Linear Latent and mixed model (gllamm) was employed to account for
unobserved heterogeneity and potential correlations across credit constraint
categories. The results show that the probability of quantity rationing increased
in the study area between the years 2011 and 2013. Exposure to climatic shocks,
age, and lack of education were found to increase the probability of being
constrained while female and married heads were relatively less constrained. The
results further indicate that borrower’s perceived probability of rejection due to
strict lending policies and institutional rigidities; the transaction cost of
borrowing; and risk aversion behavior of farmers highly reduced the probability
of borrowing from the formal credit market. Compared to North Shewa, farmers
living in South Wollo zone were found to be discouraged and hence did not prefer
borrowing from the formal sector. However, farmers in West Gojjam were less
discouraged and had a higher probability of participating in the formal credit
market, signifying zonal variation in credit constraints and borrowing behavior.
This suggests the need to work on more innovative lending approaches by giving
attention to context-specific factors to build demand-driven, climate-smart, and
inclusive rural credit market.