Causes and Implications of Credit Rationing in Rural Ethiopia: The Importance of Spatial Variation

27 Pages Posted: 20 Apr 2016

See all articles by Daniel Ayalew Ali

Daniel Ayalew Ali

World Bank - Development Research Group (DECRG)

Klaus Deininger

World Bank - Development Economics Group (DEC); World Bank - Development Research Group (DECRG)

Date Written: June 1, 2012

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.

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

Suggested Citation

Ali, Daniel Ayalew and Deininger, Klaus, Causes and Implications of Credit Rationing in Rural Ethiopia: The Importance of Spatial Variation (June 1, 2012). World Bank Policy Research Working Paper No. 6096, Available at SSRN: https://ssrn.com/abstract=2087321

Daniel Ayalew Ali (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Klaus Deininger

World Bank - Development Economics Group (DEC) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/kdeininger

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
104
Abstract Views
858
Rank
466,166
PlumX Metrics