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

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 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 This paper is a product of the Agriculture and Rural Development Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at 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. for access to the data, and Menberu Allebachew, Achim Fock and Will Martin for insightful comments and suggestions. Support from the Knowledge for Change Program (KCP) administered by the World Bank is gratefully acknowledged. The views expressed in this paper are those of the authors and do not necessarily reflect those of the World Bank, its Board of Executive Directors, or the countries they represent.