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2016 AFRICAN ECONOMIC CONFERENCE

Credit Constraints and Farm Productivity:


Micro-level Evidence from Smallholder
Farmers in Ethiopia
Dr. Adamon N. Mukasa, Adeleke O. Salami, and Anthony M. Simpasa
Development Research Department, AfDB
Abuja, December 5, 2016

Outline
Introduction

I.
I.
II.

Background
Motivation and objectives of the study

II. Methodology
I.
Model of farmers access to and demand for credit
II.
Credit constraints and farm productivity
III. Productivity loss due to credit constraints
III. Data and descriptive statistics
IV. Results

V.

Conclusion and policy implications

2016 AFRICAN ECONOMIC CONFERENCE

I. Introduction

Background
Positive correlation between access to credit and

targeted outcomes (Feder et al, 1990; Sial and Carter,


1996; Carter and Olinto, 2003; Foltz, 2004):

Poverty reduction
Transition from subsistence farming to agri-business
Acquisition of production inputs (short term) and realisation of
profitable investments (long term)

Imperfections of credit markets are the norm

(Stiglitz and Weiss, 1981; Carter, 1989; Feder et al,


1990):

Asymmetric information (adverse selection and moral hazard) in the


credit markets
Misallocation of resources and a sub-optimal use of inputs
Lower income, volatile welfare and food security (Jappelli, 1990;
Petrick, 2004; Ali et al, 2014)

Background (2)
In Ethiopia, credit market imperfections are more acute in the

agricultural sector:

Small-scale farmers (crop production is dominated by subsistence


farm households and more than 90% of the farms with at most 10
acres)
Reliance on own resources for input and consumption purchases,
labor hiring, investments,
Vulnerability to vagaries of nature (droughts, floods,) and to
market instabilities (price volatility, high transaction costs,)

Improvements in financial inclusion but still insufficient:


Agriculture receives less than 10 percent of the banks lending
22% of adult Ethiopians hold an account at a financial institution in
2014 vs 29% in SSA, 45% in South Asia, 51% in Latin America, and
69% in East Asia
Only 3 bank branches per 100,000 inhabitants in 2014 vs 4 branches in
SSA countries and 14 in the world.

Motivation
How limited access to credit (or lack thereof) affects farm

productivity?

Are credit constrained and unconstrained farmers intrinsically


different?
To what extent credit constraints affect farm productivity in Ethiopia?
What is the potential productivity gain from removing credit constraints
in Ethiopia?

Our contributions to the understanding of the potential

linkages between credit constraints and farm productivity:

Analysis of the nature and determinants of credit constraints in


Ethiopias agricultural sector (supply- and demand-side factors)
Use of econometric techniques to disentangle the differential effects
of various types of credit constraints on farm productivity
Evaluation of the potential productivity loss due to credit
constraints (or potential gains from removing them)

2016 AFRICAN ECONOMIC CONFERENCE

II.

Methodology

Methodology
Access to and demand for credit
Simultaneous estimation
= + Latent notional demand for credit
= ( + > 0) Observable demand for credit

= +

Latent notional access to credit

= ( + > 0) Observable access to credit

Estimation using bivariate probit model with partial


observability:

2 , ; + 1 [ 2 ( , ; )]

, ; =
=1

Methodology (2)
Credit constraints and farm productivity

Issues: unobserved heterogeneity and endogenous sample selection


Way out: endogenous regime switching regression model (Freeman
et al, 1998; Lokshin and Sajaia, 2004; Ali and Deininger, 2012):
Selection equations

= + +
1 > 0
=
0 0

Productivity equations

1 = 1 + 1 + 1 = 1
=

2 = 2 + 2 + 2 = 0

Productivity loss due to credit constraints


| = 1 = 2 1 + 2 1

2016 AFRICAN ECONOMIC CONFERENCE

IV.

Data and Descriptive statistics

Data and descriptive statistics


2011-2012 Ethiopia Rural Socioeconomic Survey (ERSS) and 2013-

2014 Ethiopia Socioeconomic Survey (ESS) as part of the Living


Standards Measurement Study Integrated Surveys on Agriculture
(LSMS-ISA)
Three rounds per survey:
The first round in September and October (2011 for ERSS and 2013
for ESS) for information on households post-planting activities.
The second round in November-December (2011 for ERSS and 2013
for ESS) for livestock activities.
The last round in January-March 2012 for ERSS and in FebruaryApril 2014 for ESS with post-harvest information
Balanced sample of 2,654 households engaged in agricultural
activities

Data and descriptive statistics (2)


-No need, have enough resources
-Interest rates too high
-Inadequate collateral
-Absence of lender nearby
-Do not know where to apply
-No bank account
-Too much trouble
-Do not like to be in debt
-Believed would be refused
- Fear not be able to pay

Why not?

Unconstrained
Price constrained
Transaction costs
constrained

Risk constrained

NON
Applied for a
loan in the past
12 months?

-Loan rejected
-Partially approved
NON

YES
Received total
amount applied
for?

YES
Unconstrained

Quantity
constrained

Descriptive statistics
Pooled sample
Number

2011-12

Unconstrained

1,771

Relative
frequency
33.36

Constrained

3,537

66.64

2,134

80.41

1,403

52.86

Quantity-constrained

264

7.46

145

6.79

119

8.48

Price-constrained

238

6.73

147

6.89

91

6.49

Risk-constrained

2,546

71.98

1,555

72.87

991

70.63

507

14.33

294

13.78

213

15.18

5,308

100

2,654

100

Transaction costs-constrained
Observations

Number

2013-14
Number

520

Relative
frequency
19.59

1,251

Relative
frequency
47.14

2,654

100

Descriptive statistics (2)


All panel
households

Credit
constrained
No
Yes

Household characteristics
Age of the head (in years)

45.66 (15.18)

Education of the head (in years)

1.70 (3.04)

Female-headed household (in %)

20.43

Household size
Monthly consumption ( ETB)
Access to extension services (%)

5.28(2.23)
603.21
(1,808.46)
15.79 (36.47)

45.22
(14.31)
1.73 (2.97)

45.88
(15.59)
1.69 (3.07)

18.74
(39.03)
5.40 (2.21)

21.28(40.94)*

580.02
(1,371.43)
12.76
(33.38)

614.82
(1,991.66)
17.30
(37.83)***

5.22 (2.23)***

Farm characteristics
Crop output (in ETB)
Land size (in acres)
Land productivity (ETB/acre)

9,736.68
(81,854.51)
3.82 (17.38)

14,879.73
7,146.51
(139,201.5) (18,343.46)***
4.26 (13.25) 3.60 (19.11)

6,783.94
(63,496.29)

10,906.07
(106,647.5)

4,719.95
(18,575.11)**

Descriptive statistics (3)


All panel
households

Credit
constrained
No

Yes

1,089.86 (1,976.07)

1,147.31 (1,442.52)

1,061.09 (2,194.65)*

56.67 (390.57)

82.38 (614.04)

43.80 (199.28)***

8.97 (23.65)

10.17 (21.72)

8.37 (24.53)**

% of plots with certificate

36.20 (43.58)

39.06 (43.38)

34.77 (43.62)***

Land slope (% of flatted plots)

54.95 (36.67)

58.27 (35.66)

53.29 (37.06)***

Distance to nearest main road (km)

16.70 (19.81)

16.18 (17.93)

16.96 (20.68)

Distance to main market (km)

67.27 (48.97)

65.03 (46.53)

68.39 (50.12)**

Distance to main population center (km)

37.57 (26.52)

37.53 (26.34)

37.60 (26.62)

Distance to nearest commercial bank (km)

23.81 (26.45)

22.50 (27.23)

24.46 (26.03)**

Distance to nearest microfinance institution (km)

13.22 (19.01)

14.00 (18.77)

12.83 (19.12)**

Tropical Livestock Units

8.74 (10.83)

8.83 (10.68)

8.70 (10.91)

Family labor (in hours)


Hired labor ( person-days)
Chemical fertilizer use ( kg/acre)

2016 AFRICAN ECONOMIC CONFERENCE

V.

Results

Results (1): Determinants of access to and


demand for credit in Ethiopia
Bivariate probit with partial observability
Farm size (acre)
Household size (number)
Adult rate (%)
Female (female=1)
Age (years)
Age squared
Years of schooling
Share of titled lands (%)
Objective of credit (Input purchases=1)
Tropical Livestock Units (number)
Asset index
Rural (Rural=1)
Commercial bank in the village (Yes=1)
Distance to commercial bank (km)
Microfinance institution in the village (Yes=1)
Distance to microfinance institution (km)
Distance road (km)
Distance market (km)
Distance population center (km)
Survey wave 2 (Panel 2=1)
Constant

Access
Demand
0.025 (0.014)** 0.035 (0.016)**
0.07 (0.019)*** 0.026 (0.006)***
0.458 (0.133)*** -0.157 (0.168)
-0.089 (0.090) 0.113 (0.112)
0.000 (0.003) -0.017 (0.003)
0.001 (0.000)
0.002 (0.002)
0.006 (0.010) -0.016 (0.013)
0.131 (0.076)* 0.005 (0.102)
2.497 (0.144)*** 2.203 (0.141)***
0.010 (0.005)*** -0.003 (0.007)
0.042 (0.053)
-0.007(0.025)
0.063 (0.163) -0.330 (0.245)
0.117 (0.278)
0.002 (0.005)
0.464 (0.163)***
0.008 (0.006)
-0.007 (0.007)
0.002 (0.001)
-0.00 (0.004)**
0.024 (0.015) 0.016 (0.009)*
-1.38 (0.238)*** 2.932 (2.617)

Results (2): determinants of being credit


constrained (Switching estimation)
All constrained
(Model I)
Female
Age
Age squared
Years of schooling
Farm size
Objective of credit
Rural
Commercial bank in the
village
Distance to commercial
bank
Micro. institution in the
village
Distance to micro.
institution
Distance market
Distance population center
Survey wave 2
Constant

quantityconstrained
(Model II)

Priceconstrained

RiskConstrained

Transaction costsconstrained
(Model V)

(Model IV)
0.082(0.048)*
-0.018(0.010)*
0.000(0.000)**
-0.013 (0.006)**
-0.031(0.045)
-0.240 (0.349)
0.024 (0.129)
-0.106 (0.147)

0.003(0.070)
0.005(0.011)
-0.000(0.000)
-0.012(0.009)
-0.007 (0.033)
-0.099(0.258)
0.031(0.153)**
-0.061(0.134)

0.074(0.053)
-0.018(0.008)**
0.000 (0.000)**
-0.005 (0.006)
-0.005 (0.021)
-0.605(0.059)***
-0.252(0.128)**
-0.469 (0.120)***

0.078(0.206)
-0.001(0.014)
-0.000 (0.000)
-0.001(0.001)
-0.091 (0.049)*
-0.364 (0.060)***
-0.343(0.283)
-0.041 (0.223)

(Model III)
-0.172(0.097)*
0.018 (0.015)
-0.001 (0.000)
-0.005 (0.012)
0.043(0.031)
-0.095(0.013)***
0.205(0.281)
0.097 (0.253)

0.001(0.001)

0.001(0.001)

0.000(0.001)

0.002(0.001)*

0.002(0.001)**

0.181(0.051)***

-0.072 (0.081)

0.143(0.178)

0.069 (0.125)

-0.104(0.067)

0.001(0.001)

-0.001 (0.002)

0.000 (0.003)

0.003 (0.003)

0.005 (0.002)***

0.001(0.001)***
-0.001(0.001)
-0.262(0.117)**
0.573 (1.147)

0.000(0.002)
-0.001(0.004)
0.570(0.387)
-7.756(1.550)***

0.000(0.002)
-0.001(0.002)
0.347(0.298)
1.283 (1.774)

0.000(0.003)
-0.001(0.004)
-0.094 (0.062)
1.392 (1.259)

0.000(0.001)
0.003(0.001)**
0.084 (0.161)
-3.761(1.403)***

Results (3): Determinants of farm


productivity by credit constraint status
Household size
Adult rate
Farm size
Share of irrigated plots
Family labor
Hired labor
Use of improved seeds
Use of fertilizer
Use of agro-chemicals
Use of manure
Average rainfall
Survey wave 2
Mills ratio
Constant

Constrained
-0.065(0.031)**
-0.367 (0.199)*
-0.595 (0.058)***
3.522 (0.425)***
0.984(0.048)***
0.238 (0.036)***
0.502 (0.142)***
0.709(0.194)***
0.435(0.113)***
0.363 (0.149)**
2.453 (0.445)***
1.430 (0.285)***
0.559 (0.004)***
-20.449 (2.716)***

Unconstrained
-0.037(0.034)
-0.582(0.214)***
-0.478 (0.065)***
3.062 (0.508)***
1.153(0.056)***
0.205(0.036)***
0.376(0.117)***
0.522(0.223)***
0.057 (0.111)
0.146(0.137)
1.828(0.492)***
2.011(0.458)***
1.167(0.005)***
-9.299 (3.518)***

Results (4): Productivity gains from


removing credit constraints
Type of credit constraint

Quantity-constrained

Percent
in the
sample
4.97

( | =
)

Price-constrained

4.48

Risk-constrained

47.97

Transaction costs-constrained

9.55

All credit constrained households

66.64

3,426.56
(6029.748)
3,446.119
(10,136.96)
4031
(12,149.11)
2,641.084
(10,603.38)
5,023.002
(12,975.38)

D= B-C

E=D/C

Relative
( | = ( | =
productivity
)
)
gain
2,983.058
443.502
14.9%
(3,847.658)
2,158.31
1,287.809
59.7%
(5,278.067)
2,882.7153 1,148.2847
39.83%
(1,529.69)
2,068.571
572.513
27.68%
(4780.54)
3,133.034
1,889.968
60.03%
(9,637.121)

2016 AFRICAN ECONOMIC CONFERENCE

VI. Conclusion and policy implications

Conclusion and policy implications


Main findings
Likelihood of accessing to and demanding credit was
significantly correlated with both supply- and demand-side
factors
Borrowing decision is influenced by presence of a microfinance
institution in the neighbourhood
Determinants of credit constraints and their impact on farm
productivity are specific to the type of constraints farmers face
The value of output per acre of constrained farmers could be
increased by more than 60% relative to the current level, once
all credit constraints have been removed

Conclusion and policy implications (2)


Policy implications
Tailored interventions on both supply and demand sides
of credit markets
Need to address insurance market failures in Ethiopia
given the prevalence of risk factors in explaining credit
constraints
Providing farmers with knowledge on financial services
Increasing the number of credit providers, particularly in
rural areas, to reduce transaction costs

Thank you for your attention

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