Purpose
The purpose of this paper is to model credit rationing among farmers in rural developing areas, based on micro level data of Kano State, Nigeria.
Design/methodology/approach
A total of 835 households and 45 microfinance banks were utilized as the samples of the study which were selected using multi-stage stratified sampling technique. Multinomial logit model was used to estimate the factors that determine credit rationing among the rural farmers in Nigeria.
Findings
The result of the discrete choice model shows that farmers who are either being engaged in subsistence farming or trading have a significant effect on credit rationing with the greatest impacts found on the farm profit and farmers’ location.
Research limitations/implications
This study failed to carry out a dynamic analysis regarding agricultural credit rationing. Also, it is well known that formal credit interacts with informal credit sector; nevertheless, this interaction was unaccounted for in this study. Therefore, future studies can expand the scope of this research to account for this interaction. In fact, investigating heterogeneity among credit providers will be an important topic in the future.
Practical implications
Clear and sound policies are required for the establishment of new agencies and financial institutions devoted to agricultural sector. Similarly, an integrated system of forward-looking policies based on tax and subsidy-regimes to augment desired incentives for private financial sector and NGOs to lend money to the farmers are needed.
Originality/value
Consistent with risk-balancing theory, the good story for farmers is that profit making farmers are less likely to be among the constrained borrowers. It turned out from the credit rationing model that urban farmers had a greater chance of being successful applicants in the Nigerian agricultural credit market. In comparison to farmers at periphery, urban residents are less likely to be associated with being constrained borrowers.
It is generally agreed among the researchers that farm credit has significant positive impact on agricultural production that would increase the farming output. In fact, the rising cereal production were more related to farm inputs that may be acquired through agricultural credit. In view of that, this article synthesizes and reviews different field studies on the determinants of demand for credit. Moreover, it is clear from the reviewed studies that different models have been used in examining the factors that determine the demand for credit. However, most of the findings are inconclusive, due to the contextual, geographical, socioeconomic , environmental and other variations across the study areas. Based on that, the paper call the need for more empirical studies on the determinants of demand for credit for a specific region for better policy that may be suitable for that particular region. This has important implications on agricultural production in general and farm credit in particular, especially for developing economies.
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