Credit constraints and their impact on farm household welfare

Abstract

This study aims at identifying factors affecting formal credit constraint status of rural farm households in Vietnam's North Central Coast region (NCC). Using the Direct Elicitation method (DEM), we consider both internal and external credit rationing. Empirical evidences confirm the importance of household head's age, gender and education to household's likelihood of being credit constrained. In addition, households who have advantages in farm land size, labour resources and non-farm income are less likely to be credit constrained. Poor households are observed to remain restricted by formal credit institutions. Results from the Endogenous Switching Regression model suggest that credit constraints have negative impact on household's consumption per capita and informal credit can act as a substitute to mitigate the negative influence of formal credit constraints.

The Influence of Social Capital on Farm Household’s Borrowing Behavior in Rural China

“…Model (2) in Table 4 contains the results on the probability of obtaining informal credit. The results show that kinship and friendship affect the probability of getting informal loans but in the opposite direction.…”

“…Finance is at the core of economic activities and rural finance is an important force for agricultural development, rural economic growth, and farmer income growth. However, imperfections in rural financial markets and limitations of formal financial institutions lead to credit constraints in most developing countries [1,2]. Rural people often have limited or no access to formal credit because their incomes are unstable, they have limited or no collateral, and high transaction costs because information asymmetries [3].…”

Credit Constraints on Farm Household Welfare in Rural China: Evidence from Fujian Province

“…They indicate that non-constrained households have higher monthly expenditure than constrained counterparts. Similarly, Tran et al [29] found a lower consumption expenditure among credit constrained households compared to randomly selected households. Similar findings are also found in Briggeman et al's [40] research on US farm and nonfarm households, and in Li and Zhu's [33] study on Chinese rural households.…”

“…Credit constraint was measured via the direct elicitation technique described by Boucher and colleagues [43] and often utilised for studying the phenomenon (see [17,29,32]). This method uses survey questions to separate the households with credit constraint from those without credit constraints.…”

“…Thus, those without lands such as tenants and share croppers were excluded from the credit programmes. Jia [29] study on rural farmers in Vietnam's North Central Coast region also found negative effects of farm land size on the probability of the rural household's credit constraint. This is explained by the fact that these rural lands are not acceptable as collateral for the loan and thus, are not helpful for the farmer's repayment capability [17].…”