Direct Elicitation of Credit Constraints: Conceptual and Practical Issues with an Application to Peruvian Agriculture

Abstract

This article provides a methodological bridge leading from the well-developed theory of credit rationing to the less developed territory of empirically identifying credit constraints. We begin by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing, and risk rationing. Each form adversely affects household resource allocation and thus should be accounted for in empirical analyses of credit market performance. We outline a survey strategy to directly elicit households' status as unconstrained or constrained in the credit market and, if constrained, to further identify which of the three nonprice rationing mechanisms is at play. We discuss several practical issues that arise due to the use of a combination of "factual" and "interpretative" survey questions. Finally, using a farm-level data set from Peru, we illustrate how the methodology can be used to estimate the impacts of credit constraints. (c) 2009 by The University of Chicago. All rights reserved..

Credit rationing’s determinants of Small and Medium Enterprises (SMEs) in Chittagong, Bangladesh

“…In the second stage, borrowers get a smaller amount of loan than they desire (Baydas et al 1994). Boucher et al (2009) found five categories of borrowers in credit market: a) unconstrained borrowers or price rationed borrowers, b) unconstrained non-borrowers or price rationed non-borrowers, c) quantity rationed borrowers, d) risk rationed borrowers, and e) transaction cost rationed borrowers Table 1. In nature, unconstrained borrowers are not affected with credit limit by FIs.…”

“…On the other hand, unconstrained non-borrowers are not interested in FIs loan although they are not affected by the credit limit. Again, the following three types of rationed borrower: quantity, risk, and transactional cost are non-price rationed borrowers (Boucher et al 2009). The borrowers who apply to FIs for a loan but obtain either lower amount of loan than they desire or rejected are quantity rationed borrowers.…”

Do formal credit constraints affect the rural household consumption in China?

“…Risk rationing arises from the farmers' excessive concerns about their debt repayment abilities. Self-imposed risk rationing may discourage rural households from getting enough credit or no credit at all, and it induces them to adopt a low risk and low investment strategies in order to avoid defaulting on loans (Boucher et al 2009). …”

“…To identify whether a rural household is credit constrained from the formal financial institutions 1 , we apply the direct elicitation method, which is widely used (Barham et al 1996;Akoten et al 2006;Bell 1990;Boucher et al 2009) and recognized as a reliable approach to capture the credit rationing status (Gilligan et al 2005). We design detailed credit modules to capture the information about all loans that were outstanding at some point during the year prior to the survey.…”

“…Other farm households may prefer the formal loan but did not apply because of the transaction cost rationing or the risk rationing (Boucher and Guirkinger et al 2009). The transaction cost rationing occurs when farm households require debt financing but do not seek a formal loan because the transaction costs are too high, such as strict collateral requirements (TCR1), long distances to financial institutions, a tedious paperwork, uncomfortable interviews, bureaucratic procedures, and the lengthy waiting time to get the loans approved (TCR2).…”