Who is credit constrained? evidence from rural Malawi

Abstract

The limited nature of poverty assistance funds for credit implies that only a few can benefit from such funds at a time. Considering the complexity of designing credit contracts with incentives that are constraint compatible, microfinance institutions are continuously exploring strategies for identifying and targeting credit constrained households as a way of improving efficiency in the delivery of financial services. The objective of this paper is to examine factors that influence a household's likelihood of facing credit constraints in Malawi. The data used in the study was collected in Malawi by the International Food Policy Research Institute (IFPRI) in collaboration with the Rural Development Department (RDD) of Bunda College of Agriculture. The survey was conducted in three rounds and covered 404 households in the three regions of Malawi. This paper, however, uses data from the first round only. The households credit constraint status was established by using the direct elicitation approach. The analysis on determinants of credit constraints was done using probit. The study reveals that characteristics of a household head as well as the supply side factors such as the remoteness of the location in which the household is based, significantly increase the likelihood that a household will face credit constraints. Participants in credit programs are less likely to report credit constraints, an indication that barriers to participation in credit markets continue to exist. Results suggest an urgent need for formal financial institutions to expand their outreach in order to address the huge and ever growing unmet demand for financial services among rural peasants and women in particular.

Do Connections Matter? Individual Social Capital and Credit Constraints in Vietnam

“…3. Many studies on credit constraints have shown that the poor are credit constrained mainly because of lack of sizeable collateral (Simtowe et al, 2008). This is consistent with findings in Vietnam.…”

Agricultural credit provision: what really determines farmers’ participation and credit rationing?

“…Awunyo-Vitor et al (2014) investigate determinants of agricultural credit rationing by formal lenders in Ghana and find that engagement in off-farm activities, the commercial orientation of farmers, a positive account balance, and an increase in farm size can potentially reduce rationing of loan applicants by lenders. In Malawi, Simtowe, Diagne, and Zeller, (2008) find that wealthier households are less likely to report credit constraints. In spite of these important contributions, there is limited knowledge about what influences farmers' participation or lack thereof in credit programs in an area where most farmers are economically productive, such as in the Nkoranza district of Ghana.…”

Are Technology Adoption and Collective Action Important in Accessing Credit? Evidence from Milk Producers in Tanzania

“…Borrowers are households or individuals whose access to credit is observable, while non-borrowers have comprised only those households or individuals who have sought for credit but have been unable to acquire it. However, in investigating the decision to borrow, it would be instructive to consider the possibility that some non-borrowing households that have not sought for credit are not necessarily without a credit constraint but rather are potential borrowers who have excluded themselves from borrowing because of high credit application costs (Kon and Storey 2003) or they were previously credit-rationed (Simtowe et al 2008). Stiglitz and Weiss (1981) define credit rationing as a situation in which either some loan applicants who are indistinguishable from others are denied loans even if they are willing to pay a higher interest rate, or some distinct groups of individuals are unable to acquire credit at any interest rate, but could do so at a higher level of credit supply.…”