Credit Constraints, Agricultural Productivity, and Rural Nonfarm Participation : Evidence from Rwanda
Although the potentially negative impacts of credit constraints on economic development have long been discussed conceptually, empirical evidence for Africa remains limited. This study uses a direct elicitation approach for a national sample of Rwandan rural households to assess empirically the extent and nature of credit rationing in the semi-formal sector and its impact using an endogenous sample separation between credit-constrained and unconstrained households. Being credit constrained reduces the likelihood of participating in off-farm self-employment activities by about 6.3 percent while making participation in low-return farm wage labor more likely. Even within agriculture, elimination of all types of credit constraints in the semi-formal sector could increase output by some 17 percent. Two suggestions for policy emerge from the findings. First, the estimates suggest that access to information (education, listening to the radio, and membership in a farm cooperative) has a major impact on reducing the incidence of credit constraints in the semi-formal credit sector. Expanding access to information in rural areas thus seems to be one of the most promising strategies to improve credit access in the short term. Second, making it easy to identify land owners and transfer land could also significantly reduce transaction costs associated with credit access.
Summary: | Although the potentially negative
impacts of credit constraints on economic development have
long been discussed conceptually, empirical evidence for
Africa remains limited. This study uses a direct elicitation
approach for a national sample of Rwandan rural households
to assess empirically the extent and nature of credit
rationing in the semi-formal sector and its impact using an
endogenous sample separation between credit-constrained and
unconstrained households. Being credit constrained reduces
the likelihood of participating in off-farm self-employment
activities by about 6.3 percent while making participation
in low-return farm wage labor more likely. Even within
agriculture, elimination of all types of credit constraints
in the semi-formal sector could increase output by some 17
percent. Two suggestions for policy emerge from the
findings. First, the estimates suggest that access to
information (education, listening to the radio, and
membership in a farm cooperative) has a major impact on
reducing the incidence of credit constraints in the
semi-formal credit sector. Expanding access to information
in rural areas thus seems to be one of the most promising
strategies to improve credit access in the short term.
Second, making it easy to identify land owners and transfer
land could also significantly reduce transaction costs
associated with credit access. |
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