Credit constraints and household welfare in the Eastern Cape Province, South Africa

Abstract

Rural households in developing countries may remain trapped in poverty by a lack of finance needed to undertake profitable investments. Improved access to credit could generate pro-poor economic growth if the credit constraints that poor households faced are relaxed. This study examines the effect of credit constraints on household welfare among the clients of the Eastern Cape Rural Finance Corporation (ECRFC), in the Amathole District Municipality of the Eastern Cape Province. Credit constrained households are identified based on direct elicitation of credit status from survey questions, and then an endogenous switching regression model is used to analyse the effect of credit constraints on the welfare of a representative sample of 150 households. Empirical results indicate that households with older household heads, more access to land, higher value of assets and higher debt repayment capacity are less likely to be credit constrained, and that increased access to credit can improve the welfare of credit constrained households. Key words: Credit constraints, household welfare, switching regression.