Formal Credit Market Research Articles

Credit Constraints in Manufacturing Enterprises in Africa

We investigate the question whether firms in the manufacturing sector in Africa are credit constrained. The fact that few firms obtain credit is not sufficient to prove constraints, since certain firms may not have a demand for credit while others may be refused credit as part of profit maximising behaviour by banks. To investigate this question, we use direct evidence on whether firms had a demand of credit and whether their demand was satisfied in the formal credit market, based on panel data on firms in the manufacturing sector from six African countries. More than half the firms in the sample had no demand for credit. Of those firms with a demand for credit, only a quarter obtained a formal sector loan. In line with expectations, our analysis suggests that banks allocate credit on the basis of expected profits. However, controlling for credit demand, outstanding debt is positively related with obtaining further lending while micro or small firms are less likely to get a loan than large firms. The latter effect is strong and present in the regression, despite including several variables typically referred to as explaining why small or ‘informal’ firms do not get credit. The role of outstanding debt is likely to be a reflection of inefficiency in credit markets, while the fact that size matters is consistent with a bias as well, although we cannot totally exclude that they reflect transactions costs on the part of banks. Finally, we could not detect any differences between countries in the effects of these factors in the credit allocation rule, although financial deepening is found to explain most of the country-specific fixed effects, shifting the probability of obtaining credit across the firm distribution.

Informal and Formal Credit Markets and Credit Rationing in Cote d'Ivoire

This paper endeavours to shed light on the respective roles of the formal and the informal credit markets in developing countries. We use survey data for manufacturing firms in Côte d'Ivoire, documenting their access to informal credit markets, their investments, and their financing. We confront these data with a simple moral‐hazard model of credit rationing. Because of socio‐cultural effects, the magnitude of moral‐hazard problems and the cost of credit can be different in the informal credit market. We offer a structural econometric estimation of this model. Our empirical results point at severe moral‐hazard problems for all firms, and reduced cost of credit in the informal market. Our point estimate suggests that moral‐hazard problems can be alleviated in the informal credit market. Policy implications of our results are sketched.

Indebtedness among Agricultural Labourers from Deprived Castes: Towards an Explanation

India's largest share of poor is located among agricultural labourers belonging to Scheduled Castes. The poverty in this group persists and gets perpetuated due to continued discrimination in the employment opportunities and wage market. Owing to the low wages, they are perceptually under debt burden. This issue becomes sharp due to interlocking of labour and credit market. The insignificant participation of this group in the formal credit market makes the situation worse. In this paper, an attempt is made to analyse the indebtedness and market participatian of the deprived castes especially on the background of one of the most radical institutianal changes, i.e., lanf reforms. We have used secondary level information available from different sources in order to analyse the issue. The study concludes that due to marginalisation in land market as well as extremely weak bargaining position in the labour market, the indebteduess of this group has been increasing. This situation is aggravated by the relative neglect of this group by formal credit agencies.

Adoption of Improved Wheat Technologies by Small-Scale Farmers in Mbeya District, Southern Highlands, Tanzania

This study was conducted to gain an understanding of how small-scale farmers in Mbeya District have adopted improved wheat technologies promoted by the wheat research program at MARTI-Uyole. The specific objectives were to assess farmers’ wheat management practices, determine the technical and socioeconomic factors affecting the adoption of improved wheat technologies, and draw implications for research, extension, and policy. A purposive multistage sampling procedure was used to select 202 farmers, 160 from Tembela Division and 42 from Isangati Division, which are two important wheat-growing areas in Mbeya District. Primary data were collected using structured questionnaires and supplemented by secondary information obtained from MARTI-Uyole. Juhudi was the preferred improved wheat variety grown by adopters. For all farmers, the most important characteristics preferred in a variety were high yield, marketability, grain color, and early maturity. In 1997, about 74% of sample farmers adopted improved wheat varieties. The rate of adoption increased between 1989 and 1995 for a number of reasons, including provision of seed and fertilizer by Sasakawa Global-2000 (SG-2000), the collapse of the pyrethrum industry, and market liberalization. After 1995, adoption declined because SG-2000 was phased out and the varieties had succumbed to stem rust and foliar diseases. Tobit analysis showed that farm size, family size, and the use of hired labor were significant factors affecting the proportion of land allocated to improved wheat. Farm size, family size, hired labor, and credit all significantly affected the amount of fertilizer used. Additional improved varieties need to be developed, not only to replace the old varieties, but to give farmers a wider choice. Fertilizer recommendations need to be reviewed to take into consideration farmers’ circumstances such as cash availability and soil fertility. Extension services in the area should be increased and the link between extension workers and landholders strengthened to promote the adoption of improved wheat technologies. The formal credit market is only weakly involved in supplying credit to wheat farmers, but rising input prices, especially for fertilizer, make access to credit increasingly important for farmers. Policymakers and bankers should focus on providing loans to small-scale wheat farmers with high rates of loan recovery and low cost of credit. Farmers should also be encouraged to form their own savings and credit cooperatives at the village level. Policymakers should continue to encourage and support the private sector to invest in input acquisition and distribution so that inputs (especially seed and fertilizer) are available when farmers need them.

Effective costs of rural loans in Bangladesh

The paper compares transaction costs of borrowing from both formal and informal sources in rural Bangladesh and finds that transaction costs of loans from formal lenders are higher than those of loans from informal lenders. Transaction costs per taka of loan decrease with loan size, but much faster for formal than for informal loans. The effective costs of loans are calculated to show that for small loans, the effective costs of formal loans were higher than those of informal loans, while for large loans the formal loans were cheaper than informal loans. Thus large borrowers benefit from the subsidy in the formal credit market.

The Rotating Credit Association: A "Middle Rung" in Development

The building up of a variety of institutions, serving the purpose of promoting individual savings, and organizing them and making them fruitful to the saver and to the community, should be given a high priority in every development plan. To be effective, the institutions have to be adapted to different individual needs and possibilities and must fit into the community patterns; they must aim at encouraging planned and "goal-directed" savings. Even if, at least in the beginning, the financial results would not constitute more than a trickle of new capital disposal, the effects in rationalizing attitudes and mobilizing ambitions might be crucially important. --Gunnar Myrdal, in An International Economy (p. 360)