Causes and Implications of Credit Rationing in Rural Ethiopia: The Importance of Zonal Variation

Ethiopian village-level data from two locations are used to explore determinants and crop productivity-effects of credit rationing in semi-formal markets. High levels of risk lead to widespread credit rationing (voluntary and involuntary) with political and social networks facilitating credit access. But impacts differ across zones: in high-potential surplus-producing areas, eliminating credit constraints is estimated to increase crop productivity by some 11 percentage points. In low-productivity drought prone areas where credit mainly helps smooth consumption, no relationship between credit rationing and crop productivity emerges. The impact of measures to alleviate credit constraints will thus differ depending on why credit rationing is observed and available productive opportunities.