Determinants of credit rationing among rural farmers in developing areas

Abstract

Purpose The purpose of this paper is to model credit rationing among farmers in rural developing areas, based on micro level data of Kano State, Nigeria. Design/methodology/approach A total of 835 households and 45 microfinance banks were utilized as the samples of the study which were selected using multi-stage stratified sampling technique. Multinomial logit model was used to estimate the factors that determine credit rationing among the rural farmers in Nigeria. Findings The result of the discrete choice model shows that farmers who are either being engaged in subsistence farming or trading have a significant effect on credit rationing with the greatest impacts found on the farm profit and farmers’ location. Research limitations/implications This study failed to carry out a dynamic analysis regarding agricultural credit rationing. Also, it is well known that formal credit interacts with informal credit sector; nevertheless, this interaction was unaccounted for in this study. Therefore, future studies can expand the scope of this research to account for this interaction. In fact, investigating heterogeneity among credit providers will be an important topic in the future. Practical implications Clear and sound policies are required for the establishment of new agencies and financial institutions devoted to agricultural sector. Similarly, an integrated system of forward-looking policies based on tax and subsidy-regimes to augment desired incentives for private financial sector and NGOs to lend money to the farmers are needed. Originality/value Consistent with risk-balancing theory, the good story for farmers is that profit making farmers are less likely to be among the constrained borrowers. It turned out from the credit rationing model that urban farmers had a greater chance of being successful applicants in the Nigerian agricultural credit market. In comparison to farmers at periphery, urban residents are less likely to be associated with being constrained borrowers.