Determinants of credit constraints in Ethiopia

Abstract

A well-functioning financial system plays an important role in resources allocation and credit expansion, and is vital in stimulating economic growth by fueling investment and consumption. Development of efficient financial system should therefore be one of the main priorities of a developing nation such as Ethiopia. The county has achieved phenomenal economic growth over the last decades and advanced well in modernizing its financial sector. However, the financial sector in the country is one of the least developed in the world. In order to sustain the growth achieved in the recent past, the financial sector needs to be more efficient and inclusive. Identification of the credit-constrained households is a vital step in that process. Ethiopian Socioeconomic survey (ESS) was made available for this thesis and it was useful in providing valuable information about the households’ credit situation. For this study, the aim has been to identify determinants of credit constraint in Ethiopia. These includes investigation of variables such personal, household and demographical characteristics of the households. Regression based on bivariate probit model with sample selection using maximum-likelihood estimations has been performed on the dataset. Descriptive methods shaded additional light on the available survey. The study uncovered that age, gender, education of the household head along with the size and location of the household influenced the households’ fate in the credit market. The findings of this study and studies like this could have impact further than the academic world. Policy makers benefit from such information when they devise strategies to move towards a fairer and more inclusive credit sector.

Keywords: Credit constraints, formal lenders, informal lenders, credit market in Ethiopia, policy making