Does rainfall variability explain low uptake of agricultural credit? Evidence from Ethiopia

Abstract

Credit markets are key instruments by which liquidity-constrained smallholder farmers may finance productive investments. However, the documented low demand and uptake of agricultural credit by smallholder farmers in sub-Saharan Africa pose challenges for energizing rural transformation in the region. In this paper, we investigate the impact of rainfall uncertainty—a major source of production risk—on the uptake of credit by rural farm households in Ethiopia. We further examine whether rainfall uncertainty explains credit rationing among those households not participating in rural credit markets. We find that rainfall variability discourages the uptake of agricultural credit. We also find that rainfall variability is associated with credit risk rationing, expressed as low demand for agricultural credit. We show that our findings are robust to alternative ways of constructing rainfall variability (inter-annual or inter-seasonal) and a battery of robustness checks. For instance, we show that rainfall variability is a strong predictor of credit uptake in rural areas while less relevant in urban areas. We also document heterogeneous responses to rainfall variability; those households living in the arid and semi-arid lands of Ethiopia, which are believed to be more vulnerable to recurrent weather shocks, are more responsive to rainfall variability in terms of reduced uptake of agricultural credit. Our results highlight the impacts of uninsured production risk on the demand for agricultural credit and hence smallholder agricultural investments. Our findings suggest the importance of interventions aimed at relaxing smallholders’ credit rationing while also reducing their production risk.

Does exposure to weather variability deter the use of productivity‐enhancing agricultural technology? Evidence from Ethiopia

“…Following Asfaw et al (2016) and Abay et al (2018), we use four different weather variables including coefficient of variation of precipitation, coefficient of variation of temperature, lagged rainfall, and lagged mean temperature, as a key variable of regressors. The weather variables, such as the coefficient of variation of precipitation and temperature, are often hypothesized to explain the weather uncertainty or expected weather at the beginning of the season (see Abay et al, 2018; Asfaw et al, 2016).…”

“…Following Asfaw et al (2016) and Abay et al (2018), we use four different weather variables including coefficient of variation of precipitation, coefficient of variation of temperature, lagged rainfall, and lagged mean temperature, as a key variable of regressors. The weather variables, such as the coefficient of variation of precipitation and temperature, are often hypothesized to explain the weather uncertainty or expected weather at the beginning of the season (see Abay et al, 2018; Asfaw et al, 2016). The lagged rainfall and temperature are included to capture recent weather‐induced production shocks, which can have a significant impact on last year's harvest level and thus the current liquidity constraint faced by the farm household (Alem et al, 2010).…”

“…The higher rainfall risk, reflected in a coefficient of variation of precipitation, is hypothesized to encourage the use of risk‐reducing (loss‐reducing) agricultural innovations such as irrigation and agrochemicals while decreasing the use of risky and high‐cost agricultural innovations (Asfaw et al, 2016), such as inorganic fertilizer and improved seed (Abay et al, 2018). The higher variation in mean temperature is also expected to encourage the use of risk‐reducing innovations, whereas lower variation in means temperature should encourage the use of chemical fertilizer and improved seeds.…”

“…2 2 Fertilizer and improved seed are productivity‐enhancing input as they have higher marginal products in more productive states of the nature (Abay et al, 2018). …”

Women and small-scale irrigation: A review of the factors influencing gendered patterns of participation and benefits

“…Small-scale irrigation also affects the availability and stability of food supply by enabling more cropping seasons, including during dry periods (Aseyehegn, Yirga, and Rajan 2012), and by reducing the risks of rainfed production (Fox and Rockström 2003;Oweis and Hachum 2006). Reducing the risks of rainfed production in turn, may reduce encourage more investments in agricultural production (Abay et al 2021).…”