Risk rationing and the demand for agricultural credit: a comparative investigation of Mexico and China

Abstract

Purpose -The purpose of this paper is to determine the extent of risk rationing among potential rural borrowers in Mexico and China. Design/methodology/approach -Using primary survey data from 730 farm households in the Shaanxi province of China and from 372 farmers in northeastern Mexico, the authors investigate factors associated with risk rationed, price rationed and quantity rationed farmers. The survey was instrumented to self-identify borrower typologies. In addition the authors created within the survey a discrete-choice credit demand build to determine borrower credit demand elasticities. The analysis applies a linear probability which the authors found to be consistent with multinomial and binary logit models. Findings -The authors find in China the incidence of risk rationing in farmers to be 6.5, 14 percent for quantity rationed and 80 percent for price rationed. In Mexico, 35 percent of the sample is risk rationed, 10 percent quantity rationed and 55 percent price rationed. The results from China support the hypothesis that the financially poor are more likely to be quantity rationed; in Mexico, however, the level of education is found to be important in determining quantity rationed. In both countries, asset wealthy farmers are less likely to be risk rationed; however, income does not appear to have an impact. The paper provides evidence that the elasticity of demand for credit is different among the three credit rationed groups: risk rationed, price rationed and quantity rationed. Risk aversion and prudence are significantly correlated with risk rationing in China, while only risk aversion is significant in Mexico. The results suggest that efforts to enhance credit access must also deal with risk and risk perceptions. Practical implications -Risk rationing is an important concept in the understanding of rural credit markets. The findings that only 6.5 and 35 percent of Chinese and Mexican farmers are in stark contrast to each other. For agricultural economies such as Mexico with a significant number of farmers being risk rationing, more effort should be put into financial education and financial practices, The current issue and full text archive of this journal is available at AFR 74,2 including perhaps the use of risk-contingent credit to remove collateral risk. As property rights in China evolve, and new laws are promulgated to permit borrowing against land use rights, the collateralization issue will become much more important in rural credit markets. Originality/value -This paper is the first to investigate risk rationing in China and Mexico and one of the few research studies empirically investigating risk rationing. A comparative analysis of Mexico and China is enlightening because of the structural differences in the respective agricultural economies. The use of a credit demand build and the enumeration of individual credit demand elasticities is an original contribution to this literature.

Adoption and impact of index-insurance and credit for smallholder farmers in developing countries

“…As a consequence, the relevance of bundling credit and insurance is contested. received the insurance grant with farmers who received both an insurance and a capital 35 grant, they find that the former do not invest less than the latter. Apparently, farmers with 36 solely insurance are able to find credit to increase investments.…”

“…An important disadvantage is basis risk (see below). In this 33 review paper we discuss the determinants of demand for index-insurance, the impact of 34 index-insurance on smallholder livelihoods, and the existing links between index-insurance 35 and credit. In this meta-analysis, we identify key discoveries on the potential of index-36 insurance in enhancing credit supply for smallholders and thus farm productivity.…”

Heterogeneous Demand and Supply for an Insurance‐linked Credit Product in Kenya: A Stated Choice Experiment Approach

“…However, in reality, this may not be correct. Increasing evidence of risk rationing behaviour (Boucher et al, 2008(Boucher et al, , 2009Verteramo-Chiu et al, 2014) can be quite significant and adds a complicating dimension to the problem that significant numbers of farmers will reduce borrowing, or not borrow at all if production (or consumption) assets are put at risk.…”

Socio-Demographic Determinants of Credit Rationing at Baitul Maal Wa Tamwil in Indonesia

“…Based on the literature review, a variation based on conceptual and empirical testing occurs among rural clients of the credit market, which due to different geographical contexts and socio-demographic set-ups as well as in different Mason (2014), Khoi et al (2013); Ali and Deininger (2014) Gender If the borrower candidate is a male, the credit rationing occurrence will decrease Mijid and Bernasek (2013);Vitor et al (2014); Cheng and Ahmed (2014); Menkhoff and Rungruxsirivorn (2011);Fletschner (2009) There is no influence of gender to credit rationing Zeller (1994) ; Chiu, Khantachavana, and Turvey (2014); Papias and Ganesan (2010) ; Togba (2012); Mason (2014); Drakos and Giannakopoulos (2011); Agier and Szafarz (2013); Khoi et al (2013) Income If the income increased, the credit rationing occurrence will decrease Duca and Rosenthal (1991); Zeller (1994); Khoi et al (2013) There is no influence of income to credit rationing Zeller (1994) If the distance of lender to borrower increase, the credit rationing occurrence will increase…”

“…Therefore, this study will discuss socio-demographic determinants of credit rationing. Specific factors in the socio-demographic determinants of credit rationing include gender (Vitor et al, 2014;Cheng and Ahmed, 2014;Fletschner, 2009;Chiu et al, 2014;Menkhoff and Rungruxsirivorn, 2011;Mijid and Bernasek, 2013;Zeller, 1994), income (Duca and Rosenthal, 1991;Zeller, 1994), distance (Zeller, 1994), financing duration (Carling and Lundberg, 2005;Ferri and Murro, 2014), savings duration (Vitor et al, 2014;Dusuki, 2008), education level (Al-Azzam, Hill, and Sarangi, 2012;Duong and Izumida, 2002;Menkhoff and Rungruxsirivorn, 2011), marital status (Cheng and Ahmed, 2014;Papias and Ganesan, 2010), dependency (Duong and Izumida, 2002;Zeller, 1994) and whether or not the head of household is the credit applicant (Duong and Izumida, 2002;Mason, 2014;Togba, 2012).…”