Empirical Measurements of Household's Access to Credit and Credit Constraints in Developing Countries: Methodological Issues and Evidence

Illustrating the usefulness of employing credit limits to assess households' access to credit
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This paper presents a new methodological framework for measuring the level and determinants of household access to credit and credit constraints, and the effects of access to credit on household behavior and welfare, by using data collected in Malawi and Bangladesh. Access to credit affects household welfare outcomes by alleviating the capital constraints on agricultural households, and increasing the risk bearing ability.

The new methodology illustrated in this paper corrects the shortcomings of the direct method, by developing a conceptual framework and data collection methodology that focuses on the concept of credit limit. It justifies the focus on credit limit as:

  • Every potential borrower faces a credit limit because of asymmetries of information between borrowers and lenders, and the imperfect enforcement of loan contracts;
  • Changes in household behavioral and welfare outcomes in response to changes in its credit limit represent the effects of access to credit on those household outcomes.

About this Publication

By Diagne, A., Zeller, M. & Sharma, M.