Epsilon Open Archive

Abstract

Financial markets in developing countries are imperfect and are likely to affect decision-making behaviour of economic agents, especially smallholder farm households. This thesis, comprising four articles, aimed to understand and explain farm household economic behaviour with reference to saving, credit and production efficiency under imperfect financial market conditions. It is based on data obtained from farm household survey conducted in two districts of southeastern Ethiopia from September 2004 to January 2005. Data was analysed using stochastic frontier analysis and limited dependent variable econometric tools. In article I, farm household saving behaviour and its determinants were studied. Results show that, on average, a farm household saved 37% of its farm income in financial and physical assets. However, more than 90% of savers held their savings outside formal financial institutions. Such saving behaviour of farm households was affected by factors related more to incentives and opportunities to save than to ability to save. In Article II, borrowing behaviour of farm households was analysed by considering sectoral choice of farm households among formal, semiformal and informal credit sectors and factors contributing to their choice. The informal credit sector was found to dominate sectoral choice of the farm households even though this sector charged the highest interest rates. Factors other than the interest rate, i.e., loan processing time, type of loan, credit information and loan size, significantly affected this borrowing behaviour of the farm households. In Article III, technical efficiency of smallholder farmers was estimated using a stochastic frontier analysis. There was about 12% efficiency differential between credit-constrained and credit-unconstrained farm households, ceteris paribus. In Article IV, farm households’ demand for credit and its determinants were investigated. It was found that farm households had credit demand for production and consumption purposes, whereas the formal credit sector targeted credit only for production purpose, although production and consumption purposes are closely related. In conclusion, imperfect financial markets adversely affect saving, credit demand, credit sectoral choice and production behaviours of farm households. This study suggests some policy measures, which may help to redress the adverse effects identified and to enhance development of rural financial markets and institutions.