Credit constraints in rural financial markets in Chile: determinants and consequences

Using data from two surveys carried out in 2006 and 2008 on 177 farmers in Chile, this study measures access to credit and empirically determine the effects of credit constraints on investment and production for market-oriented farmers in central Chile. More specifically, four issues are dealt with: (1) to identify the main factors that influence access to credit for market-oriented farmers, (2) to determine whether informal financial institutions act as complements to or substitutes for farmers’ strategies for funding, (3) to determine the effect of credit constraint by formal financial institutions on farm productivity, and (4) to identify the factors limiting investment in farms.

In approaching these objectives two innovative methods are used throughout. First, qualitative information collected in interviews is used to identify three categories of credit constraints from both the demand and supply side of the credit market, namely, quantity, risk, and transaction-cost constraints. Second, a panel-data structure is used in all econometric analysis in this study, which allows us to obtain estimators that are more efficient than those based on cross-sectional analysis only.

Results show that 16.4% and 13.6% of the sample felt credit constrained in 2006 and 2008, respectively, with most farmers being quantity rationed (10.7% and 9.6%, respectively). A much lower share of farmers is constrained by risk (2.8% and 3.4%, respectively) and transaction cost (2.8% and 0.6%, respectively). Despite of its low level, credit constraint status has a significant effect on investment decision. In contrast, credit constraints do not have an impact on farm productivity. These outcomes reveals long term market imperfections, most probably because the only providers of long-term credit are commercial banks for whom long-term lending is considerable risky.