The determinants of trade credit use: the case of the Tanzanian rice market

Niels Hermes*, Ernest Kihanga, Robert Lensink, Clemens Lutz

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Scopus)

Abstract

Most small businesses in the developing economies suffer from a lack of access to formal external finance. One important alternative source of finance for these entrepreneurs is trade credit. Applying a unique data-set containing data on specific trade relations between rice wholesalers and rice retailers in Tanzania, we analyse the determinants of trade credit demand and supply in this market, using a simultaneous equation modelling approach. The analysis shows that while the demand for trade credit is primarily determined by the extent to which retailers need external funds, supply is mainly driven by wholesalers’ incentives to attract and keep clients. Moreover, wholesalers’ willingness to provide credit increases if they have better information about the possibility that the customer will fail to repay the credit.

Original languageEnglish
Pages (from-to)3164-3174
JournalApplied Economics
Volume47
Issue number30
DOIs
Publication statusPublished - 2015

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Keywords

  • disequilibrium model
  • rice market
  • Tanzania
  • trade credit

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