Liquidity constraints and risk sharing in rural Ethiopia

Satoko Iritani

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines the degree of consumption smoothing achieved through lending via formal institutions and social networks in rural Ethiopia. Lending through social networks and the formal sector coexist currently in rural sub-Saharan Africa. The expansion of formal sector lending is expected to ease liquidity constraints in rural areas and may even complement or crowd out traditional network lending. Using panel data for the period from 1994 to 2009 in rural Ethiopia, I found that idiosyncratic shocks were partially alleviated through lending via both social networks and formal lending institutions. However, non-borrower households in financially less constrained villages experienced severe risks. Also, formal sector lending did not alleviate aggregate rainfall shocks during this survey period, implying that formal sector lending does not complement social network lending.

Keywords: insurance; informal credit; social networks; consumption smoothing; Ethiopia; Africa; liquidity constraints (search for similar items in EconPapers)
JEL-codes: E21 O12 O16 O17 Z13 (search for similar items in EconPapers)
Date: 2025-03-06
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:114544

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