This paper investigates the nature,
extent, and impacts of credit constraints
in Ethiopia’s agriculture. Using a direct
elicitation approach on a panel of 5,308
smallholder farmers, we find that
around 66.6% were credit constrained, a
majority of them (71.9%) due to risk
factors and transaction costs (14.33%).
The hypothesized heterogeneity of credit
constrained farmers is corroborated by
the results from the endogenous regime
switching regression model which show
that the determinants of credit
constraints and their impact on farm
productivity are specific to the type of
constraints farmers face. Predictions
from this model indicate that alleviating
credit constraints would generate
substantial productivity gains in
Ethiopia of around 60%. Our findings
suggest that expanding farmers’ access
to financial information, increasing the
number of branch offices of banks and
microfinance institutions in the country
and particularly in rural areas, and
easing financial transaction costs might
increase farmers’ access to credit and
significantly alleviate their credit
constraints.