Liquidity constraints and risk sharing in rural Ethiopia

Iritani, Satoko (2025): Liquidity constraints and risk sharing in rural Ethiopia.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: insurance; informal credit; social networks; consumption smoothing; Ethiopia; Africa; liquidity constraints
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; Z - Other Special Topics > Z1 - Cultural Economics ; Economic Sociology ; Economic Anthropology > Z13 - Economic Sociology ; Economic Anthropology ; Social and Economic Stratification

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