2008 survey.<sup>8</sup> Indeed, only 3 percent of the sampled households applied for a bank loan during the 12 months period preceding the survey. Such limited formal credit market activity is not uncommon in rural areas of developing countries due to limited outreach of the formal system. To access extra liquidity rural households are then restricted to borrowing in the informal and the semi-formal sectors. Credit market activity in the study villages are almost equally divided between the informal and the semi-formal sectors with about a fifth of households participating in each sector. Amounts borrowed in the semi-formal sector are relatively larger (USD 55 on average versus USD 34 in the informal sector), but interest rates are high at the same time.<sup>9</sup> Despite no clear differences in participation being observed, the amount of loan requested and approved is positively correlated with the asset index measure in both the informal and semi-formal credit markets. Conditional on participation, asset rich households are borrowing relatively more than their asset poor counterparts.

The main purposes for taking loans from the informal sector are consumption (35 percent), investment (26 percent), health (25 percent) and education (12 percent).<sup>10</sup> Almost 60 percent of loans from family, friends and neighbors are thus used to smooth consumption in response to external shocks. Loan amounts in the informal sector are relatively small and mainly used for purposes other than investment. As this implies that they are of limited relevance for policy, we focus on credit from the semi-formal sector. Such credit is more frequently used for investment (37 percent), followed by consumption (33 percent) and less frequently for health (14 percent) and education (12 percent). Only 29 percent of the lowest asset quartile group use loans to invest (whether to purchase land, agricultural inputs or to start a business), while over 40 percent of the relatively asset rich households take out loans for these purposes.

Table 2 presents evidence on the magnitude and nature of credit rationing in formal, semi-formal and informal credit markets. Note that the data enable us to capture multiple constraints per source of credit for both the semi-formal and the informal sectors.<sup>11</sup> Almost all households in the sample reported being credit constrained in the formal sector, making further analysis for this sector difficult. In the semi-formal sector, 71 percent are classified as being credit constrained with a clear differences by wealth (82 percent in the lowest asset index quartile versus 59 percent in the highest quartile). The most recurring constraints faced by households in securing a loan from semi-formal institutions are related to high transaction costs

> (bulls/oxen, heifer/cows, calves, sheep, goats, pigs, donkeys, mules/horses, rabbits, chicken, fish, beehives) owned by the households. Results are not reported, but available upon request from the authors.

> 8 Finscope Rwanda 2008 reports that 21percent of the surveyed households utilized formal financial products, with only 14% using formal bank products. These slightly higher numbers can likely be attributed to the exclusively rural character of our survey while 15 percent of the 2,000 households composing the Finscope sample resided in urban areas.

> 9 The low interest rates observed in the informal sector can be explained by the relative absence of moneylenders in Rwanda.

> 10 Consumption purposes include food and non-food consumption, housing, buying vehicle and financing ceremonies; investment purposes include the purchase of land, agricultural inputs, livestock or to start a business.

> 11 Indeed, reasons for not borrowing in those sectors were further disaggregated by sub-sources within the semi-formal and informal sectors.

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