the same terms (constrained, but cannot be classified as reasons for not applying for more were not asked), and (iii) had demand fully met (unconstrained). Those who had not applied were asked why they had not requested a loan and those who lacked interest because they had access to sufficient resources on their own or considered interest rates too high were classified as unconstrained or price rationed. The remainder was considered constrained in three ways, namely (i) those who reported fear of being indebted and the risk of losing collateral (risk rationed); (ii) those who stated lack of collateral and fear of being rejected were classified (quantity rationed); and (iii) those who lacked knowledge on how and where to apply or pointing towards lack of local credit supply (transaction cost rationed).

# **3.2 Descriptive evidence**

Table 1 reports household-level rates of participation in the semi-formal and informal credit sector<sup>4</sup> by zone. With none of the households having used formal sources of loan, the semi-formal sector, defined to include service cooperatives, input suppliers, microfinance institutions, as well as non-governmental and governmental programs which provide subsidized loans to targeted groups of farmers, is by far the predominant source of loans. About a fourth (27% in Gojam and 20% in Wollo) of households reported having applied for a semi-formal loan in the 12 months preceding the survey. With some 3%, rejection rates were low and most applicants (72% in Gojjam and 88% in Wollo) obtained the amount that they requested. By comparison, the relevance of the informal sector, which comprises relatives, close friends, neighbors, moneylenders, and local organizations such as rotating savings and credit associations, was very low, both in terms of outreach and the size of resources transferred. Less than a tenth (10% in Gojjam and 4% in Wollo) of households in the sample applied for a loan from this sector. Although, with some 87% of requestors receiving the requested amount, rejection rates were small, average amounts received were only about one-tenth of the average loan received from the semi-formal sector.<sup>5</sup> The bottom panel of table 1 also points towards marked differences in loan use between the two regions. In Gojjam, one of the country’s crop surplus producing areas, most farmers who received loans from the semi-formal sector (81%) used credit to purchase inputs or tools. By comparison, in Wollo, a food deficit area, more than half of the loans (56%) were used to purchase livestock, followed by consumption (16 %), and start-

> 4 For a reasons such as the segmented nature of formal credit in many developing countries, a high ratio of transaction cost to potential loan size, inability to meet the collateral requirements of formal financial institutions, and high risk which, in the absence of insurance, makes it difficult to use future harvests as a guarantee to obtain formal loans, links to the formal sector are negligible in the sample. We thus do not consider this sector in our analysis.

> 5 A study based on data from 15 villages in rural Ethiopia over the period of 1994-1995 showed that more than 94% of the applicant households obtained their loans from the informal sector with almost three-fourth of the loans were supplied by relatives and friends (Ayalew 2003). A similar pattern was observed for households surveyed in seven major urban centers in 2000. The results indicated that about 79% of the loans were made available by the informal sector and once again three-fourth of which was from relatives and friends (Ibrahim _et al._ 2007). Apparently, there seems to be a shift over the last decade in terms of loan suppliers from the informal towards that of the semi-formal sector.

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