The role of risk rationing in rural credit demand and uptake: lessons from Kyrgyzstan

Purpose: Lack of access to credit is commonly held responsible for slow agricultural and rural development in low- and middle-income countries. This paper aims to investigate the contribution of demand- and supply-side factors, particularly the role of risk rationing, on credit application and uptake in the case example of Kyrgyzstan. Design/methodology/approach: Toward this aim, the study explores the determinants of credit behavior of 1,738 Kyrgyz sample farm households from 2013 to 2016 waves of the nationally representative “Life in Kyrgyzstan” (LIK) dataset along a hierarchical regression model, differentiating between factors influencing individual demand for credit and factors influencing supply for credit. Findings: The results of our analysis indicate the relative importance of demand-side factors for credit applications, reflecting farmers' perceived risk of credit default and loss of collateral. Meanwhile, supply-side factors, such as real credit constraints and collateral requests, have a stronger influence on credit uptake rates and overall loan sums. These findings highlight the role of risk rationing for agricultural investment, suggesting a stronger focus of development policy on improving risk-sharing mechanisms for farmers, e.g. by developing the agricultural insurance sector. Originality/value: The paper contributes novel evidence on the role of risk rationing in shaping the demand for formal credits for increasing agricultural and rural investment in low-income transition economies. Previous research has mostly focused on the role of credit supply, thus underrating the potential contribution of individual risk attitude, risk experience and risk sharing.