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Savings and Investment Decisions of Farm Households: Their Implications on the Demand for Funds
Thesis Abstract:
This study addressed the interdependency of production and borrowing decisions among farm households. A demand for funds among agricultural households was quantified under the nonseparability assumption of these decisions. The result of this assumption was the endogenous treatment of effective interest in the demand equation.
The study's empirical analysis was based on 472 households from six provinces in the Philippines. A two-stage least squares (2SLS) technique was applied in the econometric analysis of the demand for funds. The explanatory variables used were area cultivated, average agricultural wage rate, irrigated area planted, education of household head, membership in farm organization, effective interest rate in both formal and informal credit markets, age, and dependency ratio.
A preliminary descriptive analysis of the data showed the prevalence of borrowers rather than savers among the sample households. Of the 472 farm families, only 13 percent reported cash savings in banks or non-bank saving institutions while 48 percent reported loans. The majority of the savers kept their surplus funds in formal institutions (usually banks). Conversely, the majority (81%) of the borrowers preferred informal sources despite higher nominal and effective interest rates. An analysis of the asset stmcture likewise revealed less preference for financial holdings. Illiquid and fixed assets such as real estate and consumer durables were commonly preferred.
The empirical analysis of the demand for funds revealed significant relationships between the demand for funds and the following variables: effective interest rates in both formal and informal credit markets, membership in farm organizations, and loan purpose. However, the signs of the parameter coefficient of interest rates and membership in farm organizations were not the expected ones. The fact that the dependent variable (demand for funds) was derived from mostly informal borrowers (which comprised the majority of the sample) accounted for the misleading sign for interest rate.
Distance was an important variable in the interest rate equation but education of the household head, previous patronage of a bank, and loan purpose were more significantly related with interest rates.