The role of loans and remittances in
Consumption and Investment
decisions in Urban Ethiopia
Abbi Kedir
University of Leicester, UK
Gamal Ibrahim, UNECA
October, 2011
Outline of the talk
Related literature
Results and discussion
• Do remittances and loans lead to higher/lower
household asset accumulation, food and nonfood consumption?
• Do remittances and loans increase the
Motivation I
• Finance and growth (macro level ‘link broken’)
• Informal financial transfers are fundamental
anchors of welfare and employment
• Most micro level literature focuses on what
determines access to credit and the motives
for private transfers such remittances (Alvi and
Dender, 2009).
• Often credit and remittances are studied
separately (Christensen and Pan, 2010).
Motivation II
• There is a dearth of evidence on how access to
credit and remittances affect household
investment and consumption decisions in SSA
( an attempt to trace the mechanism)
• Labour market – one mechanism to link
growth and poverty (Kedir et al 2011).
• Provide relevant policy recommendations
Literature(only micro) I
• Alvi and Dender, 2009 : what factors significantly
affect household loans and private transfers in
• Liverpool and Winter-Nelson (2010) no
relationship b/n participation in microfinance
programs and the use of technologies or
consumption growth among the poorest
households (Ethiopia).
• For other households, microfinance has positive
effects on both consumption and asset growth as
well as on the use of improved technology.
Literature II
• Adams (1998)- effect of remittances on asset
accumulation in Pakistan. Household are
impatient (high discount rate) and do not
sacrifice present consumption for the sake of
asset accumulation.
Theory I
• Remittance flows over long distances (severe
asymmetric information problem).
• Credit need to be repaid and often provided
by informal lenders (less serious asymmetric
information problem)
• Propensity to consume(invest) in the former
(latter) is stronger than to invest(consume).
Theory II
• We test the following propositions:
C / R  0; E / R  0; C / L  or  0;
A / R  0 ; E / L  0
Data and Econometric framework
• Panel data from urban Ethi0pia (1994,1995,
1997, 2000, 2004 on 1500 households)
• Fixed effects of consumption and asset
accumulation equations (Hausman test)
• Random effect Probit of self-employment
(stability of quadrature points)
Key Results
• Remittances are positively associated with
food consumption, non-food consumption
and asset (unproductive) accumulation.
• Remittances are negatively associated with
self-employment and entrepreneurship while
the opposite is true for credit
Policy I
• The need for credit access to households to
create employment is obvious.
• Self-employment in the data is characterised
by low-tech and low return small/micro firm
• Hence for meaningful development volume of
capital provided must be much larger than
what households can get via informal
Policy II
• Small/micro firms are unlikely to grow large.
They simply provide subsistence for millions of
unskilled workers.
• About 800,000 urban informal sector firms
(mfg, trade, services) with 1 million people
employ.ed (Soderbom, 2010)
Future work and econometric issues
• Distinguish between domestic and external
• Remittances and labour supply to explore why
remittances lead to lower self-employment.
• Endogeneity (IV) and parameter heterogeniety
(quantile regression).