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Abbi Kedir, University of Leicester, UK and Gamal Ibrahim, United Nations Economic Commission for Africa
This paper is aimed at empirically investigating the role of loans and remittances in household asset accumulation, consumption and the likelihood of self-employment and entrepreneurship. Our study tests the theoretical predictions of models of intermediation, entrepreneurship and growth and other relevant theoretical models. We used panel data from urban households in Ethiopia who were interviewed five times in the period between 1994 and 2004. Our fixed effects results reveal that loans taken out by households have no significance for asset accumulation and total consumption. This evidence holds even when we disaggregate consumption into durable and non-durable (food) consumption. However, the amount of remittances received by households has positive and significant contribution to asset accumulation, durable, non-durable and total household consumption. Our most interesting and profound results come from our estimates of the random effects panel probit model. We find that the amount of the loan is positively and significantly associated with the probability of self-employment and entrepreneurship while the amount of remittances is negative and significant. Hence, the policy implication of this micro level evidence is that provision of household credit is crucial for employment generation and serves as an engine of growth.