Determinants of Trade Credit Demand and Supply in the Tanzanian Rice Market: A Structural Modelling Approach

Abstract

This paper analyzes the determinants of trade credit demand and supply in the Tanzanian rice market, using data from individual trade transactions between rice wholesalers and rice retailers. We use a structural modelling approach to disentangle the supply and demand effects that may drive the use of trade credit in this market. We find evidence that trade credit demand is determined primarily by the extent to which retailers need external short-term funds to finance trade and business activities. With respect to trade credit supply, our analysis suggests that it is mainly determined by incentives wholesalers have to keep clients and/or attract new ones. Moreover, supply may be driven by the extent to which wholesalers have information about the default probability of their customers. Finally, both trade credit supply and demand are determined by transaction cost considerations.

Keywords: trade credit demand, trade credit supply, structural modelling approach, Tanzania

JEL Classification: L12, L14