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Abstract
The Heckman two-stage procedure is used to identify and rank the determinants of internal and
external credit rationing in rural households using data sourced from two districts in the former
KwaZulu homeland. The results confirm international findings that high transaction costs faced
by rural households limit their access to formal credit markets. Income and savings levels are
significant determinants of the level of credit obtained, with savings acting as a substitute for
credit. Better access to financial markets will require public investment in rural infrastructure,
literacy and vocational training, and legal reform in order to lower transaction costs, improve
income levels, and facilitate the efficient use of collateral. Savings lose their value as a source of
information when lending institutions are distinct from savings institutions, and moveable
assets carry high collateral-specific risk in the absence of an efficient judicial system.