Introduction
This thesis explores the factors influencing smallholder farmers’ access to formal credit in Metema Woreda, North Gondar, Ethiopia. It investigates determinants affecting access and the status of various wealth groups. This study is valuable for policy-makers, researchers, and practitioners seeking to enhance financial inclusion and agricultural development in similar contexts.
Key Insights
Characteristics of Sample Farm Households
The average family size was 5 persons, with male-headed households comprising 76.2% of the sample. Only 48.5% of households were literate. The average age of household heads was 40.21 years.
Formal and Informal Credit Sources
Formal sources included ACSI and farmers’ multipurpose cooperatives. ACSI uses a group guarantee and lending model. Informal sources included private moneylenders, friends, and relatives.
Smallholder Farmers’ Perceptions of Formal Institutions
Farmers viewed group lending as a solution to collateral problems but noted the exclusion of the very poor. Most found MFI lending procedures acceptable.
Group Lending Challenges
Farmers reported difficulties in forming groups, as the better-off did not want to include poorer farmers due to concerns about default risk. “We the very poor farmers could not form a group among ourselves because the Kebele screening committee requires that some of the group members have assets.”
Saving Requirements
Compulsory saving is seen as partial collateral but excludes very poor farmers. Physical distance to MFIs is a limiting factor to save regularly.
Loan Repayment
“Farmers thought that repaying loans by group members at the same time under all conditions is not suitable since ability to pay may not be uniform…”
Interest Rates
The level of interest charged by ACSI was viewed as reasonable given its door-to-door service.
Access for Women
The study indicated access to credit by female-headed households is still limited.
Determinants of Household Access to Formal Credit
Key determinants included participation in extension package programs, cultivated land size, experience in credit use from the formal sources and membership of households in multipurpose cooperatives.
Method: Logit Model
A binary logit model was used to analyze determinant factors that affects small holder farmers access to formal credit.
Key Statistics & Data
- 56 (43.1%) of the sampled farm households were formal credit users, whereas 74 (56.9%) were non-users
- Of the total respondents 67.8 per cent of credit non-users and 30.4 per cent of users were illiterate
- ACSI has 4323 (16.1%) credit clients, among whom 47.5% were women
Methodology
The study employed a two-stage sampling method. Three out of eighteen rural peasant associations in the Woreda were selected purposively. 130 farm households were selected randomly using probability proportional to size in the respective wealth groups and sex. Descriptive statistics and a logit model were used for analyzing quantitative data. Focus group discussions, group interview and field observations were held to generate qualitative data.
Implications and Conclusions
The study concludes that group lending solves the problem of collateral, but the very poor are often excluded. Key policy implications include a need for individuals to access MFI credit without forming groups. Loan size and duration should be designed according to the needs of the local society. Screening process should be improved to address the very poor and female headed households.
Key Points
- Limited access to institutional finance forces many poor Ethiopian farmers to rely on informal credit channels.
- The study identifies factors affecting smallholder farmers' access to formal credit and the status of women and different wealth groups in the study area.
- Farmers acknowledge group lending as a solution to collateral requirements but criticize the exclusion of very poor farmers from group formation.
- Smaller loan sizes, inconvenient saving requirements, and repayment periods pose challenges for farmers seeking formal credit.
- Participation in extension package programs, experience in formal credit, land size, livestock ownership, and cooperative membership are important for influencing access to formal credit.
- The study area exhibits a high demand for credit due to labor shortages during peak seasons.
- ACSI and farmers' multipurpose cooperatives are key providers of credit in the study area, with the former using group guarantee and lending models.