Prescription without Laboratory Diagnosis: an investigation into Rural Credit System in Arsi Zone, Oromiya, Ethiopia

Abstract

Government of Ethiopia makes different attempts to improve the livelihoods of its people. One of these attempts is the establishment of credit and saving unions in different parts of the country.  Arsi zone of Oromiya National Regional State is one of the areas in which the credit and saving unions operate. This study was undertaken in 2011/12 with general objective of assessing the status of rural poverty in the zone. It covers 443 households randomly selected from five districts of the 25 districts of the zone. Assessing the impact of rural credit on household poverty was one of the specific objectives of the study.  It was found that 300(67.7%) of the households frequently failed to cover their financial requirements and 204 (68%) of them used credit as coping strategy for financial shortages. Surprisingly, only 33 (16.2%) households took credit from formal institutions. Focus group discussions made with credit takers and credit providers revealed that the formal credit is interest based and requires group collateral. Religious background of the households forbid participation in interest based credit and no one is interested to form group with the poorest of the poor. Even among those who took the formal credit, about 94% faced food shortages very frequently ending in using the credit for covering food shortfalls rather than participating in some productive investments. On top of these, most of the credit takers are illiterate who lack marketing know-how and entrepreneurial skills. All these show that there are a lot of mismatches between the demand for credit and the supply of credit in the study area. The credit provision, therefore, looks like prescription without laboratory diagnosis. It is thus recommended that the credit system should be redesigned taking into consideration the social, cultural and economic conditions of the people.

Keywords: Credit, interest, religion, poverty