Factors Affecting Loan Repayment Performance of Smallholder Farmers in East Hararghe, Ethiopia

Abstract

This paper examined the determinants of loan repayment performance among smallholder farmers in East Hararghe zone, Ethiopia specifically Kombolcha and Babile districts.  In the study area, the Regional Government through Oromiya Saving and Credit  Share Company, and Non-Governmental organizations have extended credit facilities to farming households to narrow the gap between the required and the owned capital to use improved agricultural technologies that would increase production and productivity. However, there is serious loan repayment delinquency in the study area, which discourages the rural finance from promoting and extending credit.  A structured questionnaire was used to gather information from 140 smallholder farmers from two districts, using the multistage sampling technique. The study revealed that of the total sample households 71.4 percent and 28.6 percent households were partial loan defaulters and complete non-defaulters, respectively. A two-limit tobit regression model was applied to identify factors that influenced loan repayment. The results indicate that agro ecological zone, off-farm activity and technical assistance from extension agents positively influenced the loan repayment performance of smallholder farmers, while production loss, informal credit, social festival and loan-to-income ratio negatively influenced the loan repayment of smallholder farmers (p<0.05).  Based on the findings policy implications were drawn for improving loan repayment performance and sustainability of credit services and institutions in the study areas.

Key words: Loan repayment, smallholder farmers, and two - limit tobit model