The Role of Financial Institutions in Smallholder Agriculture Development:Ethiopian Context

Abstract

Financial constraints in smallholder agriculture remain pervasive in developing countries like Ethiopia. The government of Ethiopia is doing its best to tackle the financial bottleneck through financial inclusion and several institutional arrangements that hinder smallholders’ agriculture that represent the landslide figure in the country. This review is aimed at finding financial institutions serving smallholders in the country, evaluating the mode of service delivery of financial institutions regarding smallholder development, exploring the challenges of financial institutions, and examining the challenges that hinder smallholders in accessing services from financial institutions. There are formal, semi-formal, and informal institutions are delivering service packages to alleviate the smallholders’ financial problems through credit, saving, insurance, and to some extent, insurance services. In terms of terms, formal financial institutions (banks and insurance companies) have virtually no access to the rural population; they are all located in urban and semi-urban towns, classify smallholder agriculture as a risky business, discriminate against smallholders, and require collateral that smallholders cannot provide. However, they reach smallholders indirectly through loans they provide to the MFIs. MFIs and RuSACCOs are the main formal and semi-formal institutions that are mainly established on a poverty lending approach. Startup capital supply for SMEs is attached to MFIs indifferently. They are serving smallholders through loan provision and saving and have devised a group lending scheme where members will be accountable for others. Despite the financial inclusion proclamation, MFIs are dominated by the ruling political party. However, they are the most profound financial institutions that serve smallholders and the poorest segment of the population. Despite the tremendous expansion, progress, and the enormous resources mobilized by financial institutions in the country, especially MFIs and RuSACCOs, a substantial proportion of the rural population remains underserved. Due to the one-size-fits-all services of MFIs and the limitation of funds to expand clients, extremely low uptake and sluggish penetration of the credit service to smallholders indicates the prevalence of unbanked and untapped financial potential. Therefore, 80 percent of the poor and smallholders depend on the informal financial sector, mainly on Iqqub, Iddir, and money lenders, since they are culture-appropriate, flexible, easily accessible, and cost-effective. Insurance endeavors are rarely known in Ethiopian smallholders’ context despite its necessity. Thus, strengthening the capacities of MFIs and RuSACCOs, linking need-based input credit, designing a credit guarantee scheme, connecting these institutions with other government payment schemes, meeting the credit demands of commercial, semi-commercial, and subsistence smallholders, and launching and scaling up WII on a micro-insurance platform are all essential.

Keywords: Financial institutions, formal, informal, semi-formal, smallholder agriculture

DOI: 10.7176/EJBM/14-1-03

Publication date: January 31^st 2022