Analysis of Factors Affecting Smallholder Farmers’ Access to Formal Credit in Jibat District, West Shoa Zone, Ethiopia

Abstract

In Ethiopia, among other things, lack of finance is one of the fundamental problems hampering production, productivity and income of rural farm households. Since access to institutional finance is very limited, the majority of the poor are forced to search financial services through informal channels. This study is concerned with analysis of factors affecting smallholder farmers’ access to formal credit. As credit is one of the most important factors required for smallholders input utilization, it is important to have sustainable agricultural development. A two stage sampling method was employed. A total of 148 farm households were selected randomly using probability proportional to size. Descriptive statistics and logit model were used for analyzing quantitative data. The output from the study indicates that 51 (34.5 per cent) of the sampled farm households were formal credit users, whereas the remaining 97 (65.5 per cent) were non-users. It was also found out that credit access to female headed households is still limited and the difference between the wealth groups in accessing credit from the formal sources was also statistically significant. Farmers acknowledge group lending that solves the problem of collateral requirement by lending institutions, controls misuse of borrowed funds and minimizes the risk of default and they also recognize the provision of saving services by microfinance institutions. The maximum likelihood estimates of the logistic regression model show that Frequency of contact Development Agents, physical distance of farmers from lending institutions, family size, farm size, experience in credit use from the formal sources, Sex of household head, education level of household head, participation of households in extension package program, attitudes towards Risk, farmers’ perception of Loan repayment period, farmers’ perception of Lending procedures, lack of opportunity to take a second loan , and membership of farmer’s multipurpose cooperatives were important factors influencing formal credit use of smallholder farmers. Therefore, policy aimed to accelerate agricultural development in the area could be successful if these factors and problems are taken into consideration to access credit from the formal financial sources. Based on the findings of the study and personal observation of the situation in which the analysis of factors affecting smallholder farmers’ access to formal credit systems are found, some recommendations are forwarded

Keywords: access to formal credit, input utilization, logistic regression model and Ethiopia