Determinants of Formal Sources of Credit Loan Repayment of Small Holder Farmers in Wogera Woreda

Abstract

There is no doubt about the crucial role of credit in economic development, although the success and repayment of loans in agricultural production are troubled with a number of problems, particularly among smallholder farmers. Therefore, the major concern of this study was to identify borrowers, institutional and loan factors that affect loan default rate of smallholder farmers in Wogera Woreda Amahara National Regional State. To achieve this objective, primary data were collected from a sample of formal credit borrower farmers in the Woreda through a structured questionnaire. A total of 206 farm households’ cases were included in the final analysis. Logit model was used to identify and analyze the effect of explanatory variables on the dependent variable. A total of fourteen explanatory variables were included in the regression. Out of these, seven variables were found to be significant in terms of the probability of defaulting.  The variables that have a significant relationship with formal credit users’ loan default rate are: saving habit, other sources of income, fertilizer use, sector, loan diversion, loan supervision, and repayment period. The rest of the explanatory variables, namely age, sex, education level, family size, dependency ratio, irrigation use and loan size, had no significant effect on the probability of defaulting. Therefore, consideration of these factors is vital as it provides information that would enable one to undertake effective measures with the aim of improving loan repayment in the study area. It would also enable lenders and policy makers to have information as to where and how to channel efforts in order to minimize loan default.

Keywords: Loan repayment, logit, smallholder farmers