Determinants of Formal Source of Credit Loan Repayment Performance of Smallholder Farmers: The Case of Lemo District of Hadiya Zone, Southern Ethiopia

Abstract

As credit is one of the most important factors required for smallholders input utilization, its repayment to the lender is also of paramount importance to have sustainable agricultural development and financial institutions. Therefore, the major concern of this study was to identify the major socio-economic, institutional and natural factors that affect loan repayment capacity of smallholder farmers in Lemo district of Hadiya zone, Southern Ethiopia. The main data used for this study were collected from a sample of formal credit borrower farmers in the zone through structured questionnaire. A total of 118 farm households cases were included in the final analysis. In addition, secondary data were collected from different organizations and pertinent publication in order to elaborate the present situation of rural credit in Ethiopia. Two-limit Tobit model was employed to analyze factors influencing loan repayment and intensity of loan recovery among smallholder farmers in the zone. A total of fifteen explanatory variables were included in the model of which five variables were found to be significant. These were size of land holding, total number of livestock, number of years of experience in agricultural extension services, number of extension contact days, and income from off-farm activities. Therefore, consideration of these factors is vital as it provides information that would enable to undertake effective measures with the aim of improving loan repayment in the district. It would also enable lenders and policy makers to have information as to where and how to channel efforts in order to maximize loan repayment capacity.

Keywords: Credit repayment, farmers, Two-limit Tobit, Lemo district, Hadiya zone, Ethiopia