Determinants of Microfinance Loan Utilization by Smallholder Farmers: The Case of Omo Microfinance in Lemo District of Hadiya Zone, Southern Ethiopia

Abstract

This study investigated factors determining microfinance loan utilization by smallholder farmers from Omo microfinance institution in Lemo District of Hadiya Zone, Southern Ethiopia. Both primary and secondary data were used and a total of 118 sampled farmers were considered for interview. Both descriptive statistics and independent double-hurdle model were used to analyze the microfinance loan utilization and amount of loan received. The results showed that literacy status, household size, size of landholding, perception about loan repayment period and distance from residence to lending center were the significant determinants of microfinance loan utilization by smallholder farmers. The borrower’s sex, literacy status, income level, saving level, purpose of loan taking and perception about loan repayment period were found to be the factors influencing loan amount received by smallholder farmers in the study area. The findings generally suggest the need to enhance appropriate actions on determining factors of microfinance loan utilization and its loan amount in order to lessen financial constraints of smallholder farmers through microcredit.

Keywords: Lemo District, Loan Utilization, Microfinance, Smallholder Farmers