Determinants of Rural Households’ Participation in Microfinance Program: The Case of Omo Microfinance Institution, Sodo Woreda, Southern Nations Nationalities, and Peoples Regional State, Ethiopia

Abstract

In a subsistence agriculture and low income countries like Ethiopia, where rural households dominate the overall national economy, who are facing with shortage of financial resources not only to purchase productive agricultural inputs but they also need to participate in income generating activities. Since 1996 Microfinance institutions have made significant assistance to the livelihoods of many people through the provision of financial and supporting services to the poor, especially low income households in rural environments. This study was conducted to assess the determinants of rural household participation in microfinance program and its impact on their income and asset building in Sodo Woreda. Both primary and secondary data were used for the study. Multi-stage stratified sampling technique employed. Primary data were collected from a total of 190 rural households of which 80 were participants and 110 were non-participants in microfinance programs using systematic and simple random sampling technique. Descriptive statistics and econometric model were used for analyzing the data. Descriptive and test statistic were computed to describe demographic, socio-economic and institutional characteristics and living condition. A propensity score matching method was employed to analyze determinants of rural households’ participation in microfinance program and its impact on income and asset holding of participant households. The result of the descriptive statistics indicate that participants were Participant groups were better off agricultural input usage, clothing status of adult members of the household, annual income earning, amount and quality of food consumed during last five years, total expenditures and total livestock holding. The result of the propensity score revealed that family size, level of education and frequency of extension contact significantly and positively influenced the participation of rural households in microfinance program whereas number of dependent members, application procedure for credit, perception on risk of borrowing and distance of household’s residence from office of Omo Microfinance Institution had significantly and negatively influenced the participation of rural households in microfinance program. The average treatment effect on the treated showed that program participant households earned an average income of 2716.68 Birr and had an average total value of non-livestock asset of 3079.38 Birr and 2.46 TLU of livestock which were significantly greater than that of non-participants. Similarly, the result of descriptive statistics revealed that participants were better off in earning total income, amount, and quality of food consumption and clothing status of adult member of households as compared to non-participants. Therefore, Omo Microfinance Institution and other concerned stakeholders should expand access of microfinance program to rural households in livelihood enhancement and poverty reduction endeavors.

Keywords: Microfinance, impact, income, asset holding and propensity score matching.

DOI: 10.7176/JESD/11-1-03

Publication date: January 31^st 2020