WOLAITA SODO UNIVERSITY

COLLEGE OF AGRICULTURE

Wolaita Sodo Ethiopia

THE DETERMINANT OF ACCESS TO FORMAL CREDIT FOR

SMALL HOLDER FARMER IN ETHIOPIA

B.SC.seminar

BY: Abeba Ybiltal

A G R/122/10
College of: agriculture.

Department :agricultural economics.

Submitted To: alemayehu asale(M.Sc.)

In The Fulfillment Of Seminar In Agricltural Economics Agec3142

1
 Dec, 2019

Wolaita Sodo Ethiopia

Table of Contents
Abstract ......................................................................................................................................................... 1
AKNOWLEDGEMENTS……………………………………………………………………………………………………………………………..2
ABREVATION……………………………………………………………………………………………………………………………………………3
1. INTRODACTION ......................................................................................................................................... 4
1.1. Back ground of seminar ..................................................................................................................... 4
1.2. Statement of the problem ................................................................................................................. 6
1.3. Objectives of the seminar .................................................................................................................. 7
1.3.1General objectives ........................................................................................................................ 7
1.3.2Specific objective .............................................................................................................................. 7
1.4. Significances of the seminar .............................................................................................................. 8
2 RESULTS AND DISCUSION ..................................................................................................................... 9
2.1. Theoretical literature ......................................................................................................................... 9
2.1.1 The need for credit ........................................................................................................................ 10
2.1.2 Credit service in rural development .............................................................................................. 12
2.1.3 Types of rural credit ...................................................................................................................... 13
2.1.4 Rural financial systems in Ethiopia ................................................................................................ 13
2.5.1 Formal financial institutions in Ethiopia .................................................................................... 14
2.5.2 Informal credit intuitions in Ethiopia ......................................................................................... 15

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 2.1.5 Credit policy in Ethiopia ................................................................................................................. 16
2.1.6 Micro financing in Ethiopia ............................................................................................................ 18
2.2 Empirical Literature........................................................................................................................... 20
2.2.1 Farmers view of group borrowing guarantor by wealth and sex category ............................... 20
2.2.2 Farmers view of the prepayment period by wealth and sex category ...................................... 21
2.2.3 Factors influencing stallholder farmer’s access to formal credit ................................................... 21
3. Conclusion And recommendation .......................................................................................................... 23
3.1. Conclusions ...................................................................................................................................... 23
3.2. Recommendations .............................................................................. Error! Bookmark not defined.
4. References ................................................................................................. Error! Bookmark not defined.

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 ABSTRACT

Economic development credit provision is one of the principal components of rural development
w/c help to attain rapid and sustainable growth of agriculture. General objective of the seminar
is to investigate and assess the role of formal credit intuitions in determining the access to and
use of credit facilities by smallholder farmers in neural society. Its specific objectives are to
review factors that affect small holder farmer’s access to formal credit. Its significant of the
seminars is clack of capital and absences of attractive investment opportunities are considered
to be important reason be hand in adulate economic development in many developing
countries. Credit is typically a dual rural credit market in developing countries formal and in
formal credit. The major financial infatuations in the normal fanatical sectors in Ethiopia are
commercial banks of Ethiopia are commercial bank of Ethiopia and the development bank of
Ethiopia Poverty is the main challenge and a fundamental issue of economic development in
Ethiopia OCSSCO is contained in area when the majority of small scale poor farmers live. The
alleviation of poverty and promotion of economic development can be facilitates through
providing credit to the poor. The provision of this credit is one of the principal components of
rural development w/c helps to attain rapid and sustainable growth of agriculture

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 Acknowledgements

First of all I need to then my God who help me in my daily activities and then my profound
appreciating goes to my advisor Alemayehu MS for to tirades patience in reading corroding and
shaping the entire of my seminar second I appreciate the library workers

and computer workers to their assistance in doing the seminar. Last but not least I would like to
extend my deepest thanks to my family who help me in financial assistance

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 ABBREVIATION

OSHO Oromo Self CBE Commercial Bank of Ethiopia

CSA Central Statically Authority

DBE Development Bank of Ethiopia

FAO Food Agricultural Organization

GDP Grass Domestic Product

IDA Industrial Development of Agriculture

MFI Micro Financial Institutions

MTDP Market Towns Development Project

NBE National Bank of Ethiopia

NGOs Non-Governmental Organization

OCSSCO Oromia Credit Saving and Share Cooperative

Help Organization

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 1. INTRODACTION

1.1. Back ground of seminar

Ethiopia is one of the largest countries in Africa both in terms of land area (1.1 millionkm2) and
population of 77.4 million is the second most populous country in Africa (UNFP, 2005). The
Ethiopian economy is based mainly on agriculture which provides employment for 85 % of the
labor force and accounts for a little over 50 per cent of the GDP and about 90 per cent of export
revenue (CSA, 2002).
According to CSA (2004) the level and distribution of poverty in Ethiopia is extensive. The
1995/96 and the 1999/2000 household income, consumption and expenditure survey and welfare
monitoring survey of the central statistical authority (CSA) show that abort 44 percent of the
total population (45 percent in rural areas and 37 percent in urban areas) are living below poverty
line. The causes of poverty in Ethiopitta are in one way or another related to inappropriate social
and economic policies mismanagement of natural resources lack of developed physical and
human capital and lack of well organized and sustainable institutions. Among these lack of well
organized and sustainable institutions was recognized to be the main bottleneck that militates
against any attempt of eradication poverty. In the past several years a lot of efforts have been
made to reduce poverty. However these efforts could not come up with a remarkable outcome at
grass root level. Thus formulating polices on human development (educating the society)
building sustainable institutions and fostering financial accessibility is crucial for the self-driving
and sustainable eradication of poverty (Agrawal 1994).
Generally the accessibility of a good financial service is considered as one of the engines of
economic development. The establishment and expansion of financial service is also one of the
instruments to break the vicious circle of poverty.

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Governments of less developed countries have frequently practiced the policy of providing cheap
credit to the agricultural sector throug
financial intermediaries. This cheap credit it was hoped wouldh lower the dependence on the
rural mo9ney lenders (Pinaki, 1998).
The provision of credit has increasingly been regarded as an importance tool for raising the
incomes of rural populations mainly by mobilizing resources for more productive uses. As
development t takes place one question that arises is the extent to which credit can be offered to
the rural poor to facilitate their taking advantage of the developing entrepreneurial activities.
However at low levels of income the accumulation of such capital may be difficult. Under such
circumstances loans by increasing family income can help the poor to accumulate their own
capital and invest in employment-generating activities (Hossain, 1998).
In Ethiopia the rural financial system is dichotomous in nature. The formal and informal sectors
co-exist with differences in accessibility. The two sources continue to be the major sources of
agricultural credit though their proportion differs.
According to Singh (1993) the basic distinction between the formal and informal sectors is that
the latter operates outside the rules and regulations imposed on the farmer by the formal financial
institutions. Formal and in formal credits are imperfect substitutes. In particular formal credit
whenever available reduces but not6 completely eliminates informal borrowing. This suggests
that the two forms of credit fulfill different functions into household’s inter-temporal transfer of
resources. In Ethiopia, several microfinance institutions (MFIs) have been established and have
been operating towards resolving the credit access problem of the poor particularly those who
engage in petty business (Befekadu, 2007).Financing of agricultural inputs and labor wages
requires liquid cash that often is not readily available with the smallholder farmers. Therefore, it
is essential to expand the status of rural credit at large to improve agricultural productivity.

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1.2. Statement of the problem

Credit provision is one of the principal components of rural development which helps to attain
rapid and sustainable growth of agriculture. Rural credit is a temporary substitute for
personsavings which catalysis the process of agricultural production and productivity. To boost
agricultural production and productivity farmers have to use improved agricultural technologies.
However the adoption of modern technologies is relatively expensive and small farmers cannot
afford to self finance. As a result the utilization of agricultural technologies is very low. It is
argued that enhanced provision of rural credit would accelerate agricultural production and
productivity (Briquette, 1999).
Schmidt and kropp (1987), stated that access to financial services by smallholders is normally
seen as one of the constraints limiting their benefits from credit facilities. However in most cases
the access problem especially among formal financial institutions is one created by the
institutions mainly through their lending policies. This is manifested in the form of prescribed
minimum loan amounts complicated application procedures and restrictions on credit for specific
purposes. They further argue that the type of financial institution and its policy would often
determine the access. Where credit duration terms of payment required security and the provision
of supplementary services do not fit the needs of the target group potential borrowers would not
apply for credit even where it exists and when they do they would be denied access.

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In addition formal credit schemes do not typically take gender in to account in practice they tend
to be biased towards men. It is the male headed household which is usually approached and
registered for the provision of institutional credit (Ellis, 1992).
In Ethiopia there is a wide gap between owned and required capital to finance the agricultural
activities of small holder farmers since the income from subsistence agriculture does not yield
much surplus beyond family consumption and other social obligations. The lack of access to
capital in rural areas is one of the major factors which hinders the development of agriculture
(Tefera, 2004).
The non-formal credit unlike the formal credit sources as indicated by G/Yohannes (2000) has
easy access to information about their borrowers with whom they have social relations. This
permits credit contracts to play a more direct role in enforcing repayment. Also the fact that
collateral is rarely used in the informal sector that cannot be met by the formal financial
institutions.
On the other hand in the formal credit system, credit is disbursed without thoroughly assessing
the socio-economic condition of the community. Most of the programs were supply led and
mostly attached to agricultural technology package programs. Credit is provided without
sufficient information about the community in relation to their attitude towards
1.3. Objectives of the seminar

1.3.1General objectives:
To review the determinant of access formal credit is small holder farmer in Ethiopia
1.3.2Specific objective

1. To review smallholder farmers perception of the strengths and weaknesses of formal

financial institutions
2. To review factors that affect small-holder farmer’s access to formal credit

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1.4. Significances of the seminar

The lack of capital and the absence of attractive investment opportunities are considered to be
important reasons behind inadequate economic development in many developing countries. This
is why an attempt is made in most developing countries to encourage through development
policy measures capital formation as well as the supply of financial means in the form of credit
through official financial institutions.
Because of the lack of access to credit in the formal scooter productive assets of the poor are
depleted assets used as collateral are transferred from the poor to wealthier informal and
households may become imp9verished. Therefore the findings of the research would be of great
policy use. The study of factors that affect smallholder farmer’s access to formal credit and
assessing the status of women and different wealth groups in the study area is important in
providing information that will enable to take effective measures by lending and policy makers
to improve access to credit.
Therefore the outcome of the study will be useful to identify innovative options and institutional
arrangements that would serves as an input for policy makers in formulating rural credit policy.

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 2 RESULTS AND DISCUSION

2.1. Theoretical litreture

Beckman and foster (1969) defined credit as the power or ability to obtain goods or services in
exchange for a promise to pay for them later. In other words it is the power or ability to obtain
money through the borrowing process in return for a promise to repay the obligation in the
future. According to these authors credit represents the actual or prospective debtor’s pore to
ability to affect an exchange by offering his promise for future payment. Credit is necessary in a
dynamic economy because of the time that elapses between the production of a good and its
ultimate sale and consumption. The risk in extending credit is the probability that future payment
by the borrower will not be made. Futurity is thus a basic characteristic of credit and risk is
necessarily associated with the time element.
Regarding financial institutions there are private and governmental organizations which serve the
purpose of accumulation fund is from savers and channeling them to individual’s households and
businesses needing credit. Financial institutions are composed of deposit-type institutions bank
and non bank contractual saving institutions personal and business financial company’s
government and quasi government agencies and miscellaneous lenders. Formal financial
institutions can be defined as institutions that are regulated by central bank’s supervisory
authorities for licensing and credit policy implementation. Formal loans are those disbursed by
financial intuitions that are set up legally and engaged in the provision of credit and mobilization
of savings. In the Ethiopian context these intuitions are regulated and controlled by the national
bank of Ethiopia (NBE). On the country informal loans are those provided by individual’s
organizations and institutions that operate outside the legal banking system and control of the
national bank. According to Bekele (1995) informal credit sources are categorized as commercial
(those who lend money on short-term basis to obtain profit) and non-commercial (lenders that
generally include friends relatives and neighbors).

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Mutual help associations include Iddir,Iqqub modern cooperatives NGOs etc informal finance is
the one that comprises of all lawful but unregulated activities such as rotating and non-rotating
savings and credit associations (ROSCAs) moneylenders and money collectors and other
providers of retail financial services. Defaults are defined as failure to pay a debt or a loan at the
right time. On the contrary non-default is defined as payment of a debt or a loan at the right tiem.
Hulme (1996)defined credit worthy (synonymous to non-defaulter) borrowers as those who
satisfy the entire loan contract conditions and pray their loans without ever going into arrears.
Non-credit worthy (defaulters), as opposed to non-defaulters Is those who breach their loan
contracts and have repayment problems.
2.1.1 The need for credit

Credit is the key input in every development program this is particularly true for rural
development because so long as sufficient credit is not provided to the development programs of
poor sections of the society the goal of development cannot be achieved. Access to capital in the
form of either accumulated savings or a capital market is necessary in financing the adopt of
many new agricultural technologies.
Several authors adams and graham (1981) FAO (1996) Gonzalez -Vega (1977) and pischke
91980) have underlined the importance of credit facilities to stallholders of less developed
countries. Governments of less developed counties and aid agencies have extended a large
amount of money in the oorm of agricultural loans. The motivation has been the belief that loans
are an essential part of various input packages that are prescribed as part of agricultural
investment projects designed to introduce modern technologies a and thus stimulate change and
growth in agriculture.

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Kumar et al (1987) indicated that the need for credit in the case of majority of cultivators arises
from inadequate savings to finance various activities on their farm. Moreover while their income
accrues during limited period of the year their expenses are spread throughout the year. This
implies that expenditures out of their past savings and when these savings fall short of the
requirement that borrow. Studies undertaken in Ethiopia show that credit provi9sion to small
farmers increases their productivity and improves their standard of living. For instance Assefa
(`1987) reported the need for the expansion of rural credit to9 all areas of the country. Likewis,
Berhanu (1993) and Getachew (1993) pointed out the need for agricultural credit to increase
productivity and accelerate adoption rates.
Because of high population pressure in rural areas of developing countries like Ethiopia bringing
of additional productive land under cultivar is difficult implying the need for improving farm
level productivity through intensification. This involves the use of improved farm input such as
fertilizers and selected seeds besides improved tillage and husbandry practices. These inputs are
not available on the farm and some farmers are not able to purchase them due to their meager
resources. Moreover most of the commercial inputs are expensive and hence smallholder farmers
cannot afford to by them from their own case earnings. It is therefore generally acknowledged
that rural credit can improve smallholder’s farm productivity through of purchased farm inputs.
Generally credit removes a financial constraint and helps accelerate the use of new technologies
increases productivity and improves national and personal incomes. In Addison it constitutes an
integral part of the process of comercialilzaoin of the rural economy and a conveying redressing
rural poverty (MOA 1995)

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2.1.2 Credit service in rural development

At a certain stage in agricultural development agricultural credit clearly has become a strong
force for further improvement when a man with energy and initiative who lacks only the
resources for more and more efficient production is enabled by the use of credit to eliminate the
one block on his path to improvement. Financial credit is the most flexible form of transferring
economic resources to the poor. One can buy anything that is for sale with cash obtained through
credit (padmanabhan, 1996). According to the free on lie dictionary (undated) credit transactions
have been indispensable to the economic development of the modern world. Credit puts to use
property that would otherwise lie idle thus enabling a country to more fully employ its resources.
The presence of credit institutions rests on the readiness of people t o trust one another and of
courts to enforce business contracts. The principal function of credit is to transfer property from
those who own it to those who wish to use it as in the generation of loans by banks to individuals
who plan to imitate or expand a business venture. The transfer is temporary and is made for a
price known as interest which varies with the risk involved and with the demand for and supply
of credit.
According to kebede (1995) credit makes traditional agriculture more productive through the
purchase of farm equipment and other agricultural inputs the introduction of modern irrigation
system and other technological development. Credit can also be used as an instrument for market
stability. Rural farmers can build their bargaining power by establishing storage facilities and
providing transport system acquired through credit. Credit plays a key role in covering
consumption deficit of farm households.

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This would in turn enable the farm family to work efficiently in agricultural activities. Credit
can further be used as an income transfer mechanism to remove the inequalities in income
distribution among the small middle and big farmers. Moreover credit encourages savings and
savings held with rural financial intuitions that could be channeled to farmers for use in
agricultural production. Credit also creates employment opportunities for rural farmers.
2.1.3 Types of rural credit

There is typically a dual rural credit market in developing courtiers formal and informal credit.
In the formal credit markets institutions provide intermediation between depositors and lenders
charge relatively low rates of intersex that usually are government subsidized. In informal credit
markets money is lent by private individual professional moneylenders, traders commission
agents land lords, friends and relatives. (Mohielding S. and Write W. 2000)
Formal informal credits are imperfect substitutes. In particular, formal credit whenever available
reduces but not completely eliminates informal borrowing. This suggests that the two forms of
credit fulfill different functions in the household’s inter-temporal transfer of resources. Despite
the fact that credit is fungible informal credit is used perhaps for consumption-smoothing
purposes while formal credit is sought and used mostly for agricultural production purposes and
investment in non-farm income generating activities. The empirical evidence also suggests that
the imperfect substitutability between formal and informal credit reflects to some extent the
existence of due dates and conditionality on informal loan contracts. (AliouDiagne, 1999)
2.1.4 Rural financial systems in Ethiopia

Rural finance in Ethiopia as in other developing countries has dualistic features. There exist both
formal and informal credit institutions in the country

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  Formal financial institutions in Ethiopia

The formal sources are financial institutions that are set up legally and engaged in the provision
of credit and mobilization of savings. These intuitions are regulated and controllably the national
bank of Ethiopia (NBE). In the Ethiopian context formal financial sector includes national bank
of ethiopia (NBE) commercial banks (owned by private and public) development bank of
ethiopia (DBE) credit and savings cooperative insurance companies (both public and private) and
individual) (NBE 2003).

During physical year 2002/2003 the numbers of banks operating were nine of which one was
state woned (annual report of NBE 2004).

The numbers of bank branches reached 339 of which 172 or about 51 percent belong to the
commercial bank of Ethiopia. Despite modest branch expansion ethiopia remains as one of the
under banked countries even at sub-Saharan African counties standard. Commercial bank of
ethiopia accounted for more that 47 percent of total capital of the banking system (excluding
NBE) to population ration was 1:20,400 during 2002/2003. Similarly total capital of the banking
system reached birr 2.7 billion of which about 75 percent was hold by government owned.

Total branches of insurance companies reached 106 at the end of the fiscal year (2002/03. Yet
geographical distribution of bank and insurance branches was highly skewed to major towns and
cities. Nearly 42 percent of insurance and 31 percent of bank branches were located in Addis
Ababa (NBE, 2004)

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  Informal credit intuitions in Ethiopia

The inability of the formal financial sector to provide adequate financial services to small
farmers and the poor in general continued even after the reform (Assefa 2004).

According to G/yohannes (2000) compared with the formal financial institutors informal lending
is by far the most important source of finance to the rural and urban population.

In recent years the informal sector has continued to assume increased prominence mainly due to
restrictive rules and regulations of the formal financial sector. The ioerauibs of the informal
sector derive their rulers and regulations from the country’s culture and customs. Informal sector
transactions are conducted on the basis of trust and intimate knowledge of customers. The
common cultural background and the mutual obligations and fervent bonds of family and kinship
all operate to promote the trust accountability and moral responsibility that is lacking in the
official banking system.

Besides the informal lenders have easy access to information (at reasonable cost) about their
borrowers with whom they this permits credit contacts to play a more direct role in enforcing
prepayment. Also the fact that collateral is rarely used in the informal sector enables it to flexibly
satisfy financial needs that cannot be met by the formal financial institutions (G/Yohannes,2000).

Nevertheless the informal sector is not without limitations. Despite its flexibility rapidity and
transparency of procedures not only are there scarcities of loan able fund for investment but also
the interest rates charged on these loans are often exorbitant. The informal financial sector often
embraces a wide group of individuals and institutions whose financial transactional are generally
not subject to direct control by the country’s key monetary and financial policy instruments.
Individual economic entities in the informal sector include moneylender’s money keepers
tradesmen friends and relatives neighbors etc.

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On the other hand as Dejene (2003) stated the non-formal sources in ethiopia include relatives
and friends moneylenders neighbor, Iddir, Ikub and Mhaber. The major sources of loans include
friends and relatives (66 percent ) moneylenders (14percent) and Iddir (7 percent). In other
words the bvulk of the rural credit comes from informal sources. Every year the informal sector
mobilizes resources equivalent to about 10 percent of deposits mobilized by all banks in
Ethiopia. RualIddirs mobilized through informal loans alone an amount 3.5 times the total capital
of all micro finance instructions in ethiopia.
2.1.5 Credit policy in Ethiopia

The formal and informal financial sectors are the principal sources of fiancé for any investment
or business that can be undertaken at micro small scale and large scale levels in an economy. The
major financial institutions in the formal financial sector in Ethiopia re the commercial bank of
ethiopia (CBE) and the development bank of ethiopia (DBE). As Dejene (1993) noted because of
the elaborate paper work bureaucratic lending procedures and stringent collateral requirements
the institutions do not deliver credit as and when needed. Moreover they operate during the
imperial regime the banking sector was partly owned by foreigners and the lending policy was
mainly oriented to financing foreign enterprises and wealthy clients while domestic small
borrowers were rationed out and forced to seek credit from informal finance (Mauri, 1997).
Moreover branch concentration was in few urbane centers with Addis Ababa alone for instance
accounting for 64 percent of branches in the country. Collateral requirements were up to 200%.
The agricultural sector was almost neglected because financial intuitions considered agricultural
activity as risky investment (Itana 1994).

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During the derg regime (1974-1991) all financial intuitions were nationalized and credit was
mainly channeled to public enterprises state farms and cooperatives. The provision of credit was
not based on economic rationality but entirely ions government preference. The private sector
was marginalized. The discrimination against the private sector was not only in credit access but
also in interest rate which was for instance 9% for private sectors as opposed to 6% for public
industrial enterprises since July 1986 (Itana 1994).
Abraham (2002) noted that with the downfall of the derge the private sector got equal access to
credit with other sectors banks were also given authomy to decide by themselves based on purely
commercial criteria and establishment of private banks insurance companies was permitted. As a
result loan disbursed to the private sector which was 40% in 1992/93 rose considerably and
reached 87.7% in 2000/01. In fact there is still unsatisfied demand for credit from this sector of
the economy due to inability to meet banks’ landings requirements
As Solomon (1996) noted the banks serve big businessmen and disregard poor households as
bankable. Many small creditworthy businessman with their viable investment ventures are
denied access to intuitional credit because they count’s afford the required collateral. He also
indicated that “overall the prevailing operation of the formal financial instating in many low
income courtiers such as ethiopia is inefficient in providing sustainable credit facilities to the
poor”
Regarding delivery of financial secrecies access to intuitional credit was very limited in Ethiopia.
Because of this limited access the majority of the poor gat financial services through informal
sources like moneylenders IqubIddrmerchants friends and relatives. Etc. the formal financial
sources have not been interested in delivering credit to the poor. Even if the banks in the country
which are parts of the formal finback sources decide to give credit to the poor (as in the cases
some banks have been forced to do so during the derge)

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In recent years the informal and semi formal lending institutions (such as Iqub, Iddir , money
lender etc.) are becoming the dominant and important sources for poor households in Ethiopia.
According to Dejene (1993) these tow instates account for 81% of the agricultural credit.
Currently the establishments of sustainable and profitable micro finance institutions that serve
large number of poor households have been a primate component of the new development
strategy of Ethiopia (Wolday 2000). NGOs have also been directly funding micro credit
activities as part and parcel of poverty alleviation program since the 1970s (MFDR, 2001).
2.1.6 Micro financing in Ethiopia

Poverty is the main challenge and a fundamental issue of economic development in Ethiopia.
The solutions to poverty are multifaceted as are its causes. Many argu that an inadequate supply
of credit can affect production negatively. Alleviation of poverty and promotion of economic
development can therefore be facilitated through providing credit to the poor.
As treed to poling out earlier the formal financial sector has failed to reach the majority of the
rural as well as urbane poor. This has forced the poor to turn to the informal and semi-formal
financial sources. However credit from such sources is not only inadequate but also exploitive
and costly.
Although provision of credit to rural agricultural household for purchase of agricultural inputs
and tools has since long been practiced in Ethiopia credit schemes targeted at the urban or rural
poor were non-existent until recently. Since the 1970s however some NGOs have been providing
credit to poor households in some parts of the country side by side with activities like delivering
relief and development services (MFDR 2001 Mengistu 1997).
Wide scale micro financing begun in 1990 following the credit agreement signed between the
Ethiopian government and the IDA. The credit program was an urban micro financing scheme
that aimed at financing the market owns development project (MTDP) whose actual operation
begun in 1994 (Mengitu 1997).

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Since micro credit delivery and saving mobilizing in Ethiopia are being carried out by NGOs
government department’s co-operatives and others in a fragmented and inconsistent way the
government took the initiative to establish a regulatory framework in order to facilitate sound
development of the micro finance industry. Accordingly proclamation No 40/1996 was enacted
to provide for the licensing and supervision of the business of micro financing by empowering
the NBE to license and supervise them (MFDR,2000)
Sixteen MFIs have been aim at poverty alleviation through targeting specific groups (reaching
the poor) and group based lending. In a short period of time the MFIs have managed to reach a
sizable portion of the rural and urban poor and in so doing have gained significant experience
(MFDR 2000). One of the MFI so established is Oromia credit and saving share Co. (OCSSCO
for short) which is operating in the Oromia regional state of Ethiopia.
It was originally established as Oromo self-help organization (OSHO) in 1996 to deliver credit
and mobilize savings in rural Oromia’s. Soon it was transformed in to OCSSCO and got register
in 1997 as per proclamation N 40/1996.
The general objective of OCSSCO average loan size for the first loan is birr 1000. A client
obtains the next higher loan after the successful repayment of the first loan terms of OCSSCO
are established at different levels for different activities with a maximum loan period of one year.
To ensure the viability and sustainability of its operations OCSSCO charges 12.5% per annum
on its loan amount and interest will be paid on declining valance on the other hand OCSSCO
pays 8% interest on the amount saved by its clients.
OCSSCO is currently operations only in 29 districts of Oromia. Yet the entire regions have 180
districts. This indicates OCSSCO is at its infant stage requiring tremendous expansion of its
activities to reach the rural poor (MFDR, 2000).

19
OCSSCO is confined in areas where the majority of small-scale poor farmers live. According to
a report in MFDR 92000), the organization has disbursed a loan amount of birr 25,315,078 to
about 30,000 clients as of June 2000. The amount of savings mobilized has reached birr 3.1
million during the same period while the repayment rate has shown a decline (has fallen to 97%
in the year 2000)
2.2 Empirical Literature

According to walterB.meings (1999) deal with. Farmer’s perception of the strength and
weakness of formal financial institution in relation to their lending significance discussed in the
previous section in this section the seminar tries to identify the strength and weakness of formal
financial institutions in the case of farmers view of group borrowing and farmer view of
repayment period by wealth and sex category

2.2.1 Farmers view of group borrowing guarantor by wealth and sex category

The farmers under different wealth categories and also male and female in their group have
common understanding about group borrowing. According to farmers understanding in group
borrowing group members are jointly accountable for the repayment in the event of default and
therefore the whole group provides monitoring and enforcement mechanism as group members
pup pressure on borrowing members to repay their loans. In the event of a group member being
incapable of repaying the loan the group pays the loan group pays the loan on behalf of a
defaulting member. Farmers recognized that if credit is properly used it is productive and there is
no way of defaulting. Farmers also acknowledge that group borrowing solves the problem of
collateral requirement. Poor farmers have found group borrowing inconvenient. They face
problems to form a group because the better off do not want them in their group. This is because
some farmers though that the poorest of the poor have not enough asset which serve as guarantee
in case of default. Even though theoretically the poor can form a group among themselves in
practical cases farmers reported that there are factors that limit them from forming a group
among themselves walterB.meings (1999).

20
2.2.2 Farmers view of the prepayment period by wealth and sex category

Farmers thought that repaying loans by group members at the same time under all condones is
not suitable since ability to pay may not be uniform and also repayment capacity typically varies
across seasons. This has disadvantages according to the farmer’s perception that one has to wait
until incapable group members have repaid. This may also affect the farmer continual access to
credit for working capital walterB.meings (1999).
2.2.3 Factors influencing stallholder farmer’s access to formal credit

According to (sisayYihuala 2008) states that factor that affect affecting small holder farmer’s
access to credit are the following
1. Total cultivated land farmers who cultivate larger size of land can utilize more capital and
sloso larger land size reelects ownership of an important asset which is expected to affect access
to agricultural credit
2. Extension contact is also related to access formal credit for samllholder farmers. Farmers
who have frequent contact with extension agents were expected to have more information that
will influence farm household’s demand to use credit from the formal sources.
3. Experience of households in formal credit use farmers experience in credit use from the
formal financial institutions plays a significant role in accessing credit from these sources
4. Age of the farm household head farmers with higher age have better association with credit
sources that could provide better information about the institutions that can facility access to
formal credit sources.
5. Literacy level
Literate farmers have more exposure to the external environment and information which helps
them easily associate to credit source
6. The number of farm households who participated in agricultural extension package
Were greater for formal credit users than non-users. Farmers who are willing to participate in
agricultural technologies will be facilitated with agricultural credit
or group
7. Collateral or group formation farm households are expected to have social collateral which
is practiced in group borrowing

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8. Membership of farmer’s multipurpose cooperatives
This implies membership of farmer’s multipurpose cooperative plays a determining role in
providing access to formal credit especially in farmer’s multipurpose cooperatives source
According to Dr. Emanuel Y (2008) states that factor affecting small holder farmers access to
credit are in generally borrower are constrained by the factor own their control on a maximum
amount of they can possibly borrow from the initiations consequently any borrower however
credit worthy faces to limit over all amount of she/he borrow from any given source of credit.
Regard of interest rate she/he willing to pay and or collateral he is willing to put up to back the
loan because of this factor borrower becomes restricted from this institutions further more due to
possibility default and lack of effective contract enforcement mechanism lender have to incentive
to further restrict the supply of credit even if they have more than enough to meet a given
demand and borrower willing to pay a high interest rate frame the borrower view transportation
problem is also one factor w/c affect them in the case of distance their home is far from credit
institution.

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 3. Conclusion And recommendation

3.1 Conclusion

Ethiopia is one of counties where the small holder farming dominates the overall nation
economy and its population is subject to extreme poverty. Small holder of the countries who do
not have access to capital encompasses the largest portion of the population. This lack of access
to financial service is one of the reasons for rural households to live in the vicious circle of
poverty for long time. The alleviation of poverty and promoting of economic development can
be facilitated though providing credit to the poor. The provision of this credit is one of principal
of this limited access the majority of the poor get financial services through in formal sources
like money lenders Iqub merchant’s friends and relatives etc. The formal financial sources have
not been interested in delivering credit to the poor. Even if banks in county which are part of the
formal financial sources decide to give credit to the poor their outreach was also very limited for
long. Thus delivering financial service to the poor requires an innovative targeting deign and
mechanism of credit delivery that helps identify and target only poor that can take the initiative
and sustain productive use of loan.

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 3.2. Recommendations

Nowadays group lending becomes the most important method of providing rural credit to the
poor who could not bring material collateral. However, poor farmers especially the very poor
farmers find group lending inconvenient to access credit from MFI since they are rejected from
the group by others.

Therefore, there should be a policy environment whereby individuals may have access to MFI
credit, without forming groups, by means of usingland use right certificates and also guarantor as
a collateral.

The results of the study revealed that most of the households borrowed relatively small size of
loans for short duration. Hence, before intervention in these areas one should have to formulate
policies of credit by assessing the requirements of the communities in relation to the terms and
conditions of credit.

The policies ofcredit like the loan sizeand duration should be designed according to the need of
the local society, and the loan size ceiling should be flexible.

The majority of the rural households’ especially female headed households and the very poor
farmers did not use credit from formal financial sources. Therefore, high emphasis should be
given in screening potential borrowers and to address the very poor and female headed
households in the formal credit market. Participatory wealth ranking can be carried out to select
and reach those who should be first beneficiaries of the service.

The repayment period for agricultural loan in the region is almost uniform and regular. These
inflexible repayment schedules do not correspond to period of cash availability for the poor
households. Therefore, participatory development of activity and income calendars could be used
to synchronize repayment schedule with credit need and income flow of different households.

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 4. REFERENCE

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farmers in Ethiopia: a case of two Districts. MSC thesis Alemaya University of agriculture.
Backman, T,N and R,S. forester, 1969 credits and collections management and theory eighth
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Getachewolana 1993 Farmers response to new coffee development technologies and factors
influencing it. The case of small farmers in ginbi CIPA Wollega. MSC thesis Alemaya
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Kebedekoomsa, 1995. Agricultural credit analysis. National agricultural policy workshop
Mohieldin S. and write W.2000. Formal and informal credit markets in Egypt.

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