PATTERN OF CREDIT USE AND ITS IMPACT ON

SMALL FARMERS' INCOME:

A Study in Dire Dawa Area, Eastern Ethiopia

A Thesis submitted to the School of Graduate Studies

Alemaya University

by

Anbes Tenaye Kidane

In partial fulfillment of the requirements for the Degree of Master of

Science in Agriculture (Agricultural Economics)

June 2003
 ALEMAYA UNIVERSTY
SCHOOL OF GRADUATE STUDIES

PATTERN OF CREDIT USE AND ITS IMPACT ON SMALL FARMERS' INCOME:

A Study in Dire Dawa Area, Eastern Ethiopia

By

Anbes Tenaye Kidane

COLLEGE OF AGRICULTURE
DEPARTMENT OF AGRICULTURAL ECONOMICS

Approved by board of Examiners:

_________________________________ ______________________
Chairman Signature

_________________________________ ______________________
Advisor Signature

_________________________________ ______________________
Internal Examiner Signature

_________________________________ ______________________
External Examiner Signature

ii
This work is dedicated to my parents

iii
 BIOGRAPHY

Mr. Anbes Tenaye was born in June 1975 in Minjar-Shenkora Woreda, North Shoa.

He started his education at Zewelde School and completed his elementary education there. He

pursued his junior secondary school in Arerti Secondary School. Then he completed his

senior secondary education at Ayer Tena. Upon successful completion of his high school

studies he joined the Alemaya University of Agriculture in September 1996 and graduated

with B.Sc. degree in plant science in July 2000. Upon completion of college education he was

employed as an agronomist in Ministry of Agriculture, North Shoa Administrative Zone

where he served for sometime. He joined the school of graduate studies of Alemaya

University in February 2001to specialize in Agricultural Economics.

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 ACKNOWLEDGEMENTS

I am deeply grateful and indebted to Prof. M.V.S. Gowda, my advisor, for his

Scholarly guidance, supervision and suggestions. Successful accomplishment of this research

would have been very difficult without his generous time devotion from the early design of

the questionnaire to the final write up of the thesis by providing valuable constructive

comments and thus I am indebted to him for his kind and tireless efforts that enabled me to

finalize the study.

I also owe my deepest gratitude to Dr. Wolday Amha for his useful and valuable

comments, which led to considerable improvement in the manuscript. He has spent his

valuable time from shaping the questionnaire of the survey through the production of the draft

of the thesis in addition to providing me with pertinent information.

I acknowledge the help received from my friends Ato Tesfaye Berhanu, Elizabeth

Tesfaye, Shimelis Kefale, my sister Elizabeth Nekita, Ato Hailemikeal H/ Mariam, Hailu

Teshome, Yared Solomon and Gossaye Tenaye. The extension workers of the agricultural

office and other collaborated individuals deserve special thanks for their unforgettable co-

operation during data collection. My thanks are also due to HCS, which partly sponsored data

collection of the research work.

Finally I would like to express my sincere appreciation and gratitude to my father

Tenaye Kidane and my mother Azalech Zikarge for their special strength for sponsoring all

my expenses, besides their encouragement and inspiration, which made the study a success.

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TABLE OF CONTENTS

BIOGRAPHY........................................................................................................................ i

ACKNOWLEDGEMENTS .................................................................................................ii

TABLE OF CONTENTS....................................................................................................iii

Acronyms used in the text................................................................................................... vi

List of Tables.....................................................................................................................viii

LIST OF FIGURE .............................................................................................................. ix

LIST OF APPENDICES..................................................................................................... ix

ABSTRACT ......................................................................................................................... x

CHAPTER I ......................................................................................................................... 1

INTRODUCTION ............................................................................................................... 1
1.1 Background................................................................................................................ 1
1.2 Statement of the Problem ........................................................................................... 4
1.3 Significance of the Study.......................................................................................... 10
1.4 Objectives of the Study ............................................................................................. 11
1.5 Scope and Limitations of the Study.......................................................................... 12
1.6 Plan of the Thesis..................................................................................................... 13
CHAPTER II ................................................................................................................... 14
FINANCIAL SYSTEM OF ETHIOPIA .......................................................................... 14
2.1 Formal Financial Institutions in Ethiopia............................................................... 14
2.2 Informal Financial Sector ....................................................................................... 18
2.3 Micro financing in Ethiopia..................................................................................... 19
2.4 Regulatory Framework and Governance of Micro finance Institution in Ethiopia . 21
2.4.1 Regulatory Framework of Micro finance Institution in Ethiopia ......................... 21
2.4.2 Governance of Micro finance in Ethiopia............................................................. 25
2.5 Performance of Micro finance Activities ................................................................. 27

CHAPTER III .................................................................................................................... 29

REVIEW OF LITERATURE............................................................................................ 29
3.1 Small Farms/Farmers .............................................................................................. 29
3.2 Definitions and Importance of Credit ...................................................................... 30

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 3.3 Economic Rationale of Credit Use ........................................................................... 33
3.4 Factors Influencing Credit Use................................................................................ 35
3.5 Empirical Studies on Impact of Credit ..................................................................... 37
3.6 Conceptual Framework for Assessing Impact.......................................................... 42
3.6.1 Models of Impact Chains ...................................................................................... 42
3.6.2 Units of Assessment............................................................................................... 43
3.6.3 Impact Indicators .................................................................................................. 44
3.7 Models used in Studies on Impact of Credit............................................................. 44

CHAPTER IV .................................................................................................................... 47

DESCRIPTION OF THE STUDY AREA ........................................................................ 47

4.1 Location and physical situation ............................................................................... 47
4.2 Land use patterns ..................................................................................................... 50
4.3 Population Situation ................................................................................................ 51
4.4 Agriculture ............................................................................................................... 52
4.4.1 Crop Production.................................................................................................. 52
4.4.2 Livestock production .......................................................................................... 53
4.5 Infrastructure and Social Services ........................................................................... 53

CHAPTER V...................................................................................................................... 56

RESEARCH METHODOLOGY ...................................................................................... 56

5.1 Data Sources, Sampling and Data Collection .......................................................... 56
5.2 Methods of Data Analysis ........................................................................................ 57
5.2.1 Logistic Regression Model.................................................................................. 57
5.2.2 Cobb-Douglas Production Function .................................................................... 62
5.3 Definitions of Variables and Working Hypothesis for Logit .................................... 65
5.4 Definitions of Variables and Working Hypothesis for C-D...................................... 69

CHAPTER VI .................................................................................................................... 72

RERULTS AND DISCUSSION ........................................................................................ 72

6.1 Descriptive Results ................................................................................................... 72
6.1.1 Demographic Characteristics of Sample Households........................................... 72
6.1.2 Socio-Economic Factors ..................................................................................... 73
6.1.2.1 Land Holding and Cropping Pattern.............................................................. 73
6.1.2.2 Livestock Ownership .................................................................................... 77
6.1.2.3 Living Conditions (Welfare) - income and food consumption ...................... 78
6.1.2.4 Feeding Status of Sample Households........................................................... 80
6.1.2.5 Clothing of Sample Households .................................................................... 83
6.1.2.6 Educational Status of School-aged Children.................................................. 85
6.1.2.7 Health Status of Household........................................................................... 87
6.1.2.8 Patterns of Credit Use ................................................................................... 88

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 6.1.2.9 Changes attributed to Credit Use................................................................... 90
6.1.2.10 Constraints to Save and Invest .................................................................... 91
6.2 Factors Influencing Use of Agricultural Credit....................................................... 92
6.2.1 Elaboration on Explanatory Variables ................................................................. 95
6.2.1.1 Significant Explanatory Variables................................................................. 95
6.2.1.2 Non-Significant Explanatory Variables ......................................................... 99
6.2.2 Sensitivity Analysis .......................................................................................... 101
6.3 Production Function Results ................................................................................. 102

CHAPTER VII................................................................................................................. 106

SUMMARY AND CONCLUSIONS ............................................................................... 106

7.1 Summary ................................................................................................................ 106
7.2 Conclusions............................................................................................................ 109

REFERENCES ................................................................................................................ 111

APPENDICES.................................................................................................................. 123

v
Acronyms used in the text

AAU = Addis Ababa University

AUA = Alemaya University of Agriculture

AEMFI =Association of Ethiopian Micro-Finance Institutions

AIDB =Agricultural and Industrial Development Bank

ACSI = Amhara Credit and Saving Institute

Br =Birr

CBB =Construction and Business Bank

CBE =Commercial Bank of Ethiopia

DBE = Development Bank of Ethiopia

DDAC =Dire Dawa Administration Council

DECSI =Dedebit Credit and Saving Institution

E =East

EIC =Ethiopian Insurance Corporation

e.g. = For example

FAO = Food and Agriculture Organization

GDP =Gross domestic product

Ha =Hectare

HCS = Hararghe Catholic Secretariat

HYV = High Yielding Variety

ICRISAT =International Crops Research Institute for Semi-Arid Tropics

Km =Kilometer

LDCs = Less developed countries

LPM =Linear probability model

LU = livestock unit

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LWF = Lutheran World Federation

M.a.s.l. =Meters above sea level

MDs =Man days

MFIs = Micro-Finance Institutions

MLE = Maximum Likelihood Estimate

Mm =Millimeter

MOA =Ministry of Agriculture

N =North

NBE =National Bank of Ethiopia

NCAER =National Council of Applied Economic Research

NGOs = Non-governmental organizations

No = Number

OLS =Ordinary least squares

PA = Peasant Association

PEDO =Planning and Economic Development Office

RFI =Rural financial institution

SD =Standard Deviation

SPSS =Statistical Package for Social Sciences

TLU =Tropical livestock unit

USAID =United States Agency for International Development

VIF =Variance inflation factor

WIBS =Woreda Integrated Basic Service

10 =one degree

1' =one minute

O
c =Degree Centigrade

vii
 List of Tables

Table 1: Financial institutions in Ethiopia .......................................................................... 18

Table 2: Land use pattern of the DDAC ............................................................................. 51
Table 3: Demographic characteristics of sample households .............................................. 73
Table 4: Land holdings of the households (ha) ................................................................... 74
Table 5: Opinions on whether land holding satisfied home consumption and other needs.... 75
Table 6: Cropping pattern of households ............................................................................ 76
Table 7: Land allotted to various crops in the sample households (ha)................................ 76
Table 8: Livestock ownership of the sample households (in number /TLU)........................ 77
Table 9: Household income and food consumption ............................................................ 79
Table 10: Feeding status of sample households .................................................................. 82
Table 11: Frequency of household clothing ........................................................................ 84
Table 12: Household welfare - Education of children ......................................................... 85
Table 13: Schooling status of the household....................................................................... 86
Table 14: Health status of household.................................................................................. 87
Table 15: Patterns of credit use .......................................................................................... 89
Table 16: Changes attributed to credit use .......................................................................... 90
Table 17: Constraints to save and invest............................................................................. 91
Table 18: Variance inflation factor for continuous explanatory variables............................ 93
Table 19: Contingency coefficients for discrete explanatory variables................................ 93
Table 20: Definitions and units of measurement of variables in the logistic regression model
...................................................................................................................................... 94
Table 21: Maximum likelihood estimates of logit model .................................................... 98
Table 22: Effects of significant explanatory variables on the probability of access to credit
.................................................................................................................................... 102
Table 23: Variance inflation factor for the continuous explanatory variables .................... 103
Table 24: Parameter estimates of Cobb-Douglas production function............................... 104

viii
 LIST OF FIGURE

Figure 1: Map of Dire Dawa Council Showing the Study PAs……………………………. 48

LIST OF APPENDICES

Appendix I: Conversion Factors Used to Compute Tropical Livestock Unit (TLU) ............ 123

Appendix II: Conversion Factors to Drive Man-Equivalent................................................ 123

Appendix III: Summary of Survey Questionnaire............................................................... 124

Appendix IV: Financial Institutions Operating in Ethiopia ................................................. 136

ix
 PATTEN OF CRDIT USE AND ITS IMACT ON SMALL FARMERS INCOME:

A Study in Dire Dawa Area, Eastern Ethiopia

By
Anbes Tenaye Kidane

Major Advisor: Prof. M.V.S Gowda

ABSTRACT

Small farmers in Ethiopia cannot implement improved agricultural technologies out of

their own funds. They need credit to implement the new technologies. However, the
achievement of credit is controversial. No other solution than studying the impact of credit on
gross farm income and the livelihood of the society is important. It has been reported in
various studies that micro finance has very beneficial economic and social impacts. Others
argue that it can be an instrument of defaults and stagnation rather than an instrument of
progress. Therefore, the major concern of this study is to assess the impact of credit on gross
farm income and the living standard of the small farmers, to identify factors affecting credit
use, and to analyse the pattern of credit use by small farmers.

For the purpose of this study primary data were collected from purposively selected
four PAs. A total of 180 households comprising 110 credit users and 70 non-users were
included in the final analysis. In addition, secondary data were collected from relevant
organizations and pertinent documents. Descriptive statistics such as mean, standard deviation
and percentages were used for analyzing the data. Moreover, t-test and χ 2 - test were
employed to compare credit users and non-users with respect to the hypothesized and other
related variables. A binary logit model was employed to examine factors influencing
agricultural credit use. In this regard, a total of eleven explanatory variables were included in
the empirical model of which five were significant, while Cobb-Douglas production function
was employed to analyze the impact of credit on gross farm income. Variance inflation factor
(VIF) and the coefficient of contingency were calculated to detect multi-collinearity and
association among the continuous and discrete variables, respectively. Fertility status of the
soil, total household expenditure, and frequency of contact of DA were highly important in
influencing agricultural credit use as evidenced by the model output. The other critical
variables include farm size and gross farm income. While cultivated area, number of draft
oxen, credit and total livestock unit were highly important factors of production contributing
to gross farm income. The other critical variables include family labour and frequency of
contact of DA.

Therefore, considering of factors affecting credit use, impact of credit on gross farm
income and livelihood of the farmer are vital in providing information to undertake effective
measures with the aim of extending loans and increasing access to credit.

x
 CHAPTER I

INTRODUCTION

1.1 Background

Ethiopia is predominantly an agricultural country with the vast majority of its

population directly involve in the production of crops and livestock. Agriculture accounts for

around 45 per cent of gross domestic product (GDP), 85 percent of the employment and over

90 percent of foreign exchange income of the country (CSA, 2001). It satisfies 70 per cent of

raw materials requirements of the country's industries (Belay, 1998).

According to Wolday (2003) the delivery of credit has been as one of the antipoverty

tool for the development of programs. This is because it helps unemployed became employed,

thereby increasing their income and consumption. He farther emphasizes that improving

credit access to the poor also facilitates economic growth by easing liquidity constraints in

production, by providing capital to start up new production or adoption of new technologies.

Fantahun (2000) underlined that the provision of credit services to the poor people in the rural

economy and micro-enterprises operators in towns is believed to alleviate poverty, increase

the income of credit recipients, create employment, and reduce dependency and latter

development.

In spite of huge agricultural potentials, the growth in agricultural production in

Ethiopia has not been able to keep pace with that of demand. In fact, a great proportion of

cultivated land is represented by subsistence farmers who produce about 70 percent of the

national agricultural output (Wolday, 1989). According to Timmer (1988), the first step in the

process of economic development is 'getting agriculture moving'. Mosher (1966) has

classified the facilities and services involved in the modernization of agriculture into two

groups Viz. the essentials and the accelerators. The former, as the name implies, must be

present to enable a farmer to adopt an innovation; and the latter are those that may be

important to get an innovation adopted. Credit is one of the five accelerators that Mosher has

listed.

Credit is considered as a lubricant that helps to provide a push to the development

process (Singh, 2000). The gap between the owned and the required capital calls for outside

funding (Singh et al, 1985). However, supplying large amounts of money to farmers on credit

basis is not an end by itself. The impact of credit needs be analyzed so that the credit

suppliers as well as the credit receivers can achieve their respective goals effectively.

Microfinance model has rarely served as a vehicle for lending to support seasonal

agricultural input purchase. It has rather proved most effective for funding activities such as

petty trading, small-scale agricultural processing operations, small-scale dairy production and

other livestock-related activities. This is mainly because such activities do not exhibit a

pronounced seasonality and are conducive for making small, regular loan repayments. Micro

finance for seasonal agricultural activities implies that all group members would acquire their

loans simultaneously and would expect to repay at the same time, thus raising the problem of

mass default. There would also be significant covariance of default risk across members thus

undermining the spirit of group liability.

Farm credit is usually considered as an essential input to increase agricultural

productivity, mainly of land and labour, to boost food output and income levels, to encourage

employment and thereby to alleviate poverty. Credit accomplishes this task by enabling risk-

2
averse small farmers to overcome their liquidity problem and to make farm investments,

particularly in improved farm technology and inputs that could lead to increased agricultural

production (Abbott, 1976; Roeinweig and Binswanger, 1993; Fuentes, 1996). In the Ethiopian

case, Freeman et al (1996) have found empirical support saying, "Improving farmers' access

to adequate credit accelerates the uptake of advanced technologies."

Although Ethiopia has suitable agro-climatic conditions, most people engaged in

agriculture and ample resources the country has, she can not yet provide her people at least

the minimum food requirement and at most food self sufficiency. This is accounted for by low

productivity. Assefa and Heidhwes (1996) pointed out that the main reasons for low

productivity are: traditional agricultural practices and implements; low inputs and lack of

effective extension services; over-grazing by a very large livestock herd; severe soil erosion

and depletion of soil fertility; lack of adaptive research; inadequacy and lack of agricultural

credit; deficient communication infrastructure; ecological imbalance; inappropriate

agricultural policies; poor market integration; political instability; the low level of

technological development; etc.

In spite of its tremendous potential, the capacity of the agriculture in generating

increased production to meet domestic and export requirements has been handicapped by low

production. It is in fact, a paradox that a country with such immense agricultural resources

could not feed its population and has to rely on external food aid and imports.

3
1.2 Statement of the Problem

The question of how best to develop an effective rural financial system has been much

debated over the past three decades. A significant evolution in agricultural and rural

development strategies has taken place over the last decade. This evolution represents a shift

away from supply-led and interventionist policies towards a more liberal, market-oriented

approach. Liberalization of the financial sector includes the elimination of regulated interest

rates and directed credit programmes, and the restructuring of state-owned agricultural

development banks.

These changes removed distortions in financial markets and enhanced the prospects

for the long-term development of a sustainable rural financial market system. However, for

the moment they have reduced the availability rural and agricultural credit. Most banks have

neither the rural branch network nor the agricultural lending expertise to serve small farmer

clients. As a result, many rural people still rely heavily on informal arrangements. Unofficial

deals may be beneficial in some respects but cannot be a substitute for effective banking

services.

Lack of access to formal credit and to full financial intermediation services impedes

agricultural development and hampers the efforts to alleviate rural poverty. However, new

initiatives are being undertaken to meet the demand for rural credit. They include the reform

of agricultural development banks, enabling them to pursue a market approach in the delivery

of credit services to small and medium-sized rural clients. At the same time, some micro

finance institutions (MFIs) are attempting to transfer their urban micro credit technologies to

rural areas.

4
 Two recent developments have influenced these initiatives. The first one has been the

adoption of a ‘’financial systems’’ development approach. This emphasizes the need for an

integrated approach to financial market development and the provision of competitive and

durable financial services in local financial markets. A clear understanding of the both client

demand and the existing informal services providers is necessary. In fact, over the last

decades, development agencies, NGOs, practitioners and researchers have accumulated

substantial experience in operating financial services for rural clients.

The second development has been the emergence of specialized micro finance

institutions. Micro-enterprise credit programmes were initiated to address the unemployment

problems that are associated with the vast rural-urban migration in developing countries.

Initially, they targeted the promotion of self-employment and income-generating activities for

the urban poor. The evolution in micro finance, like the earlier one in rural finance, has been

affected by the principles of financial systems development. Attention is on developing

financial institutions that target low-income clients while pursuing commercial viability.

The best-known micro and rural finance institutions such as the Grameen Bank in

Bangladesh and the Bank Rakyat in Indonesia reach hundreds of thousands to millions of

clients in urban and rural areas. In the course of time they have succeeded in reducing their

reliance on subsidies. Although today only a few micro finance institutions have achieved full

financial independence, many more use innovative credit technologies and have developed

organizational structures that produce positive results. These initiatives illustrate the potential

to overcome the financial barriers that commercial banks traditionally face when they try to

lend to low-income clients. As a result a number of these banks now provide financial

services to micro enterprises and small businesses (Baydas, M. et al, 1997). In addition, new

5
financial institutions have been established that attend to low-income clients. However, even

in cases where services are extended to rural clients, small agricultural producers are only

rarely attended to.

Until the early 1980s, agricultural planners were primarily concerned with the need to

increase food crop production. The adoption of the new green revolution technologies was

relatively costly, and small farmers were perceived as being too poor to save and to self-

finance the required investments in additional. As a result, vast amounts of financial resources

from governments and donors were poured into agricultural development banks and

agricultural credit projects. These programmes served as conduits for the provision of

subsidized credit to small farmers often for production purposes.

The provision of subsidized and easily accessible credit constituted a central theme of

the agricultural development strategies in the 1970s and 1980s. It was argued that enhanced

access to credit would accelerate technological change, stimulate national agricultural

production. However, this approach failed to produce the desired results. The reasons for the

failure of these policies were manifold and have been detailed below.

Many agricultural development banks were created for political purposes and were not

meant to operate as financial institutions. As they were established to channel subsidized

donor and government funds to farmers, they lacked the market discipline and incentives of

commercial banks. The provision of credit depended upon political decisions and interests.

Moreover, the irregular availability of loan funds, the setting of interest rate ceilings and the

periodic write-offs of overdue loan seriously undermined the effectiveness of these

6
agricultural development banks. It is not surprising that many of them have been either

restructured or condemned to liquidation.

The new policies have led to a shift away from the administration of directed credit

programmes that rely on continuous government subsidies. Attention is now given to the

performance of financial institutions. When it comes to lending to poorer clients, two

performance indicators have been developed, outreach and sustainability (Yaron, 1994;

Christen et al, 1995). Outreach refers to the extent to which a financial institution provides

high quality financial services to a large number of small clients. Attempts are also made to

evaluate the degree to which a financial institution meets the effective demand for financial

services from the targeted clientele. The concept of outreach thus includes quantitative and

qualitative dimensions.

A major feature of sustainability is the financial self-sufficiency or the ability of the

financial institution to provide durable services on a cost-covering basis without reliance on

external subsidies. Financial sustainability is attained when the return on equity, net of

subsidies received, equals or exceeds the opportunity costs of capital (Krahnen and Schmidt,

1994). This means that a financial institution must cover the costs of loanable funds, loan

administration costs, and provisions for loan losses as well as costs of protection against

default. Financial institutions are considered commercially viable when they generate profits

above and beyond their total financial transaction costs and can finance the development costs

that are required to provide new financial products from their retained earnings.

Since small formers cannot implement improved technologies out of their own fund,

they go for credit. However, the achievement of credit is controversial. Some researchers

7
argue that micro finance has very beneficial economic and social impacts (Susan and Rogaly,

1997; Khandker, 1998; Schuler, Hashemi and Riley, 1997; Jones, 1971; Gorcon, 1976;

Mosher, 1966; Heidhwes, 1985; Nigussie, 1993; Ackery, 1995; Fuentes, 1996). Others argue

that it can be an instrument of defaults and stagnation rather than an instrument of progress

unless it is promptly and efficiency used (Adams & Von Pischke, 1992; Buckley, 1997;

Dhawan and Kahlon, 1977).

Taking the analysis further, Hulme and Mosely (1996) have demonstrated that the

better-off the borrower, the greater the increase in income from a micro-enterprise loan.

Borrowers who already have assets and skills are able to make better use of credit. The

poorest are less able to take risks or use credit to increase their income. Indeed, some of the

poorest borrowers interviewed became worse-off as a result of micro-enterprise credit, which

exposed these vulnerable people to high risks.

Whether income increase is based on loans for individual micro-enterprises or on

group-based income generation projects, its appropriateness as a strategy for poverty

reduction in the case of the poorest people is questionable (Susan and Rogaly, 1997). Ackery

(1995) has found that financial interventions have an impact on social relations partly through

their economic effects. In many instances implementers of credit schemes have claimed that

the intervention will lead to progressive social change, for example, empowering of women

and changing gender relations in the household and in the community.

With the introduction of new production technologies, the financial needs of farmers

have increased manifold (Singh et al., 1985). Steady agricultural development depends up on

the continuous increase in farm investment. Most of the time heavy investment cannot be

made by the farmers out of their own funds because of their low level of incomes. Moreover,

8
there exists no significant margin of income that can be channeled into the agricultural sector

to undertake development activities. Thus, here comes the importance of capital and hence, of

credit (Singh et al., 1985).

This study is concerned with the pattern of agricultural credit use factors affecting

credit use, and impact of credit on small farmers' income in the area selected. Through

providing the necessary inputs, agricultural credit contributes to agricultural development by

increasing productivity in farming. It encourages use of other inputs in the production

process. It is generally believed that loans are an essential part of various input packages that

are prescribed as part of agricultural investment projects designed to introduce modern

technologies and thus stimulate change and growth in agriculture. This leads to the questions

such as: does credit increase farmers' income and improve the standard of living? What

factors influence agricultural credit use? What is the pattern of credit use? The present study

focuses on loans provided by Office of Agriculture, Hararghe Catholic Secretariat (HCS) and

Woreda Integrated Basic Service (WIBS). The loans from other sources such as informal

moneylenders including friends, relatives, shopkeepers, and rural moneylenders were not

considered. Since, farmers have many other options from whom they can raise loan at lower

cost; they rarely take loans from these informal sources.

No study in the area and in the country at large has so far been made with respect to

the impact of credit on the living standard of the society and gross farm income of the

farmers', and factors affecting credit use. Since farmers' savings are inadequate to finance

various activities on their farms, they go for credit. Credit plays a crucial role in oiling the

wheels of agricultural production. It is said to be the lifeblood of agriculture and therefore the

need for adequate farm finance is obvious. In order to get a substantial increase in agricultural

9
production, the provision of credit must be accompanied by the provision of technical advice

and physical inputs. Hence, we need to study the pros and cons brought about by credit.

Since, there are many factors affecting access to credit, it is crucial to identify the important

ones.

1.3 Significance of the Study

Agriculture is the dominant sector in the Ethiopian economy. The level and the speed

of economic development are determined to a great extent by the growth of agricultural

sector. This sector, which is composed of small, fragmented and subsistence farming families

has limited or no working capital to purchase inputs to improve productivity. Hence, credit is

a vital component of modern agriculture. The importance of agricultural credit in the

development of the sector has been underlined strongly by various authors (Kebede, 1982;

Itana, 1985; Berhanu, 1993; Negussie, 1993; Bekele, 1995; Freeman et al 1996; Belay and

Belay, 1998; Fantahun, 2000; Meehan, 2001; Woldy, 2002; and Tsehay and Mengistu, 2002).

All these authors has concluded that credit helps to bring the requested productivity, bring

farmers live for better and food self-sufficiency through the adoption of new and improved

technologies.

However, there are many factors influencing credit use. Hence, this study aimed at

identifying factors affecting credit use and impact of credit on gross farm income and

standard of living of the small farmers. The aforesaid brief summary of evidence and

arguments suggests that micro-finance interventions normally lead to increase in incomes,

contribute to individual and household livelihood security and change of social relations for

the better but that they cannot always be assumed to be doing so.

10
 Credit in agriculture can also be an instrument of defaults and stagnation rather than

an instrument of progress, unless it is promptly and efficiently used in increasing agricultural

productivity (Dhawan and Kahlon, 1977). Under conditions of peasant agriculture, both the

provision of credit and its efficient use in increasing agricultural productivity confront

difficult problems. Some of the problems are lack of access to credit, inadequate supply of

credit, untimely supply of credit, and diversion of credit.

In view of the current need for attaining food-self sufficiency in the country, and the

study area being one of the strategic places to fulfill this requirement, the findings of the

research would be of great policy use. The study of factors affecting credit use is important in

providing information that will enable effective measures to improve access to credit. It will

also enable lenders and policy makers to get knowledge as to when and how to channel efforts

in order increase access to credit. Moreover, the study on impact of credit on the livelihood of

the society and gross farm income enables the lenders to stop, change, or continue providing

credit service and the policy makers to formulate appropriate policy for extending credit.

Therefore, the outcome of the study would be useful in formulating appropriate credit policy

for the agricultural sector, besides modifying the ways of extending loans by the credit

institutions. Above all, it can be a benchmark for further study.

1.4 Objectives of the Study

The general objectives of this study are to assess the impact of credit on gross farm

income and the living standard of the society, and to identify factors that differentiate credit

users from non-users. Accordingly, the study was designed, first to analyze the pattern of

credit use, second to identify factors that differentiate credit users from non-users, and third to

11
make an assessment of the impact of credit on farmers’ income. The specific objectives of the

study are:

1. To analyze the pattern of credit use by small farmers

2. To identify factors influencing credit use

3. To assess the impact of credit on small farmers’ income

1.5 Scope and Limitations of the Study

This study covered only Dire Dawa council Area; hence its scope is limited.

Moreover, not all of the area is assessed but also only four representative PAs are covered for

studding pattern of credit use, factors influencing agricultural credit use and impacts of credit

on gross farm income. This limitation is attributed to the period covered by the study, budget

and other resource limitations. Moreover, respondents may give false information if credit is

used for purposes other than stipulated ones. Furthermore, the impact of credit focuses on

formal and semi-formal credit, whereas informal credits are not included in the study.

However, the study is the first of its kind in the area, its importance in reflecting

impact of credit on the living standard of the society and gross farm income, and factors

affecting agricultural credit use should not be underestimated.

12
1.6 Plan of the Thesis

The Thesis is organized into seven chapters. The first chapter deals with the

background, statement of the problem, significance, objectives, and scope and limitations of

the study. The second chapter describes the financial system of Ethiopia and the third chapter

reviews different studies regarding impact of credit and factors affecting access to credit use.

The fourth and fifth chapters deal with the description of the study area and methodology of

the study, respectively. Chapter six deals with the results of the study while the seventh

chapter summarizes the study and draws conclusions as well as policy implications.

13
 CHAPTER II

FINANCIAL SYSTEM OF ETHIOPIA

This chapter gives a resume of the financial system of Ethiopia and it serves as a

background material for the present study, particularly the information on micro financial

institutions.

2.1 Formal Financial Institutions in Ethiopia

The formal financial institutions include the National Bank of Ethiopia (NBE),

Commercial Bank of Ethiopia (CBE), Development Bank of Ethiopia (DBE), Construction

and Business Bank (CBB), and the recently proliferating private commercial banks like

Dashen, Wogagen, Abysinia, Awash International, Nib-International, etc; and the non-

banking financial institutions like the public and private insurance companies (Ethiopian

Insurance Corporation (EIC), NICE, NYALA, Africa, Awash, etc.).

In the Ethiopian context, farm credit has been made available through public financial

institutions of which Commercial Bank of Ethiopia (CBE) and Development Bank of Ethiopia

(DBE) are the two major providers of input credit (such as fertilizer, improved seed,

herbicides, farm tools, etc). But AIDB/DBE sharply reduced its supply of fertilizer loans in

the early 1990s as its existence was threatened by massive default. Development Bank of

Ethiopia (DBE) stopped extending input credit since 1997. Currently the major source of

input credit is CBE with limited participation of the emerging rural micro finance institution

and the Amhara Credit and Savings Institution. During the military Government, the

14
Agricultural and Industrial Development Bank (AIDB), now renamed as Development Bank

of Ethiopia (DBE), was the main fertilizer supplier to farmers through credit.

In 1994, the Commercial Bank of Ethiopia (CBE) became involved in the extension of

fertilizer credit along with DBE. Beginning with the 1994 cropping reason, local NGOs

called Dedebit credit and savings institution in Tigray region, Amahara credit and savings

institution in Amhara region, Oromia credit and saving institution in Oromiya region were

involved in input credit extension activity. These institutions were not equipped, both

financially and technically, to fully handle the input credit requirement to their respective

regions from their own sources. In addition, strong cooperatives are extending input credit for

poor members of farmers from their own finance.

These financial institutions do not have contact with farmers on individual basis. But

the regional governments facilitate the loan provision along with sign agreement with banks

on amount, duration and security of the loan. The amounts of the loans are estimated by each

regional government, which are in fact estimated based on the information obtained from

zonal- and district-level demand for the previous years. These are short-term credits, which

should be paid back in a year time. The banks use the regional government's budget as

collateral.

There are 21 micro-financial institutions officially recognized by the National Bank of

Ethiopia (NBE, 2003). These institutions deal directly with individual farmers who fulfill the

loan provision criteria set by their management. Though figures on the amount of credit they

provide are not available, it is believed that these institutions play an important role in

narrowing the gap between the demand and supply of credit in rural areas. The advantage of

15
these financial institutions is that farmers can get loan in cash and use it to purchase the most

limiting production resources. In Dire Dawa, the study area, MFI has not yet well started its

operations. It is just started as the 22nd in the list of Ethiopian MFIs.

Due to large number of defaulters, banks were not interested in extending input credit

to farmers. The regions came into the picture of credit administration to fill the gap (Mulat,

1994). The majority of farmers in Ethiopia (over 80%) buy fertilizer on credit (Mulat, 1994).

Since farmers are forced to re-pay their fertilizer loans immediately after harvest when grain

prices drop to very low levels because of over supply, farmers became defaulters.

By the power vested in it, the NBE has licensed and has been regulating several

financial institutions since the introduction of market reform of 1994 (Proclamation No.

83/1994). There are 8 commercial banks, 9 Insurance companies, 21 micro-finance

institutions, and 1 development bank recognized by the National Bank by January 2003

(NBE, 2003). Both the number and branch offices of financial institutions have increased

after the liberalization. For instance, the number commercial banks increased from five to

eight between 1995 and 2003. Similarly, the number of branches offices of the commercial

banks increased from 202 to 330 between in the same years although most of the branch

offices are found in and around Addis Ababa.

The formal financial institutions currently found in Ethiopia can be categorized into

three based on ownership, viz., public banks and insurance company, private banks and

insurance companies, and micro-finance institutions.

16
 Public banks and Insurance Corporation: These are state-owned financial

Institutions which include 3 banks and 1 Insurance corporation namely: CBE, DBE,

Construction and Business Bank (CBB) and Ethiopian Insurance Corporation (EIC). One of

the peculiar characteristics of these Institutions is that all of them existed before the market

reform and, thus, have long years of service, large fixed as well as working capital and

widespread branch offices all over the country as compared to other financial institutions.

Private banks and Insurance Companies: These financial Institutions include those

established by the private sector after the market liberalization. Almost all of them are in

growing stages having limited number of branch offices. Currently, there are 6 private banks

and 8 private insurance companies in Ethiopia.

Micro finance Institutions (MFIs): These are credit and saving institutions

established in accordance with the Proclamation No. 40/1996. A total of 21 micro finance

institutions exist up at present. The central objective of these financial institutions is to

provide credit and saving services to the poor. That is, the loan policy by which these

institutions are governed enforces each financial institution to give preference to the

applications of rural and urban communities engaged in microeconomic activities whose cash

requirements are small. Therefore, the loan extended to any single borrower by a licensed

institution should not at any time exceed five thousand birr. The following table gives brief

information on the financial institutions in Ethiopia.

17
Table 1: Financial institutions in Ethiopia

Description Number Number owned Total number of

by the state branch offices
Commercial Banks 8 2 330
Development 1 1 32

Insurance Companies 9 1 79
Micro finance Institutions 21 - 106
Source: NBE, 2003, "Biritu: A Bilingual Bulletin," No 83 and NBE unpublished document.

2.2 Informal Financial Sector

The informal financial sector in Ethiopia comprises mainly Iqqubs (rotating savings

scheme), iddirs (traditional insurance schemes), arata-abedari (usurers), etc. This sector is

neither regulated nor counted for in the country's financial intermediation process. The sector,

however, provides by far the greatest financial services to the bulk of the population on

flexible terms.

Though, the informal financial sector is important to most informal sector operators

and the farming population, government support to the sector has been until recently very

little. Nowadays, micro enterprises and informal sector promotion are getting serious

consideration and support from policy makers as it is believed that this sector generates

sizeable self- employment and helps alleviate poverty. Solomon (1996) stated that the

informal financial institutions are by far the most important sources of loanable funds both for

the rural and urban population. Dejene (1993) empirically demonstrated how inaccessible the

formal credit is to the majority of the Ethiopian population. According to him, the bulk of the

Ethiopian population makes little or no use of the formal savings and lending institutions.

18
2.3 Micro financing in Ethiopia

The delivery of micro finance services to the rural poor in Ethiopia is one of the

effective instruments of promoting food production and food security. All MFIs have a shared

vision of poverty alleviation. According to Wolday (2003), Ethiopia has a favorable macro

policy environment and regulatory framework to promote sustainable micro finance activities.

Although the development of micro finance institutions started very recently, the industry

showed a remarkable growth of outreach, particularly in terms of active clients. Ethiopian

MFIs should focus on the responsiveness of their financial products to the needs of their

clients. They also learn from what their clients wanted and then produce products by

incorporating the information from market research or needs survey on one hand, and develop

built-in tools to measure the impact of the credit on the other. These types of assessment will

help MFIs to collect feedback, which makes them financially and operationally sustainable.

Realizing the need for micro finance services, the government of Ethiopia issued a

micro finance law in 1996. The main objective of the micro finance institutions is the

delivery of financial services (providing micro-loans, micro-savings, micro-insurance, money

transfer, etc) to a large number of productive but resource-poor people in rural and urban

areas, including micro and small entrepreneurs in a cost-effective and sustainable way. The

interventions of the micro finance institutions, at the end of the day, should make positive and

measurable impact on the lives of the poor.

Both formal and informal financing targeted at food security and poverty alleviation

has been pursued by local and international NGOs. Before the promulgation of proclamation

No. 40/1996 that currently serves as a basis for legal and regulatory framework for micro

19
financing, all micro financing operations by local and international NGOs including the

Market Town Development Program (MTDP) were run under the legal provision of

proclamation No. 138/78, which provides for the establishment of thrift and credit

cooperatives.

For the promotion of the informal sector, it was deemed necessary to streamline

financial, legal, and technical support to the sector. In response to the pressing financial,

infrastructural and legal demands of the micro and small enterprise sector, the Ministry of

Trade and Industry drafted a strategy paper and the Federal Government promulgated

proclamation No. 40/1996, which provides for licensing and supervision of the business of

Micro financing Institutions to enforce the micro financing proclamation.

The micro financing proclamation was issued in order to provide for legal regime of

micro financing institutions within Ethiopia's monetary and financial policies. Besides, it was

meant to fill the missing gap that the monetary and banking laws of the country did not

provide for micro financing institutions that cater to the credit requirements of peasant

farmers and micro-level business operators.

Nowadays, there are quite a number of micro financing institutions that operate both

in regions and the capital city providing loans and technical support to organized micro

enterprises and informal sector operators. Since the issuance of proclamation 40/1996 that

provides for the establishment of micro financing institutions, twenty-one micro finance

institutions have been legally registered and licensed until end of January 2003(NBE, 2003).

One of the objectives of the proclamation 147/1998(Cooperatives Societies Proclamation) is

20
to develop and promote saving credit services for members to participate actively in the free

market economic system.

2.4 Regulatory Framework and Governance of Micro finance Institution in Ethiopia

The delivery of efficient and effective micro finance services to the poor requires

conducive macroeconomic policies and the establishment and enforcement of legal and

regulatory framework in the country and good governance. The following section will review

the micro finance law and governance of MFIs in Ethiopia.

2.4.1 Regulatory Framework of Micro finance Institution in Ethiopia

An effective financial system provides the foundation for a successful poverty

alleviation program. Prudent financial regulation, according to Chaver and Gonzalez-Vega

(1994), refers to general principles or legal rules that aim to contribute to stable and efficient

performance of microfinance institutions and markets and ensure the safety and soundness of

the system. However, regulations in the micro finance industry do not only mean government

regulations; it also involves self-regulations and code of conduct introduced by networks or

associations.

Regulatory frameworks governing the micro finance industry should ensure that an

MFI has: a sound portfolio performance; low delinquency or default rate; high diversification

to reduce the risk of specializing in the delivery of one loan product; the ability to ensure the

safety of deposits through equity capital; the mechanism to ensure lower levels of liquidity

21
risk; and the power to provide regular and high quality financial information and reduce the

risk arising from dependence on subsidy and influence of donors.

There are numerous policies, laws and directives, which affect the development of

micro finance industry in Ethiopia. The Monetary and Banking Proclamation No. 83/1994

empowered the National Bank of Ethiopia (NBE) to license, supervise and regulate financial

institutions such as banks, insurance companies, micro finance institutions and savings and

credit cooperatives. The Licensing and Supervision of Banking Business Proclamation No.

84/1994 allowed for the first time the establishment of private financial institutions, thus

breaking state monopoly. To date, six private banks and eight private insurance companies

have been established.

Since NGOs, government departments, cooperatives and others performed micro-

credit delivery and savings mobilization in Ethiopia in a fragmented and inconsistent way, the

government took the initiative to establish the regulatory framework in order to facilitate

sound development of the micro finance industry. This led to introduction of proclamation

No. 40/1996, which aims to provide for the licensing and supervision of the business of micro

financing, clearly indicating the requirements for licensing micro finance institutions by

empowering the National Bank of Ethiopia to license and supervise them. According to the

Proclamation, any institution that needs to engage in micro finance activity should fulfill the

following:

i. obtain license from the National Bank of Ethiopia.

ii. formed as a company governed by the Commercial Code of 1960 (a share company

owned fully by Ethiopian nationals and having its head office in Ethiopia); and

22
 iii. deposit the minimum capital required, i.e., 200,000 Birr (24,000 USD) in a bank.

The National Bank of Ethiopia has issued 17 directives, which have been consistent

with Proclamation No. 40/1996. These include setting a loan ceiling of 5,000 Birr and loan

duration of one year. The interest rate ceiling has been waived and MFIs are now free to set

their own lending interest rates. The minimum interest rate that shall be paid per annum by

MFIs on savings and time deposits has been reduced to 3 percent (this is in line with interest

rate paid by the commercial banks). There is also a requirement for re-registration once an

MFI starts mobilizing its deposits greater than one million Birr.

The regulatory framework has affected the welfare-oriented NGOs in Ethiopia, which

focus on welfare programs by providing free or subsidized micro-credit services. They tend

to provide credit services at very low interest rate (below market interest rate) focusing on the

poorest of the poor (based on humanitarian reasons) rather than on sound credit management

principles. As a result, many of the NGOs the micro-credit service providers in Ethiopia are

in a transition from highly subsidized credit providers to organs that have become a finance-

based system.

Although the initial reactions of the NGOs in Ethiopia to the implementation of the

regulatory framework (Proclamation No. 40/96) were negative, they have now realized that

the framework has institutionalized and unified micro finance services in the country to work

toward sustainability.

The required minimum paid-up capital payment for an MFI in Ethiopia (about 25,000

US Dollars) is low and affordable. The recent full liberalization of lending interest rates is

23
also a positive development towards implementing an operationally sustainable strategy for

the MFIs. This assists to adequately price small-scale and risky loans and micro finance

operations.

The government has recognized the importance of micro-enterprise development for

the overall economic growth of the country and poverty alleviation. It has established the

Micro and Small Enterprise Development Agency to co-ordinate and support this sector.

According to Proclamation No. 33/1998, the Agency shall be involved in designing policies

and strategies for the development and expansion of the micro and small enterprises; studying

the demand for training and conducting training; establishing skill up-grading, technical and

demonstration centers in different regions of the country; and disseminating information to

the entrepreneurs. However, these enterprises require adequate flow of institutional credit to

finance both short-term operating expenses and long-term investment needs.

The Federal Government of Ethiopia has produced the Micro and Small Enterprises

Development Strategy to address the above problems and create an enabling environment for

the growth of these enterprises. It has identified criteria and prioritized the target

beneficiaries of the support program. The support program will consider those micro and

small enterprises that are using local raw materials and/or labor intensive technologies, having

greater inter-sectoral and intra-sectoral linkages; potentially competitive and having the

objective of exporting their products, and those engaged in facilitating and promoting tourism.

The support program focuses on creating an enabling legal framework; streamlining existing

regulatory conditions; facilitating access to finance; training in entrepreneurship, technical

and management skills; facilitating access to market, raw materials and fostering partnership;

and facilitating the availability and access to adequate infrastructure.

24
2.4.2 Governance of Micro finance in Ethiopia

Governance of MFI is a system that links the shareholders to the board, the

management, and the staff, clients, and the community at large (CGAP, 1997). Sound

governance is fundamental in creating efficient and sustainable micro finance institutions in

Ethiopia. The high risk of agricultural loans in the industry and the limited experience of

MFIs (most of them in transition from NGO initiated micro-credit activities to the provision

of commercial financial services) will make the task of the boards of the MFIs, who manage

the managers, very difficult and demanding. The major elements of sound governance are

transparency, accountability, board members’ dedication and commitment of members to the

mission and activities of the institution, policies and procedures that the boards follow and

skills of chairpersons (skills in leadership, vision in thinking and management). Moreover,

members of the board should have a clear understanding of the institutions' client base. The

objective here is to ascertain whether the governance of MFIs in Ethiopia is effective in

achieving their mission.

The ownership structure of MFIs includes regional government, local NGOs, and

individuals. Although many of the MFIs in Ethiopia are established as private share

companies, dividends are not distributed to shareholders. The entire resources (dividends) are

to be utilized for the benefit of the target group, the poor.

Shareholders of Ethiopian MFIs are not real investors in the sense of sharing

dividends. That is, there hardly exist private capital investments in the micro finance industry.

This implies that, the micro finance industry is currently not an attractive investment

25
opportunity for private investors. Getahun (1999) indicated that the nominal shareholders

might not have sufficient interest to control and guide the management of MFIs. They may

not be willing to provide capital quickly whenever the MFIs are in crisis. This is the real

challenge of MFIs in Ethiopia. In some of the NGO- initiated MFIs, the mother-NGOs

influence the decisions of the NGOs, a solution that makes the relationship between the two

undefined.

In assessment, all MFIs in Ethiopia do have government support in one way or the

other. All MFIs depend on donor finance mainly for their seed loan capital. There is no basic

difference between the specific region supported MFIs (six in numbers) and NGO supported

MFIs (fifteen in number) in terms of structure, process of control, and the content of

governance. The six region-based and government supported MFIs strictly coordinate their

day-to-day activities with the grass roots level government administrations while others are

not. One hardly observes any conflict of interest and the region-based MFIs obtain from the

regional governments has assisted them to reduce their transaction costs and improve

repayment rate.

In some of the MFIs, there are no regular meetings. The competence of some board

members in terms of diversified skills and effectiveness in guiding the managers of MFIs is

questionable. Some board members are too busy to spare time for the development of the

MFIs. These MFIs require restructuring and training of their board members. Regular

assessment and evaluation of the board and annual external auditing by the independent

auditors are also important for effective governance

26
 Although there hardly exists an accepted formula on the mix of board members,

selection criteria, etc., the MFIs in Ethiopia need to adjust their own criteria, rules and

procedures in order to fit to the dynamic growth of the micro finance industry. Since board

members are not the owners of the invested capital, positive incentives for them should be

designed. Detailed study of the governance and ownership of the micro finance industry in

Ethiopia be urgently conducted.

2.5 Performance of Micro finance Activities

Measuring the impact of micro finance services on the urban and rural poor is fraught

with many methodological problems relating to the fungibility of money and separating the

impact of micro finance intervention from other interventions. Rigorous econometric studies

are costly and often highly specific, unfriendly to practitioners, making generic application of

their findings impossible. The framework used in this study to assess the impact of micro

finance industry as a whole is using the outreach, sustainability and impact criteria.

Outreach is a hybrid measure that assesses the extent to which an MFI has succeeded

in reaching its target clientele and the degree to which the MFI has met the clientele's demand

for financial services (Yaron, 1994). Alternatively, outreach is the provision of a wide array of

quality financial services to a large number of poor people (Lariviere and Martin, 1999). It is

measured in terms of the number of clients, loan size, percentage loans to clientele below the

poverty line, percentage of female clients, range of financial and non-financial services

offered to the poor, the level of transaction costs levied on the poor and the extent of client

satisfaction with respect to financial services. However, on top of the criteria of sustainability

27
and outreach, one has to include developmental effects (income and empowerment) on the

target group as core performance criteria.

The sustainability of an MFI is measured in terms of generating enough revenues

(excluding subsidies) to cover the cost of all factors of production and loanable funds. If an

MFI is to maintain its capital holding, it must generate sufficient resources to meet its

operating costs, including the costs of administering loans, mobilizing and training groups,

mobilizing funds for on-lending, and covering the bad debts. A basic condition for financial

sustainability of an MFI depends on its ability to break even, given the cost of lending. A

sustainable MFI operates in such a way that the cost of making loan (the cost of funds plus

administrative and default costs) is equal to or less than the price (that is, the interest rate) it

charges borrowers. Establishing a sustainable MFI and reducing poverty are not conflicting

objectives. Actually building sustainable micro finance institutions in Ethiopia will be

preconditions to deliver financial services to the poor in a sustainable manner that permits

donors to withdraw after making relatively modest interventions.

28
 CHAPTER III

REVIEW OF LITERATURE

This chapter attempts to review the available literature on the topic including

definitions of concepts. The purpose of this review is to throw light on the research gaps, if

any, on the topic so that the present study can attempt to plug the same.

3.1 Small Farms/Farmers

No satisfactory simple definition is available to distinguish small farmers from

medium and large farmers in all parts of the world (AIDB, 1973). A small farmer household

is generally recognized as a family owning or leasing small, often disjointed plots and trading

in a local village market without access to input supplies and services essential to modern

technologies and as a family primarily producing for subsistence.

Gangwar and Ghakhar (1975) stated that no single criterion was found adequately

suitable for identifying the small farms. In the workshop on the marketing problems of small

farmers held at the Michigan State University the following definition for the farms was

suggested: " small farm agriculture comprises those farms where (i) the bulk of the labour

force, management and capital comes from the same household; (ii) production is either

consumed on the farm and/or traded in local markets; (iii) the decision making process is

hampered by limited access to marketing and political institutions; and (iv) the farmers do not

live much above culturally determined subsistence levels." Suryanarayana and Parthasarathy

(1975) have established certain criteria for identifying small farms by means of an empirical

study in India. According to these scientists, the gross value of output worth birr 1824 per

annum and the limits of small farm ranging from 2 to 3.64 hectares under traditional farming

29
conditions were considered as a measure for locating the small farm.

Gote (1979) described the characteristics of peasants (small farmers) as follows: a)

they are based on traditional techniques of production due to lack of modern know-how, b)

they use crude implements, c) they cultivate fragmented and dispersed holdings, d) they have

low yield and e) they depend on individual or family labor.

In the study area, the land size ranges from 0.25 to 3.00 hectares. Farmers own two

oxen or less and largely depending on family labor. Moreover, farmers have fragmented

farming plots, produce either consumed and/or sold at local market, low production, and lack

capital. The above definitions of small farms in accordance with Ethiopia's specific conditions

are taken into account in this study.

3.2 Definitions and Importance of Credit

Credit is defined as the power or ability to obtain goods and services in exchange for a

promise to pay for them later (Beckman and Foster, 1969). In similar manner credit is the

power or ability to obtain money by the borrowing process, in return for a promise to repay

the obligation in the future. When emphasis is placed on the high probability of repayment in

the future, credit is sometimes defined as "man’s confidence in man"(Miller 1977; Beckman

and Foster, 1969).

Credit is an exchange of goods or services for a promise of future payment. Credit is

necessary in a dynamic economy because of the time that elapses between the production of a

good and its sale. About 90% of the sales made by manufacturers and wholesalers and 30% of

30
the retail sales involve the use of credit. Credit in manufacturing industries is called business

credit, and credit extended by retail stores is called consumer credit. A common form of credit

used in business is the open, or book account, in which the seller keeps a record of the credit,

extended to the buyer and bills the buyer when payment is due. Written business credit

instruments include a promissory note, which facilitates the immediate purchase of goods and

services, and usually takes the form of charge accounts, installment accounts, and personal

loans. The risk in extending credit is the possibility that future payment by the buyer will not

be made (Greenwald and Associates, 1983).

As to the definition of financial institutions, formal financial institutions can be

defined as institutions that are regulated by central bank supervisory authorities for licensing

and credit policy implications. They usually use legal documentation collateral or the legal

system to enforce contracts. On the contrary, informal financial intermediaries are those that

are not licensed and regulated by the central banking system and they rarely use legal

documentation or the legal system to enforce contracts. In addition to this, the basis for

financial transactions, credit delivery and saving mechanism are personal or business

relationships. There are also the third category organizations that are registered under non-

governmental organizations (NGOs) and are sometimes referred to as semi-formal (World

Bank, 1997). However, Rural Financial Institutions (RFIs) should promote both credit and

deposit services. Credit enables farmers to tide over the deficit period and to take advantage

of the new technological opportunities, and deposit services for saving during periods of

surplus production (Zeller and Sharma, 1996).

Access to credit has been one of the factors that helped farm households to adopt

chemical fertilizers in Lume District (Teressa, 1997) and in Bako area (Negassa et al, 1997).

31
Access to credit has a significant positive effect on farm households' teff production, land

productivity and farm employment in Lume District, Central Ethiopia (Teressa, 1997). This

suggests that lack of credit may deny farm households the means to expand production

beyond their present potential (Abbott, 1976). Credit could significantly influence farm

households' income (Binswanger and Khandker, 1995) by empowering farm households to

tap economic opportunities (Ethiopian Herald, 1997) and thereby help them to get out of

poverty.

Besides encouraging farm investment, credit helps small farmers to smooth out

consumption patterns during the lean period of a year ( Binswanger and Khandker, 1995;

Heidhwes, 1995). By doing so, it maintains the productive capacity of poor rural households

(Heidhwes, 1995). As the Word Bank (1989) observes: "Improved consumption is also an

investment in the productivity of the farm household.”

Farm households' access to formal credit has been difficult due to high transaction

costs, risks of small-scale lending and lack of collateral (World Bank, 1989). The situation has

not been different in Ethiopia. Formal financial institutions have not developed to

expectations and/or have hardly reached the rural populations (Teressa, 1997). Consequently,

farm households had been relying almost exclusively on informal credit generated from

within the rural areas (Holmberg, 1973; Lele, 1975). This situation has not changed much

over the last two-and-half decades. In a survey conducted in three administrative regions of

southern Shoa between 1990/1991 by Amde et al (1994) found that less than 84% of the total

loan disbursed came from informal sources, mainly relatives and neighbors. Thus, the

informal financial sector has still been providing a worthy service to the most needy farm

households (Teressa, 1997).

32
3.3 Economic Rationale of Credit Use

As agriculture is the major sector of the economy and the peasant sector is dominant

within agriculture, strengthening and developing the peasant sector is bound to stimulate the

agricultural sector which in turn will trigger the rest of the economic sectors the cumulative

effect of which will be net increase in the GDP (AIDB, 1993). Most of the time, especially

during the take-off stage, agricultural development cannot be made by farmers out of their

own funds because of their low level of income. This widening the gap between the owned

and the required capital calls for outside funds (Singh et al, 1985)

Some researchers (Gonzalez-Vega, 1977; Pischke, 1980; Adams and Graham, 1981;

and FAO, 1996; underlined the importance of credit facilities to small holders of less

developed countries (LDCs). Governments of LDCs and aid agencies have spent large

amounts of money on agricultural credit schemes. Loans are an essential part of various input

packages that were prescribed as part of agricultural investment projects designed to introduce

modern technologies and thus stimulate change and growth in agricultural studies undertaken

in Ethiopia. In support the above explanations, credit expansion to small farmers increases

their productivity and improves their standard of living. For instance, Assefa (1987) reported

the need for the expansion of agricultural credit to all areas of the country. Likewise, Birhanu

(1993) and Getachew (1993) pointed out the need for agricultural credit to increase

productivity and accelerate adopting rate of agricultural technology package. Tsehay and

Mengistu (2002) also reported that credit expansion improves the standard of living, and bring

about economic and social empowerment of women. Similarly, Belay and Belay (1998),

emphasizes that credit is essential for agricultural development. Negussie (1993) listed out

several ways in that credit can contribute to the improvement of the economy.

33
 Meehan (2001) concluded that the provision of financial services to the poor has a

crucial role to play in providing household food security and alleviating poverty. If the credit

is found to be adequate and productive, it will positively influence the optimum use of

resources and enables the full application of technology (Vastoff, 1968). Traditional peasants

have low level of production unless they are provided with reasonable amount of agricultural

credit (Dhawan and Kahlon, 1977).

Wolday (2002) pointed out that poverty in Ethiopia is a multidimensional and so its

solution. The delivery of financial services has been viewed as one of the anti-poverty tools of

the development programs in Ethiopia. To ascertain whether the formal credit intervention has

brought about positive welfare shocks to its clients, a descriptive analysis was made use of by

taking credit users and non-users respondents. The inter-temporal comparison of welfare

status of the farmers captures variables like gross farm income, off-farm income,

consumption, assets, nutrition, health, education, etc.

In Ethiopia, the importance of agricultural credit in the development of the sector has

been underlined strongly by various researchers (Kebede, 1982; Itana, 1985; Berhanu, 1993;

Negussie, 1993 Bekele, 1995; Freeman et al 1996; Belay and Belay, 1998; Fantahun, 2000;

Meehan, 2001; Wolday, 2002; and Tsehay and Mengistu, 2002). All these researchers have

concluded that credit helps to raise productivity, improve standard of living and attain food

self-sufficiency through the adoption of new and improved technologies.

34
3.4 Factors Influencing Credit Use

Farm development involves adoption of improved and efficient technology, which

demands credit facility to purchase the required packages of inputs. Miller (1977) noted that

the shortage of finance in combination with very low level of saving due to little or no

marketable surplus of agricultural production is considered to be one of the major constraints

impeding farm development in most of the developing countries.

Singh and Ramanna (1981) reported that the distribution and consumption of

fertilizers is closely associated with the use of credit. If there is a need for increasing fertilizer

use, the provision of efficient credit service for the purchase of the same is considered very

essential. The close relationship between fertilizer consumption and credit use calls for the

mobilization of considerable financial resources. Dhillon and Sankhayan (1978) pointed out

that the availability of working capital was a significant factor influencing the access to and

use of fertilizers on favorable terms and at the right time.

Credit studies conducted in India (NCAER, 1974; Sarap, 1987) and in Nigeria

(Oludimu, 1983) used regression analysis to assess the factors that influence the need for

institutional credits by small farmers based on cross-section data obtained from field surveys.

The studies revealed that farmers adopting improved farming practices and farmers with

relatively high farm incomes have substantially higher credit needs compared with farmers

using traditional practices and having lower farm incomes. Farm size and literacy were

positive and significant factors associated with the level of credit needs of small farmers.

35
 In another study based on the data obtained from a sample survey of 699 randomly

selected peasant farmers in Bolivia, Miller and Ladman (1983) applied discriminant analysis

to identity a set of socio-economic, physical and psychological factors that influence credit

use among small farmers with a view to differentiate between borrowers, potential borrowers,

and non-borrowers. The results of the study indicated that borrowers were characterized by

higher resource base, farm size, higher level of education, large number of cattle, higher

household incomes, higher level of market integration, greater use of improved technology,

larger operating costs and investments, higher risk ability, etc. Potential borrowers were

characterized by farther distance from markets, low level of market integration, higher

transaction costs, less number of cattle, etc. Further more, non-potential borrowers were

characterized by older age, lack of interest to expand production, lower level of education,

limited use of improved technology, shortage of labour and proximity to market.

Assefa (1989) empirically tested a set of socio-economic and other important factors

influencing agricultural credit use among small farmers aimed at differentiating borrowers

from non-borrowers. Using discrimnant analysis, Assefa found that large farm size, high

investment, adoption of improved technology were significant variables in distinguishing

borrowers from non-borrowers. He noted that policy implications regarding combined

services of input supply, credit, marketing, training extension, etc. should be adopted to

increase agricultural productivity.

Wolday (1989) followed log-linear farm income function and probit models to

identify the factors, which inhibit the income of small farmers, and to access the major factors

that limit the consumption of fertilizer and improved seed in peasant farming. His study was

based on the sample survey conducted during 1987/88-crop year in Shebedino woreda,

36
Ethiopia. His empirical test confirmed that the size of land holding, amount of fertilizer used,

number of cattle, and value of farm tools in the farm income function and farm labour, farm

income, ownership of radio, and extension contact in the probit model were significant and

satisfactory variables to explain the variations in farm income and the adoption of fertilizer

use by small farmers.

3.5 Empirical Studies on Impact of Credit

In spite of methodological difficulties involved in measuring the impact of credit,

studies have demonstrated that the availability of credit for micro-enterprises can have

positive effects on income. A study by the government, NGOs, and banks involved in

providing financial services for poor household that had received credit were compared with

households, which had not. The results demonstrated that credit provision could enable

household incomes to rise (Susan and Rogaly, 1997). If credit were found to be adequate and

productive, it would enable optimum use of resources and fuller application of improved

technology (Vasthoff, 1968). Traditional agriculture suffers from low level of production

unless supported by a reasonable amount of agricultural credit required to purchase different

inputs like improved seeds, fertilizers, oxen, pesticides, herbicides, etc.

Farmers must spend additional sums of money on improved seeds, fertilizers, and

farm implements to increase their agricultural productivity. However, as Jones (1971),

Gorcon and Donald (1976) Mosher, (1966) and Heidhwes (1995) have observed, because of

low level of real income small farmers in particular cannot undertake such investments

without external credit support. Their studies have asserted that such farmers do not have

37
sufficient capital to invest. A study by Wills (1972) in India concludes that the majority of

small farmers reported shortage of funds as a major constraint.

In another study, Rao (1970) analyzed the economics of credit in Brazil and observed

under-utilization of capital on small farms. The study concluded that credit would relieve

capital shortage and improve output. Thus credit is one of the essential factors to accelerate

the rate of adoption of modern technology and it is a mighty weapon for increasing

productivity and improving the living conditions of the small farmers (Lipton, 1976;

Negussie, 1993). Several other empirical studies on the role of credit also confirm that it is the

engine of development.

Although a detail or comprehensive study research has yet to establish whether the

delivery of financial services to the poor through the MFIs actually eliminated or reduced

poverty, the results of the few case studies have clearly indicated that access to finance did

indeed reduce poverty. Meehan (2001), in her case study of DECSI, reveals that overall credit

provision had a significant impact on increasing agricultural production through build-up of

production assets, particularly draught oxen, and increasing the amount of land formed by

clients who were able to retrieve land previously rented out and farm it themselves, and

clients who were able to get more land through rent. Trading activities engaged in by clients

also increased in scale. Female clients were particularly able to take on trading activities,

which had previously been inaccessible, to them due to lack of capital. The increased income

generated by the credit input had a possible impact primarily on household food supply, and

on educational provision for children as well as clothing and other basic necessities.

38
 The study of Meehan (2001) also indicated that there were clear differentials in impact

related both to gender and whether clients were urban or rural based. Women took

consistently lower loans than men, and were less likely to report themselves as considerably

better off as a result of taking credit, initial resource differentials, such as lack of land, labor

and other inputs, certainly play a part in this, with women headed households particularly

those who were less likely to own oxen and to farm their own land. These are two key

indicators of productive capacity and wealth in a subsistence agricultural economy. The study

of Meehan (2001) concluded that the provision of financial services to the poor has a crucial

role to pay in providing household food security and alleviate poverty. But this role must be

seen in the context of development and priorities, infrastructural development, government

and private sectors investment, all play their part.

Another study by Getaneh (2001) reveals that the financial services of ACSI has

increased income and improved food security of clients. Access to finance in the rural area

has improved access to education and health services. The clients reported that they were that

they were better off after obtaining the financial services ACSI provided.

ITAB's study (2000) on the impact of Gasha Micro finance Institution reveals that

only those clients who had used the loan on productive activities have increased their income

to some extent. Dercon (2000) further reveals that there were signs of consumption, poverty

reduction and rapid improvement in primary enrolment rates in rural Ethiopia. The results

also suggest improvement in primary health care delivery.

Studies in Latin America reported cases where the access to credit clearly does affect

agricultural practices. Rask's study (1971) in southern Brazil, for example, shows that the

39
large farms used significantly more credit and more modern inputs per hectare. He concluded

that the relevant credit scheme did increase output. Colyer and Guillermo (1971) examined

the use of supervised credit by farmers in Colombia. They attempted to match a sample of

farmers in and outside international credit program. Those involved in the program used

more fertilizer, pesticides, etc. than those who were not. It is concluded that if small farmers

have access to international credit it is almost certainly speed their acceptance of new, more

capital-intensive production techniques. As Taylor and others (1986) describe in their book

"Agricultural credit programs and production efficiency …" one of the primary policy actions

directed towards improving the productivity and income of traditional farmers in developing

countries has been the provision of agricultural credit at subsidized rates of interest. The

rationale behind such programs focuses on the belief that the main barrier preventing the

transformation of traditional agricultural production technologies to more modern and

productive technologies is the inability of farmers to purchase the necessary technology. In

principle, if funds are made available to facilitate the purchase of such modernized production

inputs, the productivity and hence incomes of traditional farmer will be improved.

However, as Nelson (1971) indicated, it should be noted that there might be

technological barriers, which would prevent credit programs from having significant impact

on capital formation and incomes. Hence, credit institutions should exploit means and ways

so that these barriers are overcome.

Some researchers (Pischke, 1980; Adams and Graham, 1981; Gonzalez-Vega, 1977;

FAO, 1996) reported the requirement of credit facilities to smallholders of less developed

countries. Governments of less developed countries and aid agencies have spent large

amounts of money on this sector. The motivation has been the belief that loans are an

40
essential part of various input packages that were prescribed as part of agricultural investment

projects designed to introduce modern technologies and thus stimulate change and growth in

agriculture.

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 on inputs have to be incurred much

in advance of the income from resulting outputs. Producers meet these expenditures out of

their past savings; and when these savings fall short of the requirement, they borrow.

Studies undertaken in Ethiopia show that credit to small farmers increases their

productivity and improves their standard of living. For instance, Assefa (1987) reported the

need for expansion of rural credit to all areas of the country. Likewise, Berhanu (1993) and

Getachew (1993) pointed out the need of agricultural credit to increase productivity and

accelerate technology adoption rate.

Generally, credit removes the financial constraint to production and helps to accelerate

the adoption of new technologies, increase productivity, and improve national and personal

incomes. In addition, it constitutes an integral part of the process of commercialization of the

rural economy and a convenient means of addressing rural poverty (MoA, 1995).

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

41
to capital in the form of either accumulated saving or a capital market is necessary in

financing the adoption of many new agricultural technologies (Feder et al, 1985).

3.6 Conceptual Framework for Assessing Impact

The purpose of an impact assessment is to answer the question of whether an

intervention leads to a change different from what would have happened without the

intervention. The framework for the study of impact has three elements (Hulme, 2000). The

first is a model of the impact chain that the study is to examine; the second is the specification

of unit(s) or levels, at which impacts are assessed; and the third is the specification of the

types of impact that are to be assessed.

3.6.1 Models of Impact Chains

All programs have a theory of action that links implementation with outcomes. This

theory of action depicts in concrete terms how inputs and activities are related to outcomes by

specifying how each activity leads to the desired outcomes. In the case of micro-finance

impact assessment, one needs to conceptualize how micro-finance leads to changes and what

changes are reasonable to expect given the service provided and loan conditions (Hulme,

2000).

The assumption is that interventions will change human behaviors and practices in

ways that lead to the achievement (or raise the probability of achievement) of desired

outcome (Ibid). In a conventional micro finance it is assumed that services (e.g., loan,

savings) lead to increase or decrease in income. The change in income in turn leads to greater

42
or lesser household economic security. The modified level of household economic security

leads to changes in the morbidity and mortality of household members, in education and skills

levels and in future economic and social opportunities.

A simplified representation of the impact path is:

Causal Path

Interventions Mediating Processes Impacts

Source: Sebstad et al, 1995

The analytical framework developed by Sebstad et al (1995) to explore how micro-

enterprise interventions contribute to change identifies impact paths towards the boarder goals

of poverty alleviation and economic growth; for the households advancement in terms of

improved economic security; for enterprise development in terms of viability, stability, and

growth; for individuals, improved well being; and for communities, increase economic

development and civic participation.

3.6.2 Units of Assessment

Impacts can be assessed at different levels. Common units of impact assessment are

the household, the enterprise or the institutional environment within which agents operate

(Hulme, 2000). Sebstad et al (1995) have developed a preliminarily framework for assessing

43
impact at household, individual, enterprise, and community levels. The choice of levels

depends on the objective of the assessment and nature of the programme.

3.6.3 Impact Indicators

Income, expenditure, consumption and assets can be used as indicators of impact. The

framework by Sebstad et al (1995) defines "domains" of impact and "markers of change" to

measure impact at household, enterprise and community levels. At the household level, three

domains of household security are: income, expenditure on household consumptions

including debt; and assets. At the enterprise level, five domains of development are: the

resource base; production possesses; management; markets; and financial performance. At the

individual level, three domains of well being include: independent control of resources;

leverage in household decision-making; and community participation. At the community

level, four domains of development are: net change in employment and income; forward and

backward linkages; social networks; and civic participation.

3.7 Models used in Studies on Impact of Credit

Regression analysis is one of the most commonly used tools in econometric studies.

Regression analysis is concerned with describing and evaluating the relationship between a

dependent variable and one or more independent variables. It can be used to analyze the

effects of policies that involve changing the individual independent variables, forecast the

value of dependent variable for a given set of independent variable, and examine whether any

of the independent variables have a significant effect on the dependant variable (Maddala,

1989).

44
 Fantahun (2000) used descriptive analysis by taking an after-and-before analysis on

borrowers' economic and social conditions to assess impact. Similarly, Tsehay and Mengistu

(2002) used the qualitative and quantitative tools to assess the impact of credit by taking new

borrowers vis-à-vis frequent borrowers of both urban and rural areas.

Heady and Dillon (1972) described Cobb-Douglas function (C-D function for short) as

a production function, which can be easily converted to linear regression equation by using

ordinary least square (OLS) method to estimate coefficients. It has been widely used because

of its convenience while interpreting elasticities of production. The estimated coefficients

indicate the partial elasticity of output with respect to the corresponding factors of production.

Each coefficient measures the relative percentage in output for one percentage change in the

corresponding input, ceteris paribus. In Cobb- Douglas production function, the sum of

coefficients gives us information about returns to scale which means the response of output to

a proportional change in inputs. It probably has the greatest use in diagnostic analyses

reflecting marginal resource productivity at mean levels of inputs.

Robertson (1971) also appreciates the function, because it gives a relatively good fit to

much agricultural input-output data and it can be used to study the response to inputs.

Coefficients in this function directly reveal the elasticities of production of the inputs. The

production elasticites concept in Cobb-Douglas function is of importance in studying input-

output relationships. The sum total of all the coefficients or elasticities shows the nature of

returns to scale. In view of these advantages of Cobb-Douglas production function, a number

of researchers have used it for analyzing the productivity efficiency or impact of inputs.

45
 Herath (1983) used Cobb-Douglas production function in his study "Production

Efficiency, Returns to Scale and Farm size in Rice production," in Sri Lanka. In this study, the

dependent variable was gross farm income and the independent variables were farm size,

human labor, bullock power, machinery used and operating cost.

Salami (1988) analyzed the impact of formal agricultural credit on small farm

development in the Ashanti Region of Ghana by means of C-D function. Here, rental value of

land (x1), man-days value (x2), value of inputs (x3) [fertilizer, insecticides and seeds], value of

farm tools (x4), and quantity of loan for the year (x5) were taken as independent variables and

gross farm income (Y) was considered as the dependent variable. Cobb-Douglas production

function has been fitted by Singh (1975) to work out the elasticities of production of inputs.

46
 CHAPTER IV

DESCRIPTION OF THE STUDY AREA

This chapter deals with description of the study area with detailed location, physical

situation, land use patterns, population and agriculture.

4.1 Location and physical situation

The Dire Dawa Administrative Council (DDAC) is located in the eastern part of the

country specifically lying between 900 27' and 900 49'N latitudes and between 4100 38' and

4200 19'E longitudes and the city is 520 km to the East of Addis Ababa. In the West, North

and East it is bounded by the Somali National Regional States and in the South by the Oromia

National Regional State. DDAC characterized by only two broad Agro-Ecological Zones

(AEZs) mainly based on altitude, moisture and physiography. The DDAC comprises of

diversified topographic features. Its altitude ranging from 960 m.a.s.l in the northeast to 2450

m.a.s.l in the southwest. Due to narrow altitudinal ranges, using the 1500m contour as a line

of separation, the Kolla AEZ (below 1500m) and Woina Dega (above 1500m) has been

recognized.

Dire Dawa Administrative Council is located at center of Ethio-Djibouti railway. This

gives Dire Dawa city the advantage of being a commercial town. Dire Dawa Administrative

Council has no administrative zones and it is divided into 25 urban kebeles and 29 peasant

associations.

47
1. Dire Dawa
2. Gende Tesfa
3. Melka Jebdu
4. Hassen Liso
5. Adi Gafelema
6. Hulul Dire Gara
7. Lege Oda Gudufata
8. Korieso
9. Hulul Mojo
10. Wahil
11. Dujuma
12. Halo Busa
13. Lege Oda Mirga
14. Gelo Belina
15. Ijei Anene
16. Lege Dol
17. Lege Hare
18. Harla
19. Adada
20. Lege Bira
21. Bekehalo
22. Bishan Behe
23. Biyo Aawale
24. Kalicha
25. Awale
26. Kurtu
27. Belewa
28. Geldesa
29. Gerba Anenno

Figure 1: Map of Dire Dawa Council Showing the Study PAs

Source: DDAC

48
 Dire Dawa Administration council enjoys a bi-modal type of rainfall with April as a

peak for the small rains and July for the big rains. The rainfall pattern is characterized by

small rains in spring, big rains in summer merging together. With June as a dry month, the

rainy season is from February to May and from July to September and the dry season is from

October to January. It should be kept in mind that from the seven rainy months only in the

months of July and August the rainfall exceeds half the potential evapotranspiration. This

means that moisture is so meager that rainfall alone is not enough to grow a variety of crops.

That is why sorghum (a drought resistant crop) is the only crop, which grows under rain-fed

conditions in the Administrative Council. The mean annual rainfall in the study area varies

from 550mm in the lowland northern part to above 850mm in the southern mountain ranges.

The temperature, which is the other most important climatic parameter for the growth

of any plant species, is generally very high. The monthly mean maximum temperature ranges

from 28.10c, which is recorded in the months of December and January, to 34.60c recorded in

the month of June. Likewise, the monthly mean minimum temperature varies from 14.50c in

December to 21.60c in June.

Generally, the physiography of the DDAC can be classified into the following: (a)

mountain ranges mainly found located in the southern part with slopes above 45%, shallow

soil depth and mostly covered with scattered woods and shrubs; (b) hills found scattered

allover the Administrative Council, with slopes ranging between 16 and 30%, very shallow

soils composed mainly of stones and rock out-crops most of which are devoid of vegetation

cover ;(c) valley bottoms and river terraces mainly situated mainly at the foot slopes of

mountain ranges and rivers banks with moderately fertile and deep soil and with slopes

ranging from 0 to 3% and (d) flat plains mostly concentrated in the north eastern and north

49
western part , with slopes ranging between 0 and 3% , deep and fertile soils with slight

vegetation cover (mostly shrubs) mainly used as grazing and browsing by pastoral livestock.

The major soil types exhibit a general relationship with altitude and slopes, shallow

and infertile soils being characteristics of the mountains and hills, on the other hand, deep and

fertile are major properties of the valley bottoms, river terraces and flat plains. In general, in

the DDAC and in particular in the lowland flat plains, valley bottoms and river terraces, the

soil types comprise mainly of Fluvisols (medium textured) and some Vertisols (black heavy

clay soils). Texturally, these two types of soil are sandy loam and sandy clay loam. Shallow

Leptosols are the dominant type of soils found in the mountain and hills of the study area.

4.2 Land use patterns

The land use/cover types of the DDAC comprise of grassland, shrub lands, cultivated

lands, bare lands and urban areas. The extent and the percent coverage from the total study

area of each of the units are shown in Table 2.

As seen in Table 2, the largest proportion of the study area comprise of bare lands

(32.19%) in which case stones, rock out-crops and bare earth are the main components,

followed by open shrub lands (25.42%), open grassland (22.15%), cultivated lands (17.43%)

urban areas (2.22%), homesteads (0.41%) and dense shrub lands (0.18%).

50
Table 2: Land use pattern of the DDAC

Description Area (ha) Percentage coverage

Open grassland 28529.6 22.15

Open shrub land 32741.5 25.42

Dense shrub land 23108 0.18

Intensively cultivated land 244.7 0.19

Moderately cultivated land 22205.5 17.24

Homesteads 528.1 0.41

Bare lands 41461.4 32.19

Urban area 2859.4 2.22

Total 128802.0 100.00

Source: DDAC Agricultural Development Office (1998)

4.3 Population Situation

According to the 1994 population and housing census of Ethiopia, the total population

of the Dire Dawa Administrative Council was estimated to be 251,864, out of which the urban

population was 173,188 and that of the rural population, 78,676. The overall population

density of the Administrative Council was 196 persons /km2. In the DDAC, the average

family size varied. In the urban it was 4.4 persons per household, whereas in the rural part it

was 5.6 persons/household. This variation was possibly due to the polygamy practiced in the

rural area.

51
 The overwhelming ethnic group in the DDAC is the Oromo comprising of 81.48% of

the total rural population. The second largest ethnic group is the Somaile (16.33%), the third

is the Amhara (1.24%) and others (0.15%). Two religious groups, Islam and Christianity,

dominate the study area. The majority of the population (98%), being to the Muslim faith.

Christians account for the remaining (2%).

4.4 Agriculture

4.4.1 Crop Production

Mixed farming is the major economic activity in the rural area of the Council.

Although a variety of crops do grow, in the DDAC, sorghum is the only crop, which grows

under rain-fed conditions. The low and variable rainfall and drought resistant property of the

crop are the main reasons for this. In the mountain foot slopes, valley bottoms and river

terraces a variety of crops, both annuals and perennials do grow under both rain-fed and

irrigated conditions. The cereal crops grown in the DDAC are sorghum and maize only.

Besides the cereal crops, a variety of vegetables such as onion, tomato, pepper and cabbages

cash crops such as chat and coffee and fruit crops like papaya, banana and guava are also

grown.

According to land use study made by Agricultural Development Office (1998), the

total area, which is under crop, was estimated to be 17.43% of the total area. In the DDAC,

with the exception of sorghum, all of the crops are grown using traditional irrigation system.

The average cropland holding per household is about 0.75 hectare. Land preparation for

sorghum and maize crops is carried out using oxen plough (maresha plough), whilst for

vegetables and perennials and garden crops (homesteads) digging or hoeing tools are used.

52
Sorghum is cultivated in the main field and it is the major cereal crop grown in the area,

whereas maize is grown in the homestead. If at all fertilizer is used, it is used for sorghum

only. Similarly, the use of pesticides, insecticides, and improved seed varieties is very low.

4.4.2 Livestock production

The total livestock in DDAC, the total livestock population is 183,440 or 49,113 TLU.

The survey results of the population and Housing Census (1994) of the study area, showed

that goats comprise the heights proportion, 51% of the total livestock, followed by cattle 22%,

sheep 21%, donkey 4%, and camel 2%.

Overall livestock density in DDAC is about 1.42 heads per hectare. More livestock is

found in the lowlands of the DDAC that in the high lands. Among the ruminants and the

equines, goats, camels, and donkeys predominate lower altitudes, with sheep and cattle at

higher altitudes. In all the study area, some poultry and honeybees are also kept.

4.5 Infrastructure and Social Services

Roads: The DDAC is relatively accessible. In the south Dire Dawa town is connected

to Addis Ababa and Harar by a paved road, in the east to Djibouti and west to Hurso by all

weather gravel road. With in the study area, all weather roads cover a distance of about 80km.

The railroad from Djibouti to Addis Ababa crosses the study area for a distance of about

25km. With in the DDAC, there are motorable trucks (dry weather roads), which connect each

of the PA villages to each other.

53
 Education and Health: According to the Planning and Economic Development

Office (PEDO, 2001), DDAC has four secondary schools and 53 primary schools. Out of the

primary schools, 28 and 25 were found in the urban and rural parts of DDAC, respectively.

Based on the same source, the percentage of students enrolled in the secondary and primary

schools in the DDAC were 25 and 62.5 respectively. Whereas, 31.5% and 75.9% of the

students in the rural and urban areas were enrolled in primary education, respectively.

Concerning the population size of the students, the total number of students engaged in the

secondary education was 7,251. Of this the number of male and female students was 4,159

and 3,092 in order of importance. Similarly, the sum of students attended primary education

was 32,751. Of this, 18,332 and 14,419 were male and female students, respectively.

Whereas, the number of students who attended primary education in the urban and rural parts

of DDAC were 27,438 and 5,313, subsequently.

With regarded to health related services in the DDAC, there are 2 hospitals, 3 health

centers, 19 health stations, 11 health posts, 17 pharmacies and 3 drug distribution centers and

10 drug shops (PEDO, 2001). Out of these, 2 health centers and 10 health posts are situated in

the rural areas.

Agricultural facilities: the agricultural Development office of DDAC assigns

agricultural extension workers. The general principle is to have one extension worker in each

PA, though at resent on extension worker serves two or three PAs. In the study area, there are

extension worker on agricultural fields such as crop production, livestock production and

home economics all helping the peasant farmers in one way or the other.

54
 Water supply: In the DDAC, water is limiting factor for both agricultural and

domestic use purpose. In the southern part of the study area, in the mountain ranges, there is a

potential of spring water. On the contrary in the northern part of the study in the flat plains,

there is a potential of ground water.

Market Facility: Although the major market center for the DDAC is the Dire Dawa

town, small markets are located everywhere in the PA villages. Both crop and animal

products are the main goods supplied by the farmers to the market center. In return, the

farmers take home consumable goods.

On going Projects: In the DDAC, there are only two NGOs, namely, Hararghe

Catholic Secretariat (HCS) and the Lutheran World Federation (LWF) having projects which

are mainly engaged in rural development activities. The HCS is involved in rural water supply

development, soil and water conservation activities, seed multiplication and partly in saving

and credit services. The LWF, on the other hand, is involved in rural water resources

development, both spring and ground water development and rural women promotion

activities. The women's saving and credit of HCS has been operational since 1996. The HCS

office reported that the expansion of the program to address the badly needed credit and

saving activities remain an arduous task due to the new Micro financing Institution (MFI)

policy since 1999. Thus, the establishment of expansion of the program both in scope and size

remains challenging since it is not licensed by the NBE as MFI, except strengthening the

credit groups through extending loan from the revolving fund.

55
 CHAPTER V

RESEARCH METHODOLOGY

This chapter deals with the methodology of the present study including the types of

data collected, sampling method used and the techniques adopted for data analysis.

5.1 Data Sources, Sampling and Data Collection

Both primary and secondary data were used in this study. The primary data were

collected through structured questioner in the field survey. In this study, 180 small farmers

were randomly selected from four PA’s in the area to study the pattern of credit use, to

identify factors influencing agricultural credit use and assess the impact of agricultural credit

on farmers' income. The primary data, which were collected through structured

questionnaires, focuse on agricultural inputs including human labor, seeds, fertilizers,

pesticides, farm size, bullock power, credit use, etc. The questionnaire was pre-tested for

finalized it. The secondary data consisted of relevant information such as the amount and

purpose of credit sanctioned by the credit institution in the study area.

A purposive sampling was used to select the target population while random sampling

was used to select the respondents from the target population. Four PA’s were selected

purposively based on number of clients and distribution of credit. Random sampling was

preferred in order to statistically test the hypotheses. The method of analysis, the degree of

precision, the cost and the time were the most important factors' in using the purposive

random sampling and sample size. Random sampling is preferred when small-scale surveys

are conducted, since the estimation of sampling errors and significance tests are based upon

56
simple random sampling procedure. Random sampling is also simple to handle, as the

randomly selected respondents are generally easily accessible.

Five enumerators who completed secondary school education and have knowledge of

the local culture, and language of the community were employed to conduct the interview.

They were given appropriate training including field practices in order to make them

understand the objectives of the study, the contents of the questionnaire, how to approach the

respondents and conduct the interview.

5.2 Methods of Data Analysis

Both qualitative and quantitative techniques were used to analyse the data. Multiple

regression model and descriptive analysis that best fit the data were used to analyze the

impact of credit on small farmer’s income and welfare. Logistic regression analysis in

particular was used to identify the important factors that characterize credit users and non-

users (to identify factors affecting access to agricultural credit use) while Cobb-Douglas

production function was used to analyze the impact of credit on gross farm income.

5.2.1 Logistic Regression Model

When the explanatory variable(s) is (are) binary, one can represent them as dummy

variables and proceed to multiple regression analysis. However, the application of the linear

regression model is more complex when the dependent variable is binary (Pindyck And

Rubinfeld, 1981). A binary choice model assumes that individuals are faced with a choice

57
between two alternatives. Thus, one purpose of a qualitative choice with a given set of

attributes would make one choice of the alternative (in this case being credit user or non-user)

There are several methods to analyze the data involving binary outcomes. However,

for this particular study, logit model was selected over discriminant and linear probability

models. If the independent variables are normally distributed the discriminant-analysis

estimator which follows ordinary least square procedures (OLS) is the true maximum-

likelihood estimator (MLE) and therefore asymptotically more efficient than the logit model

which requires maximum-likelihood method. However, if the independent variables are not

normal, the discriminant-analysis estimator is not consistent, whereas the logit MLE is

consistent and therefore more robust (Maddala, 1983; Amemiya, 1981).

Discriminant analysis was not used for this study because it requires that, within the

groups, variables follow a multivariate normal distribution, with equal covariance matrices.

Although the violation of this assumption will not necessarily lead to poor results, Press and

Wilson (1978) recommended the logistic regression model because of its robustness in respect

of underlining distribution of the dependent variable, which need not be a multivariate model.

Press and Wilson (1978) calculated the probability of correct classification for the two

estimators in two empirical examples in which the independent variables were dummy

variables, and thus the assumption of normality was violated. In both examples, the logit

MLE did slightly better than the discriminant analysis estimator.

The linear probability model (LPM) which is expressed as a linear function of the

explanatory variables is computationally simple. However, despite its computational

simplicity, as indorsed by Pindyck and Rubinfeld (1981), Amemiya (1981), and Gujarati

58
(1988), it has a serious defect in that the estimated probability values can lie outside the

normal 0-1 range. Hence logit model is advantageous over LPM in that the probabilities are

bound between 0 and 1. Moreover, logit best fits to the non-linear relationship between the

probabilities and the explanatory variables.

At this juncture, logit and probit models come to exist. However, Amemiya (1981) has

pointed out that, the choice between logit and probit models is difficult because of the

statistical similarities between the two models. Nevertheless, Maddala (1983) and Kmenta

(1986) reported that the logistic and cumulative normal functions are very close in the mid-

range, but the logistic function has slightly heavier tails than the cumulative normal function

(Probit).

Pindyck and Rubinfeld (1981), Maddala (1983), Kmenta (1986) and Gujarati (1988)

suggested that the s-shaped curve in which the probability bound in an interval 0, 1 satisfies

the probability model as those represented by the cumulative logistic function (logit) and the

cumulative normal distribution (probit). Gujarati (1988) and Pindyck and Rubinfeld (1981)

also illustrated that the logistic and probit formulations are quite comparable, the chief

difference being that the former has slightly fatter tails than the normal curve. As pointed out

by Hosmer and Lemeshow (1989), the logistic distribution (logit) has certain advantages over

the other in that the analysis of dichotomous outcome variable is externally flexible, and

relatively simple from mathematical point of view and lends it self to a meaningful

interpretation.

As already noted, the purpose of this study is to analyze which, how and how much

the hypothesized regressors are related, to the dependent variable. The dependent variable in

59
this case is a dummy variable, which takes a value of zero or one depending on whether or not

a farmer is credit user or non-user. However, the independent variables are both continuous

and binary. Following Pindyck and Rubinfeld (1981) the cumulative logistic probability

function is specified as:

 m
 -(α+∑β x )
Pi = F (Zi) = F α + ∑ B i X i  = (1/1+e i i )………………….......................(1)
 i =1 

Where: Pi represents the probability of that ith household will make a certain choice (in

this case user and non-user), given explanatory variables (Xi);

e represents the base of natural logarithms (2.718);

Xi represents the explanatory variables;

mi represents the number of explanatory variables, i = 1, 2, 3 …, m, and

α and βi are parameters to be estimated.

Coefficient interpretation will be understandable if the logistic model once written in

terms of the odds and log of odds (Hosmer and Lemeshow, 1989). The odds ratio is simply

the ratio of the probability of being credit user (Pi) to the probability that he/she would be

non-user (1-Pi). But Pi is non-linear not only in Xi but also in αi and βi which creates an

estimation problem. So, we cannot use the familiar OLS procedure to estimate the parameters.

1
But 1-Pi = ………………………………………………………… (2)
1 + e zi

Therefore, the odds ratio becomes,

pi 1 + ezi
1 − pi
=
1 + − zi
= ez . ……………………………………………. (3)
i

60
Or

 
p 1+ez
m
α+
∑ 
i
i  BX 
1− p = 1+e−z =
i
e  ………………………………..
i
i=1
i i
(4)

Therefore, to get linearity, we take the natural logarithms of odds ratio equation (4), which

results in the logit model as indicated below:

 p 
Zi = Ln  i 
= α + β1X1 + β2X2 + … + βmXm …………………………(5)
1− 
 p i

As P goes from o to 1, the logit goes from - ∞ to ∞. That is, although the probabilities lie

between 0 and 1, the logits are not so bounded (Gujarati, 1995).

If the disturbance term Ui is taken into account, the logit model becomes,

m
Ζ i = α + ∑
i = 1
β i χ i + u i ………………………………. (6)

Hence, the above econometric model was used in this study and was treated against

the potential variables affecting the use of agricultural credit. The model was estimated using

the iterative maximum likelihood estimation procedure. The latter yields unbalanced and

asymptotically efficient and consistent parameter estimate. The coefficient of the logit model

presents the change in the log of the odds associated with a change in the explanatory

variables (Hanushek and Jackson, 1977 quoted by Edilegnaw, 1997).

61
 However, after estimating the parameters in equation (6) we would like to predict the

relative importance of any significant explanatory variables on the probabilities of any

observation belonging to either of the two groups.

5.2.2 Cobb-Douglas Production Function

Cobb-Douglas production function is named after two men called C.W. Cobb and P.H.

Douglas who together used it for a production function study in America in 1928 (Upton,

1979). This function is used extensively in the studies on impact of change in inputs on the

output.

According to Salami (1988), land, labour, and farm implement were significant factors

that limited the level of output. Moreover, Prasad, et al (1991) revealed that shortage of

capital has been one of the most critical obstacles faced by small farmers. Herath (1983) used

Cobb-Douglas production function in his study "Production Efficiency, Returns to scale and

Farm size in Rice production," in Sri Lanka. In this study, the dependent variable was gross

farm income and the independent variables were farm size, human labor, bullock power,

machinery used and operating cost.

Salami (1988) analyzed the impact of formal agricultural credit on small farm

development in the Ashanti Region of Ghana by means of this function. Here, rental value of

land (x1), man-days value (x2), value of inputs (x3) [fertilizer, insecticides and seeds], value of

farm tools (x4), and quantity of loan for the year (x5) were taken as independent variables and

gross farm income (Y) was considered as the dependent variable. Cobb-Douglas production

function has been fitted by Singh (1975) to work out the elasticities of production of inputs in

62
his study.

To estimate the Cobb-Douglas function, the dependent and independent variables were

transformed by using the natural logarithm and then ordinary least square (OLS) method was

employed to fit the model. Cobb-Douglas production function is the best function to analyze

production response to factor inputs and a number of researchers have applied in such studies.

Therefore, Cobb-Douglas production function was fitted to work out the elasticities of

production with respect to inputs and especially to assess the impact of credit through

fertilizer. Following Koutsoyiannis (1977), the Cobb-Douglas production function is specified

as:

Y= αX1β1X2β2 ...xβneu

Where: Y=Gross farm income

u = Random disturbance term,

α = Constant, and

β1 through βn are the regression coefficients for x1 through xn factors of production,

respectively.

The Cobb-Douglas Function was converted to the logarithmic form so that it could be solved

by the least squares method. In log form the function is written as:

Log Y= logα+ β1 logx1 + β2 logx2+ ... + βn logxn was the log linear form.

Then, LnY=Ln α + β1 LnX1+ β2 LnX2+... + βn LnXn+ui

63
 The production theory assumes that the factors of production (land, labour and capital)

affect the level of returns to the farm producer. It is based on this assumption of the classical

production theory that a production function has been formulated to investigate the influence

of different factors of production on the gross farm income.

The following factors were proposed to be included in the model:

1. Cultivated area (ha)

2. Number of oxen owned

3. Livestock and poultry (TLU)

4. Input (fertilizer) loan (Br.)

5. Family labour (Man-Equivalent)

6. Contact DA

In the study similar to the present one, Berhanu (1991) had incorporated five inputs in

Cobb-Douglas production function. These were cultivated land (ha), family labour force for

farming (Man-Equivalent), oxen as a drought power (number), direct costs for both crops and

animal production (in birr.) and irrigated land (ha). He also reported that applying different

functional forms of the model, not much of the variations in the net farm income could be

explained by these inputs.

Another researcher, Negussie (1993) also used Cobb-Douglas production function

taking gross farm income as the dependent variable and operational area (ha), oxen loan (Br.),

farm tools (Br.), hired labour (MDs), livestock and poultry (Br.), input (fertilizer) loan (Br.)

and family labour (MDs) as the independent variables to examine the contribution inputs to

the gross farm income.

64
5.3 Definitions of Variables and Working Hypothesis for Logit

It is necessary to identify the potential explanatory variables and describe their

measurement and represent them in symbols.

Dependent variable of the logic model (DEPENT) Yi: The dependent variable for

the logit analysis is of dichotomous nature representing the observed status of credit use of the

household. It represented in the model by 1 for credit users and 0 for non-users.

Independent variables of the study: Many factors have been hypothesized to affect

the access to credit. Some researchers emphasized exogenous factors such as natural,

economic and social factors. In this regard Berhanu (1993) listed thirteen potential variables

affecting fertilizer credit use by small farmers. These variables were: farm size, area under

improved seeds, family labour, hired labour, annual farm income, off-farm income,

investment in livestock owned, age of the farmer, investment in draft oxen, area under teff,

market distance, farming experience and literacy. Similar study in Bolivia by Miller and

Ladman (1983), had included all those variables listed by Berhanu, to study agricultural credit

use among small farmers.

In a similar study, Wolday (1989) pointed out that size of land holding, amount of

fertilizer used, number of cattle, and value of farm tools in the farm income function and farm

labour, farm income, ownership of radio, and extension contact were significant and

satisfactory variables to explain the variations in the farm income and adoption of fertilizer

use by small farmers.

65
 Age of household head (AGEHH): This was defined as the age at the time of

interview measured in years completed. Through time farmers acquire experience in formal

credit use. In addition, older farmers may accumulate more wealth than younger ones.

Therefore, this variable was hypothesized to have a positive impact on agricultural credit use.

Sex of household head (GENDER): This is a dummy variable, which takes a value 1

if the household is male and 0 otherwise. Gender differentials among farm households play a

significant role in the economic performance of a given household. Some empirical studies

have demonstrated that gender is important in defining the economic role of rural people in

Africa (Mc Sweeney, 1979; Dey; 1980; Addis, et al, 1999). More specifically, gender

differentials can be related to access to credit. In this case, one may expect that female-headed

households have less access to credit because they are less experienced in formal credit. This

may be because females are more preoccupied with childcare and home management than

interaction with the external environment. Therefore, this variable was hypothesized to have

positive impact on agricultural credit use.

Family size (FAMILYSZ): This refers to the total number of family members of the

household. The larger the number of family members, the more the labour force available for

production purpose. This is true if the dependency ratio of the household is small. Large

family size needs more production for consumption so that more access to credit and vice

versa. Therefore, Family size was hypothesized to have either positive or negative impact on

access to credit.

Education level of household head (EDUC): This is a dummy variable, which takes

a value 1 if the household is literate and 0 otherwise. Educated farmers are expected to have

66
exposure to external environment, to be acquainted with agricultural technologies, too

frequently meet DA's and get written agricultural materials, etc. Therefore, an educated

farmer would be expected to go for agriculture credit.

Farm size (FARMSZ): This is the total farm size cultivated by the household given

in hectare. Since it reflects ownership of an important asset, it is expected to affect access to

agricultural credit. The theory of substitutability of factors of production implies that, land

substitutes the other input fertilizer, which is purchased from credit. Hence, larger farms apply

a smaller amount of fertilizer obtained through credit. Therefore, farm size, as a variable, was

hypothesized to have inverse relationship with agricultural credit.

Fertility status of the soil (FERTST): Soil fertility refers to the productivity of the

soil with little or no application of fertilizer. Soil fertility and productivity are directly

correlated. The more the soil fertility, the more productivity of the land is. Hence, the lesser

the farmer applies fertilizer to the soil, the lesser the dependence on agricultural credit.

Therefore, this variable expected to have a negative relation with the dependent variable.

Number of Oxen (OXNO): This is the number of draft oxen per household during

that production year. Oxen are the prominent source of traction power in the study area.

Farmers with large farm size would have more number of oxen for cultivation. However, a

farmer with large farm size has less access to credit. This is because of substitutability of

factors of production. This implies that large farm size leads to large number of oxen which in

turn leads to less fertilizer purchased from credit. Therefore, number of oxen, as a variable,

hypothesized to vary inversely with the access to agricultural credit.

67
 Gross farm income (GROSSINC): This refers to the total value of crops and

livestock products. The income generated from these activities may help farmers to adopt new

technologies. This is because relatively the well to do farmer tend to take risks than the poor

ones. Moreover, credit is given to potential poor farmers than poor farmer. Therefore, this

variable was expected to influence access to credit positively.

Total livestock ownership (TLU): This refers to the total number of animals

possessed by the household measured in tropical livestock unit (TLU). Livestock is

considered as another asset which is liquid and a security against crop failure. Farmers

owning more livestock can settle their debts and they even neutralize crop failure by selling

out their animals and animal products. In this study access to credit use of farmers is expected

to increase with the total livestock owned.

Frequency of Contact DA (FREQDA): This refers to the total number of visits

development agent per year. Agricultural extension services provided by agricultural bureaus

and NGOs to farmers are mediated by DAs. DAs play an important role in the introduction,

dissemination and adoption of new technologies. Therefore, this variable is expected to

influence access to credit use positively.

Total expenditure (EXPENDIT): This refers to the sum of household expenses on

food item, clothing, education, health, etc. The household, which spends more, is expected to

be wealthier. The wealthier household expected to spend more not only consumption items

but also production items. The household, which spends more out of its capital, is expected to

spend more on farm inputs, which again increases his capital later. Therefore, it is

hypothesized that this variable has a positive relationship with access to agricultural credit.

68
5.4 Definitions of Variables and Working Hypothesis for C-D

It is necessary to identify the potential explanatory variables and describe their

measurement and represent them in symbols.

Dependent variable of the C-D model (GROSSINC): The dependent variable for

the production analysis is of continuous nature representing the observed status of gross farm

income of the household. This refers to the total value of crops and livestock products.

Independent variables of the study: Many factors have been hypothesized to affect

production function. According to Salami (1988), land, labour, and farm implement were

significant factors that limited the level of output. Moreover, Prasad, et al (1991) revealed that

shortage of capital has been one of the most critical obstacles faced by small farmers.

In the study similar to the present one, Berhanu (1991) had incorporated five inputs in

Cobb-Douglas production function. These were cultivated land (ha), family labour force for

farming (Man-Equivalent), oxen as a drought power (number), direct costs for both crops and

animal production (in birr.) and irrigated land (ha). He also reported that applying different

functional forms of the model, not much of the variations in the net farm income could be

explained by these inputs.

Cultivated Area (AREA): This is the total farm size cultivated by the household

given in hectare. Since it reflects ownership of an important asset, it is expected to affect

production positively. The theory of factors of production implies that, land is one of the

69
important factors of production. Therefore, farm size, as a variable, was hypothesized to have

positive relationship with agricultural production and thereby increased farmers' income.

Number of Oxen (OXNO): This is the number of draft oxen per household during

that production year. Oxen are the prominent source of traction power in the study area.

Farmers with large farm size would have more number of oxen for cultivation and hence high

production. Therefore, number of oxen, as a variable, hypothesized to affect production

function positively.

Input Credit (CREDIT): This is the value of total credit used for production purpose.

Since, the credit extended to the farmers used for production purpose, it encourages

production. Therefore, this variable was hypothesized to have a positive impact on

agricultural production thereby farmers' income.

Family Labour (FMLABOR): This refers to the total number of family members of

the household. The larger the number of family members, the more the labour force

available for production purpose and hence higher production. This is true if the family labour

is not excess. Therefore, Family labour was hypothesized to have either positive or negative

impact on farmers' income.

Total livestock ownership (TLU): This refers to the total number of animals

possessed by the household measured in tropical livestock unit (TLU). Livestock is

considered as another capital which is liquid and a security against crop failure. Moreover,

livestock used for threshing, transporting and etc hence increase production thereby farmers'

70
income. Therefore, this variable was hypothesized to have a positive impact on farmers'

income.

Contact DA (CONTDA): This is a dummy variable which takes a value 1 if the

household head has contacts and 0 otherwise. Agricultural extension services provided by

agricultural bureaus and NGOs to farmers are mediated by DAs. DAs play an important role

in the introduction, dissemination and adoption of new technologies. Therefore, this variable

is expected to influence production positively and thereby increased in income.

71
 CHAPTER VI

RESULTS AND DISCUSSION

This chapter presents the results of the study and discusses them. This session deals

with the results and discussion of logistic regression analysis and Cobb-Douglas production

function in addition to descriptive analysis.

6.1 Descriptive Results

6.1.1 Demographic Characteristics of Sample Households

As already noted, this study is based on the information collected from a total of 180

sample households out of this 110 sample households were credit users from formal and semi-

formal financial institutions and the remaining 70 were non-users.

The age structure of the sample households shows that the average age of the non-

users was 38.5 years while that of the users was 41.1 years. This probably implies that most

of the farmers have had adequate farming experience. The sample composed of 92.2% male-

headed households and 7.8% female-headed households. The average family size of the

sample respondents was 7.2. Non-users had slightly lesser family size (6.3 persons) than

credit users (7.9 persons). This implies that credit users might have larger labour resource

than non-users. Thus, the former could do timely farm operations better than the latter

leading to higher production. About 29% of the households were literate among whom 5.0%

could read and write, 20% had studied upto grade 1 to 6, 3.9% had grade 7 to 12 and none

was above grade 12. Seventy one percent of the sample households were illiterate.

72
Table 3: Demographic characteristics of sample households

Descriptions Non-users (70) Users (110) X2- Total

Value
No of Percent No of Percent No of Percent
farmers of farmers of farmers of
farmers farmers farmers
Literacy level 1.531
Illiterate 51 72.9 77 70.0 128 71.1
Can read & write 2 2.9 7 6.4 9 5.0
Grade 1 to 6 15 21.4 21 19.1 36 20.0
Grade 7 to 12 2 2.9 5 4.5 7 3.9
Above grade 12 - - - - - -
Gender 0.789
Male 63 90.0 103 93.6 166 92.2
Female 7 10.0 7 6.4 14 7.8
Source: Computed from survey data

6.1.2 Socio-Economic Factors

6.1.2.1 Land Holding and Cropping Pattern

Land Holding: Land is the basic asset of farmers. The average size of own-cultivated

land was about 1.05 ha, with 0.25 ha being the minimum and 3.00 ha being the maximum

land holding. Users cultivated, on average, a larger area of land (1.127 ha) than non-users

(0.952 ha). The mean difference was significant at 5 percent. A typical household allotted

about 91.53 % of its cultivated land to grow sorghum. The average area of land under

sorghum was 0.97 ha (Table 4).

73
Table 4: Land holdings of the households (ha)

Descriptions Non-users (70) Users (110) t- Total

Mean SD Mean SD Value Mean SD

Total cultivated area 0.952 0.527 1.127 0.592 2.07** 1.059 0.572

Area under sorghum 0.8997 0.506 1.0136 0.5600 1.38 0.9693 0.5412

Area under other 0.052 0.138 0.114 0.185 2.38** 0.089 0.171

SD = standard deviation
Minimum =0.25 Maximum=3.00
**
, Significant at 5% level

Source: Computed from survey data

All the farmers possessed their own farmland. Farmers were asked to express their

feelings about whether or not their land holding was sufficient to meet home consumption

requirements and other needs. Accordingly, 92.8% and 96.7% of the households reported that

the existing land holding could not satisfy home and other needs, respectively. Among them,

98.6% of the non-users and 89.1% of the users replied that their land holding is too small to

satisfy home consumption. Likewise, 98.6% the non-users and 95.5% of the users replied that

their land holding could not satisfy other needs. More number of users could satisfy home

consumption than non-users, which was statistically significant at 5% level.

74
Table 5: Opinions on whether land holding satisfied home consumption and other needs

Descriptions Non-users (70) Users (110) X2- Total

No of Percent No of Percent Value No of Percent

farmers of farmers of farmers of
farmers farmers farmers
**
Home 5.738
consumption
Yes 1 1.4 12 10.9 13 7.2
No 69 98.6 98 89.1 167 92.8
Other needs 1.290
Yes 1 1.4 5 4.5 6 3.3
No 69 98.6 105 95.5 174 96.7
Source: Computed from survey data
**
, Significant at 5% level

Cropping Pattern: Very limited types of annual crops and perennial crops are grown

in the study area; namely sorghum, maize, groundnut, vegetables and chat. All sample

respondents have grown sorghum as a major staple crop whereas only 1.8%, 2.8%, 13.9% and

34.4% produced maize, groundnut, vegetables, and chat respectively as food and cash crops

(Table 6). The results in Table 6 reveal that the difference between non-users and users of

credit was significant for chat and vegetables at 10% and 5%, levels respectively.

On average 0.9693 ha, 0.1002 ha, 0.0194 ha, 0.0098 ha and 0.0021 ha of land was

covered by sorghum, chat, vegetables, groundnut and maize, respectively. However, the mean

difference between the two groups in respect of land under chat and groundnut was significant

at 1% and 10%, respectively (Table 7).

75
Table 6: Cropping pattern of households

Descriptions Non-users Users X2- Total

Value
No of Percent No of Percent No of Percent
farmers of farmers of farmers of
farmers farmers farmers
Sorghum 70 100 110 100 13.95 180 100.0
Maize - - 2 1.8 1.29 2 1.8
Vegetables 5 7.1 20 18.2 16.28** 25 13.9
Groundnut - - 5 4.5 3.27 5 2.8
Chat 17 24.3 45 40.9 13.53* 62 34.4

* **
, , significant at 10% and 5% levels, respectively
Source: Computed from survey data

Table 7: Land allotted to various crops in the sample households (ha)

Descriptions Non-users Users t-Value Total

Mean SD Mean SD Mean SD

Sorghum 0.8997 0.506 1.0136 0.5600 1.38 0.9693 0.5412
Maize - - 0.0034 0.0250 1.42 0.0021 0.0197
Vegetables 0.0188 0.0763 0.0198 0.0714 0.091 0.0194 0.0730
Groundnut - - 0.0160 0.0914 1.83* 0.0098 0.0720
Chat 0.0768 0.1138 0.1663 0.1775 3.18*** 0.1002 0.1590

* ***
, , significant at 10% and 1% levels, respectively
Source: Computed from survey data

76
6.1.2.2 Livestock Ownership

Next to land, livestock is the most important asset for rural households in Ethiopia. It

is used as a source of food, draft power, income and energy. Moreover, livestock is an index

of wealth and prestige in rural community. All the sample households reared livestock, which

consisted of cattle, small ruminants, back animals and poultries. A typical household

maintained 4.79 cattle, 7.72 small ruminants, 0.85 back animals, and 3.79 poultries, on

average (Table 8). The minimum number of livestock maintained was 0 whereas the

maximum was 73. Credit users possessed relatively more livestock unit than non-users. The

mean difference between the two groups in owning of livestock was significant at 1% level.

Table 8: Livestock ownership of the sample households (in number /TLU)

Descriptions Non-users Users t-Value Total

Mean SD Mean SD Mean SD

Cattle 3.20 2.59 5.80 4.45 4.95*** 4.79 4.03
Small 5.00 4.63 9.44 7.64 4.23*** 7.72 6.96
ruminants
Back animals 0.54 0.74 1.05 1.27 3.35*** 0.85 1.12
***
Poultries 2.21 4.16 4.80 4.56 3.83 3.79 4.58
***
TLU 3.71 3.01 6.78 4.76 5.31 5.59 4.43
***
Total 10.96 9.24 21.09 13.36 6.01 17.15 12.89

***
, significant at 1% level
Source: Computed from survey data

77
6.1.2.3 Living Conditions (Welfare) - income and food consumption

Economic empowerment is certainly one of the major criteria to measure success in

the delivery of credit services. On the other hand, increasing income signifies the whole

purpose of involvement in any micro-enterprise. Has the delivery of credit made any

difference in bringing about a change in the household income?

About 50.6% of the samples replied that they enjoyed an increase in income. While

21.6%, 22.8% and 0.6% of the respondents replied that their income remained the same,

decreased and significantly decreased, respectively. Among them, a larger percentage of

credit users (77.3%) have enjoyed increase in income as compared to non-user (8.6%) during

the last two years. Despite the overall increase in income, the statistical tests indicated that

there was significant difference (at 1% level) between credit non-users and users in achieving

increase in income.

More than 51% of the respondents reported that they enjoyed an increase in the

amount of food consumed. While 18.3% of the respondents reported that they suffered a

decrease in the amount of food consumed. However, 29.4% consumed the same amount of

food during the last two years. Among those whose consumption of food increased, 78.2%

were credit users, and 11.5% were non-users of credit. There was also significant difference

(at 1% level) between credit non-users and users in achieving increase in the amount of food

consumed. A recent study by Getaneh (2001) revealed that the financial services of ACSI led

to increased income and improved food security of clients.

78
Table 9: Household income and food consumption

Descriptions Non-users Users X2-Value Total

No of Percent No of Percent No of Percent

farmers of farmers of farmers of
farmers farmers farmers
Household income 85.26***
during the last two
years:
Increased 6 8.6 85 77.3 91 50.6
Remained the 29 41.4 18 16.4 47 21.6
Same
Decreased 34 48.6 7 6.4 41 22.8
Decreased 1 1.4 0 0 1 0.6
Significantly
Amount of food 85.72***
consumed during
the last two years:
Increased 2 2.9 0 0 2 1.1
significantly
Increased 6 8.6 86 78.2 92 51.1
Remained the 35 50.0 18 16.4 53 29.4
same
Decreased 27 38.6 6 5.5 33 18.3

***
, significant at 1% level
Source: Computed from survey data

79
6.1.2.4 Feeding Status of Sample Households

Credit intervention is expected to support users in ensuring food security, which is the

prime concern of all poor households. The findings of the survey in relation to this are

presented in Table 10. As shown in the table, there was statistically significant difference at

less than 1% between credit users and non-users in respect of feeding conditions (number of

meals for children, number of meals for adult, household diet, and access to animal product)

during the last two years.

More than 60 percent of the respondents indicated that their children under 5 years

were fed three meals a day (morning meal, mid-day meal and evening meal). Among them

50.0% were credit users and 77.1% were non-users. About 33% of the respondents said that

their children under 5 years were fed four meals (morning, mid-day, between mid-day and

evening, and evening meals) a day. Among these, 40.9 % were credit users and 21.4% were

non-users. Accordingly 45.6%, 1.1%, and 53.3 % of the respondents indicated that their

household members in the 5 to 15 years age group consumed three meals (morning, mid-day

and evening meals) a day, four meals (morning, mid-day, between mid-day and evening, and

evening meals) a day, and two meals (morning and evening meals) a day, respectively.

Among those who consumed three meals and four meals in a day, 54.5% and 1.8%

respectively, were credit users and whereas 31.4% and 0 % were non-users.

A large percentage of the respondents indicated that their household diet improved

during the last two years. About 73.6% and 7.1% of the credit users and non-users enjoyed

with diet improvement, respectively. Accordingly, users had more (statistically significant)

chance of improving their diet in comparison to their non-users counterparts. Very few user

80
clients (5.5%) had occasions to eat less, while 30% non-user clients had occasions when they

had to eat less. More than 62% and 20% of non-users and users respectively reported that

their diet had neither improved nor deteriorated. A small percentage of the respondents

consumed animal products (egg, meat, milk). Less than 4% of the credit users always

consumed animal products, 1.8% usually consumed, 69.1% occasionally consumed, 22.7%

rarely consumed and 2.7% not consumed animal products at all. While 0.7% of the non-users

always consumed animal products, 2.9% usually consumed, 22.9% occasionally consumed,

58.6% rarely consumed and 15.7% not consumed animal products at all.

81
Table 10: Feeding status of sample households

Descriptions Non-users Users X2- Total

No of Percent No of Percent Value No of Percent

farmers of farmers of farmers of
farmers farmers farmers
Number of meals for 15.20***
children under 5 years:
Two meals 1 1.4 2 1.8 3 1.7
Three meals 54 77.1 55 50.0 109 60.6
Four meals 15 21.4 45 40.9 59 33.3
Five meals - - 8 7.3 8 4.4
Number of meals for 5- 11.28***
15 years of age:
Two meals 48 68.6 48 43.6 96 53.3
Three meals 22 31.4 60 54.5 82 45.6
Four meals - - 2 1.8 2 1.1
Household diet during 76.99***
the last 2 years:
Improved 5 7.1 81 73.6 86 47.8
Stayed the same 44 62.9 23 20.9 67 37.2
Worsened 21 30.0 6 5.5 27 15.0
***
Frequency of family 44.91
eat animal products:
Always - - 4 3.6 4 2.2
Usually 2 2.9 2 1.8 4 2.2
Occasionally 16 22.9 76 69.1 92 51.1
Rarely 41 58.6 25 22.7 66 36.7
Not at all 11 15.7 3 2.7 14 7.8

***
, significant at 1% level
Source: Computed from survey data

82
6.1.2.5 Clothing of Sample Households

Clothing is one of the three basic needs. That is why it was considered useful to

examine the condition of clothing of the two groups, credit users and non-users under the

assumption that credit intervention would influence clothing.

More than 79.4% of the respondents bought clothes for their children of less than 15

years, once in a year. About 16.1% of the respondents bought clothes for their children of less

than 15 years, in less than one year, 4.4% between 1 and 2 years. However, 75.5 % credit

users bought clothes for their children of less than 15 years, once a year, 22.7% in less than

one year and 1.8% between 1 and 2 years whereas lesser percentage of non-users (85.7%)

bought clothes once a year, 5.7% in less than one year and 8.6% between 1 and 2 years. In

general credit users bought clothes more frequently than non-users for their children of less

than 15 years. The difference was statistically significant at less than 1%.

More than 57% of the respondents bought clothes for adult members of the household

once a year and 42.8% between 1 and 2 years. Among the credit user respondents 72.7%

bought clothes for adult members of the household once a year and 27.3% between 1 and 2

years, whereas 32.9% of the non-users bought once a year and 67.1% between 1 and 2 years.

This shows that credit users bought clothes more frequently than non-users for adult family

members. The difference was statistically significant at less than 1%.

83
Table 11: Frequency of household clothing

Descriptions Non-users Users X2- Total

No of Percent No of Percent Value No of Percent

farmers of farmers of farmers of
farmers farmers farmers
Clothes bought for 12.64***
children under 15:
In less than one 4 5.7 25 22.7 29 16.1
year
Once a year 60 85.7 83 75.5 143 79.4
Between 1 and 6 8.6 2 1.8 8 4.4
2 years
Clothes bought for 27.78***
adult members:
Once a year 23 32.9 80 72.7 103 57.2
Between 1 and 47 67.1 30 27.3 77 42.8
2 years

***
, significant at 1% level
Source: Computed from survey data

84
6.1.2.6 Educational Status of School-aged Children

The average number of school-aged children per household was 2.94. Credit user

households had slightly larger number of school-aged children (3.39) than credit non-users

(2.23). However, the number of school-aged children who were attending school was 0.86

among non-users and 1.94 among users (Table 12). This probably shows that credit users

tend to send more number of their children to school than non-users. Non-users were perhaps

financially weaker than users; it is no wonder that non-users kept some more of their children

away from school than users. Results of this study are consistent with the study of Getaneh

(2001).

Literacy ratio showed reasonable difference between the enrollment of school-aged

children of credit users and non-users. About 52% school-aged children of credit users and

29% school-aged children of non-users were attending school. This indicates that users sent

more School-aged children than their counterpart, non-users. The difference was statistically

significant at less than 1% level.

Table 12: Household welfare - Education of children

Description Non-users Users t- Total

Mean SD Mean SD Value Mean SD

Number of school-aged 2.23 1.87 3.39 1.91 4.01*** 2.94 1.98
children per household
Number of school-aged 0.86 1.00 1.94 1.53 5.72*** 1.52 1.45
children attending school
Literacy ratio 0.29 0.35 0.52 0.36 4.10*** 0.43 0.37
***
, significant at 1% level
Source: Computed from survey data

85
 About 17.2% of the respondents had school-aged children but not sent any of them.

However, about 15.0% of the respondents had not school-aged children. Among the credit

users respondents 11.8% had school-aged children but not sent school, while 25.7%of the

non-users did so. About 66.67% of non-users, and 86.87 % users sent their children to school

(Table 13). Access to finance in the rural areas has improved access to education service

(Getaneh, 2001).

Table 13: Schooling status of the household

Descriptions Non-users (70) Users (110) X2- Total

No of Percent No of Percent Value No of Percent

farmers of farmers of farmers of
farmers farmers farmers
School-aged, 18 25.70 13 11.80 23.93*** 31 17.20
but not sent to
school
No school- 16 22.86 11 10.00 18.90*** 27 15.00
aged

***
, significant at 1% level
Source: Computed from survey data

86
6.1.2.7 Health Status of Household

About 70.6% of the respondents had access to medical care. As shown in Table 14,

access to health is significantly improved in respect of credit users than in respect of non-

users. About 78.2% of the users and 58.6% of the non-users had access to health. This showed

that credit users had more access to health care than non-users. The difference was

statistically significant at less than 1% level. This is probably credit users were financially

stronger than non-users. This result is in line with Getaneh (2001) in that access to finance in

the rural areas has improved access to health service

Table 14: Health status of household

Description Non-users Users X2- Total

No of Percent No of Percent Value No of Percent

farmers of farmers of farmers of
farmers farmers farmers
Medical care 7.91***
in the last 12
months
Yes 41 58.6 86 78.2 127 70.6
No 29 41.4 24 21.8 53 29.4

***
, significant at 1% level
Source: Computed from survey data

87
6.1.2.8 Patterns of Credit Use

Hararghe Catholic Secretariat (HCS), Agricultural Office, and Woreda Integrated

Basic Service (WIBS) were the important sources of credit in study area. Credit from these

sources was available for production purposes only. All the farmers took credit in the form of

fertilizer. In addition to fertilizer credit, about 10.9% of them received credit in the form of

other inputs, namely farm tools and working capital. The average amount of loan obtained

from these sources was 336.94 birr. In most of the cases, the loans were taken as short-term

loans (48.2%), while medium-term loans by 37.3% of the farmers and 14.5% of the farmers

took both short-term and medium-term loans.

Credit was given both in cash and in kind. About 37.3% of the credit was given to

farmers in kind, 31.8% was given in cash and 30.9% was taken in both forms. More than 95%

of the respondents (users) did not use production credit for consumption. About, 70.9% of the

users reported that they obtained the amount of credit they requested for and 29.1% did not

get the amount of credit they requested for. With regard to timeliness, 82.7% of the

respondents (users) reported that these formal credit services were delivered on time and

17.3% reported that they were not given on time. The details of the pattern of credit are

presented in Table 15.

88
Table 15: Patterns of credit use

Descriptions Users (n=110)

No of farmers Percent of
farmers
Source of credit
Agriculture Office 38 34.5
Hararghe Catholic Secretariat (HCS) 35 31.8
Agriculture and HCS 17 15.5
HCS and Woreda Integrated Basic Service (WIBS) 10 9.1
Agriculture, HCS and WIBS 10 9.1
Purpose of credit
Production 110 100
Consumption - -
Term of credit
Short 53 48.2
Medium 41 37.3
Short and Medium 16 14.5
Form of credit
Kind 41 37.3
Cash 35 31.8
Kind and Cash 34 30.9
Diversion of credit
Yes 5 4.5
No 105 95.5
Adequacy of credit
Yes 78 70.9
No 32 29.1
Timeliness of credit
Yes 91 82.7
No 19 17.3

Source: Computed from survey data

89
6.1.2.9 Changes attributed to Credit Use

About 92.7% of the respondents (credit users) reported that they were benefited from

credit intervention through different sources. There were many improvements to the

beneficiaries by credit intervention. Most of them mentioned that they received multiple

benefits from credit. About 23.6% of the respondents reported that they were able to increase

income, send their children to school, and improve the nutritional status of the family (Table

16).

Table 16: Changes attributed to credit use

Descriptions Users (n=110)

No of farmers Percent of
farmers
Change after credit
Yes 102 92.7
No 8 7.3
Changes after credit
Able to build a better house 8 7.3
Able to buy livestock 9 8.2
Able to increase income 18 16.4
Able to teach children 9 8.2
Able to feed better 12 10.9
Increase income, Teach children, Feed better 26 23.6
Buy livestock, increase income, Teach children, 5 4.5
Feed better
Built a house, Buy livestock, increase income, 15 13.6
Feed better
No change 8 7.3
Source: Computed from survey data

90
6.1.2.10 Constraints to Save and Invest

Farmers face many problems. However, the survey results revealed that natural

disasters (poor rainfall distribution, insect infestation, disease, frost, etc) were the main

problem faced in increasing production and incomes of households. About 76% of the

respondents reported that natural disaster was the main constraint to save and invest. About

10% indicated natural disaster and low price of agricultural commodities, 8.9% reported

natural disaster and limited marketing opportunity, and 5% reported natural disaster and

extended family obligation, as the main constraints to save and invest. The details are given

in Table 17.

Table 17: Constraints to save and invest

Description Non-users (70) Users (110) X2- Total (180)

No of Percent No of Percent Value No of Percent of

farmers of farmers of farmers farmers
farmers farmers
Problems to save 18.68***
and invest:
Natural disaster 61 87.1 76 69.1 137 76.1

Natural disaster - - 9 8.2 9 5.0

and Extended
family obligation
Natural disaster 9 12.9 9 8.2 18 10.0
and Low price of
agricultural
commodities
Natural disaster - - 16 14.5 16 8.9
and Limited
market
opportunities

***
, significant at 1% level
Source: Computed from survey data

91
6.2 Factors Influencing Use of Agricultural Credit

To study factors affecting credit use, data gathered from 180 small farmers were

subjected to logistic regression analysis. The statistical software used for analyzing the data

was SPSS 10.0 for windows. The logit model, as discussed in Section 5.2.1, was selected for

analyzing the factors influencing the use of a given technology (in this case, credit) of the

sample households. Prior to running the logistic regression model, both the continuous and

discrete explanatory variables were checked for the existence of multi-collinearity problem.

The technique of variance inflation factor (VIF) was employed to detect the problem of multi-

collinearity for continuous explanatory variables (Chatterjee and Price, 1991). If Ri2 is the

square of the multiple correlation coefficient that results when one explanatory variable (xi) is

regressed against all the other explanatory variables, VIF= (1-Ri2)-1. Likewise, contingency

coefficients have been computed to check the existence of multi-collinearity problem for

discrete explanatory variables, which assumes a value between 0 and 1. The contingency

coefficients are computed as follows:

x2
C=
N + x2

Where, C=Coefficient of contingency, χ2 = Chi-square random variable and N= total sample

size

Value of VIF greater than 10 is often taken as a signal for the existence of multi-

collinearity problem in the model. Similarly, the decision rule for contingency coefficients is

that if contingency coefficients approach to 1, there is a problem of association between the

discrete variables.

92
Table 18: Variance inflation factor for continuous explanatory variables

Variables Ri2 Variance inflation factor (VIF)

AGEHH 0.194 1.240

FAMILYSZ 0.333 1.501

FARMSZ 0.534 2.144

OXNO 0.619 2.622

GROSSINC 0.630 2.701

TLU 0.631 2.711

EXPENDIT 0.430 1.751

FREQDA 0.269 1.368

Source: Computed from survey data

Table 19: Contingency coefficients for discrete explanatory variables

SEXHH EDUC FERTST

SEXHH 1 0.066 0.240

EDUC 1 0.293

FERST 1

Source: Computed from survey data

Based on the VIF and contingency coefficient results, the data were found to have no

serious problem of multi-collinearity and therefore the continuous and discrete explanatory

variables were retained in the model.

Twelve variables were hypothesized to explain factors affecting agricultural credit use

of small farmers. Out of these six (50%) of the variables were found to be significant, while

the remaining six were less significant in explaining the variations in the dependent variable.

93
The definitions and units of measurement of the valuables included in the logistic model are

given in Table 20.

Table 20: Definitions and units of measurement of variables in the logistic regression model

Variable Description % With a Mean+ SD

Code Value 1
SEXHH 1, if the household head is male and 0, 92.2
otherwise
FAMILYSZ Total number of family members 6.89+2.39

AGEHH Age of the household head (years) 39.06+11.16

EDUC 1, if the household head is literate and 28.9

0,otherwise

FARMSZ Total farm size owned by the household 1.059+0.572

(hectares)

FERTST 1, if the fertility status is good, 2 if the 30.0, 50.6

fertility status is fair and 3, if it is bad.

OXNO Number of draught oxen owned by the 0.94+0.94

household

GROSSINC Sum of the values of crops and livestock 1677.07+1354.46

products (Birr)

TLU Total livestock Owned (TLU) 5.59+4.43

EXPENDIT Total expenditure of the household (Birr) 1179.99+684.39

FREQDA The number of days per year a farmer 12.20+15.57

pays visit for technical support
Note: SD=Standard Deviation

Source: Computed from survey data

94
6.2.1 Elaboration on Explanatory Variables

6.2.1.1 Significant Explanatory Variables

The maximum likelihood estimates of the logistic regression model show that farm

size (FARMSZ), fertility status of the soil (FERTST), gross farm income (GROSSINC), total

expenditure (EXPENDIT), and Frequency of contact of DA per year (FREQDA) were

important factors influencing agricultural credit use of small farmers.

Farm size ( FARMSZ) was found to be important in reducing agricultural credit use.

The Wald statistics corresponding to the variable FARMSZ show that it is significant at 10%

probability level. The odds favoring access to fertilizer credit use decreases by a factor of

0.326 for farmers who had higher farm size. The possible explanation is that as farm size

increases, the farmer can produce more from his large land holding, so that he need not go for

credit. The results of a study by Berhanu (1993) had also revealed that farmers with relatively

larger farm size tend to use a smaller amount of fertilizer credit. This statement supports the

economic logic of the substitutability of fertilizer for land.

A farmer facing the problem of low level of production due to shortage of farm land

and limited use of modern farm technologies would increase his productivity through the use

of fertilizer and other improved farm inputs. In practice, all the sample farmers bought

fertilizer on credit. For this reason, agricultural credit use was inversely correlated with the

level of farm size. This result is also consistent with studies carried out in India (NCAER,

1974; Sharma and Prasad, 1978; Subbarao, 1980) which revealed that the level of farm credit

for fertilizer and high yielding varieties (HYV) varied inversely with farm size, i.e., small

farms used relatively more credit than large farms. Farmers with limited farm income due to

95
limited land holding tended to intensify their farm by acquiring more fertilizer and HYV

thorough credits. This inverse relationship between agricultural credit use and farm size is in

line with the results of a study on adoption of new farm practices in Thailand (Greene, 1970),

which stated that farmers with smaller farm size used more fertilizer than farmers with larger

land holdings. However, whether the size of land holding owned by a farmer is large or small,

as far as the extended credit is well managed, it is beneficial to farmers because quick return

will be obtained within the crop season.

Gross farm income (GROSSINC) is another factor, which is significantly related to

the dependent variable and that it is significant at less than 5% probability level. The odds

favoring access to fertilizer credit use increases by a factor of 1.001 for farmers who had

higher farm income. An empirical study in India at three villages revealed that institutional

credit is concentrated in the richer households who have the following characteristics: more

educated, older, large family size, and large farm size (Bhende, 1983). Higher farm income

increases credit worthiness, which strengthens the repayment ability of farmers. This

condition holds true for the fact that higher level of farm income increases the repayment

capacity of the farmer, which could in turn increase the quantity of fertilizer taken on credit. It

is apparent that low-income farmers often face scarcity of capital to use and adopt improved

inputs particularly, fertilizers. For many reasons, lending agencies are unable to serve the

majority of the small farmers, especially the low income one. Berhanu (1993) showed that the

annual farm income was significant and positively correlated with the level of fertilizer credit

use so that farmers with relatively high farm income were those with relatively larger scale of

operation and greater amount of fertilizer credit.

96
 It is also apparent from the results that total expenditure (EXPENDIT) would increase

access to fertilizer credit. The odds in favor of credit use increased by a factor of 1.002 for

households, which had higher expenditure than those households who had less expenditure.

The possible explanations for this can be related to availability of capital. As availability of

capital increases, total expenses on different items also increase. The increase in the

availability of capital in turn reflects the resource base of the farmer and the overall economic

activity of the farmer to satisfy his needs and receive credit.

Fertility status of the soil (FERTST) has a negative relationship with the dependent

variable showing that households having more fertile soil did not receive fertilizer, which is

given on credit. The odds in favor of access to credit use decreased by a factor of 0.246 for the

farmers who owned more fertilize soil as compared to the farmers who owned poor soil. The

inverse relationship between land fertility and fertilizer credit use is that a land with higher

soil fertility status requires little or no application of fertilizer (which is acquired through

credit) and vice versa. Birhanu (1993) revealed that land fertility was significantly, negatively

related with fertilizer consumption.

Frequency of contact with development agent (FREQDA) has a positive relationship

with the dependent variable showing that households having more frequent contacts with the

development agent (DA) have better access to fertilizer credit use. The odds in favor of access

to fertilizer credit use increased by a factor of 1.15 for households who had frequent contacts

with DA. The development agents in the rural area have long been a strong arm of ministry of

agriculture (MOA) and other service-giving governmental and non-governmental

organizations in stimulating the adoption of innovations. Belay and Belay (1998), had also

reported that farmers who had frequent contacts with development agents on agricultural

97
development matters were the ones who got more access to credit facility and settled their

debts timely(see Table 21).

Table 21: Maximum likelihood estimates of logit model

Explanatory variable Estimated Odds Wald Significance

Coefficient ratio statistics level

Constant -2.239 0.107 4.780 0.029

SEXHH 0.148 1.159 0.033 0.855

FAMILYSZ 0.067 1.070 0.347 0.555

AGEHH -0.014 0.986 0.428 0.513

EDUC 0.505 1.658 0.994 0.319

FARMSZ -1.121 0.326 3.004 0.083

FERTST 9.120 0.010

FERTST (1) -1.404 0.246 4.875 0.027

FERTST (2) -1.894 0.150 8.834 0.003

OXNO -0.268 0.765 0.471 0.492

GROSSINC 0.001 1.001 4.068 0.044

EXPENDIT 0.002 1.002 15.030 0.000

FREQDA 0.141 1.151 19.972 0.000

TLU 0.167 1.181 2.077 0.150

2 Log Likelihood 143.211

Model Chi-Square 97.358***

Correctly 82.8
2 1
Predicted (count R )
Sensitivity2
85.5

Specificity3
78.6

98
***
, significant at 1% level
1 Based on 0.5 cut value

2 Correctly predicted users group based of 0.5 cut value

3 Correctly predicted non-users group based of 0.5 cut value

Source: Computed from survey data

6.2.1.2 Non-Significant Explanatory Variables

All of the demographic variables, total livestock unit and number of oxen owned were

unable to explain access to fertilizer credit use of small farmers indicating that the two groups

were homogeneous with regard to these variables.

Gender of household head was one of the demographic variables hypothesized to

affect access of fertilizer credit use positively. However, a non-significant result was obtained

indicating that the two groups (credit user and non-user) were homogeneous with respect to

the sex of household heads.

Family size was another demographic variable hypothesized to affect agricultural

credit use in either positive or negative directions. However, family size had also no

significant effect on access to fertilizer credit use. This was probably because both credit user

and non-user have large family size, as a result of the absence of family planning and low

educational level in both groups.

99
 The sign of the age coefficient contradicts the initial hypothesis. However, its

coefficient was not-significant implying that the two groups are homogeneous as far as age is

concerned.

The sign of the education coefficients was positive in that it is in line with the initial

hypothesis. However, its coefficient was not significant implying that the two groups are

homogeneous in terms of education. Although the number of literate households among users

was greater than that among non-users, the literacy level of both groups was generally very

low.

Total livestock in tropical livestock unit (TLU) in the rural areas constitutes

accumulation of wealth, security against emergencies, dowry and also used as a cultural

privilege. They can also be easily converted into cash when demand arises. This variable was

expected to influence fertilizer credit use significantly and positively but it did at 15% level of

significance.

The sign of the coefficient showing the number of oxen owned coefficient was

negative in that it is in line with the initial hypothesis. It is also apparent from the results that

number of oxen owned would not affect access to fertilizer credit. The possible explanations

for this can be related to homogeneity of the two groups with regard to number of oxen

owned. However, Berhanu (1993) argued that an increase in the number of draft oxen

increases the level of fertilizer consumption.

100
6.2.2 Sensitivity Analysis

All significant dummy and continuous variables do not have the same level of impact

on farmers' decision regarding credit use. The relative importance of dummy explanatory

variables can be ascertained by examining the changes in probabilities that could result from

changes in values of these variables. To rank these factors, a “typical farmer” is defined by

the most frequent values of the dummy variables included in the model. Accordingly a

typical farmer is male farmer (92.2%) who is literate (28.9%) and who has good fertility

status (80.6%). The effects of statistically significant dummy variables were calculated by

changing their values keeping the continuous and other dummy variables at the typical

farmer’s level (Table 18). Similarly, the relative importance of continuous explanatory

variables on access to credit use can be seen by examining variable elasticity, defined as the

percentage change in the value of these variables. Accordingly, a 10% increase in farm size

(from the average 1.059 to1.165) would reduce the probability of being credit user by (0.64%)

over the typical farmer. Similarly, the probability of credit user is predicted to increase by

0.79% if gross farm income increases by 10% over that of the typical farmer. The impacts of

other significant variables are given in Table 22.

101
Table 22: Effects of significant explanatory variables on the probability of access to credit

Description Probability Change in Percentage

probability change in
probability
Typical farmer 0.94919
Typical farmer 0.82105 -0.12814 13.50
but good fertility status
Typical farmer 0.73759 -0.21160 22.29
but fair fertility status
Typical farmer 0.94315 -0.00604 0.64
but a 10% increase in farm size
Typical farmer 0.95669 0.00750 0.79
but a 10% increase in gross farm income
Typical farmer 0.95944 0.01025 1.07
but a 10% increase in total expenditure
Typical farmer 0.95687 0.00768 0.81
but a 10% increase in DA contact

Source: Computed from model out put

6.3 Production Function Results

To study the contribution of inputs, especially of agricultural credit, data gathered

from 180 small farmers were subjected to Cobb-Douglas production function analysis. The

statistical software used for analyzing the data was SPSS 10.0 for Windows. The data on the

variable were converted to natural logarithm in order to use ordinary least squares analysis

procedure. However, prior to running the Cobb-Douglas production function, the variables

were checked for the existence of multi-collinearity problem as stated in section 6.2. Since,

all variables in this production model were continuous, the technique of variance inflation

factor (VIF) was employed to detect the stated problem (Chatterjee and Price, 1991).

102
Table 23: Variance inflation factor for the continuous explanatory variables

Variables Ri2 Variance inflation factor (VIF)

AREA 0.3481 1.534

OXNO 0.5296 2.126

CREDIT 0.1935 1.240

FMLABOR 0.1212 1.138

TLU 0.5775 2.367

Source: Computed from survey data

Based on the VIF results, the data were found to have no serious problem of multi-

collinearity (Table 23). So, all the continuous explanatory variables were included in the

model.

The F-ratio test indicated that there was a significant relationship between dependent

and independent variables included in the regression analysis and they showed fairly high

goodness of fit. The coefficient of determination, R2, was found to be 0.579. This means that

about 57.9% percent of the total variation of the output (income) of the sample farmers was

explained by the changes in six variables.

103
Table 24: Parameter estimates of Cobb-Douglas production function

Explanatory Variables Estimated Coefficients t - value

Constant 6.333 26.84***

AREA
0.554 5.330***
OXNO
0.421 3.030***
CREDIT
0.039 4.773***
FMLABOR
-0.227 -1.958*
TLU
0.237 2.627***
CONTDA
0.386 1.686*

R2=57.9
Adjusted R2= 56.5 n=180
F-test=39.27***
*, ***
Significant at 10% and 1% levels, respectively
Source: Computed from survey data

The significance of the elasticity coefficients was estimated and was found to be

significantly different from zero, thereby reflecting their impact on changing the gross farm

income. From Table 24 above it can be observed that four elasticity coefficients were

statistically significant at 1 percent, while family labour and contact of DA were significant at

10 percent significance level. The results of the study showed that one percent increase in the

cultivated area would result in 0.554 percent increase in the gross farm income of small

farmers. That is, there is a possibility of increasing small farmers’ gross farm income if they

cultivated more land. The number of draft oxen also showed positive effect on output and one

percent increase in the number of draft oxen would lead to 0.421 percent increase in gross

farm income among small farmers.

104
 A positive and significant effect was also observed in the use of agricultural credit.

Results revealed that one percent increase in fertilizer (credit) would increase the income of

small farmers by 0.039 percent.

The study observed a positive and significant effect of contact of DA on gross farm

income. A percent increase in contact of DA would increase the income of small farmers by

0.386 per cent.

The total livestock ownership (TLU) also showed a positive and significant effect on

gross farm income. A percent increase in TLU would increase the income of small farmers by

0.237 percent. Family labour had a negative coefficient and was significant at 10 percent.

This implied that family labour was in excess usage and would reduce the gross farm income

of small farmers if employed more than their existing mean level use. These results are in

accordance with those of Negussie (1993).

The aggregate of elasticity of coefficients is found to be 1.04. This means that one

percent increase in all the inputs would bring about roughly one percent increase on gross

farm income of small farmers. This shows that production is in the range of constant returns

to scale and this implied that there is scope for increasing the factor inputs with the exception

of family labour.

105
 CHAPTER VII

SUMMARY AND CONCLUSIONS

This chapter presents the summary and conclusions of the present study. It may be

noted that the conclusions serve as the policy implications of the study as well

7.1 Summary

Ethiopia is an agricultural country employing more than 85 per cent of the total

population in that sector. Small farmers are numerically dominant, contributing over 91 per

cent of the production. Yet, this output cannot meet the food requirements of the country's

population, even for the farmer himself. There exist a variety of reasons for this problem, but

low productivity, which results from lack of capital, is the main one.

Small farmers in Ethiopia, as in many developing countries, lack finance to purchase

productive agricultural inputs. With the exception of family labour and local seeds, almost all

inputs required in agricultural production are to be purchased. However, the majority of

Ethiopian population comprises small farmers, who cannot implement a technology without

external funding.

Therefore, the present study was focused on the importance of agricultural credit for

small farmers and thereby for the nation as a whole. This study was focused on the impact of

credit on gross farm income of the small farmers and to identify factors affecting agricultural

credit use. Logistic regression model was used to identify factors affecting agricultural credit

use (to identify factors distinguishing users and non-users of agricultural credit) of small

farmers and Cobb-Douglas production function to evaluate the impact of credit on gross farm

106
income. The descriptive analysis has revealed that the agricultural credit users are

economically better off than non-users. With regard to the amount of food consumed, the

household income, the number of meals consumed per day, the household diet, clothing,

education of children, and access to health, credit users are much better than non-users.

Twelve variables were hypothesized to explain the factors affecting the use of

agricultural credit by small farmers. Some of these variables were demographic type while the

others were socio-economic in nature. Natural and institutional factors were also hypothesized

to explain access to credit use. The logistic regression model revealed that, six variables were

significant while the remaining six were less powerful in influencing the dependent variable.

The significant variables included in the model were farm size, fertility status of the

soil, gross farm income, total expenditure, and frequency of DA contact. Farm size was found

to have a strong negative impact on agricultural credit use of the sample households, implying

that farmers who had larger farm size were not agricultural credit users. This may be

attributed to the substitutability between land and fertilizer as factors of production. This

means that the farmers can produce more either on large farm size without much fertilizers, or

on a smaller land holding but using fertilizer purchased from credit. By the same token,

households, which were non-users of credit, had good soil fertility. This also reflected

substitutability between factors of production. On the contrary, gross farm income was found

to influence agricultural credit use of small farmers positively. A larger percentage of credit

users were better off. The well-to-do households can bear risks of crop failure.

Livestock holding had a positive impact on agricultural credit use of small farmers.

This suggests that households who had a large number of livestock can bear the risk of crop

107
failure because of liquidity of livestock holding. Total expenditure by the household was also

found to have a positive effect on the use of agricultural credit by small farmers. That is,

farmers who spent more on household needs had more access to agricultural credit because

they had more capital to spend on goods and on farm inputs. The other important variable was

frequency of contact DA. As hypothesized, this variable was positively related to the

dependent variable, showing that farmers, who had more frequent contact with DA, had

greater access to agricultural credit use.

The other objective of the study was to assess the impact of credit on gross farm

income. To achieve this Cobb-Douglas production function was employed. The value of R2

was 57.9 and F-test confirmed the significance of the results at one per cent level. This means

that the fitted regression equation with six variables explained 57.9 per cent of the variation in

gross farm income of the farmers. The results revealed that the coefficients of elasticity

relating to area cultivated, number of draft oxen, agricultural credit, contact of DA and total

livestock holding were highly significant at one per cent level, thus indicating that one per

cent increase in each over the mean level use would increase gross farm income of the

farmers by 0.554 percent, 0.421 percent, 0.039 percent, 0.237 percent and 0.386 per cent,

respectively. The coefficient for family labour was significant at 10 per cent but negative.

This was, probably due to excess availability and usage of labour by small farmers.

The findings of this research indicate that financial services to the poor farmers would

improve their livelihood enabling them to purchase agricultural inputs. Micro-finance

programs assist credit recipients to increase and stabilize their incomes, generate additional

assets, and provide access to better nutrition, medical and educational services. Thus, micro

financing services play a vital role in the eradication of poverty in rural Ethiopia.

108
 In general, the study revealed that credit users are in a better position as compared to

non-users. However, credit was not adequately extended and not given to all activities as a

package. It is probably because of inadequate source of credit, untimely supply of credit, lack

of extension services, problem of infrastructure, and others. Since it is a social science

research, it has some limitations such as the limited area and small number of samples

covered, consideration of one production year, and short duration of the research. Therefore,

additional research work is necessary covering a wider area, a larger sample and extended

period of time. Nevertheless, the results of the different models used in this study are helpful

to make the following conclusions, which may be construed as the policy suggestions as well.

7.2 Conclusions

1 As observed from the results being credit user brought about a positive impact on the

living standards of the farmers and gross farm income. Therefore, it is advisable to

further extend loan to wider range in area coverage and farmers.

2 Agricultural activities in general are seasonal; hence credit providers have to be

conscious with regard to the timely provision of credit.

3 Frequency of contact of DA was found to be one of important factors, which increase

access to credit use. Hence, the government has to increase the number of DAs per

PAs.

4 As observed from the study the entire credit spent to purchase fertilizer. This lacks

diversification of credit use, which can minimize risks. Therefore, it is essential to

provide credit for different purposes, like animal fattening.

5 Package credit will serve the needs of small farmers better than financing on a piece-

meal basis. As observed from the study, fertilizer credit alone is not sufficient to raise

109
 farm incomes as other inputs also influence the output. Particularly, lack of oxen

adversely affects farmers' output. Therefore, small farmers should be provided with a

pair of oxen, improved seeds, and other inputs as a package.

6 The study revealed inadequacy of credit to meet the farm needs. However, the source

of the inadequacy of credit is not specified. Hence, further study is necessary in this

regard. This study should be integrated in the sense that it covers farmers, credit

institutions, suppliers of inputs, and extension workers.

7 Land is one of the most constraining factors and the possibility of its expansion seems

bleak. Therefore, the government should assess and encourage techniques for

increasing the intensity of cultivation through facilities like irrigation.

110
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with Special Reference to Kenya," Welt Forum Verlog-Munchen, No 3, Germany.

Wills, I.R. 1972, “Projection of Effects on Modern Inputs on Agricultural Income and
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Wolday, Amha, 2003, “Microfinance in Ethiopia: Performance, Challenges and Role in
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APPENDICES

Appendix I: Conversion Factors Used to Compute Tropical Livestock Unit (TLU)

Animal category TLU

Calf 0.25
Heifer 0.75
Cow/Ox 1.00
Horse 1.10
Donkey 0.70
Sheep/Goat 0.13
Chicken 0.013
Bull 1.00
Camel 1.00
Mule 0.70

Source: Stork, et al, 1991.

Appendix II: Conversion Factors to Drive Man-Equivalent

Age group(yrs) Male Female

<10 0.0 0.0
10-13 0.2 0.2
14-16 0.5 0.4
17-50 1.0 0.8
>50 0.7 0.5

Source: Stork, et al, 1991.

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Appendix III: Summary of Survey Questionnaire

Date_________

Code No.______
1. Identification
Name of the respondent ___________

Types of the household: 1.Male headed 2. Female headed

Types of Respondents: 1. Users 2. Non-Users

Farmer's Service coop.___________
Peasant Association _____________
Village _______________________
Type: contract\ follower__________
Interviewer____________________
Supervised by Name________________ Date ____________ Signature ____________
Approved by (Researcher)_____________ Date_____________ Signature ___________
Comment (if any) _________________________________________________________
_________________________________________________________
__________________________________________________________

2. Household/family Particulars

1. What is the household size?

1. Male ___________
2. Female __________
3. Total ___________
2. Please provide information on all the members of your household

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 1 2 3 4 5 6 7 8 9
Name Sex Age Marital Relationship with Literacy Education Main Occupation Absent/Present
Status the head of house status level
hold
1.Female in years 1.Unmarried 1. Head 1.llliterate For year 5 1.Farming 1.Usually
2.Male completed 2.Married 2.Married 2.Literate and above: 2. Handicraft present
3.Separated 3.Son/Daughter 1 Can read 3. Daily labour 2.Usually
4.Divorced 4.Parent & write 4. Student absent (less than 3
5.Widowed 5. Grand parent 2. Grade 1- 5. Soldier (months)
6. Grand Child 6 6. Unpaid family 3. Fifty-fifty
7 .Sister/ brother 3. Grade 7- 7. Unemployed 4. Often absent
8. Relatives 12 8. Trade (6- 9months)
9.Others (Specify) 4. Illiterate 9. Gvt sector 5. Completely
5. above 12 10. Disabled absent(more
11. Old age than 9 months)
12. Underage
13.Others
(Specify)
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13

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 3. Off-farm Work

Operation involved On which months Total No of working days income

3.1 Daily laborer
3.2 Handicraft
3.3 Trading
3.4 Fire wood selling
3.5 Home made drinks
Others (specify)

Farm Resource Characteristics

4. Total farm size______________ in local units.
5. Do you owe land? 1. Yes
2. No
6. If yes, size and use of land holding in 2001 crop season
1 Total land holding under utilization ______ Tsmdi (____ hectare)
2 Owned by the house hold ______Tsmdi (_____ hectare)
3 Rented in ___________Tsmdi _______(hectare)
4 Sharecropped in _______ Tsmdi (_________Hectare)
7. Own land operated by others _________ Tsmdi (_____ hectare)
1 Rented out _____ Tsmdi( _________ hectare)
2 Sharecropped out ________ Tsmdi (_______ hectare)

8. Allocation for different crops during 2001 crop season.

No Crops grown Area Allotted in Karti

1. Teff
2. Wheat
3. Chickpea
4. Guaya(vetch)
5. Lentil
6. Nugi
7. Barley
8. Sorghum
9. Maize
10. Peas
11. Beans
12. Vegetables
13. Chat
14. Others(specify)

9 Land allotted for livestock grazing _______Fallow _________others (specify)________

10 Fertility status and soil character of the plots as perceived by the farmer: good------
fair________bad___________.
11 For which crops have you used fertilizer, improved seeds etc. obtained from the loan?

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Crops Input used Total
Area(Ka Seed DAP Urea Pesticide Insectici Labou (Br)
rti) (Kg ) ( kg) (Kg) (Kg/lit) de(Kg/lit r(M.D
) ’s)
Teff
Wheat
Chickpea
Guyyo (vetch)
Lentil
Nugi
Barley
Sorghum
Maize
Peas
Beans
Vegetables
Chat
Others,
Specify
12 Do you feel that your holding is sufficient to satisfy the following needs? Yes / no
a) Home consumption__________________
b) For other needs _____________________
13 If no, which of the following activities did you perform to raise your income?
1. Preparing and selling beverages / Sewa, Areki/
2. Preparing and selling food (including tea, bread)
3. Weaving
4. Tailoring
5. Handicraft
6. Buying and selling grains and other agricultural products
7. Fattening
8. Buying and selling livestock
9. Bee reproduction
10. Poultry
11. Selling animal products such as milk, cheese, butter, honey
12. Selling second hand clothes
13. Selling firewood and charcoal
14. Selling labour
15. Trading
16. Nothing
17. Other (Specify)
14. Can you get more land if you want? Yes/ no ___________
15. If yes were? _________________distance from your home ______________hrs.
16. Have you used hired labour on farm?_________________
17. If yes, how often? ___________________
18. At what rate?______________
19. For how long? _____________________
20 For what farm activity did you hire labour?
1.Plough
2.Weeding
3. Harvesting
4. Threshing
5. Others(specify ________________________
21. Was there shortage of labour during the peak period? Yes/ no ________________.
22. If yes, how did you overcome it?
a) Through mutual aid team (Debo)_____________________

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 b) Hiring daily labourer ______________________
c) By using the female children labour of the family _____________
d) Others ( specify)_________________
23. On the average which days of the month other than Sundays pand national holdays did you celebrate
religious days? a) abbo----------b) sellassie----------c) michael---------- d) gebriel---- e) mariam f)
medianalem ---------g) Yohannis---------- h) Kidanemehret ----------I Balewold---------j) Jimata------------
others ( specify --------------
24. Which of the following systems have you used for your farming operations?

No Source of labour Type of no. of days/ Amount paid

actual weeks Kind cash
operation
1. Seasonal labour

2. Friends and relatives

3. Support from PA

4. Labour exchange

5. Others, specify

25. Number of oxen owned for draught purpose

1. none 2. one 3. two 4. three 5. four 6. five and more than five

Production and Consumption

24 Crops
Major crops Total production Price/Qts Amount
produced in (Qts) (Birr)
Consumed Sold Stored
Teff
Wheat
Chickpea
Guayyo (Vetch)
Lentil
Nugi
Barely
Sorghum
Maize
Peas
Beans
Vegetables
Others
(specify)

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25 Livestock Products

Type of Production Total owned Price per A m o u n t (No.) in 2001

unit
Consumed Sold Saved
Oxen
Cows
Heifers
Calves
Bulls
Donkey
Horses
Mules
Goats
Sheep
Poultry
Milk
Butter
Dung
Eggs
Others(specify)

26 Indicate the amount of money spent for the following during that production year.

Item Birr

1. Clothing ------------------
2. Education ------------------
3. Medication ------------------
4. Social contribution -----------------
5. Social ceremonies -----------------
6. Food -----------------
7. Recreation -----------------
8. Others (specify) ----------------

LIVING CONDITIONS /WELFARE/

Construction Materials of the Main Residence Structure
27. Is there a change after taking the credit? Yes No,

28 If yes, what changes you observed

1. Able to built a better house
2. Able to furnish my house
3. Able to by land
4. Able to buy livestock
5. Able to increase my income
6. Able to teach my children
7. Able to feed for better
8. Able to celebrate holidays
9. Able to buy better clothes for my family more frequently
10. Able to save more
11. Able to spend more
12. Able to spend more for medical care
29. If not what are the reasons:
1. Natural disasters
2. Extended family obligations
3. Low price of agricultural commodity
4. Limited marketing opportunity
5. Distant market center
30. What if credit is not available?

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 1. Sold out my assets
2. Rent out my land
3. Shared out my land
4. Selling labour
5. Trading
6. Migrate to search for work
7. Nothing
8. Others (specify)
31. Type of House
1. Debri (G + 1) 2. Hidmo, 3. Gojo (Sekhela) 4.Corrugated iron
5.Others (specify) _________
32. Number of houses including kitchen ______________
33. Type of wall
1= Mud/earth 2= stone 3 = bricks/Hollow blocks
4= Others (specify) _______
34. Type of floor 1 = Mud/earth 2= Stone, 3 = Cement
4= Others (Specify)_________
35. Type of roof
1=Grass 2 = Iron sheets 3= Timber 4 = Mud/earth)
36. Tenure of the main residential structure
1. Owner-occupier, 2. Rental 3. Free 4. Others (specify)_______
37. Please provide the following details on the assets of the household

Type Type of Asset Whether owned Whether bought within Value in

1= Yes the last two years birr
2=No 1= Yes 2= no
1 Radio
2 Cassette player
3 Mattress
4 Floor sheet
5 Bench
6 Gas Cooker
7 Bed frame
8 Others (specify)

38. During the last two years, has the total household income from farming sources increased or
decreased,
1= Decreased 2= Decreased significantly 3= Remained same
4= Increased 5= Increased significantly
39. During the last two years, has the amount of food the household eats_____?
1 = Increased
2 = Increased significantly
3 = Stayed the same
4 = Decreased
5 = Decreased significantly
40. If increased, what was the source of income?
1 = Micro enterprise profit
2 = Good harvest season
3= Use agricultural inputs
4 = Remittance from family members
5 = Casual labor
6 = Others (Specify) _____________

41. If decreased what were the main reasons

------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------

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42. What did your household do to get this difficult situation or hunger season?
1 = Borrowed money or food from others at no cost
2 = Borrowed money or food from others at cost
3 = Sold personal property
4 = Migration of one or more family members to other areas for employment
5 = Local employment as daily laborer
6 = Borrowed money or food from MFI’s
7 = Others (Specify) _____________

43. Types of meals children under 5 years of age consume? (Multiple answers)
1 = morning meal
2 = Between morning and Midday meal
3 = Midday meal
4 = Between midday and evening meal
5 = Evening meal
44. Types of meals household members aged 5 – 15 years consume
1 = Morning meal
2 = Between morning and Midday meal
3 = Midday meal
4 = Between midday and evening meal
5= Evening meal

45. How do you often celebrate major festivals/holidays such as New Year, Christmas, Easter etc,
during the last two years?
1 Slaughtering sheep
2. Slaughtering goat
3. Slaughtering chicken
4. Shared Oxen for group
5. Just as other normal days

46. During the last two years as compared to prior years, do you think your diets are.
1. Better
2. Same
3. Worse

47. How frequent do you consume dishes such as egg, meat milk and other animal products other than
in holidays.
1. Always
2. Usually
3. Occasionally
4. Rarely
5. Not at all (insignificant)
48. During the last two years has the household diet improved or worsened?
1. Improved
2. Remained the same
3. Worsened
49. If household diet is improved, what has been the major improvement?
1. Able to buy more cereals and staples such as teff
2. Able to buy vegetables and fruits
3. Able to buy dairy products such as meat, milk
4. Others (specify) _________________
50. If worsened explain how it worsened ___________________________________

51. What source of light does your household use?

1. Electricity
2. Masho
3. Kuraz
4. Candle
5. Firewood or l eaves

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 6. Others (specify)
52. What source of energy does often the household use of cooking food?
1 Hasser/Geleba
2 Cattle dung
3 Firewood
4 Charcoal
5 Kerosene/Buta gas
6 Others (Specify) ________
53. How frequent do you buy clothes for children under 15 years?
1 Once a year
2 In less than one year
3 Between 1 and 2 years
4 Others (specify)
54. How frequent do you buy clothes for adult members of the household
1. Once a year
2. In less than one year
3. Between 1 and 2 years
4. Others (Specify)
55. During the last 12 months was there any household member who needed medical attention
1 = Yes 2 = No
56. If yes what proper measure was taken?
1 Taken to a medical center (clinic, health center)
2 Taken local treatment, including tsebel
3 Thought she/he would feel better
4 Others (specify)
57. If not taken to the medical center, the main reason is
1. Lack of money
2. Local treatments are better
3. Thought she/he would feel better
4. Others (specify) ________________
58. If taken to a medical center, where did you get the money from
1. Business profit (Savings from business)
2. Borrowed from other individuals
3. Sold livestock or other property
4. From loan
4. Other sources (specify) __________

59. Number of children school aged (5-17 years of age)

a b c d e
Name Sex 1=Fem Present or last Whether currently
Age 2=Male grade attending School
Completed 1=Yes 2=No

60. If there are school – aged children, not attending school, why?
1. Needed for help in the micro enterprise activity

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 2. Need for help in other agricultural or other activities
3. School too far
4. No money
5. Has attained enough
6. Disabled
7. Not necessary or beneficial
8. Because the child is a lady
9. Others (Specify) __________________
61. What is the highest-grade level that any of your children has complete?
_______________________________________________.
62. Is the number of children attending school during school during the last two years?
13. Increased/why______________________________
14. Decreased/Why_____________________________
15. Same
63. Do children students miss classes to assist you with the micro enterprise ?
1. Occasionally
1. Sometimes
2. Rarely
3. Not at all
64. If children are missing classes who are relatively frequent absentees
1= Girls
2= Boys
Why____________________________________________________.
65. How was the amount your household spent on school and school expenses during the last two years
compared to years before?
1. Increased
2. Stayed the same
3. Decreased

Credit Acquisition Mechanism

67. Types of the Program ______________
1. ACORD
2. HCS
3. Agriculture
4. LWF
5. WIBS
6. Others (Specify)

68 What type of credit did you receive in 2001

a. Formal
b. In formal
c. Both
69. Fund Availability

Note: Short = Short term <=1 year, Medium =>1&<=5 Medium term, Long = Long term>5years
Formal Informal
DBE CBE Agric NGOs Relative Friends Rural Shopkeepers Other
WIBS ACORD HCS LWF money specify
lenders
1. Source
2. Form:
Cash
Kind
3. Term
Short
Medium
Long
4. Purpose
Production
Consumption

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5. Security
Yes
No
6. Amount
Short
Medium
Long
7 Interest rate
Short
Medium
Long

70. Duration of the client in the program is _______ years

71. Date joined the program 21.1 Date ______
20.2 Month _____
20.3 Year ______
72. Name of group (If any) ___________________________
73. Total number of members of the group (If any) ______________

74. Why did you borrow from the above mentioned sources?
a) Less security required
b) Easier to get loan
c) Seemed more friendly
d) Knew persons before hand
e) Get terms to suit situations
f) Pervious business dealings
g) Cheapest source of credit that could be found
h) Other reasons (specify) --------------------------------------
75. Please provide the following details for each loan provided starting from the latest.
a b c d e
Loan 1 loan 2 Loan 3 Loan 4 Loan 5
41.1 Amount of loan (in Birr
41.2 Date received
41.3 Main intended use*
41.4 Actual use of the loan**

* 1 = Purchase of tools/business assets

2= Working capital
3= Household assets
4= Household expenses (including ceremonial)
5= Purchase farm inputs
6=thers (specify) ____________________
** 1= Purchase of tools /business assets
2= Working capital
3= Household expenses in food, clothing and other supplies
4= Give or loan the money to spouse
5= Keep the money on hand in case of an emergency
6= Used to pay earlier loan
7= Others (specify)_____________
8= Purchase farm inputs

76. Did you use production credit for consumption purpose? -----
77. If yes, why? --------------------------------------------------------------
---------------------------------------------------------------------------
78. How much? -------------------------------------------------------------.
79. Did you get the amount you requested for production purposes? -------.
80. If not, why? -------------------------------------------------------------------------------------

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81. How could you get into the channel of formal credit? -----------------------------------
82. Did you get formal credit service in time? -------------------.
83. What are the main problems affecting your saving and investment decision?
a) Natural disaster
b) Extended family obligation
c) Low price of agricultural commodities
d) Limited marketing opportunity
e) Others (specify) ----------------------------------------

Institutional and Social Factors

84. The distance form extension agent (hrs) -----------------------------
85. Distance from institutional credit (hrs) ---------------------------------
86. How many times the formal credit source of your branch visited you? ----------
87. Was credit received adequate and timeliness? -------------------------
88 The rate of application of improved technologies/inputs per hectare you use -------------------------------
-------------------------------------------------------------
89 If the rate of application was not the recommended one, why you used like this ---------------------------
-----------------------------------------------------------------------------------
90 Perceived condition of the prevailing out put price and market service --------------------------------------
-----------------------------------------------------------------------------------
91 What is your status in PAs and SCs-----------------------------------------?
92 Did you celebrated social ceremonies in this year? ---------------
1) Wedding
2) Funeral ceremonies
3) Engagement
4) Circumcision
5) Idir
6) Mahber
7) Others (specify) ___________________
93 What were you prepared for these ceremonies and how much do you estimate to have invested
on it? ___________________________
94. Have you gone to a health center for treatment? ______________.
95. If yes, How much did you pay? ________________
96. The source of the money you paid __________.

Communication
97. Did you have a radio? __________________
98. If yes, did you follow agricultural programs on the Radio? ________________
99. If literate, have you access to written agricultural materials? _______________
100. If yes, how often? __________________________
101. If no, Why? ________________________________
102. Did you meet DAs for technical assistance?__________________
103. If yes what were the major factors that made you to communicate with your DA?
____________________________________________________________________
104. How often for each factors mentioned? _____________________________
____________________________________________________________________
105. Have you been trained about credit, interest rate and commitments that you had to
Fulfill? _________________________________________
106. Have you ever participated in leadership of local associations?___________
107. In which ones? __________, _________________, __________________
108. For how long? ______________________
109. It helped you in getting loan? _______________
110. If yes, How? ______________________________

135
Appendix IV: Financial Institutions Operating in Ethiopia
Commercial Development Insurance Micro-finance
Banks Bank Companies Institutions
1 Commercial Development Ethiopian Insurance Amhara Credit Saving Institution
Bank of Ethiopia Bank of Ethiopia Corporation
2 Construction and National Insurance Dedebit Credit Saving Institution
Business Bank Company of Ethiopia
3 Dashen Bank Awash Insurance Oromya Credit Saving Institution
S.C. Company S.C.
4 Awash United Insurance Omo Credit Saving Institution
International Company S.C.
Bank S.C.
5 Bank of African Insurance Specialized Financial and Promotional
Abyssinia S.C. Company S.C. Institution
6 Wegagen Bank Nile Insurance Gasha Micro Finance Institution
S.C. Company S.C.
7 United Bank S.C. Nyala Insurance Wisdom Micro Finance Institution
Company S.C.
8 Nib International Global Insurance Sidama Micro Finance Institution
Bank S.C. Company S.C.
9 Lion Insurance Aster Micro Finance Institution
Company S.C.
10 Africa Village Financial Service
11 Buussa Gonof Microfinance Institution
12 PEACE Micro Finance Institution
13 Meket Micro Finance Institution
14 Adiss Credit Saving Institution
15 Meklit Micro Finance Institution
16 Eshet Micro Finance Institution
17 Wasasa Micro Finance Institution
18 Benishangul Gumuz Micro Finance
Institution
19 Shashemena Idroch Yelmat Agar MFI
20 Metemamen Microfinance Institution S.C

21 Mekedela Micro Finance Institution S.c

136
 DECLARATION

I, the undersigned, declare that this thesis is my work and that all sources of

materials used have been duly acknowledged.

Name: __________________________________

Signature: _______________

Place: Alemaya University

Date of submission: April 2003

137