RESEARCH METHODS IN ECONOMICS (ECON 3063)

GROUP ASSIGNMENT

Research Title

DETERMINANTS OF HOUSEHOLD PARTICIPATION IN INFORMAL

FINANCIAL INSTITUTION: INCASE OF TICHO WOREDA.
NAME ID NUMBER

Chapter 1

1. SAMUEL ADUGNA…………………..…….…….……...UGR/2919/12
2. YOHANES BELEW …………….………..…..….…..….UGR/9472/12
3. YENEBEB DEBEBE ………………………..…..……….UGR/6770/12

Chapter 2

4. THOMAS WALDE …………………………..……… …..UGR/7195/12

5. YORDANOS GIRMAY …………………….………….….UGR/7532/12
6. SAID ALI …………………………………………………….UGR/0839/12

Chapter 3

7. SELOMIE SIFERAH ………………………..……….…UGR/2657/12

8. YONAS SHIFERAW……………………………………….UGR/1337/12
9. TIBABU EJERSA…………………………………………..UGR/9307/12

SUBMITTED TO Dr. GEBEYEHU M.FETENE (PhD)

SUBMISSION DATE MAY 20, 2022

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ABSTRACT
The determinant of household to participate in informal finance institution in the Ticho woreda
were examined in this study by considering how much informal finance institution will improve
the livelihood of households and reducing poverty and also how informal finance institution
develop the capacity of saving of households. In conducting the research we will use both
primary and secondary data. The primary data will be collected by questionnaire and
observation. The secondary sources will be collected from different documents and materials.
The research will be conduct in Ticho Woreda to analyze the determinants of household to
participate in informal finance institution and to identify the role of informal finance institution
on the livelihood of households.

The study will present the result by descriptive statistics method of data analysis and by
econometrics model like binary logit model. Quantitative data analyzed using descriptive
statistics such as, percentage, mean, and table. There are five independent variables from this
age of the household, sex of household, occupation of the household will occupy, religion of the
household and education level of the household may have a positive influence on the household
for the participation in informal finance institution and significant from the Stata regression
result.

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Contents
1. INTRODUCTION ............................................................................................................................................................................ 4
1.1 Background of the study ...................................................................................................................................................... 4
1.2 Statement of the problem .................................................................................................................................................... 6
1.3 Objective of the study ........................................................................................................................................................... 8
1.3.1 General objective ........................................................................................................................................................... 8
1.3.2 Specific objective ........................................................................................................................................................... 8
1.4 Relevance of the study .......................................................................................................................................................... 8
1.5 Scope and Limitations ........................................................................................................................................................... 8
1.5.1 Scope of the study .......................................................................................................................................................... 8
1.5.2 Limitation of the study ................................................................................................................................................... 9
CHAPTER TWO ............................................................................................................................................................................ 9
REVIEW LITERATURE ................................................................................................................................................................. 9
2.1 Informal finance institution; theoretical literature review ............................................................................................... 9
2.1.1 Iqqub ............................................................................................................................................................................ 10
2.1.2 Iddir - the social insurance ........................................................................................................................................... 10
2.1.3 Money lenders ............................................................................................................................................................. 11
2.1.5 Characteristics of informal finance institution ........................................................................................................ 12
2.1.6 The role of informal finance institution ........................................................................................................................ 13
2.1.7 The livelihood of framework ........................................................................................................................................ 13
2.2 Empirical literature review ............................................................................................................................................... 14
CHAPTER THREE ........................................................................................................................................................................ 15
METHODOLOGY ......................................................................................................................................................................... 15
3.1 Area description ................................................................................................................................................................. 15
3.2 source and method of data collection ............................................................................................................................... 15
3.3 Sampling size and sampling techniques ........................................................................................................................... 16
3.4 Method of data analysis ..................................................................................................................................................... 16
3.6 Hypothesis ........................................................................................................................................................................... 17
3.7 Definition of variables ........................................................................................................................................................ 18
3.7.1 Dependent variable ....................................................................................................................................................... 18
3.7.2 Independent variable .................................................................................................................................................... 18
3.8 Work plan and cost budget ................................................................................................................................................. 19
3.8.1 Work plan (time schedule) ........................................................................................................................................ 19
Budget schedule .............................................................................................................................................................................. 20
References ...................................................................................................................................................................................... 21

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1. INTRODUCTION
1.1 Background of the study
Financial institution is a company engaged in the business of dealing with monetary transaction
such as deposit, loan, investment and currency exchange. An institution (public or private)
connects funds from public or other institution and invests them in financial asset. It encompass a
broad language of business operation within the financial service sector including bank, trust,
companies, insurance companies and brokerage firms or investment dealer (Adam Hayes,2022).

There are two types of financial institutions those are formal and informal. Formal financial
institution is an institution that are regulated by the central banking supervisory authorities for
licensing and credit policy implementation and Informal financial institution is an institution that
provides saving and credit facilities for small farmers in rural areas and for lower income
household in small scale enterprise in urban areas. Our research focus on informal financial
institution because it provides better services to small size loan demander with less cumber some
procedures and at lower transaction costs.

In simple terms, formal finance is financing capital that has been sourced from banks and other
formal financial intermediaries, whereas informal finance is the capital which has been sourced
from friends, family, relatives or private moneylenders (Elston et al). In fact, as oppose to the
formal finance institution, informal finance institution is typically known for its high costs per
transaction, bureaucratic leading procedures, elaborate and high collateral requirement. This
could due to the fact that informal finance institutions derive their rule and regulation from the
country culture and custom and their informality nature (Dejene, 2012).

Studies in Africa show that different forms and function of informal financial institution
demonstrate the adaptability of the systems to different economic conditions and charging
circumstance (Aryeefety and Udry, 2011). The definition of informal finance in Africa is diverse
and wide, for instance rotating and credit association (ROSCAS) or ton tines in Senegal operate
among different salary employee (people with regular income, such as doctor, teacher and other
public employees). As a result ton tines are common in town and village (USAID, 2015).

Numerous studies show that similar types of ROSCAS institution are present in Ethiopia serving
in society with both credit and saving function (Aredo, 2011), (Mauric, 2013), (Solomon, 2014).

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The most important of ROSCAS are the mutual assistance association called iddir, rotating and
credit institution called iqqub, many group comes together in order to provide wide range of
mutual assistance, but in the end these are documented by provision of financial services to
members.

Both iqqub and iddir have evolved over time without any external assistance including absence
of government support to meet financial, material and social need of the small procedures. Based
up on the principle of collective action both institution provide extremely use full services that
are beyond the reach of individual person or households (Dejene, 2012).

The bulk of the population falling in low to medium income group in Ethiopia secures lending
and deposit services from the informal finance institution. Formal institutions have not
developed to expectation and have hardly reached the rural population. Consequentially farm
household have been relying almost exclusively on informal credit generated from within the
rural areas. For example in a survey conducted in the three regions of southern shoa between
2010 to 2011 by Amedeetal (2016) found that more than 84 % of loan disbursed comes from
informal finance mainly relatives and neighbors. Thus, the informal finance institution has been
still providing worthy services to the neediest farm household (Teresa, 2015 and Holmberg,
2014).

The informal finance institution had played major role in strengthen the rural economy. Because
it claims itself to be the main sources of finance to its rural clients and it enable them purchase of
farm inputs such as seed herbicides fertilizer etc and purchase of consumption good such as food,
clothes, covering children’s educational expenses and also starting or financing new business
(Teresa, 2015).

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1.2 Statement of the problem

In African countries, obstacles to private sector development are many; the financial constraints
have received the most attention from both governments and donors. Throughout the 1980s, it
was fashionable to blame the financing constraints of the private sector on the inadequacies of
banking systems and their poor perceptions of the creditworthiness of the small ventures that
dominate African economies. Increasingly, however, possible solutions to the underlying factors
behind the unwillingness of commercial and other banks to lend to small enterprises are being
sought, as more and more people begin to understand the problems of banks in relation to their
structures and policy bottlenecks. The focus of most small holders specially people that live in
the rural part of Africa obliged to divert to informal financial institutions in need of finance.

Poor households in developing countries face a variety of shocks that negatively affect their
welfare and influence their livelihood. To cope with these shocks, household use different
mechanism, for instance, household may save own money, borrow money or obtain remittances
to smooth consumption and accomplish their activities. When formal financial institutions are
ineffective or failed to provide good governance and conflict resolution, informal financial
institution are commonly used solutions by the local society. The informal financial institutions
come in to being in order to improve the welfare and promote the economic status of members
(Zainol, Awang, Rahman, Abdullah &Dzulkifli, 2015). Also, the reasons of their existence
include lack of access to bank.

In the development economics literature it is common to read that the poor cannot invest to
escape their poverty because they are credit constrained, and that they are credit constrained
because they lack collateral, lack of regular income and high transaction cost for the providers.
In Ethiopia the majority of the people live in rural area. The society has also an access of
informal financial institution and gives priority for them because of the above stated constraints
the society face with the formal one. This informal financial institution gives the freedom to the
society to have financial access when they are in need. But the informal financial institution is
facing some problems indirectly because of some factors that hinder the rural community from
partaking. So, identifying these factors that hinder the participation is necessary to make the
informal financial institutions more accessible and to give the government and policy makers a
clue about their importance.

According to National Bank of Ethiopia, over 75% of Ethiopia's population is unbanked, while
nearly 40% of all bank branches are in the capital city Addis Ababa. This is an evidence that the
rural population has no an access for banks which are the formal financial institutions. Even
those who have an access to banks may not get lend in need of finance because of complex
procedures that banks has. These factors oblige us to give a good attention for informal financial

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institutions. Even though this informal financial institutions has a great role to play in rural area
for people who has unable to get access of the formal financial institutions they are not well
recognized by and get attention from the government.

The informal finance institution had played major role in strengthen the rural economy, because
it claims itself to be the main sources of finance to its rural clients and it enable them purchase of
farm inputs such as seed ,herbicides, fertilizer and purchase of consumption good such as food,
clothes, covering children’s educational expenses and also starting or financing new
business.Studies on the impact of informal financial institutions on socio-economic development
have been conducted by researchers. Ghazala (2006) found positive effects of informal financial
institutions such as micro-credit programs on the welfare of the people.So, understanding the
importance of informal financial institutions helps to avoid in advance policy changes that will
have adverse consequences on the functioning of these informal financial institutions
(Hoddinottetal, 2013).

Through these informal financial institution, rural people can articulate their needs, protect their
interests, manage resources and have access to various kinds of services through rural farmers
are rich in informal institution, they are not seen well recognized by formal institution and do not
get attention from the government body as well. This needs further research to address and how
to overcome the existing bottlenecks that constrain the household to participate in these
institutions. The aim of this paper is to identify factors that determine participation in these
institutions and to identify the role of these institutions in the study area.

Peoples in the study area are unable to get financial access from the formal financial institutions
due to their nature of inaccessibility, high collateral and transaction cost. So, the rural society
chooses to participate in informal financial institution like IDIR (the modern insurance) and
IQUB ( the modern bank). However, it is not easy to participate for the society because of
different factors. If this research going to identify this factors which are the bottleneck of
participation, the government and the policy makers will take their part to make this informal
financial institution to be considered during the policy formulation.

Most researchers conducted in related to this topic, but they cannot incorporate religion of
households and education level of household variables in their studies. Some researchers like
(MELKAM GETU, 2017 in GONDER UNIVERSITY), tries to incorporate religion of
households and education level of households but it was at a proposal level. Taking this most
researches made on this topic were done places where the socio economic condition and the sub
population is different from that we are taking now. Therefore, this study attempts to fulfill this
study gaps.

In general this proposal paper is an outline for the research paper that going to the determinant of
household to participate in informal financial institution in Ticho woreda .by the way of
answering ,this big question the research paper going to answer the following sub questions.

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  What are the impacts of religious factor on household participation in informal
financial institution?
 What are the impacts of education level of household participation in informal
financial institution
 What informal institution looks like in that specific woreda?

1.3 Objective of the study

1.3.1 General objective
The overall objective of the study is to analyze the determinant of household to participate in
informal financial institution in Ticho woreda .

1.3.2 Specific objective

The specific objectives of the study are described as follow;
 To identify the factors that determine household participation in informal
financial institution
 It enables the policy maker to make policies about the informal financial
institution

1.4 Relevance of the study

This study will be about the informal financial institution, it is supposed to create some
awareness about their role and importance among academician, regulators and different other
stockholders. The research also serves as springboard for further studies about informal financial
institution.

This study also helps the rural people to know the types of informal finance institution and the
role it play in their livelihood of the households, not only rural people but also informal finance
institution helps the urban society in case of emergence and many other cases that let people to
financial need.

1.5 Scope and Limitations

1.5.1 Scope of the study
The scope of the study will confine to identify the factors that determines participation of
household in the informal financial institution, to identify the role of informal finance institution
and evaluate the extent in which informal financial institution improve the living standards of
livelihood of households. In Arsi zone to keep the study on the manageable size and depth the

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researchers would make the study in the Ticho woreda because this woreda is familiar for the
researchers to get adequate information for their topic.

1.5.2 Limitation of the study

The study has been more compressive if it is clear from limitationand meet our topic of interest.
Because of finance, material and time constraints the study will limited in Ticho woreda. In
addition to this, the inaccessibility and invisibility of the study area were other factors that
obliged to restrict only in some selected informal financial institution in the area.

CHAPTER TWO

REVIEW LITERATURE
2.1 Informal finance institution; theoretical literature review
It is well known that the formal financial institution is mostly urban centered and as well as to
procedural particularly for the poor and uneducated majority of the country population, therefore,
the bulk of the rural households may be reluctant to use the formal institution rather they prefer
rely on informal finance institution, that is well adopted or acceptable to their culture and
customs (Solomon, 2014).

In this respect, Solomon (2014) pointed out that the informal finance institution are by far that
the most important sources of loan able funds both for the rural and urban populations as
compared to the formal finance institution. Similarly Dejen (2012) underlined how inaccessible
the formal sector is to the majority of the Ethiopian population makes little or no use of formal
use of saving and lending institutions. In a country where more than 80 percent (%) of the
population lives in rural areas, few banks and credit association that are presently operational are
limited to urban areas.

The informal financial sector in Ethiopia comprises mainly of iqqub (rotating and saving
scheme), iddir (traditional institution scheme), and money lender “arata abedarie” etc. Relatives
and friends are the other major traditional sources of finance as identified and described by many
authors, (Dejen, 2012). It is estimated that 78% total agricultural credit in Ethiopia stems from
informal finance institution (Dejen, 2012). According to the same source of the household survey

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66% of secured financial services from relative and friends, 15% from money lenders and the
rest 19% of from other sources indicated that only 7% possessed bank account.

2.1.1 Iqqub
Iqqub is one of the most common traditional practices of saving cash for the future investment in
most parts of Ethiopia. It is a form of social organization in which members come together for
the purpose of saving in case or in kind self help association. Cash is contributed by member
very fixed day a week or a month in successive rounds and given members after drawing a
lottery (Dejen, 2012).

It is not open to all members or every bodies, it is open to only to those who are able to regular
contribute the agreed sum of money (Aspen, 2009). According to Dejen (2012) and Aspen
(2009) the term iqqub is simply defined as an indigenous savings association where each
member agreed to pay periodically on sum. In similar manner Assefa (2012) is also defined it as
an association formed by a group of people or individual who agree to make regular contribution
to a fund, which is given in whose or in part to each contribution in rotation.

Iqqub is rotating type of fund raising and one does not entertain any fear of losing this money,
because of social ties and collateral security association with iqqub. Functioning, when a
member gets the money, other members who has not collect his or her share, will be his or her
guarantor. The guarantor for is liable to pay the member depts. This builds up the confidence of
members Iqqub has its own rule and regulation, the collector “sebsabi” and judge or
“dagna”.(Kejela et al, 2014).

2.1.2 Iddir - the social insurance

Iddir is an informal finance institution or association established by the community members to
provide social security during certain specified types of crisis occurred to its members (Kejela et
al, 2014). In this sense, iddir is a sort of insurance program run by community or a group of
people in terms of emergence like death of family members.

Djene, 2012 and Mauri, 2013 also defined iddir as an association made by groups of united by
ties of family and friendship, by which living the same district, by job or by belonging in to the
same ethnic group and an object of providing mutual aid and financial assistance in certain
circumstance.

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In most cases, iddir institution is open to all irrespective of ethnic back ground, religion, political
affiliation, sex and age. In addition, ethnic or social status, election of leaders and important
decision are based on the principle of one man one vote. Iddir is perhaps the most formalized and
democratic institution in Ethiopia. Therefore, iddir appears to have no restriction on membership
beyond playing the necessary dues and fees. All village at least one iddir could be open to help
for any one (Aspen, 2009).

Now a days, iddir provides a wider range of services including financial and material assistance
and consolation of a member in the events of difficulties, as well as entertainments (Salole,
1994). Some iddir provide assistance in the events of shocking apart from death, such as fire,
illness, loss of oxen or other livestock and harvest, destruction of house weeding and any other
events. During such circumstance, iddir would either given cash transfer or give loan (Hoddinott
et al, 2012).

2.1.3 Money lenders

It is one of the most important parts of informal finance institution in Ethiopia. It is locally
known as “arata abedarie” which is refers to traditional money lenders, who extend credit at
exorbitant or very high interest rates. Money lenders enter in to informal finance market to make
business by collecting interest on loans (Kejela et al, 2014).

In most cases, money lenders are part time lenders who supplement their income through money
lending; usually they have long standing relationship with their borrowers and the well informal
about the borrowers. Mostly the money lenders are farmers, shopkeepers, salaried employees and
business persons. The financial operations of money lenders are simple cost effective as
compared to those of baking systems (Kejela et al, 2014). Furthermore, interest rates are
influenced by the extent of relationships, degree of risk involved, availability of funds in the
community, length of the maturity periods and extent of competitions from the formal financial
market. Cash loan is specifically given for one market days; principles plus interest is collected
at the end of the days. Loan can be obtained with or without collateral, depending up on past
behavior of the borrowers, extent of personal relations between the contracting partners, etc
(Kejela et al, 2014).

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2.1.5 Characteristics of informal finance institution
There are many characteristics of informal finance institution from that some of them are
discusses below;
2.1.5.1 Informality
The informal finance institution has written rule as formal finance institution. It derives its rule
and regulation from society culture and customs. This indicated the cost per transaction is less
and it involves less bureaucratic procedures and delays elaborate per workers (Kejela et al,
2014).

2.1.5.2 Collateral
Depending on the relationship between the borrower and the lender usually informal finance
institution demand assets such as houses, shops, livestock, lands or personal guarantor. If a good
relationship exists between the group lenders, then loan transaction may be executed mutual trust
only. In most of the case, informal finance institution is required to bring a guarantor. The
guarantor is expected to be dependence and a good reputation and relatively wealthy (Kejela et
al, 2014).

2.1.5.3 Flexibility
In general, borrowers believe that the informal finance institution is more flexible than the
formal system. The informal finance institution is highly flexible in terms of interest charges and
rescheduling of repayment period. Based on the request of the borrowers and consent of the
lenders, it can be extended for another one or two years. A new agreement is made for the
rescheduling of debt repayment (Kejela et al, 2014).

2.1.5.4 Enforcement mechanism of loan repayment

Enforcement may be through the elders and the court of the laws. As indicated by G/yohannes
(2016) the informal lenders have easy access to information about their borrower, with whom
they have socially relationships. This permits credit contracts to pay a major role in enforcing
repayment.

2.1.5.5 Interest rate

In rural areas both interest free loan from friends and relatives and interest bearing one operates
side by side. According to a study by Alexander (2014) interest rate varied with in village

12
depending on the types of relationship between the contracting partners. Those who are closely
related to the money lender or loyal to him pay low interest rate (or even no interest). There
could be also interregional and temporal variation in magnitudes of interest rate.

2.1.6 The role of informal finance institution

Informal finance institution plays a great role in rural Ethiopia economy. In general term the role
of informal finance institution has for rural society is in poverty reduction. Specially, it play role
in households capital accumulation, in encouraging investment and saving, to overcome case of
emergence such as death and illness and many other role (Dejene, 2012).

2.1.6.1 Household capital accumulation

Informal finance institution for rural people, rural people us informal finance institution as bank
it is called rural bank. Money saved in form of informal finance increase from time to time and
then brings the capital accumulation (Assefa, 2012).

2.1.6.2 Poverty reduction

Poverty is lack of basic human need such as lack of food, clean water, lack of education and
shelter. This is common feature for rural people those who are far from formal finance institution
such as bank and other credit institution. So for rural people, informal finance institution
provides financial services to overcome the problem of poverty (Kejela et al, 2014).

2.1.7 The livelihood of framework

The livelihood framework is a way of looking at the complexity of people livelihood, especially
the livelihood of the poor, whether they are rural or urban. It seeks to understand the various
dimensions of a person livelihood; the strategies and objectives pursued and associated
opportunities and constraints (Holmberg, 2014).

The livelihood strategies and activities of poor people are often complex and diverse. For rural
people agriculture and other natural resource based activities may play an important role, but
rural household also diversify in to other activities, some of which are linked to agriculture and
the natural sector other which are not. Strategies may include subsistence production or
production for the market, participation in labor markets or laboring in the home, poor urban
people also depend up on multiple diverse livelihood activities involving different employment
(laboring) and self employment activities (Teresa, 2015).

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2.2 Empirical literature review
The inability of the formal financial sector to provide adequate financial services to small
farmers and the poor in general continued even after the reform (Assefa, 2012). A study by the
national bank of Ethiopia (2014) concluded that commercial bank of Ethiopia (CBE) and
development bank of Ethiopia (DBE) have only catered for insignificant demand for credit of
small and micro enterprise in rural and urban areas, therefore, mostly originated from the
informal sector such as iqqub, money lender and friends (National bank of Ethiopia, 2014).

On the other hand, as Dejene (2012) stated the non formal sources in Ethiopia include relatives
and friends, money lenders, neighbors, iddir, iqqub and mahber. The major sources of loans
include friends and relatives (66 %), money lender (14%) and iddir (7%). In other words the bulk
of the rural credit comes from informal sources. Every year, the informal sector mobilizes
resource equivalent to about 10% of deposits mobilized by all banks in Ethiopia. Rural iddir
mobilized through informal loans alone an amount 3.5 times the total capital of all micro finance
institution in Ethiopia.

It is argued that informal sources, however, do not generate enough and affordable finance for
business to stimulate economic development. In particular, the individual money lender (the
ArataAbedarie) is extremely expensive and is only resorted to in the absence of any alternative.
In this case borrowers are required to provide guarantors and the interest rate is excessively high.
Until recently the annual interest rate that the money lenders charged was estimated to range
from 60% to 12% (Getaneh, 2013).

informal financial institutions are still widely used in many low income countries and are
channels by which substantial amount of economic and social activities are carried out. Scholars,
however, are calling for the transformation of those informal financial institutions to formal one
(www, umantitoba, 2011).

For the urban and rural poor, often the only affordable and accessible form of financial and socio
cultural activities are provided by informal financial institution. So informal financial institution
play a great role in society’s development, recently these institutions were considered to be
relevant to modernity and included in development activities (Asgen, 2011).

14
We conclude that the above empirical literature review different studies to determine the
determinant of household participation in informal financial institution by using past data, they
cannot use the recent data by this reason we are to include recent data and we tried to fill this
empirical gap by using recent data to determine the determinant of household participation in
informal financial institution

CHAPTER THREE

METHODOLOGY
3.1 Area description
Tichoworeda is located in the east of Arsi zone, Oromia region. The average coverage of the
areas are approximately 2500 hectares and the population 5000 and above. The number of
female is 2600 and the number of male is 2400.

According to Tichoworeda agriculture office, 2019 the topographies of the studies area
comprised about 65% plain areas, 30% mountains and 5% rugged train. It situated with an
elevation of 2100 meters above sea level (Tichostatistical report, 2019).

The climatic condition is mild (woinadega) with minimum temperature 10°c and maximum
temperature of 32°c. The annual rainfall catchment is from 1500 to 1800 mile meter per year.
Ticho populations economic activities based on agricultural practices such as wheat, barley, teff,
tomato, and potato (Tichoworeda 01 kebele report, 2019).

3.2 source and method of data collection

To achieve the study more successfully and to have sufficient information, both primary and
secondary sources of data would be used. Primary data source will be collected through
questionnaire and observation. Secondary data source will be collected from different documents
and materials like annual report, journals and books. Additionally, data would be collected from
different offices, such as central statistical office on agriculture Ticho woreda 01 kebele
municipal office.

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3.3 Sampling size and sampling techniques
By using simple random sampling method we selected 01kebele from the rural kebele
surrounding the Ticho woreda. The reason we used simple random sampling technique is that; it
requires moderate cost and it meet a specific objective and it enhance the likelihood of
accomplishing our objective and to select 01 kebele is the population live in the woreda has
homogenous and this kebele represent others. The total population of the study area is
5000(Ticho woreda statistics, 2017). From this total population, there would be about 1253 total
households. From the number of household 93 of them will be selected as sample size. This is
due to the financial and time constraints. The sample size is by using simple random sampling
method the reason to use random sampling technique is that it gives equal chance for all
members.

Then the required information will be selected from the selected household. To determine the
sample size the researchers might consider factor like cost, time etc so total size of 93
respondents will be selected randomly by using Yamane Taro that derive sample size formula in
1963;

n = N/1+ (N) e2
Where; n = sample size
N = total number of household
e = expected error that the researchers committed when gather data (e = 10 %)

n = 1253/1+ 1253 (0.12) = 1253/ 13.53= 92.61= 93

Therefore, n = 93

3.4 Method of data analysis

Both qualitative and quantitative techniques would be used to analyze the data. Qualitative data
will be analyzed using descriptive statistics such as mean, percentage, and tabulation. A binary

16
Logit model which is best fit, the analysis for determinant factors that affect participation of
household in informal financial institutions has been employed.

3.5 Model specification

The study will intend to analyze how much the hypothesis size repressors (explanatory variables)
will be related to the participation (dependent variables) of household in informal financial
institutions. The dependent variable is a dummy variable, which takes a value of one or zero
depending on whether or not. The reason we select Logit model the dependency of the variable is
a binary variable.

The relationship between the dependent and independent variable has been explained through
marginal effect from Stata software results.

3.6 Hypothesis

 Dependent variable; the probability of household participation in informal financial

institution

 Independent variable; household sex, household age and religion of household

Determinants of household participation in informal financial institution: incase of Ticho woreda.

Model

Y= β0 + β1x1i + β2x2i + β3x3i + β4x4i + β5x5i + β6x6i + £i

Where, Y = the probability of household participation in informal financial institution

β0 = the intercept
β1 = the parameter of household sex
β2 = the parameter of household age
β3 = the parameter of household of religion
β4 = the parameter of household of education level
β6 = the parameter of household of occupation level
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 £i = the error term
Hypothesis
 H0=household sex, age, religion, occupation level and education level have no
significant effect on the probability of household participation in informal institution

 H1= household sex, age, religion, occupation level and education level have
significant effect on the probability of household participation in informal institution

3.7 Definition of variables

3.7.1 Dependent variable
Dependent variables are variables, which are influenced by other factors. In this study the
dependent variable is participation of household in informal financial institution. This is to
distinguish or discriminate between those participants of informal financial institution in the
study area.

This is a dummy variable which takes a value ‘1’ and ‘0’ for participation and non- participation
of informal financial institution respectively.

3.7.2 Independent variable

Independent variables are variables, which influence others but not influenced by others.
According to Dejene Aredo (2012) the extent of participation in the informal financial institution
is affected by household characteristics. Among a number of factors, that would be related to the
participation of informal financial institution in the study, the following independent variable
hypothesize to explain the dependent variable such as Sex, Age, Religion, Occupation of the
household and Education status.

1. Sex of household (sex); this is a dummy variable that assume a value of ‘1’ if the head of
the household is male and ‘0’ otherwise (DejeneAredo, 2012). Therefore this variable we
expected that influence positively.
2. Age of household head (age); it is a continuous variable defined as the farm household
heads age at the time of interview measure in years. Those farmers having a higher age

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 due to life experience will have much better participation in informal financial institution
(DejeneAredo, 2012). Therefore, the variable we expected that positively influence.
3. Religion of household; it is a dummy variable which takes a value ‘1’ and ‘0’ for
christens and Muslim respectively. Informal finance institutions have highly relationship
with all religions. Therefore, it is expected to that all religion have great efforts to
expand informal finance institution (DejeneAredo, 2012). Therefore, this variable we
expected negatively influence on participation of the household.
4. Education level of household; it is categorize to illiterate and able to read and write or
literate, it is a dummy variable and it take a value of ‘1’ for literate and ‘0’ for illiterate.
Farmers who can read and write are expected to have more exposure to the external
environment and accumulate knowledge. They have the ability to analyze cost and
benefit. Therefore, it is expected to that, those farmers who can read and write have
better participation in informal financial institution (DejeneAredo, 2012). Therefore, this
variable we expected that positively affect the participation of the household.
5. Occupation of the household; this is a dummy variable that assume a value of ‘1’ if the
household participate in private organization and a value of ‘0’ if the household
participate in government organization (DejeneAredo, 2012). Therefore, this variable we
expected that to negatively affect the participation of the household.

3.8 Work plan and cost budget

3.8.1 Work plan (time schedule)
The work plan or time schedule we went conduct research work is presented in the next table.
The sequence of month are presented by Ethiopian calendar. .

NO ACTIVITY TIME (E.C.)

1 Title selection May (6-7)

2 Literature review may(8-15)

3 Preparing methodology May (16-19)

4 Proposal submission May (20)

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Budget schedule
NO Description Unit cost in birr Total cost in birr
1 Paper 1 100
2 Pen 15 30
3 Internet Per hour 5 80
4 Transportation 500 2000
5 Mobile card 50 50
6 Print 100 100
Total cost 2360

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