Determinants of Smallholder Farmers Participation in Formal Credit and Challenges Faced by Institutions: The Case of Mojana Wodera District, Amhara Region, Ethiopia

Abstract

Agricultural finance for smallholder farmers is critical for the growth and development of agricultural sector. Despite the increasing number of formal financial institutions penetrating in rural areas of Ethiopia, access to credit among the majority of agricultural households remains limited. To ensure that appropriate strategies are designed for improving participation in formal credit, it is important to understand why smallholder farmers cannot borrow loan for farming purposes from formal sources. Thus, this study was sought to ascertain factors that affect smallholder farmers participation in formal credit and challenges of formal financial institutions lending to agricultural activities (smallholders). Structured interview was used for collecting the data from the sampled farm households. Descriptive statistics and binary logit model were used for analyzing data. The study indicates that 43 (31.16%) of the sampled farm households were formal credit participants, whereas the remaining 95 (68.84%) were non-participants. Negative perception of farm households in formal credit participation was attributed the isolation of very poor farmers from group formation in case of group lending system. Number of livestock owned, group lending and distance from lending institution were factors influencing participation of households in formal credit use negatively as evidenced by the model output. This study recommends that in order to make agricultural development successful these factors and problems are taken into consideration by policy makers to enable participation in credit use from formal financial sources.