Abstract:
In Ethiopia, among other things, lack of finance is one of the fundamental problems hampering production,
productivity and income of rural farm households. Since access to institutional finance is very limited, the
majority of the poor are forced to search financial services through informal channels. This study is concerned
with analysis of factors affecting smallholder farmers’ access to formal credit. As credit is one of the most
important factors required for smallholders input utilization, it is important to have sustainable agricultural
development. A two stage sampling method was employed. A total of 148 farm households were selected
randomly using probability proportional to size. Descriptive statistics and logit model were used for analyzing
quantitative data. The output from the study indicates that 51 (34.5 per cent) of the sampled farm households
were formal credit users, whereas the remaining 97 (65.5 per cent) were non-users. It was also found out that
credit access to female headed households is still limited and the difference between the wealth groups in
accessing credit from the formal sources was also statistically significant. Farmers acknowledge group lending
that solves the problem of collateral requirement by lending institutions, controls misuse of borrowed funds and
minimizes the risk of default and they also recognize the provision of saving services by microfinance
institutions. The maximum likelihood estimates of the logistic regression model show that Frequency of contact
Development Agents, physical distance of farmers from lending institutions, family size, farm size, experience in
credit use from the formal sources, Sex of household head, education level of household head, participation of
households in extension package program, attitudes towards Risk, farmers’ perception of Loan repayment period,
farmers’ perception of Lending procedures, lack of opportunity to take a second loan , and membership of
farmer’s multipurpose cooperatives were important factors influencing formal credit use of smallholder farmers.
Therefore, policy aimed to accelerate agricultural development in the area could be successful if these factors
and problems are taken into consideration to access credit from the formal financial sources. Based on the
findings of the study and personal observation of the situation in which the analysis of factors affecting
smallholder farmers’ access to formal credit systems are found, some recommendations are forwarded
