Smallholder Farmers’ Participation in Microfinance Services: The Case of Omo Microfinance Institution in Gimbo District of Kaffa Zone, Southern Ethiopia

Abstract

Microfinance institutions have enabling role for agricultural production; as credit is used for investments that increase the production and productivity of agriculture and saving ensures a safe storage of money, that can be channeled to its most productive use. However, some weaknesses of the institutions coupled with household related characteristics are still hindering farmers’ utilization of services. This study was conducted in Gimbo district of Kaffa zone, Southern Ethiopia with specific objectives; to examine households’ participation in saving and credit services of Omo Microfinance Institution, identify the determinants of credit participation and loan amount received, and assess major challenges and opportunities of microfinance service provision in the district. The study was based on the data collected from 200 sample households selected through two-stage sampling technique. In addition, data collected from key informants’ interview and different secondary data sources were also used. Both descriptive statistics and econometric model were used to analyze the data. A double hurdle model was employed to assess the determinants of households’ credit participation and the amount of loan received. Econometric model result showed that sex, education level, family size, land size, distance from service provision center, extension contact, perception on group lending, and perception on loan provision time were found to be significant in influencing the probability of credit participation. Furthermore, sex, education, family size, land size, livestock holding, and extension contact were found to be significantly affecting loan amount received. The result suggests the need for improvement on delayed loan disbursement time for credit service and attractive incentive structure coupled with convenient withdrawal system to be developed for saving in order to increase households’ participation in the services.