Determinants of Access to Finance of Smallholder Farmers: A study on Members of Agricultural Cooperatives in Southwest Oromia Region, Ethiopia

Abstract

Access to finance plays significant role in enhancing agricultural productivity. However, studies showed that access to finance itself is affected by several factors though there is no consistency on the factors. This study is aimed at identifying determinant of access to finance taking evidence from least developed country, Ethiopia. To achieve this objective, 400 sample agricultural cooperative members were selected using multistage sampling and logistic regression was used in the analysis. The study found that participation in extension package, simplicity in lending procedures, Christianity in religion, large number of working family size and large land size positively affect access to cooperative credit. The study further found that short distance from MFIs, simplicity in lending procedures; higher educational level, large working family size, and possession of non farm income positively affect access to MFIs’ credit. Concerning access to informal credit, educational level, working family size and land size were found to be significant factors. One interesting finding in this study is the effect of religion on access to finance. Smallholder farmers who practice Christianity tend to have high probability of accessing formal credit from cooperatives and MFIs. Muslim smallholder farmers less likely in take credit from formal sources since Islamic religious customs do not allow prearranged interest rates but rely instead on profit and loss sharing principles. When we come to informal sources of finance, religion is not found to be significant factor which implies that cooperatives and MFIs in the region should improve their credit provision system that accommodate the Muslim community as well.