Determinants of formal Credit use among Smallholder farmers: The case of Dedo Woreda Jimma Zone, South west of Ethiopia

Abstract

This study was sought to analyse the determinants of access to formal credit by small holder farmers in Dedo Woreda. Preferences of small holder farmers towards financial credits was scored and ranked, sources of financial credit for smallholder farmers were assessed and factors affecting formal credit access of small holder farmers were analysed and identified in the study areas. A Multi stage sampling procedures were employed to select three rural kebele administrations and 167 farm household heads were selected using probability proportional to size. Semi-structured interviews were employed for collecting quantitative data from the sampled farm households in the study area. Focus group discussion, key informants’ interview and field observations were held to generate qualitative data. Ranking techniques of credit sources were applied to know the preferences of all respondents and focus group participants for credit sources. Descriptive statistics and binary logit model were employed for analysing the quantitative data. SPSS version 20 and STATA version 13 were used for data analysis. The results of the study were indicated that, out of 167respondent house hold heads, 74 of the sampled farm households were formal credit users, whereas the remaining 93 of the respondents were non-users. Relatives, friends and neighbours were preferred as the best credit source for borrowers in the study area than other sources due to its interest free, low transaction costand adjustments of repayment time. In the study areas, access to formal credit services of smallholder farmers was limited due to: some-times inconvenience of group lending in which group members’ took responsibility of paying the defaulters risk, high interest rate charged on borrowers and some respondents having external financial supports. But the logit model reveal that sex of household heads, attitudes of household heads towards credit risks, preference of household heads for group lending, age of the household heads and experience of the household heads in credit using were significantly affecting access to formal credit by smallholder farmers.