Factors Affecting Credit Constraint and Rural Households’ Access to Formal Credit in Ethiopia: The Case of Sebeta City Administration

Abstract

This study has aimed to identify factors affecting credit constraint and rural households‘ access to credit in Sebeta City Administration. A total of 190 households, 24% of them female headed households, were included in the study. Logistic regression was applied in order to identify factors affecting credit constraint and rural households‘ access to credit. The study result revealed that only 15% of households included in the survey had access to formal credit service even though 60% of them indicated that they needed the service. Many of them did not apply for credit for two major reasons, small loan size offered by the institutions and lack of awareness about the process and procedures of the organizations. Regarding access to credit, the result of the survey indicates that four continuous variables, age, aging, family size and number of livestock in tropical livestock unit significantly affected access to credit. Similarly, four categorical variables, namely Extension package, Sex of the household head, Ownership of irrigable land and Group membership significantly affected rural household‘s access to formal credit. However, education level, income and land size didn‘t have significant impact on credit access. Number of livestock owned negatively influenced access to credit while family size and aging have positive impact on access to formal credit. Furthermore, the result of the study revealed that male headed households were more likely to access credit compared to female headed households. Finally, ownership of irrigable land, and group membership positively affected access to formal credit service while access to extension service had negative effect on access to formal credit. With respect to Credit Constraint, the study result indicates that 57.3% of the households included in the study were credit constrained households. From the continuous variables, age of the household and number of livestock owned have significant impact in determining credit constrained households while number of dependent children, education, family size and land size seemed to be insignificant in determining credit constraint. From the dummy variables, Sex of households had impact on credit constraint while group membership is insignificant in identifying credit constraint. Aging and number of livestock owned negatively affected credit constraint. As people become older, they accumulate enough wealth which can serve as collateral to access credit. Livestock ownership had negative impact on credit constraint since livestock can be easily converted to cash; people with larger number of livestock may prefer to sell their animals to meet their financial needs instead of accessing credit from financial institutions. The finding of the study also indicates that most of the explanatory variables expected to affect access to credit were found to be in line with theoretical and empirical findings of other studies. It also shaded light on the need to revisit the loan size currently provided by financial institution and importance of awareness creation activities to promote farmers understanding about credit and saving.