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Access and Use of Credit in High-Potential Areas of Rural Ethiopia


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International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI). Conference on "Towards what works in Rural Development in Ethiopia: Evidence on the Impact of Investments and Policies". December 13, 2013. Hilton Hotel, Addis Ababa.

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Access and Use of Credit in High-Potential Areas of Rural Ethiopia

  1. 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Access and Use of Credit in High-Potential Areas of Rural Ethiopia Ibrahim Worku, Bart Minten and Guush Berhane IFPRI ESSP-II December 13th, 2013 Hilton Hotel, Addis Ababa International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI) 1
  2. 2. Outline 1. Introduction 2. Data description and methodology 3. Use of credit 4. Purpose and source of credit 5. Repayment and default 6. Determinants of credit use 7. Credit use and agriculture 8. Concluding remark 2
  3. 3. 1. Introduction • Significant evidence on the importance of credit in rural development: 1. For use in productive activities (e.g. agriculture production and use for enterprise development) 2. For consumption smoothing and welfare • However, lack of updated evidence on the use of credit in the case of rural Ethiopia 3
  4. 4. 1. Introduction (cont.) The presented research will address four questions: 1. What is the share of farmers that are using credit in rural Ethiopia? If no credit use, why not? 2. What is the purpose and source of credit? 3. What are the determinants of the use of credit? 4. What is the link of credit to agriculture?
  5. 5. 2. Data description and methodology Data : AGP survey data- 2013 • Collected by CSA in collaboration with IFPRI (ESSP) • Sample size: about 7,500 households • Coverage: 93 high yield potential woredas of the country: Classified as AGP and control woreda • Representative of 9 million population of the country Method: 1) Descriptive statistics 2) Econometrics
  6. 6. 3. Use of credit • Only 10% of the AGP woreda population used credit from any source over the two years prior to the survey. • Of those who used credit: 1) The majority is male. Credit use by gender (%age) Male Head Population in AGP woreda Those who have taken credit 69 82 Female Head 31 18 2) Region wise: the credit use in Oromiya and Amhara are much higher (linked to their size) HHs’ Credit use by region (%age) Region Tigray Amhara Oromiya SNNP Male 5 25 40 10 Female 2 7 6 3 Total 7 33 47 13 Ratio in total credit 0.7 3.3 4.7 1.3
  7. 7. 3. Use of credit • Reasons for not using credit: 1/ Demand side reasons: About 40% did not want to take credit; 15% afraid that they can not pay back 2/ Supply side reasons: 25% complain about availability Reason for not borrowing? (percentage) of credit OTHER INTEREST RATES TOO HIGH AFRAID THAT I CANNOT PAY BACK AFRAID OF LOSING COLLATERAL I HAVE NO ASSETS FOR COLLATERAL EXPECTED TO BE REJECTED, SO DID NOT… NO-ONE AVAILABLE TO GET A LOAN… TRIED TO GET A LOAN BUT WAS REFUSED NO NEED FOR A LOAN 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 Precentag
  8. 8. 4. Purpose of credit • Credit is mainly used to buy agricultural input (80%) • Less used for consumption purposes or for other businesses Reason for taking credit 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 percetage of population FARMING (PURCHASE AGRICULTURAL INPUTS FOR FOOD CROP BUSINESS STARTUP CAPITAL EXPANDING BUSINESS OTHER (SPECIFY)
  9. 9. 4. Source of credit • MFIs are major suppliers of credit in rural area (64% of credit given out). • Formal banks cover only 3%. 63.8 percentage of population 10.1 5.7 0.3 2.1 7.7 0.9 3.3 0.9 1.3 3.9
  10. 10. 5. Repayment and default • A major issue in credit markets in Ethiopia (and elsewhere) is default • In the AGP survey, 41% of the farmers did not repay back their last loan for various reasons • When asked for reasons, incidence of shocks and alternative uses of credit are common • However, except for 3% of them, all of them have the intention to repay back in next year(s). Partly lost Used money for Farm output farm some other Not willing destroyed output purpose to repay Other Why did you not pay back yet? (%) 0.4 10.0 30.7 2.8 56.1
  11. 11. 6. Determinants of credit use What are the characteristics of farmers that use credit? Two reasons: 1. Productive investments; data indicate that the richer households use more credit. 2. Consumption smoothing; those that faced shocks used more often credit. Dependent variable: Likelihood of using credit • Shown in probit estimates: Likelihood of using credit is: a) positively related to wealth--- > 1 b) positively related to shocks--- > 2 Covariates Household size Wealth index (1) Shock (2) Livestock assets Numeracy Coefficient 0.045* 0.074*** 0.333*** -0.042* 0.18 Note: Significant at 1% (***), 5%(**) and 10%(*)
  12. 12. 7. Credit and agriculture • Only 23% revealed the type of payment of modern input • Few households were able to get modern inputs with credit • Only 2 % have reported to have used credit to buy fertilizer. Source of modern input % age of population Cash 21.5 Credit 0.7 Partially in cash and partially with credit 0.9 Partially free and partially in credit 0.1 Total 23.1
  13. 13. 7. Credit and agriculture (cont.) Dependent variable: - Probit estimates: Likelihood to use fertilizer Likelihood of using fertilizer is positively and significantly related Control variables Coef with access to credit (Controlling Use of credit 0.291*** for other characteristics) Male head -0.241** - If a household uses credit, the Married 0.173* likelihood of using chemical Education level 0.058* fertilizer goes up by 0.29. Numeracy 0.210* - As fertilizer use is strongly related Wealth index 0.151*** to productivity, access to credit Livestock assets 0.072*** significantly influences agricultural Shock 0.172** productivity Note: Significant at 1% (***), 5%(**) and 10%(*)
  14. 14. 8. Conclusions  In AGP woredas, households that use credit are limited. This is seemingly more due to demand constraints than by lack of supply  Farmers mainly use the credit to buy agricultural inputs; MFI’s are major sources while the role of formal banks is insignificant  Relatively richer households use more credit, likely because they have collateral; Farmers that faced shocks also seem to take credit but is less important  Farmers that take credit use more chemical fertilizer
  15. 15. 8. Conclusions (cont.) Policy implications:  A quarter of the farmers complain about the lack of credit provision. It seems that more could be done on the supply side to allow credit access to them.  Credit use is significantly linked with modern input use and therefore agricultural productivity; Making credit more readily available for modern input purchase might likely contribute to improved agricultural productivity in the country.  Default in credit markets a major issue, often because of shocks; explore options of linking credit to insurance might be a useful way forward
  16. 16. Thank You!