This document summarizes a presentation on credit markets in rural Ethiopia. It finds that less than 10% of rural households take formal credit due to fears of losing assets if they default and high interest rates. While many rural areas have microfinance institutions, physical access does not guarantee use. Most loans are used to purchase agricultural inputs. Poorer and female-headed households have less access to formal credit. The presentation recommends further promoting the financial sector through efficient, low-cost credit facilities to help reduce liquidity constraints, especially for poorer households.

1. Credit markets in rural Ethiopia
By: Bethelhem Koru (Policy Studies Institute)
(Guush Berhane, Kibrom Abay and Jordan Chamberlin)
IFPRI
Addis Ababa Hilton
May 2, 2019
Addis Ababa
1

2. 2
Introduction
 Sustained access to rural financial markets remains crucial to undertake income-
enhancing opportunities and hence improve rural livelihoods in developing
countries.
 In Ethiopia, the rural financial sector is mostly dominated by microfinance
institutions and rural savings and credit cooperatives.
 Despite the improved coverage of MFIs and financial cooperatives in recent years, rural
financial markets in Ethiopia are mostly dominated by informal financial schemes (CSA
shows that only about 10 percent of smallholders in Ethiopia have access to formal
credit).
 Empirical studies have shown that microcredit can stimulate agricultural
investments, including use of modern agricultural inputs.
 In this presentation, we discuss credit participation rate of rural farm households
and assess its role in transforming smallholder agriculture.

3. 3
Data
 Primary source of data: the Ethiopian socio-economic survey (ESS) 2011/12,
2013/14, and 2015/16 (a collaborative project between the Central Statistics
Agency of Ethiopia (CSA) and the World Bank)
 Other data source used are the PSNP, the AGP and the FtF impact surveys.
 The ESS is a nationally representative dataset covering a large sample of rural and
urban households throughout the country.
2011→ 3776 HH (Only rural and small towns)
2013/14 and 2015/16 → 5262 (rural and urban HH)

4. 4
Conceptual framework on credit constrain categories
Have you applied for a loan in
the past 12 months?
Yes
Why
not?
Unconstrained
- Not interested to borrow
- Have adequate farm
/Business
Risk rationed
- Fear of losing asset
- Fear of being in debt
- Expected to be
rejected
Price and transaction cost
- Too much trouble
- Cost of accessing, processing
- High interest
- Lower access of credit
No

5. 5
Descriptive Statistics
Table 1: Households’ uptake of formal credit (ESS data)
 Rural credit participation is very low, with less than 10 percent of rural households
taking credit
 Consistent result from other data
 AGP - High agriculture potential areas (10%)
 PSNP - Food insecure areas of Ethiopia (6%)
Survey year (round) 2011/12 2013/14 2015/16 All
Households who took credit (%) 7.8 9.5 7.0 8.1
Number of obs. 3589 3503 3454 10647

6. 6
Credit (Gender)
0
2
4
6
8
10
12
All Male Female
HHwhotookcredit(%)
AGP
0
1
2
3
4
5
6
7
All Male Female
HHwhotookcredit(%)
PSNP
 Substantial gender differences in households’ access to financial services.
 Female headed households have less access to formal credit.

7. 7
Credit (Poverty)
Table 2: Households’ uptake of formal credit by poverty status
 Percentage of poorest households who took on credit is lower than for the
richest households.
 Reasons:
- Collateral requirement
- Risk-taking ability
 The poor are excluded from the credit market more than the rich households
Data Source Poorest Average Rich
AGP 4.0 10.0 27.0
FtF 12.6 15.1 13.4

8. 8
Supply Side (Credit)
Table 3: Availability of Credit and Saving Associations in the community
 In line with the government effort, the result show that many rural villages have at
least one microfinance or credit and saving association.
 On average half of the community confirmed the availability of a financial institution
in their kebele.
 This suggest that lack of physical access to financial markets may not necessarily
explain the low credit market participation.
PSNP AGP FtF
Is there rural saving and credit cooperatives in this
kebele ( % )
52 40 38
How many RUSACCOs operate in this kebele?
(average)
1 2 3
How many microfinance institutions operate in this
kebele? (average)
- 1 1
Number of observation/woredas … 252 282 252

9. 9
Supply Side (Credit)
PSNP AGP
Survey year 2016 2013
Share (%) of hh that did not pay back credit 68 40
0
10
20
30
40
50
60
70
80
Failure to repay back by source of loan
PSNP AGP
 Half of the HH have an
outstanding loan that was not
repaid back (higher from formal
sector)
 Household may not be able to
ask for a loan if they have
outstanding loan already

10. 10
Descriptive Statistics
Table 4: Reasons for not taking credit from financial institution
 The most important constraint limiting rural households’ credit uptake is fear of
loss of assets or additional risk of having to bail out fellow group members in the
case of group lending.
 Followed by limited access to financial institutions due to high interest rate and
processing cost.
Survey year (round) 2011/12 2013/14 2015/16 All
Unconstrained 6% 12% 13% 10%
Fear of being in debt 52% 44% 50% 49%
Interest rate and processing cost 20% 14% 14% 16%
Other reasons(personal/religion) 22% 29% 23% 25%
Number of obs. 3389 3181 3211 9781

11. 11
Descriptive Statistics
Table 5: Purpose of credit from financial institution
 Increase consistent with the Ethiopian government’s agenda of expanding access to
credit for agricultural investment.
 More than half of the credit taken from formal sources is used for purchase of
agricultural inputs.
 The next important reason appears to be starting up or expanding businesses.
 The purpose for which credit is used remains comparable across years.
Survey Year 2011/12 2013/14 2015/16 All
Purchase agricultural inputs 59% 56% 53% 56%
Business startup/expanding
business
19% 15% 20% 17%
Purchase house/lease land 2% 2% 3% 2%
Purchase nonfarm inputs 1% 3% 4% 3%
Other purposes 18% 23% 19% 21%
Number of obs. 284 328 242 854

12. 12
Conclusion
 Despite the significant evolution in recent years, we find evidence of low
participation in credit markets in rural Ethiopia.
-Afraid of losing collateral in case of default
-Having outstanding loan from previous loans
 Physical availability of rural finance may not mean use of it and several factors may
limit use of given access
- High interest rate and potential transaction cost
 Household’s main reason of obtaining loan from formal source is for the purchase of
agricultural inputs.
 Poor households and Female- headed households have lesser access to formal credit.

13. 13
Recommendation
 An important policy implication of our result is that promoting the financial sector is
a desirable pro-poor policy as it eases liquidity constraints.
 In addition, efficient credit facilities for the rural poor is important so as to reduce
potential transaction cost of accessing credit.
 Effort towards inclusion of the poorest households to the credit markets is important.

14. 14
Thank You