Final Research MAC2020

MA COLLEGE
ASSESSMENT OF SAVING AND BORROWING BEHAVIORS OF FARMERS IN

ASSOSA DISTRICT
A RESEARCH PAPER SUBMITTED TO MA COLLEGE
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE BACHELOR

DEGREE IN ACCOUNTING AND FINANCE
By:
1.
2.
3. .
4. .
5. .
August, 2020
Assosa, Ethiopia
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Table of Contents
1. INTRODUCTION................................................................................................................................... 1
1.1. Background................................................................................................................................... 1
1.2. Statement of the Problem.............................................................................................................. 1
1.3. Objectives of the Study................................................................................................................. 1
1.4. Significance of the Study.............................................................................................................. 1
2. LITERATURE REVIEW........................................................................................................................ 1
2.1. Perspectives on Rural Finance...................................................................................................... 1
2.2. Rural Finance in Ethiopia............................................................................................................. 1
2.2.1. Formal Financial Institutions............................................................................................. 1
2.2.2. Informal Financial Sector in Ethiopia................................................................................ 1
3. MATERIALS AND METHODS............................................................................................................. 1
3.1. Description of the study area........................................................................................................ 1
3.1.1. Livestock........................................................................................................................... 1
3.1.2. Cropping Pattern................................................................................................................ 1
3.1.3. Social and Communication infrastructures........................................................................1
3.1.4. Cooperatives...................................................................................................................... 1
3.2. Methods........................................................................................................................................ 1
3.2.1. Method of Data Collection................................................................................................ 1
3.2.2. Methods of Data Analysis................................................................................................. 1
4. RESULTS AND DISCUSSION.............................................................................................................. 1
4.1 Households Characteristics............................................................................................................ 1
4.2. Distribution of Farm HHs according to Land Holdings...............................................................1
4.3. Participation of Households in Extension Package Program........................................................1
4.4. Age Distribution of Sample Farm Households.............................................................................1
4.5. Level of Education of Sample Farm Households.........................................................................1
4.6. Access to Markets......................................................................................................................... 1
4.7. Livestock Possession of Sample Farm Households......................................................................1
4.8. Financial Arrangements of Sample Farm Households.................................................................1
4.8.1. Informal Self-Help Groups................................................................................................ 1
4.8.2. Formal Financial Arrangements........................................................................................ 1
5. CONCLUSIONS..................................................................................................................................... 1
REFERENCES............................................................................................................................................ 1
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1. INTRODUCTION
1.1. Background
Improved financial access focusing on rural credit was one of the crucial points of the
Agriculture Development Led Industrialization (ADLI) Policy. Contrary to the previous
credit program, which involved only the Development Bank of Ethiopia (DBE) in financing
rural credit. The National Bank of Ethiopia (NBE) issued a revised rural credit policy to
expand credit operations in the rural sector by providing short-term credit for agricultural
production and investment credits for the agricultural activities in the rural sector. Therefore,
to implement this policy, both the NBE and DBE expanded credit outlets through branch
expansion (Gebreyohannes, 2000).
According to Amha (2000), about one-fifth of the district’s in the country have bank
branches. However, rural poor have limited access to the conventional banks due to high
collateral requirements. Thus, the demand for rural finance is met through the informal sector
(friends, relatives, moneylenders, equb, idir, etc), micro-finance institutions, saving and
credit cooperatives, and government projects and civil society organizations (CSOs) involved
in saving and credit activities.
CSOs have been playing an important role, in the rehabilitation of communities affected by
drought and in implementation of integrated rural development projects since 1984/85. The
major focus has been on drought affected and marginal areas of the region. In the year 2000,
there were one hundred fifty CSOs operating in Ethiopia. Most of the CSO programs had
saving and credit as one of the components of their activities. Initially, CSOs started credit
service by lending for the purchase of agricultural inputs, farm tools and oxen, usually
following drought seasons. As this approach has a problem of loan collection because of its
quasi-aid nature, CSOs had to change their credit strategy (ACDI, CEE, 1995).
A study sponsored by USAID in 1995 clearly revealed that financial schemes of CSOs and
institutions that do not follow sound and sustainable financial principles might cause more
harm than good in the real economic growth of the country (ACDI, CEE, 1995), because it
encourages financially irresponsible behavior. Thus, any lending scheme must be designed to
be self-sustaining. The study of USAID in Ethiopia (1995) recommended that the
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government should develop national standards for CSO credit schemes or programs. Another
study by Pischke et al. (1996) also recommended that CSOs offering credit and other
financial services should be subject to national standards, and that adoption of appropriate
standards should improve their performance. The other problem observed was that CSOs
were to some extent reluctant on credit collection. As it had been observed, the situation has
created precedence among many farmers that nothing would happen to them even if they did
not pay back their debts. This had been a threat to the whole system of rural credit in the
country (ACDI, CEE, 1995),
In recognition of these problems, the government of Ethiopia put in place a legal framework
(proclamation No. 40/96) in 1996 under which MFIs can be registered and supervised. Since
the promulgation of this proclamation, a number of MFIs have been formed and registered.
These MFIs are contributing significantly to boost the income and productivity of millions of
small farmers throughout Ethiopia.
To improve agricultural productivity, it was believed that the peasantry requires variety of
agricultural inputs, improved implements and adaptation of new technologies and methods.
The financing of these inputs requires liquid cash that often is not readily available with the
peasantry. Hence, innovative rural finance services delivered at the doorsteps to the farm
households (HH) were believed to enable the farmer to increase his/her food production.
1.2. Statement of the Problem
Like many developing countries, Ethiopia is a country where rain-fed agriculture dominates
the lives of farmers, the majority of whom are small holder farmers. Rain-fed agriculture
not only results in low productivity but also more importantly in fluctuating production
which in turn results in fluctuating income and food availability of farmers. The incomes of
these farmers vary from season to season and from year to year. Such fluctuations in
income translate into fluctuations in consumption if the farmers cannot fall back on savings
or access to credit.
The structure of rural financial markets in developing countries is typically dualistic. The
same situation applies to rural financial markets in Ethiopia. There are formal and informal
financial intermediaries in the market with differing degrees of interaction with the farmers.
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The performance of many formal institutions in rural finance has been disappointing.
Commercial and development banks have shown little interest in rural lending, particularly
to small farmers. Specialized agricultural credit institutions and CSOs have been able to
extend credit to a limited clientele only. They have often suffered because recovery rates
are low and margins narrow, while high administrative costs and lack of efficiency have led
to losses and government dependency. The perceived high risks and transaction costs in
small-scale rural lending together with targeted credit extension for production purposes
only, as well as a failure to provide other financial services, particularly other saving
opportunities, have alienated the major part of the rural clientele.
Financial services for the poor pose some specific policy and program design problems.
The rural poor have little or no collateral to offer. Savings and credit amounts and
installments are small, raising per unit transaction costs. Financial needs for consumption
and production are inter-twined and often inseparable. Given the vulnerability of the poor
to various covariate risks such as flood, drought, rural finance plays an important role to
reduce the cost the farmer incurs to cope up with the above problem.
Traditionally formal finance focuses exclusively on disbursing credit for income generating
productive assets such as fertilizer and seed. In Ethiopia the role of consumption credit in
promoting is usually overlooked, or not clearly understood, particularly by the formal
financial institutions. Consumption can be differentiated into various types of goods such as
food, health care, social obligations, and leisure. Credit used for consumption such as food,
health care and clothing can generate income through improved productivity of family
labor, which is the most important factor of production in poor HHs. Clearly pressing
consumption needs such as hunger or illness induce high time preference rates and
therefore impose immense opportunity costs on investments such as holding and
maintaining production durables, purchasing production inputs, preserving natural
resources, or sending children to school.
Critiques of consumption credit often argue that credit should be used for income-
generating activities to ensure the repayment of loan. This is true in principle but
productivity of a HH economy does not depend only on conventional production inputs and
durables, but also on the skills, education, nutritional and health status of its family labor.
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Therefore the use of credit for maintaining and enhancing the human capital can be highly
productive.
Increased access to savings options and credit has the potential to affect all linkages
between investment, technological disseminations, production, and consumption, including
health, education and nutrition. Thus, directing credit to specific production activities is not
only futile because of fungibility, as Von Piscke and Adams (1980) convincingly argue, but
also ignores part of the demand side, that is, the willingness to pay for specific saving and
credit services that lead to more efficient smoothing of consumption.
Another important argument is that credit and precautionary savings can serve as insurance
substitutes. Providing access to credit and liquid savings options may increase the risk-
bearing capacity of HHs through increased credit limits more efficient precautionary savings.
Credit access and pre-cautionary savings work in similar ways: both increase resiliency of
HHs to different crisis although the costs and benefits of the two strategies will differ among
different types of HHs and socio-economic contexts. HHs with higher credit limits or higher
amounts of pre-cautionary savings will have a greater capacity to absorb risks and to pool
these risks across periods thus stabilizing consumption over time (Eswaran and Kotwal,
1990).
The lower risk-bearing ability of poor HHs tends to favor well-known production practices
and hinders the adoption of new technology. As a result, potentials for productivity
increases remain unexploited. Poor HHs often lack access to formal credit. (Binswanger
and Sillers, 1983). They thus turn to the informal credit markets, where they often face
credit shortages. Interest rates in the informal market vary greatly depending on the type of
relationship between borrower and lender. When access to credit from friends and relatives
is depleted, real interest per year often exceed 100 percent (Zeller, Von Braun, 1997). Poor
HHs usually borrow at such high interest rates only to smooth consumption. As a result of
the lack of access to credit in the formal sector, productive assets of the poor are depleted,
assets used as collateral are transferred from the poor to wealthier HHs, and HHs may
become impoverished. Therefore the principal tasks of the study were to examine the
financial arrangements made by rural HHs and the major determinants of consumption
credit users in the study area.
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1.3. Objectives of the Study
The specific objectives of the study were:

♦ To identify the important socio-economic factors that discriminate the farm HHs
getting consumption credit from those who did not get consumption credit.
♦ To examine saving and borrowing behavior of farm HHs.
1.4. Significance of the Study
Credit plays an important role in various development activities undertaken in the economy.
The functioning of rural credit institutions and role played by rural credit in agricultural
production performance is well researched and documented. However the role of
consumption credit and the determinants of consumption credit user rural HHs in Ethiopia is
yet to be researched.
Providing financial services to the poor could efficiently and effectively contribute to income
generation and consumption stabilization. In this connection, the output of the research that
investigated the financial arrangements of rural HHs and the determinants of consumption
credit use would provide conclusions for policy and institutional design and for further
research that should be valuable to anyone involved in designing and evaluating policy and
programs for rural financial institutions.
2. LITERATURE REVIEW
2.1. Perspectives on Rural Finance
Ever since development aid to low-income countries started forty years ago, policy and
research with regard to rural credit have been limited to a one-sided emphasis on the role of
formal financial institutions: commercial and nationalized banks, specialized agricultural
development agencies set up by the government or international donors, village and regional
cooperatives, or projects initiated by private Non-Governmental Organizations at home and
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abroad (CSOs). Little or no attention has been paid to the potential development role of the
informal financial circuit. Informal finance was -- and often still is -- identified with a money
market dominated by unscrupulous moneylenders, traders and landlords who were commonly
regarded as being anything but development-oriented (Von Pischke et al, 1983).
This one-sided emphasis on the flow of credit via formal financial channels is based, on the
one hand, on the strong belief in the superiority of the formal sector and, on the other hand,
on a series of misunderstandings on the nature, magnitude and role of the informal finance
sector and the type of actors that dominate in this field (Bouman, 1989).
Many credit programs and institutions narrowly focus on the enterprise or farm, without
taking into consideration the socio-economic context within which the HH or individual
members invest, produce, and consume (Stiglitz and Weiss 1981).
The theory on the pioneering work of Stiglitz and Weiss (1981), explains why the interest
rate cannot clear the credit market and why lenders ration credit. Because of adverse
selection of high-risk borrowers when interest rates rise, lenders prefer to hold interest rates
low so as to protect the quality of the loan portfolio and, instead, clear the market by
rationing loans. Thus, some HHs or individuals will fail to borrow, while others can not
borrow as much as they need.
In a cross-section of HHs at any point in time, four groups with different borrowing
behaviors and constraints can be distinguished (Zeller et al. 1996). First there is a group that
voluntarily does not borrow, either because they have strong risk aversion and fear of getting
into debt or because they are prudent and only want to consume up to what they earn (as is
the case with the standard life cycle consumers). Most consumers, however, will borrow at
one or the other stage during their life cycle. Among borrowers, there are those who want to
borrow less than their combined available credit lines from all lenders and also those who
want to borrow more than their available credit limit at a particular point in time. The former
group is not credit rationed, whereas the latter is. The fourth group consists of non-borrowers
who have no access to credit, or who perceive that they are highly unlikely to get credit, so
that the transaction costs for loan application outweigh the expected value of the benefit of
obtaining a loan (non-voluntary non-borrowers).
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If loan demand exceeds the maximum amount of credit available, the loan demand will be
rationed or fully rejected. The credit limit available to a HH is a function of its repayment
capacity, which is determined by the available human, physical, and social capacity
controlled by the HH. The repayment capacity and therefore the available credit limit for a
certain HH can fluctuate over time (Zeller, 1994).
2.2. Rural Finance in Ethiopia
Rural finance in Ethiopia, as in other developing countries, has dualistic features. There exist
both formal and informal saving and credit arrangements.
2.2.1. Formal Financial Institutions
Development Bank of Ethiopia: The Development Bank of Ethiopia (DBE) has been the
main source of agricultural input credit for the past several years. The Agricultural and
Industrial Development Bank (AIDB) of Ethiopia was established in 1970 by amalgamating
the Development Bank of Ethiopia and the Ethiopian Investment Corporation. The assets and
liabilities of these hitherto independently operating development finance institutions were
transferred to the newly formed AIDB by Imperial decree No. 55, of 1970. The bank
continued its capitalist oriented operation till 1974 revolution, which led to the
nationalization of most of the enterprises in the productive and service sectors of the
Ethiopian Economy in 1975. AIDB had also to amend its policies and procedures to serve the
interests of the then socialist oriented Ethiopian government. Accordingly, the board of
directors of the bank adopted new policy in August 1976 to suit the needs of the new
economic policy of the time. The policy had statements on general credit policy, financial
policy, agricultural credit policy and credits to service sector projects. But even that was not
sufficient and the bank had to be established in 1979 (DBE, 2000).
Proclamation No. 158 of 1979 provided the legal base for the re-establishment of the
agricultural and industrial development bank (AIDB). The authorized capital of the bank was
birr 100,000,000. The purposes for which the bank was re-established were to extend loans to
specified agricultural and industrial sectors as well as to other sectors of the national
economy in pursuit of the nation’s economic and social objectives. Its main purpose was,
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thus, to serve the socialized sector of the economy that included state enterprises and co-
operatives and to some extent to handicrafts and small scale industries (DBE, 2000).
Credit operations of the DBE (1970 – 1998): Total loan approvals of DBE increased with an
average growth rate of 16.1% per annum from birr 16 million in 1970/71 to birr 781.3 million
in 1997/98 (DBE, 2000).
According to DBE (2000), DBE was established by the Council of Ministers’ regulation No.
200 of 1994 to mobilize funds from sources within and outside the country and provide
medium and long-term investment credits besides providing short term agricultural credits.
As shown in table 1, out of the total amount of credit approved during the period by DBE,
70% i.e. 6,320.4 million was channeled to the agricultural sector. Agricultural loan approvals
increased from birr 13.2 million in 1970/71 to birr 414.4 million in 1997/98 with an average
growth rate of 14.2% per annum. Total loan approvals during the reporting years for the
agricultural sector amounted to birr 6,320.4 million, but from 1974/75 to 1997/98 state
enterprises accounted for birr 1,554.9 million and individual farmers accounted for birr 655
million. During the last several years (1994 – 2000), no agricultural loan approval was made
to state enterprises whereas agricultural loan approval for private and individuals has been
increasing. Loan approvals for agricultural cooperatives grew from birr 7.2 million in
1974/75 to birr 179.6 million in 1997/98 with an annual average growth rate of 15.7% per
annum.
Regarding loan disbursements by DBE (1974 – 1998), state enterprises accounted for birr
3,940 million (56.2%), co-operatives and individual farmers accounted for birr 1,431.1
million (20.4%) and 1,635.2 million (23.4%), respectively (DBE, 2000).
As cited in DBE (2000), even though loan repayments increased with an average growth rate
of 17.9% per annum, it was insignificant when compared with the large amount of loans
disbursed during the years under review. Collections from the agricultural sector increased
from birr 4.8 million in 1970/71 to birr 330.9 million in 1997/98 with an average growth rate
of 17.7%. Total loan in arrears stood at birr 810.7 million in 1997/98. Loan in arrears
increased by an average growth rate of 18.8% per annum from birr 9.2 million in 1970/71 to
birr 810.7 million in 1997/98. The percentage of loan in arrears to loan outstanding increased
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from 19.7 in 1970/71 to 29.3 in 1997/98. In 1997/98 the lion’s share of loan in arrears went
to the agricultural sector which claimed 51% of the total loan in arrears.
Table.1: Agricultural credit operations of the DBE (1970 – 1998) in ‘ooo birr.
Loan Loan Loan Loan Loan in
Fiscal year
approvals disbursals Collections outstanding arrears
1970/71 13,166 4,011 4,834 22,381 5,154
1971/72 19,197 19,152 10,839 31,044 n.a.
1972/73 17,132 19,440 16,582 34,306 n.a.
1973/74 26,183 22,675 17,691 50,529 n.a.
1974/75 64,766 55,630 22,305 70,317 14,687
1975/76 180,275 122,581 49,731 143,182 31,438
1976/77 156,513 115,790 63,438 193,995 53,366
1977/78 150,229 104,484 33,639 264,250 172,531
1978/79 687,081 292,617 55,790 496,641 141,982
1979/80 179,351 311,865 91,956 715,020 339,019
1980/81 480,531 321,636 174,349 861,073 366,367
1981/82 438,415 227,109 341,932 746,661 386,277
1982/83 509,025 243,203 104,466 8,860,791 626,930
1983/84 516,396 264,689 140,374 1,011,024 752,707
1985/86 141,663 333,417 143,446 1,197,672 904,822
1986/87 400,075 245,252 87,432 1,355,493 1,024,726
1987/88 261,960 318,525 92,196 1,582,835 1,223,048
1988/89 221,118 189,996 85,935 1,693,778 1,487,205
1989/90 204,287 219,342 101,318 1,821,642 1,648,717
1991/91 75,686 64,044 73,816 1,814,211 1,683,094
1991/92 131,280 115,791 44,862 1,879,884 1,713,475
1992/93 34,688 124,209 41,896 218,796 130,991
1993/94 102,922 32,493 18,694 239,213 206,515
1994/95 204,200 184,000 128,886 297,184 214,103
1995/96 309,100 272,800 158,556 409,643 226,175
1996/97 380,746 330,753 268,370 485,363 276,081
1997/98 414,435 420,253 330,906 721,350 410,754
Total 6,320,420 4,975,757 2,704,249
Source: (DBE, 2000)
Commercial Bank of Ethiopia (CBE): The CBE is the oldest existing bank in the country
with over five decades of banking experience. In an effort to provide banking service in
rural areas, the government coerced the bank to expand branch networks and increase the
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volume of lending in rural areas. The services of the bank however, tended to cluster in
urban locations and industrial enterprises and large scale farms while most of the rural areas
were left without banking facilities (G/Yohannes, 2000).
According to G/Yohannes (2000), the CBE has been providing input credit since the 1986
rural credit policy declaration by the National Bank of Ethiopia (NBE) that permitted CBE
to participate in the market. Nevertheless, the CBE did not play a major role in availing
agricultural input loans to small holder farmers till 1994/95 mainly because of the very
nature of the bank. Between 1994/95 and 1997/98, the CBE in collaboration with the DBE
covered the input credit demand of small holder farmers. The responsibility of input loan
delivery and collection was on the lending bank, the organizing agency and of a committee
known as ICU (Input Coordinating Unit).
During the 1994/95 – 95/96 crop years, the bank extended credit to small farmers through
the intermediaries of farmers’ service cooperatives. The borrowers were assisted technically
by the organizing agency (agriculture offices). Therefore, the organs in charge of the credit
delivery and recovery were CBE, DBE, the cooperatives and the organizing agency at
district level. Input credit advanced by CBE in 1994/95 and 1995/96 were birr 158 million
and 221 million respectively. Out of these loans or loans advanced prior to the new input
credit arrangement in 1996/97, a substantial amount has been outstanding (Jimma, 1999).
Since the 1996/97, the regional governments have established a credit modality through
which credit is extended by administrative bodies at different levels (regional, zonal,
district) with bureau of agriculture under the supervision of the Input Coordinating Unit
(ICU). The regional councils made an agreement with the government banks (CBE and
DBE) to avail credit to farmers, and the councils agreed to put their budgets as collateral.
Agricultural input credits have been going smoothly since the regional governments have
begun to sign loan contracts with the bank on behalf of the beneficiaries. Thus, all loans
advanced to small farmers in the crop years 1996/97 and 1997/98, against regional
government guarantee, were fully settled, the details of which are given in table.2. The
100% recovery rate indicated in the table is not the actual loan repayment by farmers. It
includes transfer form the regional capital budget.
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Table 2: Input loan performance under the new arrangement with regional government
collaterals.
Crop year Approved Disbursed Recovery Rate (%)
1996/97 318,609,875 247,431,083 100
1997/98 422,964,078 307,051,943 100
1998/99 602,914,154 398,163,991 86
1999/2000 677,805,964 298,690,324 –
Source; Jimma, 1999
According to Jimma (1999), agricultural input credit collection has been improving as a
result of the administrative measures taken by the regional governments to enforce
repayment. Task forces comprising of regional, zonal, district staff of agriculture, finance,
administration and peasant association officials are organized to collect loans immediately
after harvest.
Cooperatives in Credit and Saving: Proclamation no. 83/1995 provides for the
establishment of primary and secondary agricultural cooperatives on voluntary basis and
democratic principles. One of the objectives of the new proclamation 147/1998 (co-
operatives societies proclamation) is to develop and promote saving and credit services for
members to participate actively in the free market economic system.
As cited in Amaha (2001), until 2001 there were 7,366 co-operatives in the country. These
cooperatives have 3,684,112 members involving 18.4 million family members. The total
capital of these cooperatives was estimated over 515.7 million family members. These
cooperatives provide services such as input supply, credit, grain and coffee marketing,
supply consumer goods, savings, flour mill services, tractor services, water pumps, etc. to
their members. They also provided job opportunities to 12,000 people.
Another major outlet to deliver financial services is through the saving and credit
cooperatives and multi-purpose co-operatives. The number of saving and credit co-
operatives grew from 160 in 1983 to 716 in 1999. They had a total number of 27,556
members in 1983 whereas the membership grew to 156,938 members in 1999 as shown in
Table 3.
Following the agreement made between IFAD and the Ethiopian government in 1994 to
strengthen cooperatives, subsidiary agreement was signed between the ministry of finance
and commercial bank of Ethiopia (CBE). Under this agreement CBE would extend credit
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provisions to service cooperatives from IFAD and its own sources. This is a specialized
cooperative credit program (Alemayehu, 2001).
The principal objective of this IFAD supported program is to improve the income levels of
the rural poor, and increase agricultural productivity through support to service cooperative
development.
Table 3: Number of co-operatives in Ethiopia (2001) .

Number of members Capital in region
Number of
basic in millions
Administrative associations Male Female Total (birr)
Tigray 551 234,483 65,993 300,476 11.1
Amhara 1235 1,166,796 134,098 1,300,894 51.3
Oromia 1947 1,009,382 80,107 1,089,489 139
South 884 717,883 93,941 811,824 109.33
Addis Ababa 2716 150,648 26.903 177,551 202.5
Diredawa 15 697 - 697 0.3
Harari 9 1361 - 1361 1.18
Afar 8 1339 - 1339 0.7
Somale 1 481 - 481 0.3
Benishangul 1 201 - -201 -
Gambella - - - - -
Total 7366 3,283,070 401,042 3,684,112 515.71
Source: (Amaha, 2001)
However, credit disbursement and recovery performance has been extremely low. Out of birr
38.7 million proposed to be provided as credit to service cooperatives over six years, only
birr 7.2 million (18%) has been disbursed from 1994 to June 1998. The recovery rate of these
loans was poor.
Donor Sponsored CSOs Credit Intervention in Ethiopia: CSOs have been playing an
important role, in the rehabilitation of communities affected by drought and in
implementation of integrated rural development projects since 1984/85. The major focus
has been on drought affected and marginal areas of the country (ACDI/CEE, 1995).
Table 4: Saving and credit co-operatives in Ethiopia (1983 – 1999)
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No of Contribution Outstanding
Year Membership Reserves Total assets
cooperatives and savings loans
1983 160 27,556 7,528,691 8,136,677 437,895 9,996,753

1984 17 30,815 9,421,332 9,153,030 7,233,338 14,084,043
1985 217 38,116 12,970,879 12,561,829 881,672 19,239,674
1986 264 56,885 22,925,673 23,517,531 1,738,320 29,887,557
1987 309 63,540 23,300,011 23,644,390 1,676,556 30,332,813
1988 371 68,366 30,845,398 33,375,253 2,148,308 42,053,667
1989 419 98,973 50,406,195 52,104,599 2,173,238 69,926,742
1990 484 118,037 68,959,446 69,834,856 4,019,913 90,781,491
1991 495 119,799 78,772,710 79,919,665 4,497,197 102,168,244
1992 420 109,231 87,035,927 89,200,462 5,097,756 109,756,427
1993 426 101,299 86,105,842 87,474,898 5,484,551 112,286,156
1994 497 112,664 99,767,864 100,394,074 7,396,965 135,371,088
1995 522 116,619 111,173,060 93,582,753 8,163,985 150,707,746
1996 578 129,216 124,441,325 118,878,606 9,392,965 168,612,385
1997 620 147,302 159,865,849 148,491,188 10,989,767 196,132,447
1998 670 150,468 167,059,812 155,173,291 15,538,636 207,900,393
1999 716 716 156,938 174,577,503 162,311,262 16,626,340 220,374,417
Source: (Amaha, 2001)
In the year 2000, there were one hundred fifty CSOs operating in Ethiopia. Most of the
CSO programs had saving and credit as one of the components of their activities. Initially,
CSOs started credit service by lending for the purchase of agricultural inputs, farm tools
and oxen, usually following drought seasons. As this approach has a problem of loan
collection because of its quasi-aid nature, CSOs had to change their credit strategy
(ACDI/CEE, 1995).
The saving and credit program of CSOs focused on women and were mostly based on the
Grameen Bank model. In most cases women were organized in-groups of 5-7 members and
56 groups formed a center. CSO credit officers assisted the women in group and center
formation as well as in the training of members. CSOs also provided revolving funds that
centers or groups used for lending to their members (ACDI/CEE, 1995).
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2.2.2. Informal Financial Sector in Ethiopia
According to G/Yohannes (2000), compared with the formal financial institutions, informal
lending is by far the most important source of finance to the rural and urban population. In
recent years, the informal sector has continued to assume increased prominence mainly due
to restrictive rules and regulations of the formal financial sector. The operations of the
informal sector derive their rules and regulations from the country’s culture and customs.
Informal sector transactions are conducted on the basis of trust and intimate knowledge of
customers. The common cultural background and the mutual obligations and fervent bonds
of family and kinship, all operate to promote the trust, accountability and moral
responsibility that is lacking in the official banking system.
Besides, the informal lenders have easy access to information (at reasonable cost) about
their borrowers with whom they have social relations. This permits credit contracts to play
a more direct role in enforcing repayment. Also, the fact that collateral is rarely used in the
informal sector enable it to flexibly satisfy financial needs that can not be met by the formal
financial institutions (G/Yohannes, 2000).
Nevertheless, the informal sector is not without limitations. Despite its flexibility, rapidity
and transparency of procedures, not only are there scarcities of loanable fund for investment,
but the interest rates charged on these loans are often exorbitant. The informal financial
sector often embraces a wide group of individuals and institutions whose financial
transaction are generally not subject to direct control by the country’s key monetary and
financial policy instruments. Individual economic entities in the informal sector include
moneylenders, money-keepers, tradesmen, friends and relatives, neighbors, etc. A brief
review of how these different actors operate in terms of extending credit to low income HHs
is discussed below.
Self-Help Credit and Saving Associations: There are various types of informal credit and
saving associations in Ethiopia. Informal groups such as idir, equb, and the like are the most
important credit and saving arrangements organized by the people themselves on a self-help
basis in both urban and rural areas (Assefa, 1993).
Idir is a type of traditional organization whose aim is to provide assistance at times of

mourning. Idir is generally defined as an association of a group of people and its primary
14
purpose is to provide mutual aid and financial support under emergency situation. It is
mostly popular in urban areas and the common fund is deposited in a bank. Except the
family idir, other forms of idir, such as community idir and occupations (work place) idir
participate in various developmental activities (Assefa, 1993).
Idir is also found in rural areas, but they are not linked with the banking system. A case
study of a village idir in north Shoa shows that the common fund is kept with the treasurer
simply because there are no bank services in the nearest towns. This is an indication of how
the banking system is critical in savings mobilization (Assefa, 1993).
Equb (rotating savings) is a form of social organization in which members come together for
the purpose of savings in cash or in kind. The normal practice is that members contribute
money or material on a monthly or a weekly basis, and lots are drawn every month so that
the one who wins the chance gets the total sum. This process continues every month till the
last member receives his/her share, or what he / she has been saving through the months, and
then the whole process starts anew. Equb is a common form of a rotating saving and credit
associations (ROSCAs). ROSCA is defined as an association formed by a group of
individuals who agree to make regular contribution to a fund which is given in whole or in
part to each contribution in rotation (Assefa, 1993). In Ethiopia, domestic savings through
equb are considerably high. The third five year development plan (1968 – 1973) estimated
that domestic savings through equbs represent 8 to 10% of the GDP (Begashaw, 1978.).
Equb is also a source of savings and credit in rural areas, but the extent of its importance is
not known.
Mahaber usually includes regional associations, church associations and other mutual aid
associations. These regional associations raise funds for construction of schools, roads, etc.
The church associations raise funds for charitable purposes. Mutual aid associations raise
funds to support a member having a financial problem to meet his social obligation such as
marriage (Begashaw, 1978).
In general, the traditional savings and credit associations are not effective in rural areas
because they are not linked with the banking system (Assefa, 1993). However, the informal
credit sources are effective. The formal sector should, therefore, be able to emulate these
attributes of accessibility and flexibility. Nonetheless, since very little is known about the
15
potential of the informal credit sources and traditional associations in rural Ethiopia, an in-
depth study is needed. In all of the traditional organizations, there are chairpersons,
secretaries and cashiers elected by members and they have their own administrative
management and controlling system.
Private Informal Financial Services: In Ethiopia, privately owned credit and saving
arrangements constitute essentially relatives and friends, other farmers, traders and
moneylenders. Credits from friends and relatives are mostly interest free though interest
charges of other sources could vary from 50 – 200%, according to various sources. The
utilization of informal credit shows that close to 50% is used for consumption, clothing and
medical expenditures, about 21 % for social and other obligations: and the remaining 29%
for productive purposes such as agricultural inputs (Assefa, 1993).
According to G/Yohannes (2000) the following private informal financial arrangements are
found in Ethiopia.
Moneylenders: The informal sector accounts for most of the financial services provided to
the rural sector in Ethiopia. The general view of informal finance, however, is of powerful
moneylenders who exploit the poor through usurious interest and unfair seizure of
collateral. Loans from moneylenders are typically short term and are extended to clients of
long distance.
When a potential borrower approaches a moneylender for a loan, it is impossible to

determine the risk involved in offering him/her a loan contract. The lender would not sign a
loan contract for every one that comes along, because this would easily increase the
riskness of the loan portfolio that the lender would find unacceptable. Higher interest rates
that moneylenders charge are in large part due to the higher costs and risks associated with
informal loans. The risks of long term lending are also greater, because informal lenders
and their customers are small and isolated groups.
Friends and Relatives: In Ethiopia, where there is a long tradition of mutual assistance and
reciprocity, individuals who need funds call on friends and relatives for help. Acceptance of
such help, however, obligates the borrower to reciprocate by providing non-financial services
or by supplying funds in turn when the lender needs to borrow. Lending between friends and
relatives often carries low interest or no explicit interest charge. And oral promise,
16
confidence, trust and mutuality are frequently all that is needed as collateral or security
(G/Yohannes, 2000).
Pawn Brokers: Pawn brokers are found everywhere as they are involved in many kinds of
“pawning” or exchanging cash for something like gold or land or anything of value which is
the quickest way for people with a problem to get funds. The lender has to know a lot about
the items pledged, but does not have to know anything about the borrower. However, some
pawnbrokers do want to know something about the borrower to avoid lending against stolen
goods.
Money keepers: Generally, money keepers are parents, elders or religious leaders. They are
persons generally acknowledged to be trustworthy in a locality with which individuals and
groups feel comfortable in trusting their spare cash for the safekeeping service. Money
keepers are known to fulfill a strong demand for safekeeping and depository services. They
are also recognized as lenders, able to lend short term undertaking at their own risk but
splitting the interest earned with depositors.
Tradesmen: Trading is an important component of marketing transactions between traders

and farmers. Contractual linkage is prevalent in many forms. The pledging of standing crops
as collateral, committing all or part of a crop or crops at harvest time, the forward sale of
future crops, etc. this kind of credit is extended as a short term loan for consumption goods,
farm inputs and other. Loan repayments are made at the end of the cropping season.
There is another class of transactions involving transfer of right to a standing crop or to land
for varying length of time, which is different from transactions in which land is leased out.
The transactions involve the borrower transferring the asset (standing crop) to the lender,
who leases it. The transfer of a standing crop in return for cash is a forward of sale of
produce. A very common example is in coffee growing areas; where about a third of the
anticipated value during the harvest is advanced. In this case, collection is in kind, and those
who make the advances are often coffee traders.
17
3. MATERIALS AND METHODS
3.1. Description of the study area
The study were conducted in Assosa district, Assosa Zone, Benishangul-gumuz regional
state (BGRSt). The study area is situated 685 km from Addis Ababa. There are 74 kebeles in
the district. The population of the district was estimated at 104, 147 in the year 2007. Of
whom 52,968 were men and 51,179 were women. The urban population was estimated to be
24,214 or 23.25%. The remaining 79,933 (76.75%) were rural inhabitants. Average family
size for rural HHs was 7.19 (Assosa district agriculture development office, 2011). The
annual temperature ranges from 18°c to 28°c. The annual rainfall ranges from 500 mm to
1150 mm. The summer season starts in May and ends in mid-September. The winter season
is from October to April. The altitudinal location of the district ranges from 1500 m to
1750masl.
According to Assosa district agriculture development office, the total cultivated land area of
the district is 41,050 hectares. The forest land area is 1,460 hectares, while the shrub land
area is 2,490 hectares. Grassland and wet land cover 2,190 hectares and 5,000 hectares of
land respectively. An estimated area of 11,486.33 hectares is barren land. The total size of
urban part of the district is 1,000 hectares. (Table 5)
Table 5: Land use pattern of Assosa district
Land use Area in hectares

Cultivated land area 41050
Forest land area 1460
Shrub land area 2490
Grass land area 2190
Wet land area 5000
Bare land area 11,486.33
Urban area 3490
Total 67,166.33
Source : Assosa district agricultural development office
3.1.1. Livestock
18
The population of oxen in the district is estimated at 39,189. The number of cows is
estimated at 29,138. The number of sheep and goat is estimated at 16,348 and 10,436
respectively. The number of poultry in the district is around 61,365. (Table 6)
Table 6: Livestock population of Assosa district, 2000

Type Number
Oxen 39,189
Cows 29,138
Goats 16,348
Sheep 10, 436
Horses 235
Mules 432
Donkeys 15,644
Poultry 61,365
Source: Assosa district agricultural development office
3.1.2. Cropping Pattern
Teff, wheat, barley, pea, and lentil are grown in the district. Teff is sown from the end of
June to August and it is harvested from the first of November up to first of January. Wheat is
sown in June and harvested from October to December. Millet is sown in early June and
cultivated before the end of October. Pea is sown at the beginning of June and harvested up
to the end of October. Maize is sown in June and harvested in the end of August. (Table 7)
Table 7: Crops grown in Assosa district and their growing seasons

Crop name Cultivating season
Teff End of June – August

Wheat Mid-June – July
Millet June 1st – July
Pea June 1st – July
Maize June – August
3.1.3. Social and Communication infrastructures
According to unpublished data from Assosa district agricultural development office, the size
of population, utilizing clean drinking water, is 70,400. The number of HHs utilizing
electricity was 3,400 in 2001. These people were located mainly in the town of Assosa.
19
There is one hospital in the district. There were eleven elementary schools, four junior
secondary schools and one high school. The asphalt road length is 132 kilometers.
There were twenty-nine development agent centers with twenty houses and twenty-five
development agents, each of whom have completed grade twelve. There was only one
animal health clinic in 2001 with one doctor of veterinary medicine and four sub-
professionals (Assosa District Agriculture Development Office).
3.1.4. Cooperatives
There are thirteen farmer cooperatives in the district. Eight of them are registered as farmer
service cooperatives. The co-operatives in the district are established with the following
major objectives:
 To solve problems collectively which members can not individually achieve.
 To achieve a better result by coordinating their knowledge, wealth and labor.
 To promote self-reliance among members.
 To collectively protect, withstand and solve economic problems.
 To improve the living standards of members by reducing production and service costs
by providing input services at a minimum cost by finding a better price to their
products or services.
 To expand the mechanism by which technical knowledge could be put into practice.
 To develop and promote savings and credit services.
 To minimize and reduce the individual impact of risks and uncertainties.
 To develop the social and economic culture in members through education and
training.
3.2. Methods
3.2.1. Method of Data Collection
3.2.1.1. Sampling Procedure and Primary Data

Two-stage random sampling was employed in the survey. At the first stage, eight out of the
74 Kebeles available in the district were selected randomly based on the list of Kebeles
available. At the second stage, 100 farm HHs were selected randomly using probability
proportional to size in the respective Kebeles. Details of sample Kebeles, and farm HHs were
provided in Table 8
Table 8: List of Kebeles and number of farm HHs selected for the survey.
20
Number of farm Number of sample farm Percentage
Sample Kebeles
HHs* HHs selected (%)
Amba 8 329 12 3.6
Megele 29 544 20 3.7
Baro 265 10 3.8
Komoshiga 28 384 14 3.6
Amba14 485 17 3.6
Amba 12 323 12 3.6
Ura 251 9 3.6
Komoshiga 25 163 6 3.6
Total 2744 100 3.6
Source: own data
Primary data were collected from sample farm HHs by using a structured questionnaire
prepared for the survey. Before formal data collection started, interviews were made with
five randomly selected farmers so as to evaluate the questionnaire for consistency and
clarity, as well as identify missing information, duplication, time requirement and to obtain
preliminary information on farming system in the area.
3.2.1.2. Secondary Data
In order to facilitate interpretation of the analysis based on primary data, secondary data were
used as the need arose. The secondary data provided a background to understand the
situation saving and borrowing behaviors of farmers and agricultural credit situations in the
District. Sources of secondary data were local farmers association, District office, Central
Statistics Authority, Association of Ethiopian Micro-finance Institution (AEMFI) and such
other sources.
3.2.2. Methods of Data Analysis
Descriptive statistics were employed to investigate the socio-economic profile; and the saving
and borrowing behavior of farm HHs in the study area. Data were presented in chart, graph and
tabular format.
4. RESULTS AND DISCUSSION
21
4.1 Households Characteristics
There are seventy four Kebeles in Assosa district. In this study, eight Kebeles were selected to
choose sample farm HHs for the survey. Distance to the region capital Assosa serves as a
criteria to divide Kebeles into two parts. Amba 8, Megele 29, Amba 12 are Kebeles located
nearer to the regional capital. Some of these Kebeles are adjacent to the main road from Addis
Ababa to Kumruk. Farm HHs living in these Kebeles have access to microfinance service in
addition to their respective service co-operatives. Moreover, they are more conducive for off-
farm activities. This is mainly due to the fact that they are located closer to the town of Assosa
than the other Kebeles. Whereas Kebeles such as Baro, Komoshiga 28, Komoshiga 25, Ura,
and Amba 14 are located at a long distance from the regional capital, Assosa. In these
Kebeles, the only institutional credit providers accessible to farm HHs were service co-
operatives.
Table 9: Distribution of consumption credit user and non-user sample farm HHs by Kebele
Users Non-users Total

Kebeles Number Percent Number Percent Number Percent
Komoshiga 25 – - 12 19 12 12
Komoshiga 28 2 5.6 18 28 20 20
Baro 1 2.7 9 14.1 10 10
Amba 12 9 25 3 4.7 12 12
Amba 8 4 11.1 2 3.1 6 6
Ura 9 25 – - 9 9
Amba 14 9 25 8 12.5 17 17
Megele 29 2 5.6 12 18.6 14 14
Total 36 100 64 100 100 100
Source: Farm Household Survey
Out of one hundred farm HHs approached for the study, twelve were located in Komoshiga 25
and none of them were users of consumption credit. Twenty farm HHs were selected from
Komoshiga 28, which is one of the Kebeles located far away from the town of Assosa. Two of
the twenty farm HHs in this Kebele reported using credit for consumption purposes during the
year. One out of ten sample farm HHs in Baro reported using credit for consumption purposes
during the year. On the other hand the distribution of consumption credit users shows a different
picture when one examines the Kebeles located nearer to the town of Assosa. In these Kebeles,
namely Amba 12, Amba 8, Ura, Amba 14, the number of consumption credit users was found to
be more than that of non-users. Table 9 presents the distribution of users and non-user of
consumption credit on the basis of Kebeles to which sample farm HHs belong.
22
4.2. Distribution of Farm HHs according to Land Holdings
About eleven percent of users and six percent of non-users own up to 0.50 hectare of land. 8.3%
of users and 7.8 % of non-users own between 0.51 and 1 hectare of land. 13.9% of users and
9.4% of non-users own between 1.01 to 1.50 hectares of land. Twenty-five percent of users and
about sixteen percent of non-users own between 1.51 to 2 hectares of land. Nearly fourteen
percent of users and non-users each own between 2.01 to 2.50 hectares of land. About twenty-
eight percent of users own above 2.50 hectares of land, whereas the corresponding figure for non-
users is about forty-seven percent as shown in Table 10.
Table 10: Sample farm HHs according to average land size and farmer group
Size of land in Users Non-users Total

hectares Number Percent Number Percent Number Percent
0 – 0.50 4 11.1 4 6.3 8 8
0.51 – 1.00 3 8.3 5 7.8 8 8
1.01 – 1.50 5 13.9 6 9.4 11 11
1.51 – 2.00 9 25 10 15.6 19 19
2.01 – 2.50 5 13.9 9 14.1 14 14
2.51 – 3.00 9 25 21 32.8 30 30
3.01 – 3.50 - - 3 4.7 3 3
3.51 – 4.00 - - 3 4.7 3 3
4.01 – 4.50 - - 1 1.6 1 1
4.51 – 5.00 1 2.8 2 3.12 3 3
Total 36 100 64 100 100 100
Source: Farm HH survey
Renting in and Renting out of Land: Sixty-nine percent of sample farm HHs did not rent in any
land during the period. Twenty-five percent of users reported renting in land during the
production year. Thirty-four percent of non-users reported renting in land during the production
year. The maximum size of land rented in by the consumption credit users is one hectare. Only
eleven percent of consumption credits users rented one hectare of land. This means that the
remaining eighty-nine percent of consumption credit users rented in below one hectare or did not
rent in any land altogether during the year. The maximum size of land rented in by non-users of
consumption credit during the year was three hectares. Nearly seventeen percent of non-users of
consumption credit during the year rented between 1 and 3 hectares of land during the study
period. The distribution of size of land rented in by the HH versus consumption credit user and
non-user farm HHs is shown in Table 11.
23
Table 11: Distribution of sample respondents by farmer group and size of rented in land
Size of land Users Non -users Total

rented in
(hectares) Number Percent Number Percent Number Percent
0 – 0.50 29 80.5 48 75 77 77
0.51 – 1.00 7 19.5 8 12.5 15 15
1.01 – 1.50 - - 1 1.6 1 1
1.51 – 2.00 - - 4 6.2 4 4
2.01 – 2.50 - - 1 1.6 1 1
2.51 – 3.00 - - 2 3.1 2 2
Total 36 100 64 100 100 100
When it comes to the distribution of rented-out land, we come across a different observation. As
shown in table 12, thirty-six percent of consumption credit users are involved in renting out of up
to three hectares of land per HH during the year. Whereas, only fourteen percent of non-users of
consumption credit, have reported renting out their farmland.
Table 12: Distribution of sample respondents by farmer group and size of rented out land
Users Non -users Total
Size of land rented out in
hectares Number Number
Number Percent
Percent Percent
26
0 – 0.50 61 95.3 87 87
72.2
5
0.51 –1.00 - - 5 5
13.9
1.01 –1.50 2 5.6 - - 2 2
1.51- 2.00 2 5.6 1 1.6 3 3
2.01– 2.50 - - - - - -
1
2.51 –3.00 2 3.1 3 3
1
Total 36 100 64 100 100 100
Three HHs reported that they rented out their whole possession of land. The main reason for this
is that the HH heads are widowers or in the old age. They neither have the energy to till the land
nor the resources to hire farm laborers.
4.3. Participation of Households in Extension Package Program
24
When it comes to participation in the extension package program, the number of farm HHs who
reported participation is shown in Table 13. As the figures in the table indicate, 86% of
consumption credit users did not participate in the extension package program during the year.
About forty-seven percent of sample farm HHs who did not use credit for consumption purposes
during the year reported participating in the extension package program.
Table 13: Distribution of sample farm HHs by farmer group and participation in the extension
package program
Participation of HH in Consumption credit Total

extension package
users non-users
program
Number Percent Number Percent Number Percent
5
Yes 34 53.1 39 39
13.9
31
No 30 46.9 61 61
86.1
36
Total 64 100 100 100
100
4.4. Age Distribution of Sample Farm Households
In traditional agriculture where one of the most important inputs is family labor, age of the farm
HH head affects all types of activities related with crop enterprise, livestock enterprise and also
petty trade.
Table 14: Age distribution of HH heads by farmer group
Age in years
1
< 25 – - 1 1
2.8
25 –
24 66.7 42 65.6 66 66
50
50 –
11 30.6 22 34.4 33 33
75
Tot
36 100 64 100 100 100
al
Source: Farm Household Survey.
As shown in Table14, sixty-six percent of sample farm HHs were within the age bracket of
twenty-five and fifty years. Thirty-three percent of the sample respondents were aged between
fifty and seventy-five years. Sixty-seven percent of farm HHs who used credit for consumption
25
purposes during the year were found in the economically active age i.e. between twenty-five and
fifty.
4.5. Level of Education of Sample Farm Households
The two types of institutional finance providers accessible to farm HHs in Assosa district are the
micro-finance agency and the service cooperatives. Even if the service cooperatives do not have a
bankbook, micro-finance clients are expected to handle their bankbook properly. Usually as
observed in the field, the credit agents fill bankbooks of the micro-finance. But to understand
how much saving do they have, how much loan amount have been repaid and what balance in
their book remains, rural clients of the microfinance are expected to have some academic back
ground. The level of education of sample respondents is summarized in Table15.
Nineteen percent of consumption credit users and 20 percent of non-user sample farm HHs were
found to be illiterate. Forty-four percent of consumption credit users and forty-five percent of
non-user farm HHs could read and write in the local language of the area. With regard to formal
education, 28 percent of consumption credit users and 26 percent of the non-users reported that
they attended elementary education, whereas about eight percent of consumption credit users and
eight percent of the non-users reported attending secondary education.
Table 15: Educational level of sample respondents by farmer group

Number
Level of education Number Percent Number Percent
Percent
Illiterate 7 19.4 13 20.3 20 20
Read and write 16 44.4 29 45.3 45 45
Church education – - 1 1.6 1 1
Elementary
10 27.8 16 25 26 26
education
Secondary education 3 8.3 5 7.8 8 8
Total 36 100 64 100 100 100
4.6. Access to Markets
Farmers in Assosa district have access to the Assosa markets only. This is the main reason why
the term “to the nearest market” is made use of in the interview. The time it takes to reach the
nearest market is one of the key determinants for farm HH to engage in a number of other off-
26
farm activities. As can be seen from table 16, eighty-percent of consumption credit users spend
less than one and half hour to reach the nearest market, while only twenty-three percent of non-
users of consumption credit were in the same category. On the other hand, twenty percent of
consumption credit users traveled more than two hours to reach the nearest market, the
corresponding figure for the non-users was seventy-seven percent.
Table 16: Distribution of sample respondents by farmer group and the time required to reach the
nearest market.
Length of time in hours Number Percent Number Percent Number Percent
< 1.30 hours 29 80.6 15 23.4 44 44
1.30 – 2.00 hours 5 13.9 13 20.3 18 18
> 2 hours 2 5.6 36 56.3 38 38
Total 36 100 64 100 100 100
4.7. Livestock Possession of Sample Farm Households
The term livestock includes plowing oxen, milking cows, heifers, calves, sheep, goat, poultry
which are briefly discussed in this section. The maximum number of oxen owned by users was
four livestock units whereas the corresponding figure for non-users was six livestock units. The
average number of plowing oxen was 1.61 livestock units for users and 2.56 livestock units for
non-users. The maximum number of milking cows owned by users was two livestock units,
whereas the corresponding figure for non-users was two livestock units. The average number of
milking cows was 0.61 livestock units for users and 0.86 livestock units for non-users. The
maximum number of heifers was 2.25 livestock units for users and 1.50 units for non-users. The
average number of heifers was 0.31 livestock units for users and 0.43 for non-users. The
maximum number of sheep owned by users was 1.17 livestock units and the corresponding figure
for non-users was 1.82 livestock units. The average number of sheep possession was 0.072
livestock units for users and 0.16 livestock units for users. The average number of goat was 0.04
livestock units for users and 0.06 livestock units for non-users. The average number of poultry
was 0.07 livestock units for users and 0.07 livestock units for non-users. With regard to pack
animals, the maximum number of donkeys owned by users was 2.10 livestock unit and the
average possession of donkey by users was 0.62 livestock units. Whereas the maximum number
of donkeys owned by nonusers was 3.50 livestock units and the average possession of donkey by
non-users was 1.13 livestock units. With regard to horses, the average number of horses was 0.03
27
livestock units for users and the corresponding figure for non-users was 0.09 livestock units as
shown in Table 17.
Table 17: Livestock Possession of sample farm HH in tropical livestock units

Users Non- users
Livestock Minimum maximum Mean Minimum Maximum Mean
Oxen 0 4 1.61 0 5 2.56

Milking
0 2 0.61 0 2 0.86
cows
Heifers 0 2.25 0.31 0 1.5 0.43
Sheep 0 1.17 0.072 0 1.82 0.16
Goat 0 0.91 0.04 0 1.04 0.06
Poultry 0 0.85 0.07 0 0.43 0.07
Donkey 0 2.1 0.62 0 3.5 1.13
Horse 0 1.1 0.03 0 2.2 0.09
Source: Farm HH survey
4.8. Financial Arrangements of Sample Farm Households
4.8.1. Informal Self-Help Groups

This section deals with the informal financial arrangements in the study area with special
reference to the sample HHs. Informal saving and credit groups occur frequently and have a long
history in Ethiopia. Saving groups are common sights both in the urban and rural part of the
district. Even if their prevalence is well known, there is still lack of understanding as to what
exactly these groups are and the functions they play in mobilizing savings. This section tries to
answer the questions like what saving associations exist in the district. Why people join them?
And the impact they have on the lives of savers.
Within the district the informal saving associations are mainly of two kinds, viz.; the idir and the
equb.
4.8.1.1. The “Idir”
Idir is a saving group, which brings together HHs usually living close to each other. Members
contribute cash saving on a monthly basis. There is a cashier and a chairman for every Idir. The
principal objective of Idir is to save for funeral purposes. At the time of death of a member of
HH, payment will be made to the mourner to help him/her cover burial related expenses. In
addition to cash, members contribute their labor to the mourner HH. In addition to mobilizing
28
resources, the Idir bring people together. This means they strengthen the social bond between
members of the society.
Sometimes these saving groups have an organizational base or center. According to one
informant, they used to meet at the home of one of the members. Usually members have a
specific meeting place where they make their respective payments and discuss about problems of
their members. As shown to Table 18, all the sample farm HHs have at least one Idir to which
they were members. As many as 51% of them were members of one or two Idir while remaining
49% were members of more than two Idir. Usually the HH head was found to be a member of
one Idir and his wife is of another Idir.
Most of the HHs started membership in one or more Idir immediately after they established their
family. According to the table 18, majority of the sample farm HHs had membership of more
than ten years in one or more of their respective Idir. In fact, 64% percent of the respondents had
stayed in Idir between eleven and thirty years.
Table 18: The number of idirs in which HH head is a member.

Number
of Idir Number
Number Percent Number Percent
Percent
1 –2 19 52.8 32 50 51 51
3–4 16 44.7 20 31.2 36 36
5–6 1 2.8 10 15.6 11 11
7–8 – - 2 3.1 2 2
36 100 64 100 100 100
Total
There were older respondents who had been members of one or more Idir for over forty years.
This shows how long Idir prevailed as a means of mutual co-operation among farm HHs. Most of
the Idir receive contribution from their members on a monthly basis. Most of the HHs contributed
between five birr to twelve birr per month for one Idir or saving group. There also exist several
Idir which collected less than five birr per month in the district. As shown on table 6.16, only
seven percent of sample farm HHs saved up to fifty birr per year each in one or more Idir. As
many as 68% of sample farm HHs saved between fifty and one hundred fifty birr per year each in
one or more Idir. Further 25% of sample farm HHs saved between 150 birr and 350 birr per year
per HH in one or more Idir.
29
Table 19: Distribution of sample respondents by the length of stay in Idir and by farmer group
Consumption credit
Length of non- Total
membership in user
user
years Number
Number Percent Number Percent
Percent
0 –10 7 19.4 16 25 23 23
11 –20 16 44.4 18 28.1 34 34
21 – 30 12 33.3 18 28.1 30 30
31 – 40 1 2.8 9 14.1 10 10
41 – 50 - - 3 4.7 3 3
Total 36 100 64 100 100 100
Table 20: Distribution of sample respondents by the amount of annual contribution to Idir and by
farmer group
Annual Users Non -users Total

contribution Number Percent Number Percent Number Percent
0 –50 2 5.6 5 7.8 7 7
51–100 4 11.1 19 29.7 23 23
101 –150 19 52.8 26 40.6 45 45
151 – 200 4 11.1 9 14.1 13 13
201 – 250 4 11.1 5 7.8 9 9
251 – 300 2 5.6 – - 2 2
301 –350 1 2.8 – - 1 1
Total 36 100 64 100 100 100
4.8.1.2. The “Equb”
The second most important informal saving and credit arrangement observed among sample farm
HHs is equb. The term is used in reference to rotational saving and credit activity. In equb,
savings are collected from group members in a single round and they are awarded to one member
of the group based on mutually agreed upon rotation formula. In equb, members are expected to
contribute once in one to three weeks. Therefore, most of the members are the ones who have
access to liquid money more frequently. Unlike Idir, all the sample farm HHs did not save in
equb (rotational saving group).
30
Idir is a long lasting saving association in the community. Equb usually does not last longer than
a year. Out of 100 respondents in the district, only 37 were members of one or more equb.
Twenty-six respondents were members of one equb during the year while eleven were members
of two Equb’s during the year. Most of the sample farm HHs who were members of one or more
Equb’s were also engaged in petty trade in addition to agricultural activity. Their weekly or bi-
weekly saving to equb was derived from the petty trade rather than agricultural activity. Table 21,
shows that about 64% of consumption credit users saved in one or two Equb’s, while the
corresponding figure for the non-users was only about 22 %.
Members of Idir usually live close to each other. Idir is usually meant for mutual assistance at
funeral times. In equb, the business or some other motives outweigh the social motive. Therefore,
equb is organized based on various motives of the members who initiate the saving group. This
means the lump sum is utilized for different purposes based on the decision of the members.
Table 21: Distribution of sample respondents by the number of Equb in which HH is a member
and by farmer group
Number User Non -user Total

of Equbs
0 13 36.1 50 78.3 63 63
1 15 41.7 11 17. 2 26 26
2 8 22.2 3 4.7 11 11
Total 36 100 64 100 100 100
Out of the thirty-seven respondents who reported to be members of one or more equb(s) during
the year, fourteen reported using the lump sum of Equb (s) for production purposes, particularly
to promote their petty trade. Twelve respondents reported that they utilized the lump sum for
various consumption expenditures. Eleven respondents reported using the lump sum for both
production and consumption purposes. The purposes for which the lump sum of equb was spent
are shown in Table 22.
Table 22: Distribution of sample respondents who were members of equb by the purposes for
which the lump sum was spent and by farmer groups
31
Consumption credit
Total
Purpose user non-user
Production 7 30.4 7 50.0 14 37.8
Consumption 6 26.1 6 42.8 12 32.4

Production and
10 43.5 1 7.1 11 29.7
consumption
Total 23 100 14 100 37 100
4.8.2. Formal Financial Arrangements

The most important institutional credit providers used by the sample respondents were service
cooperatives and the microfinance institutions. Microfinance service provides cash loans, while
the former one provides input loans.
Forty-two farm HHs reported that they used service co-operatives as their sole means of
acquiring institutional loan. These farmers were the ones who lived in Kebeles like Komoshiga
25, and Komoshiga 28 where the micro-finance service was totally absent. Households with
small land size reported that they did not take loan from co-operatives. Eight sample farm HHs
stated microfinance as their only means of access to institutional loan. Farm HHs living in Amba
14, Amba 12, Amb 8, and Megele 29 Kebeles, who constitute 50 percent of the total sample of
respondents, reported that they have access to both cooperatives and microfinance services.
About eight percent of users and sixty-one percent of non-users used service cooperatives as their
sole means of getting institutional loan. Nearly fourteen percent of users and five percent of
nonusers had access to only micro-finance agency. About seventy-eight percent of users and
thirty-four percent of non-users had access to both service cooperatives and micro-finance
agency. The institutional financial service providers are shown in Table 23.
Table 23: Distribution of sample respondents by source of institutional finance

Name
Service cooperatives 3 8.3 39 60.9 42 42
Microfinance agency 5 13.9 3 4.7 8 8
Cooperatives and
28 77.8 22 34.4 50 50
microfinance agency
Total 36 100 64 100 100 100
32
4.8.2.1. Micro – Finance Service
There was only one micro-finance service provider in the district during study period, namely
Busa Gonoffaa Microfinance S.C. It had been there for two years only. It provided financial
services to residents of Assosa-the district capital and the rural dwellers of the district. The main
clients of the micro-finance were rural farm HHs. The microfinance does not enquire for property
collateral when it forwarded loans. Like all other micro-finances in the country, it uses group
collateral as a guarantee for loan repayment. Solidarity groups were usually organized by the
farmers themselves. In some cases credit agents also organized solidarity groups in collaboration
with members of the farming community.
Thirty-two percent of the sample HHs reported that they were beneficiaries of micro-finance
service in the district. More specifically about sixty-four percent of consumption credit users and
only about 14% of the non-users were beneficiaries of MFI. In almost all of the micro-finance
user farm HHs, only one member of the HH was client to the microfinance service during the
year. The distribution of number of HH members who got microfinance services during the study
period is presented in Table 6.20.
Table 6.20: Number of HH members who had access to micro-finance services during the study
period.
Number of members Users Non -users Total

per HH Number Percent Number Percent Number Percent
0 13 36.1 55 85.9 68 68
1 22 61.1 9 14.1 31 31
2 1 2. 8 – - 1 1
Total 36 100 64 100 100 100
The MFI does not compel the borrowers to use the money for a particular activity. The clients
were set free to use the money to whatever type of activity they deem proper including food grain
purchase, health care expenses, children clothing and the like. From the respondents who took
microfinance loan, about nine percent of consumption credit users and forty-four percent of non-
users used micro-finance loan for purchase of fertilizer. None of the users used the microfinance
loan for renting in land. On the other hand, about forty-four percent of non-users used the micro-
finance loan for renting in land during the period. Nearly nine percent of consumption credit
users used the microfinance loan for purchase of food grain. Whereas none of the non-users spent
the micro-finance loan for food grain purchase. About forty percent of consumption credit users
33
and eleven percent of the non-users who took microfinance loan, used the money for off-farm
activities. Nearly twenty-two percent of users used the micro-finance loan for buying
consumables, while none of the non-users used the micro-finance loan for the same purpose.
About twenty-seven percent of the consumption credit users who took microfinance loan, used
the loan for both production and consumption purposes. The various purposes to which micro-
finance loan was utilized by sample respondents are stated in Table 24.
Table 24: Distribution of sample respondents who took micro-finance loan by the purpose for
which they used micro-finance loans

Purpose Number Percent Number Percent Number Percent
Purchase of
2 8.7 4 44.4 6 18.8
fertilizer
Rent in land – - 4 44.4 3 9.4
Purchase food 2
– - 2 6.2
grain 8.7
Petty trade 9 39.1 1 11.1 10 31.2
Buying
5 21.7 – - 5 15.6
consumables
Consumption and
6 26.1 – - 6 18.8
production
Total 23 100 9 100 32 100
The speed with which the loan is settled depended on the performance of the solidarity groups.
According to credit agents, some groups finish paying their installments earlier than others. Rural
clients are expected to contact credit agents once in two weeks for repayment. Otherwise, they
would be treated as defaulters. The first loan cycle usually begins with 300 birr. The second loan
cycle involves 500 birr. The third cycle involves 700 birr. It goes on progressively in this manner.
A person-taking loan two times is interpreted as, he first took 300 birr and next he took 500 birr.
If it were three times, then the third loan cycle would be 700 birr. About thirteen percent of the
users took micro-finance loans only once during the period, while eleven percent of the non-users
took micro-finance loan only once during the study period. From the farm HHs who used
microfinance loans during the period, about 30 percent of the users and nearly fifty-six percent of
the non-users reported taking two cycles of loan from the microfinance agency. About fifty-three
percent of the users and thirty-three percent of the non-users reported taking three cycles of the
microfinance loan. Only about four percent of the users reported taking four cycles of the micro-
finance loan. However, none of the non-users of consumption credit reported taking four cycles
34
of the micro-finance loan. The number of times a HH took microfinance loans is summarized in
Table 25.
Table 25: Distribution of sample respondents who took microfinance loans by the frequency of
loan acquisition
Number of times Users Non-users Total

(cycles)
1 3 13.0 1 11.1 4 12.5

2 7 30.4 5 55.6 12 37.5
3 12 52.2 3 33.3 15 46.9
4 1 4.3 – - 1 3.1
Total 23 100 9 100 32 100
4.8.2.2. Service Co-operatives
Service co-operatives are found mainly engaged with their traditional activities of disbursement
of seasonal agricultural input loans. These loans are of short term in nature and are expected to be
paid back in the following harvest season. The principal type of loan reported by sample farm
HHs was fertilizer loan in kind advanced to farmers by their respective service co-operatives.
Table 26, shows that 62 % of sample farm HHs took loan from the service cooperatives in the
study period. Only 25% of consumption credit users took loan from cooperatives, whereas nearly
83% of the non-users reported taking loan from cooperatives.
Table 26: Number of sample farm HHs taking loan from service cooperatives .
Consumption credit
Total
Households user non-user
Who took loan 9 25 53 82.9 62 62
Who did not take
27 75 11 17.1 38 38
loan
Total 36 100 64 100 100 100
The amount of fertilizer loan advanced to farmers by respective cooperatives is summarized in

Table 27. As can be seen from the table, that 28 % of sample farm HHs, the majority of whom
35
were consumption credit users, did not avail fertilizer loan. In other words, almost half of
consumption credit users had not taken fertilizer loan from service co-operatives during the
year. The maximum amount of fertilizer loan used by consumption credit users was 800 birr.
On the other hand, the maximum amount of fertilizer loan used by non-users of consumption
credit is more than 2000 birr. This indicates that there exists a clear difference on the use of
fertilizer among consumption credit user and non-user sample farm HHs.
Table 27: Amount of loan taken during the year for fertilizer purchase from service
cooperatives.
Amount of loan in Users Non -users Total

birr Number Percent Number Percent Number Percent
100 – 400 4 44.4 14 21.9 28 28
401 – 800 5 55.6 16 25 21 28
801 – 1200 – - 12 18.8 12 12
1201 – 1600 – - 6 9.4 6 6
1601 – 2000 – - 3 4.7 3 3
2001 – 2400 – - 1 1.6 1 1
> 2400 - - 1 1.6 1 1
Total 9 100 53 100 62 100
4.8.2.3. Collateral and Source of Repayment of Institutional Loans
Property collateral was not used directly in the disbursement of institutional loans in the district.
Bussa Gonnoffa Microfinance-the only microfinance organization in Assosa district – uses
solidarity groups or social collateral in the disbursement of loans. The other institutional credit
providers – the service cooperatives, use membership of cooperative as a guarantee to advance
loans to farm HHs. Table 28 summarizes the types of collaterals given by the borrowers in the
district.
Table 28: Distribution of sample farmers who borrowed from institutional sources by the type
of collateral they provided.
36
Consumption credit
Total
Collateral offered user non-user
Group 6 16.7 5 7.8 11 12.2
Membership of cooperative 8 22.2 49 76.6 57 63.3
Group for MFIs and membership for
18 50 4 6.3 22 24.5
coop.
Total 32 100 58 100 98 100
Repayment of institutional loans depends on the number and kind of economic activities the HH
is engaged in. Among the sample farm HHs, those who live near the town of Assosa are engaged
in petty trades in addition to their main engagement i.e. seasonal crop production. Farm HHs
living in Kebeles like Megele 29, Amba 14 and Ura use the Assosa market to perform their petty
trade and earn additional income. Farm HHs living in Amba 12, Amba 8 and in Ura use the
Assosa market to generate additional income from petty trades. Farm HHs living in Komoshiga
25, Komoshiga 28 and Baro have no additional means of earning income except the seasonal
agriculture, due to their location far away from the town of Assosa. Farm HHs living in the last
mentioned three Kebeles are expected to wait for harvest to settle their institutional loan, or to be
precise, their fertilizer loan.
As shown in Table 29, 59% of the sample of respondents stated that their only source of loan
repayment is crop harvest. Whereas, thirteen percent of the farm HHs reported that they use the
income generated through petty trade and also wage employment to settle their institutional
loans.
Table 29: Distribution of sample respondents according to the source of repayment of

institutional loan.

Source of repayment
Harvest 13 36.1 46 71.8 59 59
Petty trade 6 16.7 4 6.25 10 10
Wage employment – - 3 4.7 3 3
Harvest and wage
12 33.3 5 7.8 17 17
employment
Total 31 100 58 100 89 1 00
5. CONCLUSIONS
37
Among the sample respondents, only thirty-two percent were found to have access to micro-
finance service in the district. Service co-operatives were the only institutional loan providers
accessible to the remaining sixty-eight percent of sample farm HHs. Almost all of the service co-
operatives were engaged in the disbursement of the traditional seasonal input loans (fertilizer).
Most of the rural clients of the microfinance agency were residents of Kebeles located relatively
closer to the regional city, where the only district branch office of the micro-finance exists and
where credit agents live. Moreover due to bi-weekly repayment schedule of the micro-finance
agency, the majority of the rural clients were those engaged in off-farm activities as a source of
liquidity in addition to seasonal agricultural activity. In other words, purely subsistent farmers
who could not have access to petty trades due to the remoteness of their Kebeles were unable to
benefit from the micro-finance service in the study area.
In view of these facts the following implications can be very useful for people involved in
designing and evaluating policy and programs for rural financial institutions:
♦ Credit and savings facilities can help poor rural HHs manage and often augment their
otherwise meager resources and acquire adequate food and other basic necessities for their
families.
Therefore, while extending credit for farm inputs, rural financial institutions must also think
the possibility of incorporating consumption credit in their loan products as this can also
promote productivity of farm family labor and hence contribute positively towards food
security.
♦ Consumption credit users can be characterized by a range of agro-ecological and socio-

economic factors of the beneficiaries. The most important ones identified in the study
include the use of microfinance loan for food grain purchase, the use of informal loans to
meet emergency health care expenditure, relatively more participation in equbs, less
participation in the extension package program and lesser access to remittances from
relatives or family member working in surrounding towns. Therefore before launching
institutional finance in rural areas, practitioners need to have adequate knowledge of the
complex and multiple characteristics of the target population.
♦ While MFIs are advised to diversify their loan portfolio towards addressing the diverse loan
demands of farm HHs, the government must not forget its responsibility of maintaining and
38
enforcing a strong legal framework that ensures contract compliance so as to avoid willful
defaulting.
♦ Capacity and resource limitation is the most important constraint private micro-finance
institutions are facing in the study area. As a result micro-finance outreach is limited to
accessible parts of rural areas. This is a clear indicator of the fact that MFIs with the meager
resources under their disposal can not move any further in expanding their services to rural
clients. Therefore in order to expand outreach of microfinance institutions in remote areas,
governmental and non-governmental organizations ought to provide especial incentives to
the MFIs.
♦ The prevalence of ROSCAs and network of friends and relatives in the study area indicate the
possibility of strengthening the participation of groups in formal lending and saving
activities. If groups can be made responsible for some of the screening, monitoring and
enforcement functions, the risk would be reduced for formal outsider institutions. This is
believed to contribute fairly towards reduction in transaction costs.
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MA COLLEGE

ASSESSMENT OF SAVING AND BORROWING BEHAVIORS OF FARMERS IN

A RESEARCH PAPER SUBMITTED TO MA COLLEGE

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE BACHELOR

1.2. Statement of the Problem

The specific objectives of the study were:

1.4. Significance of the Study

2.1. Perspectives on Rural Finance

2.2. Rural Finance in Ethiopia

2.2.1. Formal Financial Institutions

Table 3: Number of co-operatives in Ethiopia (2001) .

Table 4: Saving and credit co-operatives in Ethiopia (1983 – 1999)

1983 160 27,556 7,528,691 8,136,677 437,895 9,996,753

Idir is a type of traditional organization whose aim is to provide assistance at times of

When a potential borrower approaches a moneylender for a loan, it is impossible to

Tradesmen: Trading is an important component of marketing transactions between traders

3.1. Description of the study area

Table 5: Land use pattern of Assosa district

Land use Area in hectares

Table 6: Livestock population of Assosa district, 2000

3.1.2. Cropping Pattern

Table 7: Crops grown in Assosa district and their growing seasons

Teff End of June – August

3.1.3. Social and Communication infrastructures

3.2.1. Method of Data Collection

3.2.1.1. Sampling Procedure and Primary Data

3.2.1.2. Secondary Data

4. RESULTS AND DISCUSSION

Users Non-users Total

Size of land in Users Non-users Total

Size of land Users Non -users Total

4.3. Participation of Households in Extension Package Program

Participation of HH in Consumption credit Total

4.4. Age Distribution of Sample Farm Households

Source: Farm Household Survey.

4.5. Level of Education of Sample Farm Households

Table 15: Educational level of sample respondents by farmer group

Users Non -users Total

4.6. Access to Markets

Source: Farm Household Survey

4.7. Livestock Possession of Sample Farm Households

Table 17: Livestock Possession of sample farm HH in tropical livestock units

Livestock Minimum maximum Mean Minimum Maximum Mean

Oxen 0 4 1.61 0 5 2.56

4.8. Financial Arrangements of Sample Farm Households

4.8.1. Informal Self-Help Groups

4.8.1.1. The “Idir”

Table 18: The number of idirs in which HH head is a member.

Users Non-users Total

Annual Users Non -users Total

Source: Farm Household Survey

4.8.1.2. The “Equb”

Number User Non -user Total

Production 7 30.4 7 50.0 14 37.8

Consumption 6 26.1 6 42.8 12 32.4

4.8.2. Formal Financial Arrangements

Table 23: Distribution of sample respondents by source of institutional finance

Number of members Users Non -users Total

Users Non -users Total

Number of times Users Non-users Total

1 3 13.0 1 11.1 4 12.5

Source: Farm Household Survey

4.8.2.2. Service Co-operatives

The amount of fertilizer loan advanced to farmers by respective cooperatives is summarized in