COLLEGE OF AGRICULTURAL AND ENVIRONMENTAL SCIENCE

DEPARTMENT OF AGRICULTURAL ECONOMICS

THE ROLE OF MICRO FINANCE INSTITUTIONS ON IMPROVING

HOUSEHOLD FOOD INSECURITY (THE CASE OF ASELLA TOWN)

A SENIOR PROPOSAL SUBMITTED TO DEPARTMENT OF

AGRICULTURAL ECONOMICS: IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR B.Sc. DEGREE IN AGRICULTURAL ECONOMICS

PREPIRED BY;MULUGETA TSEGA

ADVISOR;MR.SHIFERAW

DEC, 2023

ASELLA ETHIOPIA

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 Table contents

Abstracts.......................................................................................................................................................................II
1.Introduction...............................................................................................................................................................1
1.1. Background of the study.................................................................................................................................1
1.2 Statement of the problem.................................................................................................................................3
1.3. Objective of the study.....................................................................................................................................5
1.4. Research questions..........................................................................................................................................6
1.5 Significance of the study..................................................................................................................................6
1.6 Scope/limitations of the study..........................................................................................................................7
RELATED LITERATURE REVIEW .......................................................................................................................8
112.1.3. Food security in Ethiopia.............................................................................................................................10
2.2. Empirical Literature Review.........................................................................................................................12
2.3 conceptual framework....................................................................................................................................15
3. RESEARCH METHODOLOGY1........................................................................................................................18
3.1. Description of the Study Area 1....................................................................................................................18
3.2. Data Sources and Types................................................................................................................................18
3.3. Method of Data Collection............................................................................................................................18
3.4. Sampling Techniques and sample size..........................................................................................................19
3.5. Econometric Model Analysis........................................................................................................................20
3.6. Definition of variable....................................................................................................................................24
3.7. BUDGET AND SCHEDULE.......................................................................................................................27
Table 2 time schedule..................................................................................................................................................28
4. Budget schedule.......................................................................................................................................................29
5.0.References..............................................................................................................................................................30
 Abstracts

Acronyms and Abbreviations

MFIs Micro finance institutions

FAO. Poverty Reduction Strategy Paper

FGD. Focus group discussion

WB. World bank

NGO Non Goverment organization

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II
 1.I

1.1. Background of the study

Micro finance is a form of financial development that has primarily focused on alleviating
poverty through providing financial services to the lower income society or the poor. The
primary goal of microfinance, a type of financial development, has been to reduce poverty by
offering financial services to the poor or members of lower income societies. If microfinance is
understood at all, it is generally associated with micro credit—small loans to the poor.
Microfinance offers more than just this particular service; it also offers savings and insurance
transaction services. Microfinance is the provision of a broad range of financial services to low-
income women and men in order to help them accumulate assets, raise their incomes, and lessen
their lack of access to formal financial institutions (Canadian International Development Agency,
2007).

Micro credit is probably the most well-known type of microfinance; other services include
money transfers, micro insurance, savings accounts, and micro insurance. Offering a wide range
of financial services to low-income and low-income families and their small enterprises,
including deposits, loans, payments, money transfers, and insurance, is known as microfinance.

Microfinance Institutions (MFIs) were founded to address the gap in the financial services
industry by offering lower-class and impoverished individuals access to capital. Professor of
economics Muhammad Yunus started experimenting with micro credit in 1976 by giving small
loans to low-income rural Bangladeshi households. He discovered that despite lacking any
collateral to secure the loans, borrowers were able to operate and expand basic businesses like
rice husking and bamboo weaving. Furthermore, the borrowers consistently made loan
repayments. Funds for working capital or startup businesses are provided by MFIs (Abebaw,
2014).

Financial services provided by various service providers to the poor and low-income segments of
society are commonly referred to as micro finance. In actuality, the phrase is frequently applied
more narrowly to describe loans and other services offered by companies that call themselves
microfinance institutions (MFI). These organizations frequently use novel techniques that have

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been developed over the past 30 years to provide very small loans to unpaid borrowers while
requiring little to no repayment security.

These methods include group lending and liability, per-loan savings requirements, gradually
increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans
are repaid fully and promptly ((CSA,2015). More broadly, micro finance refers to a movement
that targets a world in which low-income households have permanent access to a high quality
and affordable financial services, offered by a range of retail providers. These are generally
financing for generating income, building assets, securing consumption, and providing protection
for vulnerable section of the society. These services include savings, credit, insurance,
remittances, and payments. In other words, micro finance typically refers to a range of financial
services including credit, savings, insurance, money transfers, and other financial products
provided by different service providers, targeted at poor and low-income people (IMF,2014).
Micro finance beneficiaries are poor and low-income people who do not have access to other
formal financial institutions. They are often self-employed and household-based entrepreneurs.
In rural areas, micro entrepreneurs often have small income-generating activities such as food
processing and trade.

More importantly, accessing credit to the male /female members of the households will lead to
increase in availability of daily calorie within the households. Though increase in availability of
daily calorie may not necessarily implying the exact food security situation for the family, but
surely it reduces the calorie deprivation in the family (World bank,2016).

Ethiopia is one of the poorest countries in the world. Plans to reduce food insecurity are central
to the governments development agenda, and many policies, goals and objectives are focused on
targeting the most disadvantaged households. Micro finance is considered by the government to
be one of the important tools in fighting food insecurity (World bank,2017).

More significantly, giving male and female household members access to credit will raise the
daily caloric availability in the homes. Even though an increase in daily caloric availability may
not accurately reflect the family's food security status, it does, certainly reduce calorie
deprivation (World bank, 2016).

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Among the world's poorest nations is Ethiopia. The government's development agenda places a
high priority on plans to reduce food insecurity, and a number of policies, goals, and objectives
are centered on helping the most low-income households. The government views microfinance
as one of the key instruments in the fight against food insecurity (World bank, 2017).

Though increase in availability of daily calorie may not necessarily implying the exact food
security situation for the family, but surely it reduces the calorie deprivation in the family (World
bank,2016).

The government views microfinance as one of the key instruments in the fight against food
insecurity (World bank, 2017). The main goal of microfinance institutions is to give financial
services to the underprivileged who are unable to obtain loans because they do not have tangible
assets to pledge to official financial institutions. Put differently, microfinance institutions can be
viewed as a way for the reduced to get access to working capital in order to improve their level
of consumption and capital accumulation.

Micro finance which group size, internal rule of regulation, peer monitoring, and peer pressure);
factors specific to the lender (e.g., loan size, training, experiences of credit officers); factors
specific to the demographic (e.g., age, sex, marital status, family size, and business work
experience); and socioeconomic (e.g., external shocks) factors that primarily affect the level of
food insecurity in Asella town.

1.2 Statement of the problem

The main goals of microfinance institutions (MFIs) are to help alleviate food insecurity and
alleviate financial constraints for the impoverished by offering finance services (savings and
credit). MFIs were acknowledged as agents of economic growth, avoiding unemployment and
food insecurity despite this (Zemenu and Mohammed, 2014). The majority of them are dealing
with crucial limitations during both the startup and operation phases. Among these limitations
are those related to financing, employment opportunities, management and entrepreneurial
training, marketing knowledge, and the like (Brahane, 2014).Other major obstacles facing
Ethiopian MFIs include a lack of working ideas, a lack of credit availability and size, challenging
licensing requirements, and a lack of suitable locations for sales (Assefa et al., 2014).

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Furthermore, research on microfinance has been accepted as a crucial instrument for reducing
food insecurity and fostering socioeconomic growth in numerous developing nations, including
Ethiopia. The ability of the impoverished to accumulate assets, manage risks, and enhance their
standard of living can be greatly aided by having access to financial services. Microfinance in
particular has the ability to reduce food insecurity by giving low-income households the means
to purchase enough nutrient-dense food to lead active and healthy lives.

Operations for Microfinance Focusing on Agriculture: A major section of Ethiopians make their
living from agriculture. It is crucial to look into the ways that microfinance can support the
growth of agriculture and ensure food security. According to studies, having access to credit can
increase agricultural productivity by allowing farmers to purchase cutting-edge equipment and
inputs (Alemu, 2011; Getaneh & Hailu, 2013). Additionally, agricultural loans and other targeted
microfinance programs can help address market failures and seasonality, enhancing food storage
and lowering post-harvest losses in rural areas. But according to the researcher's file, there is a
research gap in this field because there aren't many studies on how MFIs, or microfinance
institutions, can help address food insecurity in Asella Town's urban areas.It is necessary to look
into the ways that microfinance can support food security and agricultural development.
Specifically, targeted microfinance programs for rural areas, like agricultural loans, can help
address market failures and seasonality, enhancing food storage and lowering post-harvest
losses. Further investigation into the relationship between food insecurity in the study area and
business types, experience, and financial shock is another goal of the project. The study's
conclusions will contribute to the body of knowledge in this field, close knowledge gaps, and
offer important new information about how microfinance institutions can help combat food
insecurity in Asella's cities. It makes an effort to advance knowledge by identifying the roles
played by institutions in food insecurity.

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1.3. Objective of the study
1.3.1. General objective of the study

 The general objective of the study is to examine the role of micro finance institution on food
insecurity in Asella town.

1.3.2 .Specific objective of the study;

 To determine level or extent of household food insecurity in the study area. 

 To investigate the effect of micro finance institution on food insecurity.  .

 to examine the challenges faced by micro-Finance institution in promoting Food security in

Asella town.

1.4. Research questions

 What is the extent/level of household food insecurity in the study area? 

 How micro finance institution effects on food insecurity? 

 To what extent does micro finance contribute to vulnerability reduction among urban
household, lending to improve food security? 

 what is the factor that influence the effectiveness of micro-Finance institution in addressing
Food insecurity?

1.5 Significance of the study

 This study will be examined the role of micro finance on food insecurity in the woreda is
vital because provide information that would enable effective measure to be taken so as
to improved food insecurity status and bring the success of food security development
program.

 It also enables development policy maker to have better knowledge as to where & how
to intervene in rural area to bring food security or minimize the severity of food
insecurity area.

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  This study is following on the role of micro finance on food insecurity. The result of this
study can significantly be useful for those micro finance institution especially working
on rural development in general & food security issues in particular to improve the lives
of the people in the woreda, to help people who are in need of food by having clear
understanding or status.

 The study helps the researcher acquire knowledge and practical experience about how to
conduct research & it can also be a source document for those researchers who want to
make further study on the area.

In addition to these the study useful for policy maker so as to be base for the design &
implementation of appropriate rural development & projects.6

1.6 Scope/limitations of the study

Finding the institutional and policy gaps pertaining to household food security in the study areas
is the goal of this investigation. In a similar vein, readers interested in the topic will find this
study to be a useful source of information and a foundation for future research.It is especially
crucial for organizations that support women's groups to develop a variety of credit services.
More importantly, those involved in household food security and microfinance promotion, such
as policy makers, planners, and non-governmental organizations, should take note of this
research.Even though it is preferable to carry out the research for the majority of Ethiopia,
Because of time constraints, budgetary limitations, and other issues, it is not possible. Therefore,
in order to evaluate the impact of microfinance institutions on enhancing household food
security, the study's scope will be restricted to Asella Town. Given the longer time data,
examining the impact of microfinance on enhancing household food security is typically crucial
for the validity of the research. Nevertheless, the research will only be conducted for a brief
amount of time due to scheduling, budgetary, data source, and other limitations. In conclusion,
the study holds importance for community-based organizations, particularly women's groups
who are resilient enough to tackle issues related to food security and family circumstances.

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 RELATED LITERATURE REVIEW

2.1. Theoretical literature review

2.1.1. Concepts and definitions

.Microfinance is a form of financial development that has primarily

focused on alleviating poverty through providing financial services to the lower income society
or the poor. People think of microfinance, if at all, as being about micro credit, which is lending
small amounts of money to the poor. Microfinance is not only offering this service only, but also
it provides broader: including insurance, transaction services, and savings. Canadian
International Development Agency (CIDA, 2007) defined microfinance as, the provision of a
wide range of financial services to poor women and men to enable them to increase their
incomes, build assets and reduce lack of access to formal financial institutions. Micro credit,
which is likely the most visible form of micro finance, but also saving, micro insurance, money
transfer and other financial services. 7

Microfinance, as defined by Christen et al. (2003), is the provision of banking services to

individuals with lower incomes, particularly the impoverished and extremely poor. Many times,
the term "microfinance" is used much more narrowly, primarily referring to micro credit for
small, informal enterprises operated by micro entrepreneurs, which is provided through
techniques developed since 1980 primarily by non-governmental organizations (NGOs) with a
social focus.The World Bank's definition of food security from 1986 is among the most
important. "Access by all people at all times to enough food for an active and healthy life," is
how the Bank defined it. This definition covers a wide range of topics.It addresses distribution in
the sense that everyone should have access to produce; it addresses consumption in the sense that
each person's nutritional needs should be satisfied in order for them to be active and healthy; and
it deals with production in relation to food availability. Food should also be accessible and
readily available to meet each person's needs in a sustainable manner.

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Food security: Access by all people at all times to enough food for an active, healthy life. Food
security includes at a minimum: (1) the ready availability of nutritionally adequate and safe
foods, and (2) an assured ability to acquire acceptable foods in socially acceptable way(e.g.,
without resorting to emergency food supplies, scavenging, stealing, or other coping strategies).

Food insecurity: Limited or uncertain availability of nutritionally adequate and safe foods or
limited or uncertain ability to acquire acceptable foods in socially acceptable ways.

Hunger: The uneasy or painful sensation caused by a lack of food. Hunger may produce
malnutrition over time. Hunger is a potential, although not necessary, consequence of food
insecurity.

In the global perspective food security is one of the great unsung global achievements of the
second half of the 20th century has been the world's extraordinary success in raising global food
production. While the global population has doubled to over 6 billion people in less than 50
years, average per capital food consumption has risen from about 2350 to 2800 kcal per day,
with the fastest increases in both food output and consumption occurring in developing countries.

In Ethiopia 35 Microfinance Institutions were emerged in to the microfinance industry and

provides their financial services to the poor peoples who lack financial services due to
inaccessibility of banking service and collateral requirements. These institutions provide their
financial services in all nine national regional states of the country (namely Amhara, Tigray,
Oromia, SNNP, Afar, Hareri, Somalia, Gambella & Benishangul Gumuz) and two city
administrations namely Addis Ababa & Dire Dawa (Abreham Garomsa 2017).

2.1.2. Characteristics of Micro finance

Low-income individuals who want to start or increase an income-generating activity can

access financial services through microfinance. The impoverished clients have small individual
loans and savings. The realization that some less fortunate customers and micro entrepreneurs
could not obtain bank loans led to the creation of microfinance, which allows them to save
money and make timely repayments of principal and interest when financial services are
customized to meet their requirements.The institution of microfinance has produced financial
services and products that, taken together, have made it possible for those with low incomes to

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use banking intermediaries as clients. It encompasses a wide range of providers with differing
goals, missions, and legal frameworks. All of them, nevertheless, have in common offering
financial services to customers who are less fortunate and more at risk than those of traditional
banks (CGAP, 2010).

Fitsum Tadele (2014) lists the following features of microfinance products: small loan and
savings amounts; short-term loans (up to one year); payment schedules with frequent
installments or deposits; payments (installations) consisting of both principal and interest; higher
interest rates on credit (higher than commercial bank rates); easy access to the microfinance
intermediary, which saves the client's time and money and enables the intermediary to have a
better understanding of the client's financial and social status; short application procedures and
short processing times (between the application's completion and the loan's
disbursement).Contrary to official banking procedures, clients who make their payments on time
are eligible for constant loans in higher amounts with no collateral requirement. Microfinance
intermediaries use alternative methods in place of collateral, such as cash flow analyses to assess
clients' potential for repayment based on the cash flows generated by the activities for which
loans are taken out.

2.1.3. Food security in Ethiopia

The availability and accessibility of food are the two components of food security. If there is no
fear of starvation or hunger among all members of a household, then food security is established.
Food secure conditions to complete starvation are examples of different stages of food insecurity.
(2016 World Food Summit)
When everyone, everywhere, has physical and financial access to enough wholesome food that
satisfies their dietary needs and preferences while maintaining an active and healthy lifestyle,
then there is food security. (FAO, 2014).
Ethiopia is a typical agrarian society in which more than 85% of the population stays attached to
farming life. Over 85% of people in Ethiopia continue to work as farmers, making it a typical
agrarian nation. Due to the sector's dominance in the nation's economy, agriculture employs
more than 80% of the labor force and accounts for nearly half of GDP growth. Ethiopia is
typified by an agrarian economy based on subsistence farming. Consequently, it should be
acknowledged that the assessment of food productivity and security presents an unusual

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subsistence agrarian economy functioning under the conditions of an ecologically degraded
environment, including a changing climate and sub production methods.It is important to
recognize that evaluating food productivity and security requires taking into account an
uncommon subsistence agrarian economy operating in an environmentally damaged setting with
unsatisfactory production practices and a changing climate. The famine of the 2017s gave rise to
the concept of national food security in Ethiopia, which had two goals. The drive to promote
self-reliant development and mistrust of the global market led to the first objective, which was to
achieve national food self-sufficiency. The second goal was more focused on stabilizing the
domestic food supply by stockpiling food crops in case there were unexpected drops in national
production. (D. Getachew, 2015).
2.1.4 Food security indicators
Food security indicators are summary measures of one or more of the dimensions of food
security used to demonstrate change or the result of a program activity for a target population. In
most analyses of food security conditions, multiple indicators are used to reflect the various
dimensions of the problem. Some of the most commonly used types of indicators in the
assessment of food security conditions include those related to: food production, income, total
expenditure, food expenditure, share of expenditure on food, calorie consumption, and
nutritional status (Riely, et.el.2019).Brehanu, (2013) lists such measures like food production,
nutritional intake and quality, income distribution, the per capita food and nutritional availability
and distribution, land use and per capita arable land, consumer price index (reflecting changes in
the cost to the average consumer of acquiring a fixed basket of goods and services), food price
index as relevant food security indicators. Maxwell and Frankenberger (2018) classify the
indicators into three groups as the food supply / availability/ indicators, food access indicators
and the outcome indicators. Accordingly, the supply indicators include such as metrological data,
market information, institutional and market infrastructures, and conflicts. On the other hand, the
access to food indicators comprises such as land use practices, diversification of income sources,
diversification of assets, and access to credit services.
On the outcome category we find such indicators as change of household budget and
expenditure, change in the frequency of food consumption, subsistence potential, nutritional
status and the household perception of food insecurity. In assessing the role of microfinance, this
study too employed the combination of some of the access as well as availability indicators of

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food security. They include income, on food and non-food expenditures, savings, and stock of
food and the yearly harvest.

2.2. Empirical Literature Review11

The role of microfinance on household food security has widely documented. Researches show
positive role that access to financial services can have for improving income generation, food
consumption, nutritional status as well as school enrolment of children: that will have a long
term impact on household food security. For example, a study conducted in calcuta (India) by
Holt and Ribe (2015) indicated improvement of the household income by 82% due to their
participation in microfinance program. The same positive linkage has been discovered between
households income, which was believed to place them in better position in terms of food
security, and participation in microfinance in the study conducted in Bangladesh. Webster and
Fidler (2016) reported that study of participants in the Grameen bank (in Bangladesh) loan
programs has successful in increasing their household incomes, expenditures, employment
opportunities and nutritional intakes.
This study further revealed that participation in microfinance program has a significant effect
on the well-being of the poor households and that this effect is greater when women are the
program participants. On the basis of his study in Bangladesh on three micro credit programs:
Grameen Bank, BRAC, RD-12, Kahandker (2018) concluded that participation in microfinance
had a positive effect on households expenditures on basic necessities. He also observed a rise in
household net worth and improvement in nutrition intake. By their studies in Madagascar and
Cameroon, Zeller (2013) and Schrieder (2015) observed significant positive effects of financing
programs on rural households income and calorie consumption.
A study, conducted in China, by Zhu et al. (2016) showed that participation in credit program led
a per capital calorie consumption to rise by 316 calories, which represents a 14% increase at the
sample mean. Rosntan, et al. (2019) witnessed that the women who received the loans from self-
employment and micro credit programs, a microfinance institution in Indonesia, increased their
income substantially and improved their family nutrition. Citing a study conducted by the World
Bank in collaboration with the Bangladesh Institute of Development Studies, Hashemi and

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Morshed (2013) stated that the Grameen Bank (microfinance institution) not only reduced
poverty and improved the welfare of participating households, but also enhanced the household
capacity to sustain their gains over time. This was accompanied by an increased caloric intake
and better nutritional status of children in households of Grameen Bank participants.
The study conducted by Nur (2016) in oromia regional state in Ethiopia has revealed households
participated in microfinance program are found better than the nonparticipants in the area of the
study on the food security indicators. The average income of the participant households found
better than non-participants. The participant households also performed better than the non-
participants on such variables like food and non-food expenditures, number of school age
children attending schools, and the average savings.
2.2.1. Micro credit and food security
.The role of micro finance in agricultural production: Agricultural production is a critical
determinant of food security, particularly in rural areas where the majority of households depend
on agriculture for their livelihoods (FAO, 2017).Some studies have found positive impacts of
microfinance on food security. For instance, Doocy et al. (2005) found that participation in micro
finance programs in Ethiopia led to a significant increase in households' food consumption and
food security status. Similarly, Garikipati (2010) found that participation in a micro finance
program in Andhra Pradesh, India resulted in increased food security and diversification of diets.
.Micro finance can improve agricultural production by providing farmers with loans to invest in
inputs, such as seeds, fertilizers, and equipment, which can boost yields and overall production
(Gaiha & Kuroda, 2006). Several studies have shown positive effects of micro finance on
agricultural production. For example, Malik (2012) found that access to micro finance
significantly increased agricultural productivity and food security in Pakistan, while
Cheminingwa and Van-Loan (2013) found similar results among smallholder farmers in Kenya.
Several studies have shown the importance of micro finance in helping households cope with
shocks. For instance, Islam and Maitra (2012) found that access to micro finance helped
households in Bangladesh cope with a major flood event and improved their food security.
Similarly, Armendáriz and Morduch (2010) found that micro finance clients in Ghana were
better able to cope with economic shocks compared to non-clients. .Studies on the relationship
between micro credit and food security show mixed result: Micro finance can affect food
security through several channels, such as by providing credit to invest in agricultural

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production, facilitating access to non-farm income-generating activities, and helping households
cope with shocks (Barnes, 2005).
2.2.2 The impact of micro credit on food security of poor

Micro credit has impacted the poor in various aspects via improving their accessibility to credit,
and such impacts can be classified as economic impacts and non-economic or social impacts
(World Bank, 2006). By extending small collateral-free loans to underprivileged people at
affordable costs, micro credit enables its borrowers to actively take up job-creating activities
which generate a range of improvements in their economic conditions.

According to Islam (2014), micro credit can positively impact the poors welfare in terms of
income, employment, capital accumulation, and productivity. Micro credit can create a „virtuous
circle‟ for poor borrowers: low income, credit, investment, more income, more credit, more
investment, and more income. The continued growth in income will then push-up the total
consumption levels of the households, which constitutes an immediate welfare result from
borrowing from micro credit programs.

In addition, enhanced income from borrowing encourages the poor to increase investment in
working capital (for example, raw materials, seeds, and fertilizers) and assets (physical, such as
machinery, and financial such as cash savings). As the micro credit loan is repaid in small
installments at relatively short intervals (usually one week), it is easy for a borrower to pay the
installment from their income while leaving the original capital untouched.Osmani (2007)
described how poor women can be empowered through participation in micro credit programs.
First, micro credit enables poor women to earn an independent income and contribute financially
to their families, which immediately raises their self-esteem as well as their esteem in the eyes of
others. Second, women will free themselves from the narrow confines of household precincts
and move into a wider world in the process of taking out loans and using loans to initiate
income-generating activities. The exposure to the outside world, together with the formation of
networks with other women in the community, is expected to help women foster self-confidence
and courage so as to exercise more power both within and outside households.

2.3 conceptual framework

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.Ethiopia is one of the poorest countries in the world. Plans to reduce food insecurity are central
to the governments development agenda, and many policies, goals and objectives are focused on
targeting the most disadvantaged households. Micro finance is considered by the government to
be one of the important tools in fighting food insecurity.

The key principle for the existence of micro finance institutions is to provide financial services to
the poor people who do not have access to loan services due to lack of physical collateral to be
pledged for formal financial institutions. In other words, micro finance institutions can be
considered as a means for access to working capital to the poor to enhance their capital
accumulation and improvement in their level of consumption. Given this and considering the
actual situation of the society, it is crucial to expand these institutions to reach all the banned
group of the society. Taking into consideration this, the conceptual framework of this study
emphasized the role of micro finance institutions in accessing credit in terms of target group,
methodologies, and services/products offered. Having this in mind further the reason behind this
framework is to assess the effect OMFIs on the food security of the poor as an intervention at
household level. At the household level, effect may be assessed by increase in household
income, saving habit, asset accumulation, and expenditure as a result of the intervention. 14

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3. RESEARCH METHODOLOGY15

3.1. Description of the Study Area 15

Asella is one of towns of Oromia National Regional State. The town is located 7054‟55‟‟N and
8000‟05‟‟N latitude and 39006‟10‟‟E and 39010‟00‟‟E longitude. It is serving as capital of
both Arsi administrative zone in asella town. Asella is about 175 kilometer away from Addis
Ababa and 75 kilometer from Adama. According to CSA (2015) the total population of Asella
town was counted to be 98,958. The numbers of male about 49,334 while the number of female
about 49,624. Afan Oromo is the working language in the region while Amharic language is also
widely spoken in the town. According to structural plan (2009), Asella town has a total area
coverage 4,623 hectares of land. The town is subdivided into fourteen urban kebele

15
administrations. Asella is situated under the foot of mount Chilalo which is 4139 meters above
sea level.

3.2. Data Sources and Types

Two types of data sources, primary and secondary will used to obtain the desired qualitative and
quantitative data types in order to meet the study purposes. Primary data will have obtained from
the potential informants (beneficiaries and non-beneficiaries) and the micro finance specialists
who were working for the organization delivering the scheme. The secondary data will further
gather from document of the micro finance institution that exists in the study area.

3.3. Method of Data Collection

Primary data will gather through informal and formal survey. Informal survey will under taken
first; to collect background information which was useful for subsequent survey. Then formal
survey will have conducted to assess the role of micro finance institution in improving household
livelihood in the study area by using open ended and closed ended questions for semi-structured
interview schedule and checklist for focus group discussion. The interview was help to gather the
necessary qualitative and quantitative information through asking questions and writing down
the response of the respondents which build research purpose. It will propose to those people
selected as a sample. On the other hand, focus group discussion will used by the researcher to
obtain qualitative data. FGD allowed a dialogue among participants and stimulates them to
openly express their views on the issues raised.16

Secondary data will gather through reviewing of documents, reports and records of published
and unpublished documents. It is the main source of information and these data were easily
available inexpensive and obtained quickly. These secondary data indicate the past and current
performance of micro finance institutions in reduction of food insecurity through providing
micro finance credit service.16

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3.4. Sampling Techniques and sample size.

Sampling Technique and Sample Size will an important decision which will be taken while selecting a
sampling technique is about the size of the
sample. Appropriate sample size depends on
various factors relating to the subject under
investigation like the time aspect, the cost aspect,
the degree of accuracy desired (Gupta, 2002). The study area will have purposively selected. In the
second stage, one Kebeles will select randomly from those Kebeles where micro finance are found kebele
06 in asella town. To calculate the sample size was provided by Yamane (1967) which is given by the
simple random sample is chosen because it gives equal chance of being selected to all micro finance
members of the institutions.

Where n = is the sample size

N =is the number of households

e = is the level of precision.

According to the selected members of cooperative in asella district, the total household of micro finance
members will be 4916 members those are currently in operation. A 95% confidence level, 0.05 degree of
variability and e = 6% = 0.06 the level of precision measures how close an estimate is to actual
characteristics in the population which are inserted into the equation.

Then according to the Yamane (1967) formula the sample size of 4280 micro finance members will be
selected randomly from selected the total number of 1 branches of 4280 and will investigate their food
insecurity status considering of different variables.

17
 This sample size was assumed to enable us to gather richer data with regard to demographic,
socioeconomic behaviors. The selected 98 sample beneficiaries will be interviewed by using unstructured
survey questionnaires.

3.5. Econometric Model Analysis

The dependent variable is dichotomous taking two values, 1 if the event occurs and 0 if it does not.
Estimation of this type of relationship requires the use of qualitative response models. In this regard,
linear probability, logit and probit model are the possible alternatives. The logit model is computationally
easier to use and leads itself to a meaningful interpretation than the other types (Green, 1991; Gujarati,
1995). Therefore, logistic regression model to identify the determinants of participation of households in
the use of credit in this study. In the study on micro credit activities, responses to the questions such as
whether a household participates in using credit activities could be "yes" or "no", a typical case of
qualitative dichotomous variable.

This model specifies a functional relation between the probability of participating in taking credit from
MFI and various explanatory variables. Hence, factors (Independent variables) that affect farmers‟
participation in taking credit from MFI activities can be expressed both quantitatively and qualitatively.
Hosmer and Lemeshew (1989) pointed out that a logistic distribution has got advantage over the others in
the analysis of dichotomous outcome variable in that it is extremely flexible and easily used model from
mathematical point of view and results in meaningful interpretation. Drawing upon Gujarati (1988) and
Aldrich and Nelson (1984) the logit distribution function for the participation in using credit from MFI

is specified as: 18

18

18

Where pi: is the probability of participating in credit activities from MFI.

Zi: is a function of n- explanatory variables (x) and expressed as:

18
Zi = β0+β1X1+β2X2+……. +βnXn…................................................................................. 3

Where:

β0: is the intercept and β1, β2,…βn are coefficients of the equation in the model. The slopes tell

how the log-odd in favor of participating in credit activities from micro finance institution

as independent variables change.

Pi is not only non-linear in X but also in the βi's, which can be written as:

This means that we cannot use the OLS procedure to estimate the parameters. But this problem is

more apparent than real because this equation is intrinsically linear, which can be shown as

follows.

Therefore, taking the ratio of the probability of participating to using credit from MFI can be
written as:

is simply the odds ratio in favor of participating in credit activities from MFI

It is the ratio of the probability that the farmer will participate in credit activities to the

probability that he will not participate. Finally taking natural log of equation 6 we get:

19
Li =ln βnXn ……………………………………………………………………………….7

Where Li is log of the odds ratio, which is linear not only in X but also in the parameters. Thus,

if the stochastic disturbance term (Ui) is introduced, the logit model becomes:

Zi =β0+β1X1+β2X2+...+βn Xn +Ui……………………………………………………….8

In this study, the above econometric model will be used to analyze the data. The model will

estimate using the iterative maximum likelihood estimation procedure. This estimation procedure

yields unbiased, efficient and consistent parameter estimates. Thus, the marginal effect was

calculated for estimation of parameters along with logistic models.

Before taking the selected variables into the logit model, it is necessary to check for the existence

of multi col linearity among the continuous variables and verify the degree of association among

discrete variables. The reason for this is that the existence of multi col linearity affects the

parameter estimates seriously. The Variance Inflation Factor (VIF) was used to test for the

existence of multi col linearity between continuous explanatory variables. VIF shows how the

variance of an estimator is inflated by the presence of Multi col linearity (Gujarati, 1995). If R2
of

the multiple correlations co-efficient that results when the explanatory variable, Xi, is regressed

against all the other explanatory variables, VIF is computed as follows:

VIF (Χi) = (1- R2) -1

As R2 Approaches 1, the VIF approaches infinity. That is as the existence of collinearity

increases, the variance of the estimator increases, and in the limit, it can become infinity. If there

is no col linearity between regressor, the value VIF will be 1. As a rule of Thumb, Values of VIF

greater than 10 is often taken as a signal for the existence of multi col linearity problem in the

model (Gujarati, 1995).

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3.6. Definition of variable
3.6.1. Dependent variable
The dependent variable for the study was the indicator of micro credit participation (treatment

variable) and impact (outcome variable). The treatment (participation in micro credit); will a

dummy variable takes the value 0 and 1. 1 for treated group (credit user) and 0 for control group

(non-user). The main outcome variable in this study will be food insecurity indicator variable

which was calorie intake status of households. This outcome variable is considered as the main

21
indicator of food security for rural households because it provides an understanding of the energy

available to a household, and can be used to assess the food insecurity (quantity dimension,

caloric sufficiency), of a population in order to design appropriate interventions.

3.6.2. The independent variables

Access to micro finance services (Zi): is expected to reduce the probability of the Household

being food insecure (Balwant, 2016), (Shih, 2011). In addition, mobile phones and internet

services enhance social capital in urban slums; expand a competitive business, and lowering the

cost of financial services (Rangaswamy & Nair, 2010). It also reduces the transaction and

transportation cost, the flow of information can ease doing business, and individuals stay

connected during an emergency to increase the sense of wellbeing (Adera et al., 2014).

Age of the household head(X1): The age of the household head is an important demographic

factor that potentially affects productivity, income, and thus consumption. The household age increases
the Household's poverty status due to reduced productivity, large family size, and income level (Datt &
Jolliffe, 2005)

Gender of the household head(X2): In societies where tradition plays a dominant role in

allocating various tasks, gender also has implications for generating income and education.

Custom and practice also exert differential power relations between men and women, which

further suppress asset ownership by women. In Kenya Geda et al. (2005), Female-headed

households were more likely to be poor than male-headed households. In other findings,

households headed by females reduce the probability of being poor Xhafaj & Nurja, (2014),

inverse finding. In Nigeria, Male headed households were more likely to be poor than female

headed households (Oginni et al., 2013).

The education level of the household head(X3): It expected that household heads with more

education were gain better income and be more efficient than those with less educated. The

education status of household heads increases thereby educational expenditures also increase the

positive relationship between education of household head and whole family's education

22
expenditures and academic level of the Household positively related to the poverty status of the

households Kabubuo (2002); Geda et al., (2005); Mok et al., (2007); Akerele (2011); Fru Awah

Wanka, (2014) and Edoumiekumo et al., (2013).

Household size(X4): The impact of household size on poverty status was mixing as shown in

previous literature. Here, it's hypothesized that household size affects the variable quantity in,

either way, counting on the demographic composition of the Household. For example, it'll

positively affect a bigger household size composed of working labor (hence less dependency

ratio) and negatively impact if it implies a better dependency ratio. At the same time, household

size is also expected to own an opposite impact on the Household's vulnerability compared to its

effect on poverty.

Household income(X5): Family income represents the amount of income the family earns either

daily or monthly. It is the amount of income (in Birr) generate from work and any activities.

Therefore, it was being expected that the availability of family income is positively related to

welfare.

Access to credit(X6): Access to micro-credit might help households make up assets because it

smoothed income and consumption, enhances the purchases of inputs and productive assets, and

protects against risks.

23
Table 1, Expected sign of the variables

24
3.7. BUDGET AND SCHEDULE
3.7.1 Time schedule

NU DUTY Mont
MB hs
ER

OCT NOV DEC JAN FEB MAR APR MA JU

1 Topic selection

2 proposal preparation

3 Research proposal
submission

4 Preparation and
searching for

material on Internet

5 Review related
literature

6 Data collection and

process

7 Data analysis

25
8 Report writing and
editing

9 Submission and
presentation

Table 2 time schedule

26
4. Budget schedule

Number Cost item Unit Quantity price Total cost

measurement

1 secretary free page - - 0

2 Telephone hour 2 50 100

expense

3 Transportation Gross 8 20 160

4 photocopy page 20 25 500

5 pen number 4 25 100

6 Mobile card number 5 25 125

7 flash number 1 650 650

total 1635

Table 3 budget schedule

27
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