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

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Access and Use of Credit in
High-Potential Areas of Rural Ethiopia
Ibrahim Worku, Bart Minten and Guush Berhane
IFPRI ESSP-II
December 13th, 2013
Hilton Hotel, Addis Ababa
International Food Policy Research Institute (IFPRI)
and
Ethiopian Development Research Institute (EDRI)
1

2. Outline
1. Introduction
2. Data description and methodology
3. Use of credit
4. Purpose and source of credit
5. Repayment and default
6. Determinants of credit use
7. Credit use and agriculture
8. Concluding remark
2

3. 1. Introduction
•
Significant evidence on the importance of credit in
rural development:
1. For use in productive activities (e.g. agriculture
production and use for enterprise development)
2. For consumption smoothing and welfare
• However, lack of updated evidence on the use of credit
in the case of rural Ethiopia
3

4. 1. Introduction (cont.)
The presented research will address four questions:
1. What is the share of farmers that are using credit
in rural Ethiopia? If no credit use, why not?
2. What is the purpose and source of credit?
3. What are the determinants of the use of credit?
4. What is the link of credit to agriculture?

5. 2. Data description and methodology
Data : AGP survey data- 2013
• Collected by CSA in collaboration with IFPRI
(ESSP)
• Sample size: about 7,500 households
• Coverage: 93 high yield potential woredas of the
country: Classified as AGP and control woreda
• Representative of 9 million population of the
country
Method: 1) Descriptive statistics 2) Econometrics

6. 3. Use of credit
• Only 10% of the AGP woreda population used credit
from any source over the two years prior to the survey.
• Of those who used credit: 1) The majority is male.
Credit use by gender (%age)
Male Head
Population in AGP woreda
Those who have taken credit
69
82
Female Head
31
18
2) Region wise: the credit use in Oromiya and Amhara are
much higher (linked to their size)
HHs’ Credit use by region (%age)
Region
Tigray
Amhara
Oromiya
SNNP
Male
5
25
40
10
Female
2
7
6
3
Total
7
33
47
13
Ratio in total credit
0.7
3.3
4.7
1.3

7. 3. Use of credit
• Reasons for not using credit:
1/ Demand side reasons: About 40% did not want to take
credit; 15% afraid that they can not pay back
2/ Supply side reasons: 25% complain about availability
Reason for not borrowing? (percentage)
of credit
OTHER
INTEREST RATES TOO HIGH
AFRAID THAT I CANNOT PAY BACK
AFRAID OF LOSING COLLATERAL
I HAVE NO ASSETS FOR COLLATERAL
EXPECTED TO BE REJECTED, SO DID NOT…
NO-ONE AVAILABLE TO GET A LOAN…
TRIED TO GET A LOAN BUT WAS REFUSED
NO NEED FOR A LOAN
0.0
5.0
10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
Precentag

8. 4. Purpose of credit
• Credit is mainly used to buy agricultural input (80%)
• Less used for consumption purposes or for other
businesses
Reason for taking credit
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
percetage of population
FARMING
(PURCHASE
AGRICULTURAL
INPUTS
FOR FOOD CROP
BUSINESS STARTUP CAPITAL
EXPANDING
BUSINESS
OTHER (SPECIFY)

9. 4. Source of credit
• MFIs are major suppliers of credit in rural area (64% of
credit given out).
• Formal banks cover only 3%.
63.8
percentage of population
10.1
5.7
0.3
2.1
7.7
0.9
3.3
0.9
1.3
3.9

10. 5. Repayment and default
• A major issue in credit markets in Ethiopia (and
elsewhere) is default
• In the AGP survey, 41% of the farmers did not repay
back their last loan for various reasons
• When asked for reasons, incidence of shocks and
alternative uses of credit are common
• However, except for 3% of them, all of them have the
intention to repay back in next year(s).
Partly lost Used money for
Farm output
farm
some other Not willing
destroyed
output
purpose
to repay Other
Why did you not pay
back yet? (%)
0.4
10.0
30.7
2.8
56.1

11. 6. Determinants of credit use
What are the characteristics of farmers that use credit?
Two reasons:
1. Productive investments; data indicate that the richer
households use more credit.
2. Consumption smoothing; those that faced shocks used
more often credit.
Dependent variable:
Likelihood of using credit
• Shown in probit estimates:
Likelihood of using credit is:
a) positively related to wealth--- > 1
b) positively related to shocks--- > 2
Covariates
Household size
Wealth index (1)
Shock (2)
Livestock assets
Numeracy
Coefficient
0.045*
0.074***
0.333***
-0.042*
0.18
Note: Significant at 1% (***), 5%(**) and 10%(*)

12. 7. Credit and agriculture
• Only 23% revealed the type
of payment of modern input
• Few households were able
to get modern inputs with
credit
• Only 2 % have reported to
have used credit to buy
fertilizer.
Source of modern
input
% age of
population
Cash
21.5
Credit
0.7
Partially in cash and
partially with credit
0.9
Partially free and
partially in credit
0.1
Total
23.1

13. 7. Credit and agriculture (cont.)
Dependent variable:
- Probit estimates:
Likelihood to use fertilizer
Likelihood of using fertilizer is
positively and significantly related Control variables
Coef
with access to credit (Controlling Use of credit
0.291***
for other characteristics)
Male head
-0.241**
- If a household uses credit, the
Married
0.173*
likelihood of using chemical
Education level
0.058*
fertilizer goes up by 0.29.
Numeracy
0.210*
- As fertilizer use is strongly related Wealth index
0.151***
to productivity, access to credit
Livestock assets
0.072***
significantly influences agricultural Shock
0.172**
productivity
Note: Significant at 1% (***), 5%(**) and 10%(*)

14. 8. Conclusions
 In AGP woredas, households that use credit are limited.
This is seemingly more due to demand constraints than
by lack of supply
 Farmers mainly use the credit to buy agricultural inputs;
MFI’s are major sources while the role of formal banks is
insignificant
 Relatively richer households use more credit, likely
because they have collateral; Farmers that faced shocks
also seem to take credit but is less important
 Farmers that take credit use more chemical fertilizer

15. 8. Conclusions (cont.)
Policy implications:
 A quarter of the farmers complain about the lack of credit
provision. It seems that more could be done on the supply side
to allow credit access to them.
 Credit use is significantly linked with modern input use and
therefore agricultural productivity; Making credit more readily
available for modern input purchase might likely contribute to
improved agricultural productivity in the country.
 Default in credit markets a major issue, often because of shocks;
explore options of linking credit to insurance might be a useful
way forward

16. Thank You!