ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE

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

Ibrahim Worku, Bart Minten and Guush BerhaneIFPRI ESSP-II

December 13th, 2013 Hilton Hotel, Addis Ababa

International Food Policy Research Institute (IFPRI) and

Ethiopian Development Research Institute (EDRI)

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Outline1. 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

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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

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?

1. Introduction (cont.)

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

2. Data description and methodology

• 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.

2) Region wise: the credit use in Oromiya and Amhara are much higher (linked to their size)

3. Use of credit

Credit use by gender (%age) Male Head Female Head

Population in AGP woreda 69 31Those who have taken credit 82 18

HHs’ Credit use by region (%age)

Region Male Female Total Ratio in total creditTigray 5 2 7 0.7Amhara 25 7 33 3.3Oromiya 40 6 47 4.7SNNP 10 3 13 1.3

• Reasons for not using credit:1/ Demand side reasons: About 40% did not want to take credit; 15% afraid that they can not pay back2/ Supply side reasons: 25% complain about availability of credit

3. Use of credit

NO NEED FOR A LOAN

TRIED TO GET A LOAN BUT WAS REFUSED

NO-ONE AVAILABLE TO GET A LOAN FROM

EXPECTED TO BE REJECTED, SO DID NOT TRY

I HAVE NO ASSETS FOR COLLATERAL

AFRAID OF LOSING COLLATERAL

AFRAID THAT I CANNOT PAY BACK

INTEREST RATES TOO HIGH

OTHER

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

Reason for not borrowing? (percentage)

Precentage

4. Purpose of credit

• Credit is mainly used to buy agricultural input (80%)• Less used for consumption purposes or for other

businesses

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Reason for taking credit

percetage of population

4. Source of credit

• MFIs are major suppliers of credit in rural area (64% of credit given out).

• Formal banks cover only 3%.

RELATIVE

NEIGHBOUR

GROCERY/LOCAL M

ERCHANT

MONEY LENDER (K

ATAPILA)

EMPLOYER

INSTITUTIO

N

MICROFINANCE IN

ISTITUTIONS

BANK (COMMERCIAL)

NGO

FRIEND

OTHER (SPECIFY).

10.15.7

0.3 2.1 0.97.7

63.8

3.3 0.9 1.3 3.9

percentage of population

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).

Farm output

destroyed

Partly lost farm

output

Used money for some other

purposeNot willing

to repay OtherWhy did you not pay back yet? (%) 0.4 10.0 30.7 2.8 56.1

6. Determinants of credit useWhat 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.

• Shown in probit estimates: Likelihood of using credit is: a) positively related to wealth--- > 1 b) positively related to shocks--- > 2

Dependent variable: Likelihood of using credit

Covariates CoefficientHousehold size 0.045*Wealth index (1) 0.074***Shock (2) 0.333***Livestock assets -0.042*Numeracy 0.18

Note: Significant at 1% (***), 5%(**) and 10%(*)

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

7. Credit and agriculture (cont.)

- Probit estimates:Likelihood of using fertilizer is positively and significantly related with access to credit (Controlling for other characteristics)- If a household uses credit, the likelihood of using chemical fertilizer goes up by 0.29.- As fertilizer use is strongly related to productivity, access to credit significantly influences agricultural productivity

Dependent variable: Likelihood to use fertilizer

Control variables CoefUse of credit 0.291***Male head -0.241** Married 0.173* Education level 0.058* Numeracy 0.210* Wealth index 0.151***Livestock assets 0.072***Shock 0.172**

Note: Significant at 1% (***), 5%(**) and 10%(*)

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

8. Conclusions

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

8. Conclusions (cont.)

Thank You!