Abstract
This study investigated factors determining microfinance loan utilization by smallholder farmers from Omo Microfinance institution in Lemo District of Hadiya Zone, Southern Ethiopia. Both primary and secondary data were used and a total of 118 sampled farmers were considered for the interview. Both descriptive statistics and independent double-hurdle model were used to analyze the microfinance loan utilization and loan amount received. The results showed that literacy status, household size, size of landholding, perception about loan repayment period and distance from residence to lending center were the significant determinants of microfinance loan utilization by smallholder farmers. The borrower’s sex, literacy status, income level, saving level, purpose of loan taking and perception about loan repayment period were found to be the factors influencing loan amount received by smallholder farmers in the study area. The findings generally suggest the need to enhance appropriate actions on determining factors of microfinance loan utilization and its loan amount in order to lessen financial constraints of smallholder farmers through microcredit. Key words: Lemo District, loan utilization, loan amount received, microfinance, smallholder farmers.
Highlights
Ethiopian economy depends to a great extent on the growth of agricultural sector
In rural areas of Ethiopia, households mainly rely on agriculture to get food, generate income and meet other household financial obligations
That is, to identify key factors influencing microfinance loan utilization decision by smallholder farmers, the model makes use of a univariate probit regression while for the second hurdle, that is, to identify the determinant factors of loan amount received by smallholder farmers it applies the truncated regression
Summary
In rural areas of Ethiopia, households mainly rely on agriculture to get food, generate income and meet other household financial obligations. They suffer from income shocks due to fluctuations in weather condition and farm output prices. When farm households face income shock, they finance their agricultural production and smooth their consumption by using accumulated savings and borrowing from outside. The source of credit for farm households is either formal lending institutions or informal lenders. Their choices of borrowing depend on how they can access credit providers and how they can obtain the loan (Nguyen, 2007)
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