Agricultural Financing and the Role of Formal Financial Institutions in Improving Rural Livelihood: In Case of West Guji Zone Selected Weredas

Abstract

Agricultural sectors play an important role in the process of economic development of a country, especially in developing countries like, Ethiopia.  Credit is vital to increase the productivity of agricultural operations or to diversify the economic activities of rural households. However, one major constraint facing farmers is lack of access to formal sector credit that enable them to take advantage of economic opportunities to increase their level of output, hence move out of poverty. As a result, this study aimed to examine access to agricultural financing and its role in improving the rural poor livelihood in the case of West Guji zone. To achieve this objective, both descriptive and explanatory designs along with quantitative research approach were employed. The target population of this study comprises of smallholder farmer in West Guji zone particularly households of three randomly selected woredas (Dugda dawa, Bule Hora and melkasoda). Out of 51,835 total numbers of rural households in three selected woredas, 397 samples were selected purposively. This study utilized direct elicitation approach and ordinary least square method (OLS) to analyze the data. By using the direct elicitation approach, this study found that, about ¾ or 75% of farm households were credit constrained. In other words, only ¼ or 25% of rural farmers have access to agricultural credit. The result also reveals that the share of formal institutions were only 10% while the remaining 90% of credit demand of households were financed by semi-formal and informal institutions. In addition to this, the simple regression result also reveals that there is a significant and positive relationship between access to finance and agricultural productivity. However, a credit constraint had a negative impact on the agricultural growth. Therefore, the study recommended that it is critical to strengthen both the agriculture and financial sectors through inaugurating an intelligible strategy with consistent regulation and policies that match the sectors´ needs and in line with the realistic capacities of all the actors in both sectors.