COLLEGE OF AGRICULTURE AND ENVIRONMENTAL

SCIENCE

DEPARTMENT OF AGRICULTURAL-ECONOMICS

DETERMINANTS OF CREDIT REPAYMENT ON SMALLHOLDER

FARMERS: THE CASE OF DEBARK WOREDA, NORTH GONDAR

ZONE, AMHARA REGION, ETHIOPIA

A Proposal Submitted to the Department of Agricultural-Economics, College of

Agriculture and Environmental Science, Debark University in Partial Fulfillment
of the Requirements for the Degree of Bachelor of Science in Agricultural
Economics

BY: WORKIE CHEKOLE

ID.NO:- 1200350

ADVISOR:; YIMEGN A.

JANUARY, 2023

i
 DEBARK ,
ETHIOPIA

TABLE OF CONTENTS

Title

TABLE OF CONTENT........................................................................................i

ACRONYMS.....................................................................................................ii

ACKNOWLEDGEMENT........................................................................... iv

CHAPTER ONE............................................................................................................................ 1

1. INTRODUCTION.....................................................................................................................1

1.1. Background of the study..................................................................................................1

1.2. Statement of the Problem..................................................................................................4

1.3. Objectives of the study.......................................................................................................4

2.3.1. General objective......................................................................................................4

1.3.2. Specific objective................................................................................................................5

1.4. Research question..............................................................................................................5

1.5. Significance of the study................................................................................................. 5

1.6. Scope of the study............................................................................................................. 6

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 1.7. Organization of the study .................................................................................................. 6

CHAPTER TWO........................................................................................................................7

2. REVIEWS OF RELATED LITRATURE......................................................................................7

2.1. Theoretical literature review.............................................................................................7

2.1.1. Concept and definition of credit........................................................................................7

2.1.2. Purpose of credit.............................................................................................................7

2.1.3. Source of credit...............................................................................................................8

2.1.3.1. Formal financial institution............................................................................................8

2.1.3.2. Micro-financial institution.............................................................................................. 9

2.1.3.3. Informal financial institution...........................................................................................9

2.1.4. Loan default and its problem.........................................................................................10

2.2. Empirical literature review.............................................................................................10

2.2.1. Empirical studies in other countries.......................................................................................11

2.2.2. Empirical studies in Ethiopia..........................................................................................12

2.3. Conceptual frame work of the study.............................................................................15

CHAPTER THREE....................................................................................................................17

DATA AND RESEARCH METHODOLOGY.......................................................................................17

3.1. Background of the study area..............................................................................................18

3.2. Research design and source population............................................................................18

3.3. sampling size and sampling techniques...........................................................................18

3. 4. Data collection instrument and techniques.......................................................................19

3.5. Data Entry, Processing and Analysis..........................................................................................20

3.5.1. Data entry and processing...................................................................................................20

3.5.2. Method of data analysis.......................................................................................................20

3.6. Descriptive statistics, econometrics model and description of the study area.............20

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 3.6.1. Descriptive Statistics..................................................................................................................21

3.6.2. Credit Repayment Model Specification..................................................................................21

3.6.3. Description of Variables in the Model....................................................................................23

3.6.3.1. Dependent Variable.............................................................................................................23

3.6.3.2. Independent Variable.........................................................................................................23

3.7. Ethical Consideration.............................................................................................................27

CHAPTER FOUR......................................................................................................................28

4.TIME SCHEDULE AND BUDGET BREAKDOWN........................................................................28

4.1. Time Schedule (work plan)............................................................................................................28

4.2. Budget schedule (Budget Breakdown).....................................................................................29

REFERENCE.................................................................................................................................30

iv
 ACRONYMS

ADLI Agricultural Development Lead Industrialization

CSA Central Statistical Agency
MFIs Micro-financial Institutions
NGOs Non-Governmental Organizations
PPS Probability Proportional Sample
UND United Nations development Program
ACSI American Customer Satisfaction Index
CBE Commercial Bank of Ethiopia
DBE Development Bank of Ethiopia
NBE National Bank of Ethiopia

v
 ACKNOWLEDGEMENT

First and foremost, I give thanks to the almighty God for giving me the health, strength and
patience to finalize this Research Proposal.
I owe special gratitude to my instructor Yimegn(ms). I am very grateful for his giving research
proposal as an assignment and encouragement to do this study. This is why because it is very
important for the next Research paper.
I also would like to thank my lovely Sister Haymanot (Haymi) and my little Brother Mintesnot.
Your love, support and friendship are the most important elements of my life.
Finally, I would like to thank my families who encourage and assist me morally and financially
in order to complete this study.

------------

vi
 CHAPTER ONE
1. INTRODUCTION
This section is structured in eight sections. The section will describe and introduce the
background of the study by providing background information about the research topic,
statement of the problem that explains the reason to study on the topic, objectives of the
study to be achieved, and the research questions that must be raised to answer or meet the
research's objectives. The significance of the study that highlights the importance of the
research. The scope, and limitation of the study is also part of this section. Finally, the last
section of the research proposal will cover the organization of research proposal.

[1.1.] Background of the study

Many financial institutions in developing countries provide financial services such as

saving and credit to aid several smallholder enterprises. This is an effort in line with the
“Millennium development goals” which seeks to reduce poverty by 50% by the year
2015(Patrick, 2013).

The provision of loan has increasingly been regarded as an important tool for raising the
incomes of urban as well as the rural populations, mainly by mobilizing resources to more
productive uses (Kibrom, 2010)

In subsistence agriculture and low-income countries like Ethiopia, where smallholder

farming dominates the overall national economy, smallholder farmers work on 96.3 percent
of the total cultivated area and produce over 95 percent of the national crop production
(CSA, 2007). However, smallholder farmers face severe shortage of financial resources to
purchase productive agricultural inputs. The prices of inputs rise very rapidly every year.
Consequently, the hope of the subsistence farmers on financial institutions for credit has
become substantially higher in the recent times.

It is important that borrowed funds be invested for productive purposes, and the additional
incomes generated be used to repay loans to have sustainable and viable production
1|Page
processes and credit institutions. However, failure by farmers to repay their loans on time or
to repay them at all has been a serious problem faced by both agricultural credit institutions
and smallholder farmers. Poor loan repayment in developing countries has become a major
problem in agricultural credit administration, especially to smallholders who have limited
collateral capabilities (Okorie, 2004).

In the Ethiopian context, farm credit has been made available through public financial
institutions of which Commercial Bank of Ethiopia (CBE) and Development Bank of
Ethiopia (DBE) are the two major providers of input credit (such as fertilizer, improved
seed, herbicides, and farm tools). However, DBE sharply reduced its supply of fertilizer
loans in the early 1990s as its existence was threatened by massive default. Development
Bank of Ethiopia (DBE) stopped extending input credit since 1997. Currently the major
sources of input credit are CBE and some rural micro finance institutions.

There are 27 micro-financial institutions officially recognized by the National Bank of

Ethiopia (NBE, 2010). These institutions deal directly with individual farmers who fulfill
the loan provision criteria set by their management. Though figures on the amount of credit
they provide are not available, it is believed that these institutions play an important role in
narrowing the gap between the demand and supply of credit in rural areas. The advantage of
these financial institutions is that farmers can get loan in cash and use it to purchase the
most limiting production resources.

In order to increase loan repayment most of the micro financing schemes in Ethiopia
provide loans to organized members, who are not required to put up physical collateral but
operate in a group mechanism in which risks of non-repayment are transferred to the group.
Essentially, most micro financing schemes in the country have, with slight modifications,
adopted the Grameen Bank micro credit mechanisms (Fantahun, 2000). Even if group
liability claims to improve repayment rates and lower transaction costs when lending to the
poor by providing incentives for peers to screen, monitor and enforce each other’s loans,
the problem of poor loan repayment performance persists.

2|Page
Ethiopia’s agricultural sector to produce at subsistence level with incomes not adequate to
cover the farmers' consumption and expenditures and allow them to invest back in to their
farms. Where subsistence agriculture prevails and where small-holder farming dominates
the overall national economy, farmers often face a scarcity of capital (saving) to adopt new
agricultural technologies. Hence, short-term credits with favorable terms for seasonal inputs
like fertilizer, improved seeds, pesticide and herbicides would generally be favored because
better return would be achieved quickly within the crop season. The use of credit has been
envisaged as one way of promoting technology transfer, while the use of recommended
farm inputs is regarded as key to agricultural development (Mohad N and Takashi, 2010).

Smallholder farmers face severe shortage of financial resources to purchase productive

agricultural inputs. The prices of inputs rise very rapidly every year. Consequently, the
hope of the subsistence farmers on financial institutions for credit has become substantially
higher in the recent times (Ifeany etal. 2012). Generally, the accessibility of a good
financial service is considered as one of the engines of economic development and the
instruments to break the vicious circle of poverty (Sisay, 2008).

(Mohammad, 2009) Loan default problem has been a tragedy as it leads to a system failure
to implement appropriate lending strategies and credible credit policies. In addition, it
discourages the financial institutions from refinancing the defaulting members, which put
the defaulters once again into vicious circle of low productivity. Debark Woreda is one
amongst autonomous woreda of North Gondar zone of Amhara Regional State. In this
woreda, the Regional Government through Amhara Saving and Credit Share Company, and
Non-Governmental organizations have extended credit facilities to farming households to
narrow the gap between the required and the owned capital to use improved agricultural
technologies that would increase production and productivity. However, there is a serious
loan repayment problem in the area. Therefore, this study will be was undertaken to analyze
how non-default and default rates were associated with different loan characteristics as well
as personal and socio-economic characteristics of farm households.

In the Ethiopian context, farm credit has been made available through public financial
institutions of which Commercial Bank of Ethiopia (CBE) and Development Bank of
3|Page
Ethiopia (DBE) are the two major providers of input credit (such as fertilizer, improved
seed, herbicides, and farm tools). However, DBE sharply reduced its supply of fertilizer
loans in the early 1990s as its existence was threatened by massive default. Development
Bank of Ethiopia (DBE) stopped extending input credit since 1997. Currently the major
sources of input credit are CBE and some rural micro finance institutions.

There are 27 micro-financial institutions officially recognized by the National Bank of

Ethiopia (NBE, 2010). These institutions deal directly with individual farmers who fulfill
the loan provision criteria set by their management. Though figures on the amount of credit
they provide are not available, it is believed that these institutions play an important role in
narrowing the gap between the demand and supply of credit in rural areas. The advantage of
these financial institutions is that farmers can get loan in cash and use it to purchase the
most limiting production resources.

In order to increase loan repayment most of the micro financing schemes in Ethiopia
provide loans to organized members, who are not required to put up physical collateral but
operate in a group mechanism in which risks of non-repayment are transferred to the group.
Essentially, most micro financing schemes in the country have, with slight modifications,
adopted the Grameen Bank micro credit mechanisms (Fantahun, 2000). Even if group
liability claims to improve repayment rates and lower transaction costs when lending to the
poor by providing incentives for peers to screen, monitor and enforce each other’s loans,
the problem of poor loan repayment performance persists.

Ethiopia’s agricultural sector to produce at subsistence level with incomes not adequate to
cover the farmers' consumption and expenditures and allow them to invest back in to their
farms. Where subsistence agriculture prevails and where small-holder farming dominates
the overall national economy, farmers often face a scarcity of capital (saving) to adopt new
agricultural technologies. Hence, short-term credits with favorable terms for seasonal inputs
like fertilizer, improved seeds, pesticide and herbicides would generally be favored because
better return would be achieved quickly within the crop season. The use of credit has been
envisaged as one way of promoting technology transfer, while the use of recommended
farm inputs is regarded as key to agricultural development (Tomoya and Takashi, 2010).
4|Page
Smallholder farmers face severe shortage of financial resources to purchase productive
agricultural inputs. The prices of inputs rise very rapidly every year. Consequently, the
hope of the subsistence farmers on financial institutions for credit has become substantially
higher in the recent times (Million etal. 2012). Generally, the accessibility of a good
financial service is considered as one of the engines of economic development and the
instruments to break the vicious circle of poverty (Sisay, 2008). There is no doubt about the
crucial roles of credit in economic development. But the increasing default rate is one of the
major problems of the lending institutions (Mohammad, 2009).

1.1.[1.2.] Statement of the Problem

Financing of agricultural inputs and labor wages requires liquid cash that often is not
readily available with the smallholder farmers. Therefore, it is essential to expand the status
of rural credit at large to improve agricultural productivity (Sisay, 2008). There is no doubt
about the crucial roles of credit in economic development. But the increasing default rate is
one of the major problems of the lending institutions (Mohammad, 2009).However, poor
loan repayment in developing countries has become a major problem in agricultural credit
administration, especially to smallholders who have limited collateral capab ilities (Okorie,
2012).
It is obvious that many rural credit schemes have sustained heavy losses because of poor
loan collection. And yet a lot more has been dependent on government subsidy to
financially cover the losses they faced through loan default (Firafis, 2014).

According to Wangia (2012), borrowers involved in the agricultural sector are more
defaulters compared with other sectors like industry and service. Likewise Jamal’s (2013)
research result shows that urban borrowers have better repayment rate than rural borrowers.

(Wivine, 2013)Since there were low repayment performances in rural borrower, it

discourages the lender to promote and extend credit to large and fragmented farm
households. Although there are such problems related to loan repayment in Debark woreda.

5|Page
Therefore, this will be was used as an initiated to undertake this research on analyzing the
Determinants of loan repayment performance of smallholder farmers in Debark woreda.

[1.3.] Research Questions

Based on the problem statement above, this study will attempt to address the following two
research questions

 What is the source of credit use in smallholder farmer in Debark woreda?

 What are the factors influencing loan repayment performance in smallholder farmers
in the study area?
[1.4.] Objectives of the study

1.3.1. General objective

The general objective of the study will be is to analyze determinants of credit repayment
performance in smallholder farmers.

1.3.2. Specific objectives

Based on the research questions, the following specific objectives were formulated:the
specific objectives will be:

 To describes source of credit in the study area. To investigate the follow up systems of
the credit institutions to repay loans of smallholder farmers.
 To identify factors influencing loan repayment performance in smallholder farmers in
the study area.

1.2.[1.5.] Research Questions

Based on the problem statement above, this study will attempt to address the following two
research questions

 What is the source of credit use in smallholder farmer in Debark woreda?

6|Page
  What are the factors influencing loan repayment performance in smallholder farmers
in the study area?

1.3.[1.6.] Significance of the study

As mentioned earlier, other researchers willmay use the research outcome because it will
help them to identify the problem related to credit repayment performance. It will give them
background information on smallholder farmers, marketing and production activities of
their products, and other social and economic variables influencing the repayment ability.
As output of the analysis, identifying factors that contribute to successful loan repayment
will help policy makers to formulate successful credit policies and programs that will again
help in allocating financial resources effectively and efficiently.

MFIs or ACSI are engaged in providing credit to the poor so that they can generate income
and employment for themselves. For these institutions to be able to render such a service on
a permanent basis they should be viable and suitable. They should not depend on donation
or subsidies in the long run. This requires an efficient loan repayment performance as well
as an impact to be observed on the target beneficiaries.

Although some study has been conducted on the credit schemes that target the poor in
Ethiopia, no empirical-study has been done micro-financing operation of ACSI so far. So
this study tries to provide a detail empirical analysis on the loan repayment performance of
MFIs or ACSI. It also tries to investigate the screening mechanisms used by the institution
and assess the impact of the program on its borrowers.
The result of the study will enable credit associations to get information about the
performance of existing credit loan repayment and it helps to create awareness about credit
association among small holder farmers in the area. Also the result of this research can
serve as input for other researches and policy making. And also the findings of the study
will be important to diverse number of stakeholders. Among others, the findings will be
much relevant for policy makers, entrepreneurs, credit associations and academicians.
Finally, planners and academicians will find this work useful as there is a single research on
the subject matter in Debark woreda. The study will therefore add value to the existing

7|Page
knowledge in the subject area.

[1.7.] Scope of the study

The study focused on the Determinants of credit repayment performance of smallholder

farmers in Debark woreda. This study will be geographically limited to Debark woreda,
which has a total of 33 Kebeles, and one of them selected by randomly. Conceptually this
research was limited to identifying factors affecting credit repayment performance of
smallholder farmers in the study area as well as on possible opportunities for credit
repayment of smallholder farmers in the woreda. Besides, this thesis used cross sectional
data collected only smallholder farmers in the study area; whose credit history were
registered by credit and saving association of Debark woreda during data collection period.

Moreover,therefore this study did notwill be also include all kebeles in smallholder
farmers that belong to the Debark woreda. Moreover, the research will perform the
determinants of credit repayment performance in economic sectors other than the
smallholder farmers such as service and construction sectors are also beyond the scope of
this thesis.

[1.8.] Definitions of terms

Credit: is the ability to borrow money or access goods or services with the understanding
that you'll pay later. It is generally defined as a contract agreement in which a borrower
receives a sum of money or something of value and repays the lender at a later date,
generally with interest.
Determinants: It is an element that identifies or determines the nature of something or that
fixes or conditions an outcome.
Smallholder: is a small farm operating under a small-scale agriculture model. Definitions
vary widely for what constitutes a smallholder or small-scale farm, including factors such
as size, food production technique or technology, involvement of family in labor and
economic impact.
Farmer: is a person who cultivates land or crops or raises animals.

8|Page
Performance: is the doing, achievement, conduct, work, attainment, completion and
consummation of an action: something accomplished.

[1.9.] Organization of the study

This thesis is organize in four chapters. The first chapter presents the background of the
study, statement of the problem, research questions as well as objectives, significance,
scope, definitions of terms and organization of the study. The second chapter deals with
review of both related theoretical and empirical literature as well as the conceptual
framework of the study whereas the third chapter covers the methodology and data used in
this study in depth. The last section deals with time schedule and budget required for the
study.

CHAPTER TWO

REVIEW OF RELATED LITRATURES

2.1. Theoretical Literature

2.1.1. Concept and Definition of Credit
9|Page
Credit is a transaction between two parties in which one, acting as creditor or lender,
supplies the other, the debtor or borrower, with money, goods, services, or securities in
return for the promise of future payment. As a financial transaction, credit is the purchase
of the present use of money with the promise to pay in the future according to a pre-
arranged schedule and at a specified cost defined by the interest rate (Sisay, 2008).

Credit is defined as an exchange of goods and services for a promise of the future payment.
It also indicates that credit is necessary in a dynamic economy because of the time that
elapses between the production of a good and its ultimate sale and consumption and credit
bridges this gap (Amare, 2005).
According to Abebe (2011) it is the power or ability to obtain money, through the
borrowing process, in return for a promise to repay the obligation in the future. According
to these authors, credit represents the actual or prospective debtor’s power or ability to
affect an exchange by offering his promise for future payment. Credit is necessary in a
dynamic economy because of the time that elapses between the production of a good and its
ultimate sale and consumption.

2.1.2. The Purpose of credit

Finance is central to establish and operate productive activity, a prerequisite to proper

organization of production, acquiring of investment assets and/or raw materials and
development of marketing outlets etc. (Wangia, 2002).

Credit is necessary in a dynamic economy because of the time that elapses between the
production of a good and its ultimate sale and consumption (Partick, 2013). Credit is the
key input in every development program; this is particularly true for rural development
because so long as sufficient credit is not provided to the development programs of poor
sections of the society, the goal of development cannot be achieved (Abebe, 2011).

According to Amare (2005) high population pressure in rural areas of developing countries
like Ethiopia, bringing of additional productive land under cultivation is difficult, implying
the need for improving farm level productivity through intensification. This involves the
use of improved farm inputs such as fertilizers and selected seeds besides improved tillage
10 | P a g e
and husbandry practices. These inputs are not available on the farm and some farmers are
not able to purchase them due to their meager resources. Moreover, most of the commercial
inputs are expensive and hence smallholder farmers cannot afford to buy them from their
own cash earnings. It is, therefore, generally acknowledged that rural credit can improve
smallholder’s farm productivity through use of purchased farm inputs. Generally, credit
removes a financial constraint and helps accelerate the use of new technologies, increases
productivity, and improves national and personal incomes (Abebe, 2010).

2.1.3. Source of Credit

2.1.3.1. Formal financial Institution

The formal sources are financial institutions that are set up legally and engaged in the
provision of credit and mobilization of savings. These institutions are regulated and
controlled by the National Bank of Ethiopia. In the Ethiopian context formal financial
sector includes National Bank of Ethiopia (NBE), commercial banks (owned by private and
public), Development Bank of Ethiopia , credit and savings cooperative, insurance
companies (both public and private) and microfinance institutions (owned by regional
governments, NGOs, associations and individuals), Construction and Business Bank , and
the recently proliferating private commercial banks like Dashin, Wogagen, Abysinia,
Awash International, Nib-International, etc; and the nonbanking financial institutions like
the public and private insurance companies (Anbes,2003)

2.1.3.2. Micro financial institution

Microfinance is defined as the provision of financial services to low-income clients,

including Consumers and the self- employed, who traditionally lack access to banking and
related services (Mohad, 2010).The objective of microfinance institutions as development
organizations are to service the financial needs of un-served or underserved markets as a

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means of meeting development objectives such as to create employment, reduce poverty,
help to develop existing business or diversify their activities, empower women or other
disadvantaged population groups, and encourage the development of new business ( Bayeh,
2012).

While the end of 2011, the total number of MFIs has risen to 31 with 433 branches and 598
sub branches. At the same year the study shows 10 – 25% of the total micro finance
demand in the country. The institutions have extended total credit of 6.9 billion ETB to
2,470,611 active borrowers (Shaik and Tolosa, 2014).

2.1.3.3. Informal financial institution

The informal financial sector often embraces a wide group of individuals and institutions
whose financial transaction are generally not subject to direct control by the country’s key
monetary and financial policy instruments. Individual economic entities in the informal
sector include moneylenders, money keepers, tradesmen, friends and relatives, neighbors,
etc. (Amare, 2005)

According to G/Yohannes (2000), compared with the formal financial institutions, informal
lending is by far the most important source of finance to the rural and urban population and
it has increased prominence mainly due to restrictive rules and regulations of the formal
financial sector. The operations of the informal sector derive their rules and regulations
from the country’s culture and customs. Informal sector transactions are conducted on the
basis of trust and intimate knowledge of customers.

2.1.4. Loan default and its problem

It default is defined as failure to pay a debt or a loan at the right time. On the contrary, non-
default is defined as payment of a debt or a loan at the right time (Patrick, 2013).According
to Samuel (2011) as cited in Firafis (2014), also divided the causes of default into two
categories: (i) weaknesses from the lender side such as absence of post-disbursement
monitoring system, lack of technical assistance given to the microfinance recipients,
inexperienced field workers, burdensome immediate weekly payment system, lack of

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common accessible database of the microfinance recipients. (ii) Moral hazard problem on
the borrower side such as hiding business, family member‘s illness.

Increasing defaults in the repayment of loans may lead to very serious implications. For
instance, it discourages the financial institutions to refinance the defaulting members, which
put the defaulters once again into vicious circle of low productivity (Zelalem al., 2013).

2.2. Empirical Literature on Loan Repayment Performance

Loan repayment performance is affected by a number of socio-economic and institutional

factors. While some of the factors positively influence the loan repayment, the other factors
are negatively affecting the repayment rate. Regarding to the loan repayment performance
of borrowers several studies have been conducted in many countries by different authors.
Some of the studies are summarized below:

Empirical studies in other countries

Arene (1992) outlines the main factors that determine loan repayment performance as loan
size, enterprise size, income, age, number of years of business experience, distance between
home and source of loan, education, household size, adoption of innovations, and credit
needs.

Balogun and Alimi (1988) identified the major causes of loan default as loan shortages,
delay in time of loan delivery, poor supervision, non-profitability of farm enterprises and
undue government intervention with the operations of government sponsored programs.

Belay Abebe and Tang (2002) conducted a study to investigate the determinants of loan
repayments in microcredit programmes that applied the group lending approach, but took a
different approach. Belay Abebe and Tang looked at the borrower’s socio economic
variables instead of the elements of group lending for their influence on loan repayment
behavior. The borrower’s socio-economic variables included gender, educational level,
household income and characteristics of the business (type of business, years in business,
etc.). In their study, they found that a higher education level was significant and positively

13 | P a g e
related to bette repayment performance. Conversely, female borrowers, level of household
income, type of business and borrower’s experience had no significant effect on repayment
behavior.educational levels, involved in a non-farm business activity, who were using the
loans for investment and were female, had a higher probability of repaying their loan. The
study found that the subsidized interest rate level did not have a significant effect on
repayment behavior among rural borrowers in Pakistan. They concluded that a subsidized
interest rate was not the best way to ensure good repayment by borrowers.

Eze and Ibekwe (2007) examined the determinants of loan repayment under the indigenous
financial system in Southeast Nigeria. It was discovered that, an amount of loan received,
age of beneficiary, householder size, years of formal education and occupation were some
of the significant predictors of loan repayment under the system.

Hassen and Deogratius (2013) examined the credit rationing and loan repayment
performance victoria savings and credit cooperative society in Tanzania. The study found
that business management skills, alternative source of income, unfavorable weather
conditions, household size, late loan delivery, distance between the SACCOS and the
member’s project, number of years of project runs, experience, age, credit rationing and
loan diversion influenced loan repayment performance.

Okorie (1986) studied the repayment behavior in one agricultural corporation in Nigeria.
The author’s results from interviews with borrowers showed that the nature of the loan,
either cash or in kind (seeds, fertilizer and equipment) can influence the borrowers’
repayment behavior. He found that borrowers who received a loan in kind had higher
repayment rates than who received a cash loan. This was because many borrowers misused
the cash, diverting it into personal consumption instead of investing in making their
business productive. Regular visits by the loan officer to the borrowers’ business site and
higher profits generated by the borrowers also contributed to higher repayments by
borrowers. Overall, the loan repayment performance can be influenced by three factors:
borrower characteristics, business characteristics and loan characteristics.

2.2.1. Empirical studies in Ethiopia

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Abebe (2011) examined determinants of credit repayment and fertilizer use by members
ofcooperatives in Ada district, Oromia Region, Ethiopia. Tobit model was employed to
identifyfactors influencing loan repayment performance of the households. The result of the
model showed that family size, livestock ownership, on-farm income, non-farm income and
saving habit were the statistically significant factors influencing timely loan repayment
performancepositively.
Wangia (2002) studied on the loan repayment and its determinants in small-scale
enterprisefinancing in Ethiopia around Zeway area. In an attempt to analyze the
determinants of loanrepayment status of borrowers and to identify the criteria employed to
ration credit he used two equations; loan repayment and rationing equations. The estimation
result employing Tobit model reveals that having other source of income, education, work
experience in related economic activity before the loan and engaging on economic activities
other than agriculture are enhancing while loan diversion, being male borrower and giving
extended loan repayment period are undermining factors of the loan recovery performance
of projects. With regards to the loan rationing mechanism, he found that borrowers who
secured high value of collateral and those with relatively longer repayment period were
favored although they tend to be more risky while those with higher equity share and
extensive experience in related activity were disfavored.

Wongna (2011) also recommended that education, income, loan supervision, suitability of
repayment period and availability of other credit sources were important and significant
factors that enhance the credit repayment performance, while credit diversion and
credit/loan size were found to be significantly increase credit default.

Amare (2005) studied on the determinants of loan repayment performance of smallholder

farmers in North Gondar, Ethiopia. In order to analyze the factors that affect loan
repayment, he employed a tobit model. A total of 17 explanatory variables were considered
in the econometric model. Out of these variables, seven of them were found to have
statistically significant influence on the loan repayment performance of the sample
households. These were; land holding, size of the family, agro-ecology of the area, total
livestock holding, number of years of experience, number of contacts, sources of credit and

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income from off-farm activities. The remaining variables (family size, distance between
main road and household residence, purpose of borrowing, loan amount and expenditure for
social festivals) were found to have insignificant effect on loan repayment performance of
smallholder farmers.

Bekele et al. (2005) studied the socio-economic factors influencing repayment of

agricultural input loan in Ethiopia using a logit model. The result of the model showed that
total livestock holding, the amount of loan taken by households, off farm income by
member of the household, yield loss, grain production and timeliness of input supply, were
became significant variables.

Sisay and Fufa (2008) employed probit and logit regression to study the determinants of
loan repayment rates for agricultural loans among small-scale farmers in Ethiopia. In the
study, they found that borrowers with larger farms, higher numbers of livestock and farms
located in a rainfall area had a higher capacity to repay loans, since all those factors
increased the farmers’ productivity and income. The study also found that borrowers who
had extra business income and were experienced in using agricultural technology had a
good repayment performance.

Belay (2002) employed a logit model to estimate the effects of hypothesized explanatory
variables on the repayment performance of rural women credit beneficiaries in Dire Dawa,
Ethiopia. Out of the twelve variables hypothesized to influence the loan repayment
performance of borrowers, six variables were found to be statistically significant. Some of
these variables are farm size, annual farm revenue, celebration of social ceremonies, loan
diversion, group effect and location of borrowers from lending institution. Gebrehiwot
(2006) employed logit regression model in his research and showed that five variables were
significant to affect borrowers’ loan repayment performance. These variables include:
educational status of the sample household, family size of the household, duration of
membership of the household, total size and use of land holding of the household and
amount of money borrowed by the household. Except the size of land holding, all the
significant explanatory variables affect the loan repayment performance smallholders
positively.
16 | P a g e
Jemal (2003) analyzed the microfinance repayment performance of Oromia credit and
saving institution in Kuyu, Ethiopia. According to his finding; sex, loan size and number of
dependents are negatively related to loan repayment. On the other hand age was found to be
positive, while age squared turned to be negative. Income from activities financed by loan,
repayment period suitability and loan supervision are positively and significantly related to
loan repayment performance. Moreover, loan diversion is significant and negatively related
to loan repayment rate. The negative sign implies that the use of diverted funds for non-
income generating purposes.

Ifeany. (2012) studied factors affecting loan repayment performance of smallholder farmers
in east hararghe zone, Oromia, Ethiopia using a Tobit model. The result of the model
showed that agro- ecological zone, off-farm activity, production loss, informal credit,
celebration of social ceremonies, number of contact days of the farm household head with
extension agents and loan income ratio, determined repayment performance.

Retta (2000), cited in Jemal (2003) employed probit model for loan repayment performance
of women fuel wood carriers in Addis Ababa, Ethiopia. In his finding, frequency of loan,
supervision, suitability of repayment period and other income sources are found to
encourage repayment hence reduce the probability of loan default. While educational level
is negatively related to loan repayment.

2.3. Conceptual framework of the study

Though, both theoretical and empirical literature identified a number of determinants of

credit repayment performance in smallholder farmers, this thesis will identified some
independent variables as the determinants of credit repayment performance in smallholder
farmers at Debark woreda of North Gondar Zone in Amhara regional state. Thus, the
schematic are presentation below indicates the conceptual framework for this study. The
conceptual framework in figure 2.1 depicts the relationship between credit repayment
performance in smallholder farmers in the study area (dependent variable) and the
independent variables identified literature for empirical investigation. The researcher

17 | P a g e
 conceptualizes that the given independent variables in the figure affect loan repayment
performance in smallholder farmers in the study area.

Demographic Characteristics
 Age
 Gender/Sex
 Family size
 Education level of respondents

Economic Factors
 Access to Credit
Dependent Variable
 Access to market
Natural factors
information Credit Repayment Performance.
 Agro ecologic differentials
 Loan size

Institutional factors
 Loan supervision
 Suitability of Repayment period

Figure 2.1: Source: Own compilation from literature (2023)

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 CHAPTER THREE

DATA AND RESEARCH METHDOLOGY

This chapter provides a detailed discussion of the research methodologies employed in this
study. It includes a description of the study area, study design, the sampling procedures and
data collection methods, sampling techniques, sources and methods of data collection.
Finally, this chapter will presents the method of data analysis

3.1 Background of the study area

This study will be conducted in Mikara Keeble, Debark woreda, North Gondar Zone.
Mikara Keeble is one of the kebeles of Debark woreda in the North Gondar zone, Amhara
region, with the factor that affecting of credit repayment. Debark woreda is one of the 22
woredas in the North Gondar zone, Amhara region. The woreda is named after its largest
town, Debarq. Part of the Semien Gondar Zone, Debarq is bordered on the south by Dabat,
on the west by Tegeda, on the northwest by the Tigray Region, on the north by Addi Arkay,
and on the east by Jan Amora. This woreda is crossed by the Lamalmo Mountains, which
form the western end of the Semien. Rivers include the Zarima.

Debark woreda has a total of 32 kebeles which are located 830km far from Addis Ababa,
the capital city of Ethiopia. It is geographically located at mid-size place in the region of
Amhara in Ethiopia, 13°09′22.0″N latitude and 37°53′53.0″E longitude. Its average altitude
is 2,712 meter above sea level, with the highest elevations at Ras Dejen Mountain to the
north reaching 3,122 meters. This makes Debark woreda is one of the high-altitude woreda
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of the north Gondar and is one of the largest places in Ethiopia. The woreda is divided into
32 kebeles and a lot of gotis, which are the lowest administrative units.

Based on the 2007 national census conducted by the Central Statistical Agency of
Ethiopia (CSA), this woreda has a total population of 159,193, an increase of 31.83% over
the 1994 census, of whom 80,274 are men and 78,919 women; 20,839 or 13.09% are urban
inhabitants. With an area of 1,461.18 square kilometers (564.16 sq. miles), Debarq has a
population density of 108.95, which is greater than the Zone average of 63.76 persons per
square kilometer (0.39 sq. miles). A total of 33,822 households were counted in this
woreda, resulting in an average of 4.71 persons to a household, and 32,573 housing units.
The majority of the inhabitants practiced Ethiopian Orthodox Tewahedo Christianity, with
94.8% reporting that as their religion, while 5.2% of the population said they were Muslim.
The altitude in the woreda ranges from 2712 to 3122 meters above mean sea level.

3.2. Research design and source population

Research design is the blueprint for fulfilling research objectives and answering research
questions. In other words, it is a master plan specifying the methods and procedures for
collecting and analyzing the required information. The choice of research design is based
on research objectives and answering research questions.; the objectives of this research
will be determine the determinants of credit repayment performance in smallholder farmers
located in Debark woreda.

This thesis will use descriptive research design that employ quantitative techniques. Data
will be collected from respondents using descriptive survey which Saunders et. al., (2003)
defines as one which looks at intense accuracy at the phenomena of the moment and
describes precisely what the researcher sees. This study design will beis explanatory and the
methodology employed will beis a quantitative approach. As a result, the source population
will be all smallholder farmers who participate in credit Repayment in randomly selected.
(i.e., 200 households).

3.3. Sampling Size and sampling techniques

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The target populations for this study will use smallholder farmers that are involved in the
credit Repayment, all the randomly selected households. The sample size will be is
considered the major part of all statistical analyses. The computation of the appropriate
sample size is generally considered the most important and the most difficult step in
statistical study. The sample size plays a crucial role in those cases of statistical studies
where the statistical studies like sample survey, experiments, observational studies, etc. are
involved. The sample size will be to be employed for the identified target population.

The formula that was used to determine class interval for determination of scientifically
acceptable sample size, the researcher will prefer to use the following formula.

The study will use Yamane's (1967) sample size determination formula to determine the
sample size of the population with a 95% confidence interval (at a 5% level of precision). It
is calculated as follows:
N
n=
(1+e 2 N )

Where n=represents the sample size,

N=is the total population size, and
e=is the level of precision or sampling error = (0.05).
3.4. Data Collection Instrument and Technique

In order to generate genuine and reliable qualitative and quantitative primary data from
sample respondents will bewas collected using self-administered questionnaire, which
includes relevant variables related to determinants of credit Repayment performance in
smallholder farmers, designed to collect primary data from sample respondents.

The primary data will be collected through structured questionnaires by household

interview schedule. Thus, primary data will obtained from sample respondents using
household interview survey method to get firsthand information about determinants of loan
repayment performance. The Secondary data will be gathered through reviewing,
examination of documents, reports and records of published documents. Before embarking

21 | P a g e
in to data collection, the questionnaire will be translated into Amharic and refined in
consultation with thesis supervisor.

3.5. Data Entry, Processing and Analysis

3.5.1. Data Entry and Processing

Prior to data entry, questionnaires will be reviewed for completeness and possible
correction is made to avoid outliers. Data will be checked using range and consistency
check methods to identify problems related to data quality prior to the entry of the forms
into the database. Prior to analysis, quantitative data will be entered into computer.

3.5.2. Method of Data Analysis

The study will be collected from community of Debark woreda by using questionnaires and
interview using primary and secondary source of data.

The study will use both descriptive and econometric method of analysis to determine the
determinants of credit repayment performance in smallholder farmers in the study area. It is
because to establish a clear picture of the characteristics of the sample units, the study will
use descriptive statistics for analysis. Using descriptive statistics enables one to compare
and contrast different categories of the sample units concerning the desired characteristics.
This analysis helps to identify the variables that affect credit repayment performance in
smallholder farmers. In addition to descriptive statistical tools, inferential statistical tools
mainly econometrics model will be used since they help the researcher make valid
inferences about the topic under study and use Stata 14 Statistical software.

3.6. Descriptive Statistics, Econometrics Model and Description of Study

Variables
3.6.1. Descriptive Statistics

A descriptive analysis will be used to meet both general and specific objective are easy for
readers to understand what is discussed in the study. By applying descriptive statistics such
as, percentages, mean standard deviation and table will compared and contrast different
categories of sample households with respect to the desired characters. And also use

22 | P a g e
interventional statistics T-test for continuous and Chi square tests for discrete variables used
to indicate the significance of different variables on credit use and loan repayment
performance.

3.6.2. Credit Repayment Model Specification

In order to analyze the determinants of credit repayment performance in smallholder

farmers in Debark woreda, the study will use Binary Logit model. The study will use the
Binary Logit model because the nature of the dependent variable (being dichotomous),
logistic regression will develop which allows the establishment of a relationship between a
binary outcome variable (the dependent variable) and a group of predictor variables.

1
Pi=F ( Z i )= −¿ ¿
1+e ¿

Where Pi = the probability of credit repayment given Xi

Xi= a vector of explanatory variables

 And β = regression parameters to be estimated.

e= the base of the natural logarithm

For ease of interpretation of the coefficients, a logistic model could be written in terms of
the odds and log of odd. The odds ratio is the ratios of the probability that the credit
repayment would be affected (Pi) to the probability of credit repayment not being affected
(1- Pi). That is:

Pi Z
=e … … … … … … … … … … … … … … … … … … … … ....(3.2)
i

1−Pi

Taking the natural logarithm of the equation yeilds

ln
( )
Pi
1−Pi
=Z i=α + β1 X 1 + β 2 X 2+ … …+ β M X M … … … …(3.3)

If the error term taken into account, the equation becomes

23 | P a g e
 ln
( )
Pi
1−Pi
=Z i=α + β1 X 1 + β 2 X 2+ … …+ β M X M +e t … …(3.4 )

Therefor,
Econometrics Model Specification: The econometric model specification of the variables
is as follows

Zi = f (Age of household, Sex of household, Family size, Education level of household, Distance
from local market, Credit access to household, Access to market information, Access to extension
service, Loan size, Loan supervision, Suitability of Repayment period, agro ecologic
differentials etc.…)

Where

Zi = credit repayment
X 1 = Age of household
X 2 =sex of household
X 3 = Family size
X 4 = Education level of household
X 5 = Distance from local market
X 6 = Credit access to household
'
'
'
α , β 1, β2, and… β m are coefficients of explanatory variable
m= number of explanatory variables
e t = error term.

3.6.3. Description of Variables in the Model

3.6.3.1. Dependent Variable

24 | P a g e
Credit Repayment Performance of smallholder farmers (CREP): This is the dependent
variable which will the amount of loan repayment. It is periodic payment of interest and
principal amount. It could be affected by household characteristics, socioeconomic
characteristics and other institutional characteristics. It also refers to the dependent
variables are categorized as two types of credit repayment status performances. The credit
repayment performance in households categorized as “1” if respondents are answer as " Yes
" and credit repayment performance in households categorized as “0” respondents are
answered as "No".

3.6.3.2. Independent Variable

Independent Variables: - The study will use a total of ten (10) variables. They are
categorized into four categories. The first category includes four demographic characteristics
of credit repayment performance such as sex of household, age of household, family size of
household, and education level of household. The second category determinants of credit
repayment performance in smallholder farmers is Economic constraints, which include three
variables such as access to credit/finance, access to market information, and land size. The
third category include two variables such as loan supervision and suitability of repayment
period. The fourth and final category of determinants of credit repayment performance in
smallholder farmers is Natural constraints, which include one variable such as agro ecologic
differentials.

DEMOGRAPHIC CHARACTERISTICS OF RESPONDENTS

Gender of household head (sex): The male borrowers will have high repayment
performance as they engage themselves in different income generating activities and have
the opportunities to get inputs and facilities for their farm than female household heads.
This variable is measured by dummy in which the variable takes a value 1 if the respondent
is male and 0 if the respondent is female. Therefore, the impact of gender of respondents on
credit repayment performance is indeterminate a priori.

Age of households (Age): This is a continuous variable measured by the age of the
respondents included in the study. As indicated in the theoretical literature, the impact of
25 | P a g e
age of respondents on credit repayment performance in smallholder farmers has to do with
maturity and experience obtained in life not by the mar number reflecting age. That is, if the
majority of respondents are matured and experienced respondents, age will have positive
impact on credit repayment performance and vice-versa. The age of the farmer has
influence on credit repayment. Farmers who are at working age (15-60 years) can repay
what they borrow in the due date. As the age of the farmer increase their working ability
will decline. So they will get difficulty to pay the amount they borrow with its interest.

Level of education (EDLEV): If the farmers are literate they will have the ability to use
the money they borrow in profitable activities. So as the education level of the farmers
increases the probability to repay the credit taken is high. In this study, the level of
education of respondent is measured by dummy in which the variable takes a value 1 if the
education level of the sample respondent is high school and beyond and 0 otherwise. These
values are attached to the level of education precisely because those sample respondents
with a high school and over level of education are expected to be able to read and
understand texts written in other languages and listen to the news in electronic media,
which would ultimately broaden their knowledge horizon and risk taking behavior.

Family size (Fams): is another variable which affect the repayment negatively. As the
family size increase more of the production of the farmers will be used for home
consumption. So as the family size increase the farmers will be unable to repay what they
took.

ECONOMIC CONSTRAINTS:

Access to credit/finance (ACRED): This is a dummy variable, which takes a value ‘1’ if
the sample respondents reported that he/she had access to adequate credit sources and ‘0’
otherwise. Economic theory has shown that access to credit plays significant role in
enhancing credit repayment performance.

Access to Cultivated land size (ACLAN): This is broadly defined as the processes by
which people individually or collectively gain rights and opportunities to acquire and utilize
land. It is the available land that a farmer uses for farming activities (crop and livestock
26 | P a g e
production) which is measured in. It has positive relation with amount of loan repayment.
As the size of the land holding increase the farmers can get the chance to use improved
inputs with modern technologies so that the productivity of the land will increase. Hence, as
the land size increase they can pay the money from the sale of what they produce.

Distance from the market: it refers to distance of the market from the farm (the
production site) which is measured in terms of hours. If the distance of the market from the
production site is near the farmers will have the ability to sale their products without quality
deterioration and physical damage with good (profitable) price at minimum transportation
cost. As a result the farmers will be encouraged to market their products and earn money
and repay their loan.
Non-farm income: is an income that can be earned from non-farm activities. These
include: petty trading, homemade drinks, firewood selling, and handicraft (weaving,
blacksmith, and tannery) etc. It has a positive relation with amount of credit repayment. As
the non-farm income increase the farmer will pay with in the due date.

Loan size (LOANSIZ): It is a continuous variable measured by the total amount of

money (in Birr) accessed as a loan from the cooperative. An efficient amount of loan which
equals with the prepared business plan can create conducive environment for the borrower
to use it properly and repay it back. But, if the disbursed loan size is below or above the
required, it will lead to diversion of the resource to other activities or mismanagement
respectively. Thus, this variable may have positive or negative sign. Fantahun (2000)
indicated that if the size of loan issued to a borrower is greater than his project cost, it is
possible that the borrower might spend that part of the loan proceed which is in excess of
what is required to cover his business costs. This in turn could affect repayment negatively.

Number of live stock holding (TLU): This variable is defined in terms of Tropical
Livestock Unit (TLU) and may serve as a proxy for the capacity to bear risks of using credit
for the purchase of new technology such as fertilizer and capture wealth effect. Live stocks
are source of cash income as well it serve as one input in crop production measured in TLU.
If the farmer has large flock of cattle he/she can earn more income from the direct sale of
the cattle or their production so as it helps to pay their loan.
27 | P a g e
INSTITUTIONAL FACTORS:

Loan supervision (LNSN): If there is a continuous follow up and supervision visit to

evaluate the loan utilization and repayment, this makes borrowers to observe their
obligation and improve the proper utilization of the loan thereby improving repayment
performance. Therefore, we expect a positive relationship. Okorie (1986) regular visits by
the loan officer to the borrowers’ business site and higher profits generated by the
borrowers also contributed to higher repayments by borrowers.

Suitability of repayment period (SUITPERIOD): It is a dummy variable which takes 1 if

the loan repayment period is suitable and 0 if not. It is expected that suitable
repayment period could help borrowers benefit from the loan finance properly, gain profit
and pay the loan back on time. This variable is hypothesized to have a positive influence on
loan repayment. Jemal (2003) found that this variable can positively influence loan
repayment performance.

NATURAL FACTOR:

Agro ecologic differentials (ECZN): The area is divided into two which are Woynadega
and Kola areas, which are represented by 1 and 0 respectively. As the life of farmers is
highly related to nature and most of the farmers are engaged in agriculture related activities
the amount of rainfall will significantly influence their activities thus, those borrowers from
areas with relatively better rainfall is expected to have a better loan repayment performance.
Amare (2005) found that being a residence of adequate rainfall area will increase the
probability of not becoming a non-defaulter.

3.7. Ethical Consideration

The study relies exclusively on primary data. Accordingly, the reliability of information
obtained from the respondents participated in the survey were top priority. Hence,
permission of the respondents will be secured using formal letter written from the
Department of Agricultural-Economics, Debark University before embarking into data
collection. That is, in order to secure their trust sample respondents will be approached in

28 | P a g e
person and informed clearly about the purpose of the study. Then, consent of subjects will
be secured before the initiation of data collection and a subject was assured about the
confidentiality of the information they give. Moreover, to maintain confidentiality the
names of subjects will not be registered on the questionnaire.

29 | P a g e
 CHAPTER FOUR

TIME SCHEDULE AND BUDGET BREAKDOWN

4.1 Time Schedule (work plan)

The following table shows the time schedule to finish the research.

The Conserved Issue February March April May June

Week 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Define the Problem and
Formulating the research
problem(topic)
Preparing Proposal Report
Preparing Questioner
Data collection, processing
procedure Model
specification
Data Entry
Data Analysis
Preparing Research Report

30 | P a g e
 A. Budget schedule (Budget Breakdown)

To conduct a research it is obvious that a researcher needs finance to carry out the research since
the research budget determine the quality of the research. The budget breakdown is described
below:

Required Items (Description) Total Cost In Birr

1. Stationery, Printing, Copying and Laminating (pen, 400.00

paper, flesh…)
2. Transportation 1,00.00

3. Internet 300.00

4. Tea and Telephone (Mobile card) 250.00

5. Contingency 500.00

6. Data collecting 250.00

Grand Total 1,800.00

31 | P a g e
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Kibrom.T.(2010). “Determinants of successful loan repayment performance of private borrowers
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