Determinants of Rural Households’ Access to Formal Credit in Muslim Communities: The case of Dewa-Chafa Woreda, Oromiya Zone, Amhara Region

Abstract

The provision of credit has increasingly been regarded as an important tool for raising the income of the rural population, mainly by mobilizing resources to more productive use. However, in Ethiopia, among other things, lack of finance is one of the fundamental problems impeding production, productivity and income of the rural households in general and food insecure household in particular. The Federal and Regional governments have been making different efforts to address the overwhelming problem of food insecurity by providing food security package based credit and other complementing services. Although credit facilities are available to rural households in the study area, in practice, some Muslim households made use of the facility while many others have not. The purpose of this study is to assess the factors that determine rural Muslim households' access to formal credit in the study area. A two stage sampling method was employed to select two out of eighteen rural peasant associations and 150 Muslim rural households (80 credit user and 70 non users). Both quantitative and qualitative data were collected from the households using a structured questionnaire, focus group discussions and field observation. Descriptive statistics and binary logistic regression model were employed to analyze the data. The result revealed that, 65.7 percent of the non credit user households displayed the need for credit. Some 40 percent of those who confirmed the need for credit indicated the presence of interest, which is not supported by Islam, as the main impediment for not borrowing from microfinance institutions. Moreover, rural households who participate in extension package program have significantly more access to microfinance loans than non participants. Besides, problems related to group formation and lack of own cultivated land significantly affected participation in formal credit. While access to credit is quite crucial for poverty alleviation, the findings of this study show that policy makers as well as governmental and non-governmental development actors need to pay due attention to promote and enhance access to credit of rural Muslim households.