What factors affect households’ decision to allocate credit for livestock production? Evidence from Ethiopia

Shiferaw, Kaleb and GEBEREMEDHIN, Berhanu and LEGESSE, DEREJE (2015): What factors affect households’ decision to allocate credit for livestock production? Evidence from Ethiopia.

Abstract

Access to credit is often viewed as a key to transform semi-subsistence smallholders into market oriented producers. However only few studies have examined factors that affect farmers’ decision to allocate credit on farm activities in general and livestock production in particular. A trivariate probit model with double selection is employed to identify factors that affect farmers’ decision to allocate credit on livestock production using data collected from smallholder farmers in Ethiopia. After controlling for two sample selection bias – taking credit in the production season and decision to allocate credit on farm activities – land ownership and access to a livestock centered extension service are found to have a significant (p<0.001) effect on farmers decision to use credit for livestock production. The result showed farmers with large land holding, and access to a livestock centered extension services are more likely to utilize credit for livestock production. However since the effect of land ownership squared is negative the effect of land ownership for those who own a large plot of land lessens. The study highlights the fact that improving access to credit does not automatically translate into more productive households. Improving farmers’ access to credit should be followed by a focused extension services.

• Item Type: MPRA Paper
• Language: English
• Keywords: livestock production, credit access, credit allocation, household decision, double sample selection
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C34 - Truncated and Censored Models ; Switching Regression Models; D - Microeconomics > D1 - Household Behavior and Family Economics > D13 - Household Production and Intrahousehold Allocation; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q12 - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q14 - Agricultural Finance; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q16 - R&D ; Agricultural Technology ; Biofuels ; Agricultural Extension Services

References

Amha W. (2009): “Meeting the Financial Needs of Smallholder Farmers in Ethiopia.” Proceedings of the 10th Anniversary of AEMFI, 2009, pp. 09 – 46.

Amha W. (2008): “Value Chain Financing: Changing the Perspective of Providing Financial Services to the Livestock sector in Ethiopia.” Proceedings of the 5th Bi-Annual Conference on Microfinance Development in Ethiopia, AEMFI, 2008, pp. 26 – 75.

Ayele Solomon, Assegid Workalemahu, Jabbar M.A., Ahmed M.M. and Belachew Hurissa. (2003): “Livestock marketing in Ethiopia: A review of structure, performance and development initiatives.” Socio-economics and Policy Research Working Paper 52. ILRI (International Livestock Research Institute), Nairobi, Kenya. 35 pp.

Bastin A. & Matteucci N., (2007) “Financing Coffee Farmers in Ethiopia: Challenges & Opportunities.” Savings & Development, No.3 - 2007 - XXXI, pp. 251 - 282.

Berhanu Gebremedhin, Hoekstra D and Azage Tegegne. (2006): “Commercialization of Ethiopian agriculture: Extension service from input supplier to knowledge broker and facilitator.” IPMS (Improving Productivity and Market Success) of Ethiopian Farmers Project Working Paper 1. ILRI (International Livestock Research Institute), Nairobi, Kenya. 36 pp.

Borsch-Supan, A. and V. Hajivassiliou. (1993): “Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models.” Journal of Econometrics 58: 347–368.

Buvinić, M. and Gupta, R. G. (1997): “Female-Headed Households and Female-Maintained Families: Are They Worth Targeting to Reduce Poverty in Developing Countries?” Economic Development and Cultural Change 45(2) pp. 259-280.

Cappellari and Jenkins, (2006): “Calculation of multivariate normal probabilities by simulation, with applications to maximum simulated likelihood estimation.” Stata Journal 6(2): 156-289.

Carreon V. and Garcia L. J., (2011) “Trivariate Probit with Double Sample Selection: Theory and Application.” Centro de Investigación y Docencia Económicas A.C. (CIDI). Álvaro Obregón, México DF, México.

Cheng E., (2007): “The demand for microcredit as a determinant for microfinance outreach – evidence from China." Savings & Development, No.3 - 2007 - XXXI, pp. 307 – 334.

de Janvry A, Sadoulet E (2001): “Income strategies among rural households in Mexico: the role of off-farm activities.” World Dev, 29:467–480.

Dubin, Jeffrey A., and Douglas Rivers. (1990): “Selection Bias in Linear Regression, Logit, and Probit Models.” Sociological Methods Research 18(2-3) 360-390. doi: 10.1177/0049124189018002006.

Ethiopian Economics Association (EEA), (2014): Report on the Ethiopian Economy. Addis Ababa.

FAO Women in Agricultural Development (1990): Gender Issues in Rural Food Security in Developing Countries. Rome.

Freeman H.A., S.K. Ehui, M.A. Jabbar. (1998): “Credit constraints & smallholder dairy production in the East African highlands: application of a switching regression model.” Agricultural Economics 19 (1998) 33 – 44.

Gebremedhin, B., Jemaneh, S., Hoekstra, D. and Anandajayasekeram, P. (2012): “A guide to market-oriented extension services with special reference to Ethiopia” IPMS (Improving Productivity and Market Success) of Ethiopian Farmers Project. Nairobi: ILRI.

Greene, W. H. (2008): Econometric Analysis, 6th ed. Upper Saddle River, NJ: Prentice Hall.

Hajivassiliou, V. and P. Ruud. (1994): “Classical estimation methods for LDV models using simulation.” In Handbook of Econometrics, eds. R. Engle and D. McFadden, vol. IV, 2383–2441. Amsterdam: North-Holland.

Heckman, James. (1979): “Sample Selection Bias as a Specification Error.” Econometrica 47:153–161.

Jabbar M.A., S.K.Ehui and R.Von Kaufmann. (2002): “Supply and Demand for Livestock Credit in Sub-Saharan Africa: Lessons for Designing New Credit Schemes.” World Development Vol.30, No.6, pp.1029–1042.

John K. M. Kuwornu, Isaac D. Ohene-Ntow & Samuel Asuming-Brempong. (2012): “Agricultural Credit Allocation and Constraint Analyses of Selected Maize Farmers in Ghana.” British Journal of Economics, Management & Trade 2(4): 353-374, 2012.

Kohansal M.R., Mansoori H. (2009) “Factors affecting loan Repayment Performance of Farmers in Khorasan-Razavi Province of Iran.” Paper presented at the Conference on International Research on Food Security, Natural Resource Management and Rural Development, University of Hamburg.

Lehner, Maria (2009): “Group Lending versus Individual Lending in Microfinance.” Discussion Paper No. 299 University of Munich. http://epub.ub.uni-muenchen.de/13255/1/299.pdf.

Mohammadi Yeganeh Behrouz, Cheraghi Mehdi, Hosseinzadeh Akbar (2012): “An Analysis of Effective Factors on Diversion of Agricultural Credits in Rural Areas: A Case Study of Ghani Bigloo Sub district of Zanjan County.” Roosta Va Towse' E 15(2) 37-58.

National Bank of Ethiopia (NBE) (2014): Annual Report 2013-2014. Addis Ababa.

Oboh VU, Ekpebu ID (2011): “Determinants of formal agricultural credit allocation to the farm sector by arable crop farmers in Benue State,” Nigeria. Afr. J. Agric. Res., 6(1): 181-185.

Okonya, S. J. and Kroschel, J (2014): “Gender differences in access and use of selected productive resources among sweet potato farmers in Uganda.” Agriculture & Food Security, 3:1.

Ricker-Gilbert, Jacob, Charles Jumbe, and Jordan Chamberlin (2014): “The impact of increasing population density on African agriculture and livelihoods: The case of Malawi.” Food Policy 48: 114–128.

Roodman, D. (2011): “Estimating fully observed recursive mixed-process models with cmp.” Stata Journal 11(2): 159-206.

Sebopetji T.O. & A. Belete. (2009): “An application of probit analysis to factors affecting small-scale farmers’ decision to take credit: a case study of the Greater Letaba Local Municipality in South Africa.” African Journal of Agricultural Research Vol. 4 (8), pp. 718-723.

Shallone K. Chitungo & Simon Munongo. (2013): “Determinants of farmers’ decision to access credit: the case of Zimbabwe.” Russian Journal of Agricultural and Socio-Economic Sciences, 5(17), PP. 7-12.

Shehla Amjad and SAF Hasnu. (2007): “Smallholders’ Access to Rural Credit: Evidence from Pakistan.” The Lahore Journal of Economics, 12: 2 pp. 1-25.

Wakilur M. R., Jianchao L. & Enjiang C. (2011): “Policies and performances of agricultural/rural credit in Bangladesh: What is the influence on agricultural production?” African Journal of Agricultural Research Vol. 6(31), pp. 6440-6452

World Bank. (2009): Towards the Competitive Frontier, Strategies for Improving Ethiopia’s Investment Climate. Washington, DC.

World Bank. (2012): Economic and Sector Work. Agribusiness Indicators: Ethiopia. Washington, DC.

Zeller M. & Sharma M. (2000): “The Demand for Financial Services by the Rural Poor.” IFPRI, Policy Brief No. 1.