The Role of Financial Intermediation on Welfare Status of Rural Farm Households in Ethiopia

This paper looks at the role of improving access to financial services on rural farm households’ socio-economic status in Ethiopia using a national survey data collected from 1559 households for the end-evaluation of Rural Financial Intermediation Program II (RUFIP-II) project. In order to assess the role of access to credit on rural farm households’ socio-economic status, the study employs both descriptive and econometric regression analysis methods. While the descriptive method employs a range of descriptive statistics to show the change in the status of beneficiary households (vis-à-vis comparison households) during the project period, the econometric analysis used a quasi-experimental method, namely Propensity Score Matching method.

The study result shows that improved access to finance contributes to the country’s efforts to reduce poverty. This is achieved by extending the outreach of the rural financial institutions and increase in the size and amounts of loan. The average loan size is found to have increased by four times during the period of the program.  The main findings of the evaluation study have mirrored that households’ accessibility to rural credits could liberate the user population from poverty through building of household assets and improved incomes, increased savings, better food security status, improved market participation and capacity to deal with the vagaries of climate change through use of improved crop varieties tolerant of extreme climate conditions. However, the result shows that credit user households were more likely to be large sized, owners of large areas of cultivated land, and either young or at their old ages in their lifeline. Thus, policy measures that aim to reduce poverty and alleviate food insecurity should consider the poorer households with land and labor shortages who remain to be credit constrained (they are still left out) as they were not accessing credits that might have allowed them to increase productivity and eventually attain food security.

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