Excerpt
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES
LIST OF ABBREVIATIONS AND ACRONYMS
ACKNOWLEDGEMENT
ABSTRACT
1. INTRODUCTION
1.1. Background
1.2. Problem statement
1.3. Objective of the Study
1.3.1. General objective
1.3.2. Specific objectives
1.4. Research Questions
1.5. Significance of the Study
1.6. Scope and Limitation of the Study
1.6.1. Scope of the study
1.6.2. Limitation of the study
1.7. Conceptual Framework
2. LITERATURE REVIEW
2.1. Theoretical Literature Review
2.1.1. Definitions and concepts
2.1.2. Sustainable livelihood framework
2.2. Empirical Review
2.2.1. Microfinance and its role in economic development
2.2.2. The role of microfinance on poverty reduction
2.2.3. Role of microfinance on livelihoods
2.3. Null Hypothesis
3. METHODOLOGY
3.1. Description of the Study Area
3.2. Type of Research Design
3.3. Data Sources and Types
3.4. Method of Data Collection
3.5. Sampling Techniques and sample size
3.6. Methods of Data Analysis
3.6.1. Econometric Method of data analysis
4. RESULT AND DISCUSSION
4.1. Demographic Characteristics of Sample Respondents
4.1.1. Sex sample respondents
4.1.2. Religion and Marital Status of Sample Households
4.1.3. Age, family size and age composition of sample households
4.1.4. Educational Status of Sample Household Heads
4.2. Major Sources of Household Income
4.3. Loan Purpose and Income Generating Activities of the Households
4.4. Household Income and Expenditure
4.5. Challenges of the Households in Credit Participation
4.5.1. Challenges related to transportation
4.5.2. Challenges related to the size of the loan and repayment time (due time)
4.6 Child Education and the Microfinance Services
4.6.1 Children Access to Education
4.6.2. Expenditure on Education
4.7. Logistic Regression
5..CONCLUSION AND RECOMMENDATIONS
5.1. Conclusion
5.2. Recommendations
REFERRENCES
APPENDIX
LIST OF TABLES
Table 2.1. Hypothetical relationship of variables
Table 3.1 Sampling Techniques of the Respondents
Table 4.1 Sex of the respondents
Table 4.2. Religion and Marital Status of Sample Households
Table 4.3. Age, family size and age composition of sample households
Table.4.4. Annual income, expenditure on food and non-food items
Table 4.5 Children at school age and children attending formal education
LIST OF FIGURES
Figure 1.1. Conceptual framework of the study
Figure 4.2 Source of income of the respondents
Figure.4.3, Loan Purpose of the Beneficiaries
Figure 4.4, Mean Annual Expenditure on Child Education
LIST OF ABBREVIATIONS AND ACRONYMS
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ACKNOWLEDGEMENT
First of all, I would like to thank God for being with me in all aspects of my life especially in my academic performance. I would like to extend my heartfelt praise to my advisor Mr. Misginaw Tamirat for his valuable advice, insight and guidance from the beginning to the completion of this research paper. My praise also goes to department of agricultural economic and extension for their assistance in the preparation of this research proposal through the costs needed in conducting the research. Finally, I would like to thank and appreciate the JUCAVM’s library technicians for their assistance in providing the important materials for me.
ABSTRACT
Livelihoods are ‘means of making a living’, the various activities and resources that allow people to live. It comprises the capabilities, assets (including both material and social) and activities required for a means of living. Thus, microfinance programs have been considered as one of the main instruments in livelihood improvement in recent development agenda. Microfinance comprises the provision of financial services including credit and other facilities like savings, insurance, and transfer services to poor household. The study was conducted in Geniji-Dalecho and Bulbulo kebeles among 35 target kebeles of the OCSSCO. The main objective of the study is to identify the contribution of OCSSCO in improving household livelihood through providing credit. Further, the study used both primary and secondary data sources. The primary data was collected with semi-structured interview and focus group discussion from sampled respondents; whereas, secondary data gathered from different documents of the microfinance institution that exists in the study area. Stratified random sampling was used to select 60 respondents (35 beneficiaries and 25 non-beneficiaries) based on the principle of probability proportional to size (pps). Generally, Microfinance Institutions have an explicit potential that intends to improve the livelihoods of households. While improving livelihood, microfinance (OCSSCO) credit service increases the income of the clients; which, in turn, enable them educating their children and improves their nutritional status. Inferential statistics such as crosstabs; independent sample t-test and custom table are used in data analysis. Descriptive statistics like frequency, percentage, mean and standard deviation were employed to analyze the data. Chi-square (for categorical variables) and t-test (for continuous variables) were used to see the significance of the relationships of independent variables with dependent variables. Moreover, the qualitative data was analyzed by describing, summarizing and interpreting for further clarity. Finally, conclusion and recommendation were made based on the findings obtained from result and discussion.
Key words: assets, client, role, microfinance institution, livelihood,
1. INTRODUCTION
1.1. Background
According to a World Bank (2012), Ethiopia is one of the poorest and largest populated countries in Africa. Its total population was 84,734,262 in 2011; its economy is based on agriculture, which accounts for more than 50% of GDP, 80% of exports, and 80% of total employment. The biggest sources of foreign trade are coffee, flowers and oilseeds. Yet, in spite of high rates of growth most Ethiopians live in poverty.
The formal microfinance in Ethiopia started in 1994. In particular, the Licensing and Supervision of Microfinance Institution Proclamation of the government encouraged the spread of Microfinance Institutions(MFI) in both rural and urban areas as it authorized them among other things, to legally accept deposits from the general public (hence diversity sources of funds), to draw and accept drafts, and to manage funds for the micro financing business. Currently there are 23 licensed MFIs reaching about 905,000 credit clients and some saving clients. Considering the potential demand, particularly in rural areas, this only satisfies an insignificant proportion (Gobezie, 2005).
The origins of MFIs in Ethiopia is largely rooted in their NGO past with a clearly defined mission of rural poverty eradication. With a network of 500 sub-branches and branches, the MFIs have expanded their outreach to many of the regions where the incidence of poverty is highest. As of January 2001, MFIs has made loans to and mobilized savings from about 500,000 clients nationally. Some MFIs have also started to offer other services such as managing pension remittances and money transfer services At least 41% of the MFI clients nationally are women and in the majority from rural households. Most of the MFIs have two types of loan products, namely loans for on-farm activities, which are due in four to twelve months, and off-farm investments with more flexible repayments on weekly or monthly basis (IFAD, 2001). On average, 60% of the MFI portfolio represents loans for on-farm investments while income generating activities and petty trading accounted for about 40%. (Dejene, 1999).
Microfinance uses the likelihood approach to improve their livelihood by strengthening the following five basic assets and comprises broad and inter related programs and policies. These includes giving people salaried jobs and other opportunities to earn income; providing loans; saving and other financial services; providing training in jobs and business skills; developing institution alliance and network to advances economic interest, and promoting policy and social changes that improve the farming household livelihood Projects (Barry et al,1996).
Oromia Credit and Saving Share Company (OCSSCO) is currently operating largely in rural areas to complement the agriculture lead and rural centered development effect of the Federal Government of Ethiopia in general and Oromia Regional National State (ORNS) in Particular. Agaro town is also one of the places where OCSSO is giving credit for the households.
The study tried to assess the role of OCSSCO in improving the livelihood of the household of the study area. It was conducted by assessing the clients who are participating in the program; dropouts from the program and potential clients in the near future.
1.2. Problem statement
Ethiopia is predominantly an agricultural country that 85 percent of its population depends on agriculture for their livelihood. Its agriculture is also characterized by low productivity, which can be attributed to shortage of skilled human, lack of good governance and lack of capital that compounded by inaccessibility of the poor to the existing formal financial institutions due to some factors such as high collateral (guarantee) requirements for small loans. Since poor people were regarded as credit worthless, access to credit is very limited (Gebrehiowot, 2002).
Relative to the experience of other developing countries, microfinance development in its institutionalized form is a recent phenomenon in Ethiopia. Lack of financial resources is one of the major problems facing poor households. Formal financial institutions are inefficient and inaccessible in providing credit facilities to the poor (Assefa et al., 2005).
Likewise the clients of Agaro town microfinance institution is influenced by many factors such as lack of facilitated infrastructure; limited funding alternatives, limited financial products (small amount of loan), short repayment period, weak inter control system, shortage of technological support and lack of strong regulatory frame works.
1.3. Objective of the Study
1.3.1. General objective
The purpose (general objective) of the research is to identify the role of OCSSCO in improving livelihood and to assess challenges of the users in credit participation in the study area.
1.3.2. Specific objectives
- To identify the contribution of credit in increasing household income.
- To assess the challenges of households in accessing microfinance credit service in study area.
- To identify loan purposes and income generating activities of households in the study area.
1.4. Research Questions
- What are the contributions of credit in increasing households’ income?
- What are challenges of households in accessing microfinance credit service in study area?
- What are the main purposes and income generating activities of households in the study area?
1.5. Significance of the Study
The product of the research identifies the role of OCSSCO in improving household livelihood in the study area. It also aims finding out the integration of the micro credit service and initiate other researchers to generate and add information on existing knowledge of micro finance contributions in improving the livelihood of households. Further, the findings of the research provide multipurpose information to different users, including practitioners in microfinance, donors, policy planners, academicians and the public at large. At worst, it raises questions for further research and study.
1.6. Scope and Limitation of the Study
1.6.1. Scope of the study
The research was carried out on microfinance institutions (OCSSCO) that found in Agaro town. The study assessed and analyzed the role of OCSSCO toward improving the livelihood of household of the study area. And the extent to which it contributes in initiating and improving the livelihood of household. The study includes the indicator values to identify the role of selected microfinance institutions on the improvement of household living standards in the study area. So, the scope of the study is at the household level.
1.6.2. Limitation of the study
The researchers were limited to deal with the role of microfinance institutions in improving household livelihood with specific microfinance institution; due to financial, time and labor constraints; that forced the researcher to limit the sample size and the scope of the research. So, the researchers focused only on the role of microfinance institutions in improving the livelihood of household (clients) of OCSSCO at Agaro branch. Generally the researchers faced problems like: lack of facilitated transportation, shortage of time and money, shortage of labor and lack of real information and etc
1.7. Conceptual Framework
Conceptual frame work is the maps that showing the interaction of the concepts. It would mobilize the habit of credit service. Creating better way better for achieving means of living for the beneficiary or clients of OCSSCO that found in the town through institutional credit, saving, insurance and generating employment opportunities, education opportunities, nutrition facilities. Diagrammatically, it can be shown as follow:
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Figure 1.1. Conceptual framework of the study
2. LITERATURE REVIEW
2.1. Theoretical Literature Review
2.1.1. Definitions and concepts
Microfinance as defined by (Asiama & Osei, 2007), encompasses the provision of financial services and the management of small amounts of money through a range of products and a system of intermediary functions that are targeted at low income clients through the provision of small loans and other facilities like savings, insurance, transfer services to poor low-income household and micro enterprises. Schreiner (2001) support this view by defining microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.”
Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector. Related concepts to microfinance are micro savings; micro insurance and MFIs. They are briefly explained in the subsequent paragraph.
Micro Savings is also a microfinance service that allows impoverished individuals to safeguard money and other valuables items and even earn interest. It allows a lump sum to be enjoyed in future in exchange for a series of savings made now (Arytery, 2008).
Micro Insurance is also a component of microfinance. It is the provision of insurance to households. Poor households are especially vulnerable to risk both in the form of natural calamities as well as more regular occurrences of illness and accidents. Microfinance Institutions (MFIs) have played an active role in reducing or protecting the poor households against this vulnerability. This is done by providing credit for increasing income earning opportunities and through providing savings services to build up resources that can be drawn down in cases of emergencies.
On the other hand, the terms micro credit and microfinance are often used interchangeably, it is important to highlight the difference between them because both terms are often confused. Sinha (1998), states that “micro credit refers to small loans, whereas microfinance is appropriate where NGOs and MFIs supplement the loans with other financial services such as savings and insurance”. Therefore, microcredit is a component of microfinance in that it involves the provision of credit to the poor, whilst microfinance add on non-credit financial services such as saving insurance, pensions and payment services (Ayertey, 2008).
Livelihood comprises the capabilities, assets (including both material and social res o urces) and activities required for a means of living. It can also define as the activities, assets and access that jointly determine the living gained by an individual or households. it is the means of support something that provides income to live on, a specially paid work to secure necessity of life through livelihood activities such as economic activities that people know own and undertake to earn income today and in the future.
A sustainable livelihood is that which can cope with and recover from stresses and shocks and maintain or enhance its capabilities and assets both now and in the future, while not undermining the natural resource base. Access to capital is one of the determinants of a household’s ability to achieve well being, defined broadly to include natural, physical, financial, human and social capital (Barry et al., 1996).
2.1.2. Sustainable livelihood framework
Sustainable livelihood framework is a holistic, asset-based framework for understanding poverty and the working of rural poverty reduction. It also points out the need to building the assets of individuals and households. Moreover, this asset-access activities framework is iterative and is a process unfolding over time for individuals, households, and communities (Simon et al., 200).
Asset Resources: Assets are resources owned, controlled, and claimed to access by the individual and the household who needed to cope with stresses and shocks, and to maintain and enhance capabilities now and in the future (Ellis, 2000). Resource assets can be natural, physical, financial, and social and human that contribute to a sustainable livelihood are interdependent (Lipton pers. Comm. cited in Scoones, 1998).
Natural capital comprises the land, water, and biological resources that are utilized by people to generate means of survival. Whereas physical capital is produced goods comprising building, irrigation canals, roads, power lines, water supplies, tools, machines, technologies and housing that are created by economic production processes. Financial capital refers to stock of money to which the household has access. It is chiefly likely to be cash, savings, and access to credit in the form of loans. Further, human capital is demographic such as gender structures, the body of education, skills, knowledge, ability to and good health and physical capability important for the successful pursuit of different livelihood strategies. So, human capital refers to the available to the household; its education, skills and health that is enhanced by investment in education, training and pursuing one or more occupations (Scoones, et al., 2001). Social capital is the social resources (social networks, social claims, social relations, affiliations, associations more generally; and consensual norms and relationships of legitimate authority) upon which people draw when pursuing different livelihood strategies (Scoones, 1998: Ellis, 2000; Stephen and Simon, 2001).
2.2. Empirical Review
2.2.1. Microfinance and its role in economic development
Microfinance has a very important role to play in development according to proponents of microfinance. UNCDF (2004) states that studies have shown that microfinance plays three key roles in development.
- It helps farm households meet basic needs and protects against risks,
- It is associated with improvements in household economic welfare,
- It helps to empower women by supporting women’s economic participation and so promotes gender equity.
Otero (1999) illustrates the various ways in which “microfinance, at its core combats poverty”. She states that microfinance creates access to productive capital for the poor, which together with human capital, addressed through education and training, and social capital, achieved through local organization building, enables people to move out of poverty.
The aim of microfinance according to Otero (1999) is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. Littlefield and Rosenberg (2004) state that the poor are generally excluded from the financial services sector of the economy. So, MFIs have emerged to address this market failure. By addressing this gap in the market in a financially sustainable manner, MFIs can help households to access capital markets to fund their lending portfolios, allowing them to dramatically increase their income.
2.2.2. The role of microfinance on poverty reduction
Dichter (1999), states that microfinance is a tool for poverty reduction and while arguing that the record of MFIs in microfinance is “generally well below expectation” he concedes that some positive impacts do take place. From a study of a number of MFIs he states that findings show that consumption smoothing effects, signs of redistribution of wealth and influence within the household are the most common impact of MFI programs. Hulme and Mosley (1996) in a comprehensive study on the use of microfinance to combat poverty, argue that well-designed programs can improve the incomes of the poor and can move them out of poverty.
Wright (1999), states that there is significant difference between increasing income and reducing poverty. He argues that by increasing the income of the poor, MFIs are not necessarily reducing poverty. It depends on what the poor do with this money, oftentimes it is gambled away or spent on alcohol, so focusing solely on increasing incomes is not enough. The focus needs to be on helping the poor to “sustain a specified level of well-being” by offering them a variety of financial services tailored to their needs so that their net wealth and income security can be improved.
2.2.3. Role of microfinance on livelihoods
Having access to MF services have led to an enhancement in the quality of life of clients, had increased their self confidence, and had helped them diversify their livelihood security strategies and thereby increase their income (Robinson, 2001). Health care and education are two key areas of non-financial impact of MF at a household level. Wright (2000) stated that from the little research that has been conducted on the impact of MF interventions on health and education, nutritional indicators seem to improve where MFIs have been working. MF interventions have been shown to have a positive impact on the education of clients‟ children because one of the first things that poor people do with new income from micro-enterprise activities are to invest in their children’s education (Littlefield et al., 2003).
Moreover, women empowerment is also a key objective of MF interventions. Women need empowerment as they are constrained by the norms, beliefs, customs and values through which societies differentiate between women and men. MFI cannot empower women directly but can help them through training and awareness rising to challenge the existing norms, cultures and values that place them at a disadvantage in relation to men and to help them have greater control over resources and their lives as Kabeer, quoted in (Mosedale, 2003).
2.3. Null Hypothesis
There are independent (explanatory) and dependent variables in the hypothesis
Table 2.1. Hypothetical relationship of variables
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Table 2.1: Types of variables and the effect of independent variables on dependent variable
The dependent variable is: - livelihood improvement through participating in microfinance credit.
3. METHODOLOGY
3.1. Description of the Study Area
Agaro is the town and separate district in the south western of Ethiopia in the Oromia regional state and it is one of the 17 district town of Jimma zone. It is located 390 km south west of Addis Ababa and 50 km west of Jimma town. The average annual rain fall is 1560 mm and the small rain fall is ranges from March to April and the main rainy seasons extend from June to October. The monthly temperature varies between 12.67oc and 27oc. It has 70 51’N and 36035’E coordinates and an elevation of 1560 meters above sea level. Ecologically Agaro town is classified as 96% wet weinadega and 4% kola (Wikipedia, the free encyclopedia).
According to the 2007 national census, a total population for this district was 25,458, of whom 12,946 were men and 12,512 were women. The majority of the inhabitants were Muslims with 60.7% of the population, while 33.76% of the population practiced Ethiopian orthodox Christianity, and 5.04% were protestant. The 1994 census reported this town had a total population of 23,246 of whom 11,687 were men and 11,559 were women.
3.2. Type of Research Design
A cross-sectional type of research design was used, which employed comparative study between participants and non- participants of micro finance scheme. Furthermore, descriptive survey type of research was used. Cross-sectional survey design was selected to collect data from the sample population at specific point in time and based on the results to make generalizations. Descriptive survey research was chosen to generally describe the differences experienced by households aroused from obtaining microfinance services in comparison with non-beneficiary households.
3.3. Data Sources and Types
Two types of data sources, primary and secondary were used to obtain the desired qualitative and quantitative data types in order to meet the study purposes. Primary data has been obtained from the potential informants (beneficiaries and non-beneficiaries) and the micro finance specialists who were working for the organization delivering the scheme. The secondary data were further gathered from document of the microfinance institution that exists in the study area.
3.4. Method of Data Collection
Primary data was gathered through informal and formal survey. Informal survey was under taken first; to collect background information which was useful for subsequent survey. Then formal survey was conducted to assess the role of microfinance institution in improving household livelihood in the study area by using open ended and closed ended questions for semi-structured interview schedule and checklist for focus group discussion. The interview was help to gather the necessary qualitative and quantitative information through asking questions and writing down the response of the respondents which build research purpose. It was proposed to those people selected as a sample. On the other hand, focus group discussion was used by the researcher to obtain qualitative data. FGD allowed a dialogue among participants and stimulates them to openly express their views on the issues raised.
Secondary data was gathered through reviewing of documents, reports and records of published and unpublished documents. It is the main source of information and these data were easily available inexpensive and obtained quickly. These secondary data indicate the past and current performance of microfinance institutions in improving livelihood through providing microfinance credit service.
3.5. Sampling Techniques and sample size
The sample frame comprised of two categories: the microfinance participant and non- participant households. The sampling frame was compiled by drawing together lists of names of beneficiaries obtained from the microfinance documents who were providing micro finance service to them. For non-participants names were obtained from village savings and credit cooperatives using credit seekers data.
The total number of target population is 580 i.e. the number of households registered in credit seeker data and the clients of the OCSSCO in the two kebele. From the total of.580 target population 60 respondents were selected randomly as a sample. Hence the corresponding number of respondents from the two kebele was obtained based on the principle of probability proportional to size (pps) as it is indicated in the table below.
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Table 3.1 Sampling Techniques of the Respondents
The participants in the micro finance service were selected from the lists using stratified random sampling method, based on the loan cycle of the beneficiaries. OCSSCO provides microfinance credit and other services for 35 kebeles. Among these kebeles, two kebeles Genji-dalecho and Bulbulo were selected through random sampling techniques. Purposive stratified random sampling technique was used to select a total of 60 households (35 households participating in micro finance scheme and 25 non-participants) for the study. Those participants who have reached second the loan cycle and above have been targeted to study the role of the OCSSCO scheme in improving household livelihood.
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3.6. Methods of Data Analysis
The quantitative data, which was collected, based on semi-structured interview analyzed by using inferential statistics like cross tab, Custom table and independent sample t-test. Descriptive statistics such as frequency, percentage, mean and standard deviations were used to analyze the quantitative data. Chi-square (for categorical variables) and t-test (for continuous variables) were used to identify the significance of the relationship of independent variables with dependent variables. It includes the comparison of demographic factors, income, sources of income, and household income and expenditure on food items & non-food items using SPSSS. Moreover, the qualitative data was analyzed by describing, summarizing and interpreting for further clarity.
3.6.1. Econometric Method of data analysis
The modeling methodology used to analyze the factors determining household’s participation in credit program is logistic regression that allows the prediction of discrete variables by a mix of continuous and discrete predictors (McCullagh and Nelder, 1983). The model constrains the estimated probabilities to be either 0 or 1, relaxes the constraints that the effect of independent variables is constant across different predicted values of the dependent variable.
The logit model assumes that while only the values of 0 and 1 are observed for the variable Y , there is a latent, unobserved continuous variable Y* that determines the value of Y. It is assumed that εi is normally distributed across observations, and the mean and variance of ε are normalized to 0 and 1. The Y* can be specified as follows:
Y*i = β 0 + β1x1i + β 2x2i + … + β kxki + εi (1) and that: Yi = 1 if Y*i > 0 Yi = 0 otherwise. It is assumed that yi* is a function of observed and unobserved variables yi* = β0 + x1i β1 + x2i β2 …. + xki βk + εi (2)
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Where: yi*= latent and measure of credit market participation by i th household,
Xi = a vector of explanatory variables describing the personal, social, economic and environmental factors,
β i= a vector of parameters to be estimated, and
εi = a random error term (assumed to follow a standard normal distribution).
The model is determined by the assumed distribution of ε. The observed and coded discrete credit market (MFI) participation variable, yi* , is determined from the model as follows:
Pr(yi=1)
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Where, Φ represents the cumulative normal distribution function. The interpretation of this model’s primary parameter set, β, is as follows: positive signs indicate likely factor for household’s participation in credit program as the value of the associated variables increase, while negative signs suggest the converse.
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