Microcredit and Rural Household Outcomes: Evidence from Habru Woreda’s Smallholder Farmers, Ethiopia

Abstract

Background Most people in third-world countries are impoverished and rely on small-holder farming as a source of income. Due to a lack of working capital to diversify their sources of income and acquire new sources, farmers are highly dependent on financial institutions to access microloans. Method This study utilized logistic regression and propensity score matching methods to analyze the primary data collected from a sample of 385 household heads. Results The Estimation results of the study shows that Gender, age, family size, and education, access to irrigation, extension services, dependency ratio, and distance to credit sources were among the significant determinants of access to microcredit service. Propensity score matching results showed that microloans increased household spending but did not improve household asset accumulations. Conclusion While microloans have increased household spending, it has not significantly improved rural households asset accumulation, largely due to high interest rates and repayment pressures. To enhance long-term welfare impacts, microcredit should be complemented with financial literacy, savings and asset-building programs, and redesigned with lower interest rates and more flexible repayment structures in the study area.