The Legal and Institutional Framework Governing Small-Scale Farmers Access to Credit in Ethiopia; Successes and Failures in the Case of the Amhara National Regional State
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Date
2020-06
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Addis Ababa University
Abstract
Small scale farmers dominated agriculture is the mainstay of the Ethiopian economy
contributing 35 % of the total domestic production, employing 72% of the labor force, and
constituting 79 % of total export. However, small-scale peasant farmers suffer from poor and
unsustainable farming practices aggravated by lack of finance and technology. Ethiopia aspired
to realize overall economic development through transformation of the agriculture sector in its
development policies and strategies. Despite the policy aspirations, small scale farmers are not
backed by affordable rural credit facilities to use modern agricultural technology. Several cross cutting factors, which are attached to both the nature and regulation of the financial and
agricultural sectors contributed to the underdevelopment of rural credit intermediation in
Ethiopia. Formal FIs, particularly, banks use collateral based credit appraisal policy, which
excludes small scale farmers from accessing affordable credit. Banks consider credit delivery for
small scale farming as a risk bearing business and ditched such operation in favor of a less risky
and profitable operations in other sectors.
Microfinance and banking regulatory and institutional frameworks pledged priority for financial
soundness with strict prudential regulation. Ethiopia introduced a one size fits all prudential
regulation for all types of MFIs with similar entry, organizational structure, capital, and
governance regulations irrespective of their risk bearing potential. However, literature and best
experience shows that a tailored microfinance regulation depending on the risk bearing potential
of particular MFIs is important to ensure competition and access to credit.
The restrictive rural land holding policy and regulatory framework at sub constitutional level,
that restricts use of land holding right as collateral, is another major constraint.
Underdeveloped normative and institutional capacity in the registration of movable property
security rights made a vast majority of small scale framers’ assets collateral unworthy. Lack of
insurance coverage along with poor credit reference system posed significant challenge for FIs
to engage in a prudent rural credit intermediation without being exposed to credit risk. Absence
of an enabling micro and index weather insurance regulatory framework, that enables large
number of small scale farmers to access universal insurance with lower premiums, is also
another major impediment. While the warehouse receipt financing scheme failed to benefit small
scale farmers due to strict membership based ECX regulatory framework.