Journal of Biology, Agriculture and Healthcare www.iiste.org ISSN 2224-3208 (Paper) ISSN 2225-093X (Online) Vol.10, No.7, 2020 11 Assessment of Loan Repayment Performance of Smallholder Farmers: The Case of Gubalafto District, North Wollo Zone, Amhara National Regional State, Ethiopia Bogale Belay Wollo University, Agriculture, Agricultural Economics: P.O Box. 1145, Dessie: 0930979727 Abstract The main objective of this study was to assess loan repayment performance of smallholder farmers in Gubalafto district of North Wollo Zone. A two-stage sampling technique was employed to select a total of 140 sample borrowers. The two-limit Tobit model and descriptive statistics were used to analyze the data collected from the sample respondents. The descriptive statistics result indicates that about 27 percent of the sampled households are low performer and the remaining 73 percent were high performers of loan. In addition, the descriptive statistics results revealed that there were significant mean differences between the low and high repayment performance group in the study district with respect to age of the borrowers, sex, distance from credit source, education level, total land size, Loan amount received, livestock holding and purpose of borrowing. The maximum likelihood estimate of the two Limit Tobit model results indicate that 13 variables were considered in the econometric model out of which, 7 variables were found to significantly influence loan repayment rate among the farm households at less than 5 percent level of significance. Age of borrowers, Educational level of borrowers, land size, total livestock holding and Off-farm income positively and significantly influenced the intensity of loan repayment while, Distance to credit source and Loan amount received negatively influenced the loan repayment rate of small holder farmers in the study area. Keywords: Loan repayment performance, Tobit model, Gubalafto District DOI: 10.7176/JBAH/10-7-03 Publication date: April 30 th 2020 1. INTRODUCTION Agriculture is the main stay of Ethiopian economy where it holds the key of rapid economic development because of its size, potentiality for growth and capacity to transform the entire outlook of economy. The contribution of agriculture in GDP is about 41%, providing employment to almost 85% of the population and 86% of the country’s export earnings (Matthew, 2011). According to IMF, Ethiopia’s GDP growth was 8.2% in2013/ 14 and 8.5 in 2014/15. Basically, rapid growth of agricultural productivity is improved through the expansion and implementation of new agricultural technologies and the use of credit facilities. However, with the introduction of new production technologies, the financial needs of farmers increase. Steady agricultural development depends up on the continuous increase in farm investment which requires increasing use of modern agricultural inputs such as fertilizers, tractors and improved seeds. This implies that local farmers with small scale operation, low productivity, low income and inability to purchase these modern requisites needed to be supplied with credit facilities to generate increased productivity (Ololade and Olagunju, 2013). Most financial institutions in developing countries provide collateral free small loans to low income productive poor farmers and services like saving and credit to aid several smallholder farmers. This is an effort in line with the “Millennium development goals” in order to relieve financial constraints and reduce poverty by 50% by the year 2015 (Solomon, 2013). However, the sustainability and continuity of the financial institutions to increase the volume of credit to stimulate the poverty reduction goal depends on the repayment rates. High repayment rates are associated with benefits of both MFIs and the borrowers. High repayment rate helps to obtain higher amount of next loan (Fikirte, 2011) and also enables MFIs to lower the interest rates and processing costs and consequently reduce the dependence of the credit institutions on subsidy and enables them to reach a better sustainability level. Better repayment performance thus serves as a positive signal for increasing the volume of credit availability to various sectors of the economy. However, the financial institutions continue to decline credit to the agricultural sector due to poor loan repayment performance from these sectors. The provision of loan has increasingly been regarded as an important tool for raising the incomes of urban as well as the rural populations, mainly by mobilizing resources to more productive uses (Kibrom, 2010). However, smallholder farmers face severe shortage of financial resources to purchase productive agricultural inputs due to continuous increase in prices of inputs and the relatively low level of farm income. Consequently, the hope of the subsistence farmer on financial institutions for credit has become substantially higher in the recent times and failure by farmers to repay their loans on time or to repay them at all has been a serious problem faced by both agricultural credit institutions and smallholder farmers (Million et al., 2012). Credit and saving services have a great potential brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals