The Impact of Microfinance on Household Livelihoods: Evidence from Rural Eritrea

Abstract

Eritrea, a relatively young African nation, is one of the least developed countries in the world. Its economy is predominantly dependent on subsistence agriculture and the level and magnitude of poverty is more severe in rural areas. The formal financial sector is underdeveloped, state-owned, far from being competitive, and limited in terms of depth and breadth as measured by the relevant financial sector development indicators. To address the limitations of the formal banking sector and to help fill the financing gap, and improve the general livelihood of those at the lower income group, the Government of Eritrea introduced a Saving and Microcredit Programme (SMCP) in 1996 for which no scientific study measuring its impact has been done at the household level. The study was conducted in rural areas to find out whether the SMCP as a microfinance institution has improved the livelihood of its clients. The specific objectives of the study were to describe the characteristic feature of rural livelihoods in terms of the resources owned, the strategies pursued and outcomes achieved, identify and examine the determinants of household participation in the SMCP and finally assess the impact of participation in SMCP on household livelihoods. The study employed a quasi-experimental cross-sectional survey design involving structured and semistructured questionnaire administered to 500 respondents of whom 200 represented the treated group and 300 the controlled group. Logit regression was employed to identify the factors that determine household participation in the SMCP. In regard to this, age of the client household, household size, marital status, level of education of the client household, the size of first round loan, entrepreneurial experience, type of loan product offered by the institution, ownership of livestock and microenterprise, the perception of the client on involuntary deposits, the occurrence of a negative events (shock) to the household and village access to electricity were found to have statistically significant effect on the household"s probability to participate in the SMCP. Furthermore, the marginal effects were also computed to evaluate the contribution of each of these factors to the likelihood of participating in the SMCP. A propensity score matching model was applied to assess the impact of the programme on the livelihood of its clients. The findings reveal that participation in the SMCP has a significantly higher average treatment effect on the treated (ATT) households.Profits generated from off-farm and small microenterprises, the values of household and livestock assets, food and non-food consumption expenditures and nutrition quality, were ii found to be on average higher for the treated households than for the controlled households.

The impact of microfinance programs on monetary poverty reduction

“…In the empirical literature, researchers have adopted different thresholds to separate new clients from old clients. However, most researchers did not explain explicitly the basis and the reason for adopting the threshold, except Habte (2016), who proposed to select the cut of the period based on the discussion with the MFI's authorities. Therefore, following the methodology adopted by Habte (2016), in consultation with SMFIs' field staff; they articulated that with the assumption that given circumstances in Sudan they do not expect to realize the fruits of microfinance on beneficiaries in less than two years after receiving the loan.…”

“…However, most researchers did not explain explicitly the basis and the reason for adopting the threshold, except Habte (2016), who proposed to select the cut of the period based on the discussion with the MFI's authorities. Therefore, following the methodology adopted by Habte (2016), in consultation with SMFIs' field staff; they articulated that with the assumption that given circumstances in Sudan they do not expect to realize the fruits of microfinance on beneficiaries in less than two years after receiving the loan. Hence, the beneficiaries were controlled based on the length of their relationship with the MFI and divided into old respondents (with 24 months or more in the program) as the treatment group and new respondents (with less than 24 months in the program) as a control group.…”

Small Businesses’ Awareness, Experience and Attitude towards Microfinance in Asmara, Eritrea

“…Researchers have tended to focus their studies on the limited MFI activities being undertaken, particularly the beneficiaries. It cannot be maintained that socio-economic justice and development are being promoted by MFIs [Habte et al 2017] while the majority of SMEs remain nonbeneficiaries. Also, narrow research perspectives on the characteristics and behaviors of the beneficiaries or groups of beneficiaries fail to provide a fuller picture of the real situation [Asgedom & Muturi.…”

Impact of savings and credit co-operative societies’ services on household livelihood outcomes in Mwanza and Tabora rural areas, Tanzania

“…Access to SACCOS’ services including credit, savings and training can enable households in rural areas to mobilise internal resources and exploit opportunities at their disposal through livelihood strategies to improve their livelihood outcomes. In rural areas of developing countries, livelihood outcomes include farm productivity, household assets, household savings, food and non-food expenditures (Habte, 2016; Zeller and Meyer, 2002).…”

“…There is scepticism, however, among scholars worldwide and in Tanzania in particular, on whether SACCOS really improve livelihood outcomes of their members particularly smallholder farmers who are continually at the mercy of debilitating effects of poverty in rural areas (Gikuri and Sanka, 2018; Anania and Gikuri, 2015; Finscope, 2017; Habte, 2016; Silva, 2012; Zeller and Meyer, 2002). This doubt is evident particularly in regions such as Tabora and Mwanza, which belong to the top six regions because of the huge number of SACCOS in Tanzania and with basic needs’ poverty incidences of 34.5% and 34.6%, respectively, which are above the average national basic needs’ poverty of 26.4% (URT, 2018a, b; TCDC, 2017).…”