Rural Finance and Agricultural Technology Adoption in Ethiopia: Does the Institutional Design of Lending Organizations Matter?

It has now become almost a stylized fact that sustained agricultural growth is central to rapid poverty reduction and economic development. Yet, world poverty is largely concentrated in the agrarian societies, which have the potential for agricultural productivity growth. This is particularly true for Sub-Saharan African countries, where the gaps between potential and actual yields remain high. Minimizing this gap through the promotion of modern inputs—such as fertilizer and modern seeds—has been at the core of almost all development strategies in Ethiopia. Among other initiatives, the country has promoted microfinance institutions and member-owned financial cooperatives to alleviate credit constraints of the smallholder farmers. This paper analyzes the impacts of these institutions. Using household survey data and a propensity-score-matching technique, we examine the effects that institutional financial services have on farmers’ adoption of agricultural technology in Ethiopia. The results suggest that access to institutional finance has a significant positive impact on both the adoption and extent of technology use. However, when impacts are disaggregated by type of financial institution and farm size, heterogeneities are observed. In particular, financial cooperatives have a greater impact on technology adoption than microfinance institutions, and the results appear to vary depending on farm size and types of inputs. The paper concludes with implications for policies to promote adoption of modern agricultural inputs.