Impact Analysis of Formal Microcredit on Income of Borrowers in Rural Areas of Sidama Region, Ethiopia: A Propensity Score Matching Approach

Microcredit has been found to be a critical instrument in improving the livelihood of poor people who have no financial access from other formal financial institutions. This study examined the impact of formal microcredit on income of borrowers in the rural areas of Sidama Region, Ethiopia. Data was collected from 456 sampled rural households consisting of 200 borrowers and 256 non-borrowers. This study applied propensity score matching (PSM) model to analyze the impact of microcredit on income of the borrowers. The result of this analysis indicates that microcredit had a positive and significant impact on the income of the borrowers. The sensitivity analysis result showed that the impact result estimated by this study is insensitive to unobserved selection bias and it is a true impact of formal microcredit. Therefore, microfinance institutions, other governmental, and nongovernmental organizations working in credit provision should expand access to credit to rural households in poverty reduction strategies.