DETERMINANTS OF LOAN REPAYMENT PERFORMANCE: THE CASE STUDY OF HARARI MICROFINANCE INSTITUTIONS

Abstract

The study was conducted in Eastern Hararghe Zone of the Harari Regional State, Ethiopia. This study is intended to assess factors affecting loan repayment performance of Harari Microfinance Institution. The survey was conducted in three Kebele Associations having the maximum number of borrowers, by selecting 120 sample households through systematic random sampling between defaulters and non-defaulters of the MFI. Out of 120 borrowers, 50% were defaulters, and the remaining half was non-defaulters. Pre-tested structured interview schedule was used to collect primary and secondary data. Key informant interviews and focus group discussions were used to generate the necessary qualitative data. The collected data were analyzed by employing descriptive statistics and logistic regression (binary logit). A total of fifteen explanatory variables were included in the empirical model and out of these, nine were found to be statistically significant to influence the dependent variable. These significant variables are: Saving habit of borrowers, loan size, perception of borrowers on repayment period, source of income, availability of training, business experience, business type, family size, and the purpose of saving were found influencing loan repayment performance as evidenced from the model statistic (significant at 1, 5 and 10%). The econometric result revealed that the probability of default increases as the family size increases, when the borrower has negative perception on repayment period, less training, low business experience, poor saving habit and only single source of income. On the basis of the study findings, some recommendations were made to improve loan repayment performance in the study area. The strategy would be: Reducing family size through expanding family planning program, increasing borrower’s perception on repayment period through training, selecting business-experienced borrowers. The study also recommends a plan to assist borrowers in the study area to increase their business entrepreneurs’ skills through appropriate infrastructure, enhanced lendable funds in the microfinance institutions and business training for borrowers, enhanced loan amount and addressing challenges facing the microfinance institution.   Key words: Binary logit, loan repayment, microfinance, performance, policy makers.