COMPARATIVE STUDY ON THE DETERMENTS OF LOAN REPAYMENT PERFORMANCE AMONG MICROFINANCE INSTITUTIONS OPERATING IN BUTAJIRA TOWN

Abstract

This study was conducted with the aim of analyzing the factors that influence loan repayment performance of borrowers in Butajira town of microfinance institution. A total of 559respondents were involved in this study, of this 550 were borrowers and 9 were managers and credit officers. A questionnaire was used to collect data. Descriptive statistics such as frequencies, means and percentages was used to summarize the data and standard deviation was used to analyze the background characteristics of sampled respondents and descriptive summary of both dependent and independent variables. Inferential statistics such as correlation and multiple linear regression analysis were employed to identify the factors that affect the loan repayment performance of borrowers. The result of the multiple linear regression models indicated that five variables included in regression model and all variables had showed significant relationship with the loan repayment performance of borrower in the study area. These variables are borrower related factors, institutional, social, and cultural factors were found to influence the loan repayment performance of borrower significantly. Borrower related factors such as borrowing experience and literacy of borrowers have positive effect on loan repayment performance of borrowers. Literate borrowers are better loan repayment rate than illiterates’. Such borrowers cannot read and write. They have inadequate knowledge of loan acquisition and management, thereby making them unable to repay the loans. Regarding institution related factors, the study results revealed that supervision made for loan utilization and loan repayment by credit officers was inadequate and borrowers 'feeling toward repayment period in this study, market problem, lack of adequate man power and shortage of resources were identified as the main repayment challenges from the forgoing it can be concluded that both barrowers and institution related factors are affecting loan repayment performance in the branch. In order to develop effective credit rationing system, microfinance institutions are recommended to visit borrower’s business premises, verify borrower’s asset collateral and enquire borrower’s additional information during screening process so as to ensure that only credit worthy borrowers are granted loans.