DETERMINANTS OF FARMERS LOAN REPAYMENT IN MICROFINANCE INSTITUTIONS OPERATING IN GURAGE ZONE, THE CASE OF ABESHGE WOREDA

Abstract

Farmers often exhibit reluctance to repay loans from microfinance institutions (MFIs) due to a combination of socio-economic challenges, structural issues within the lending systems, and personal circumstances. This study was aimed at identifying factors affecting farmer’s loan repayment in microfinance institutions operating in Gurage Zone, the case of Abeshge Woreda.Both descriptive, inferential statistics and econometric methods (probit model) of data analysis were employed. Random sampling method was used to select sample farmers considered in this study. In general, a total 314 farmers were used for gathering the required data. Based on the data about 27.07% of the respondents were defaulters while 72.93% were non defaulters. The mean comparison t-test showed significant difference among two groups (defaulters and non-defaulters)regarding family size, year of schooling, livestock ownership and distance to development agents and loan amount. Also, significant proportion difference was among defaulters and non-defaulters regarding the sex of households. The probit model outputs suggest that sex of the household head, educational attainment, and livestock ownership, income from farm and non-farm sources, proximity to extension service providers, distance to lending institutions, and the size of the loanare significant factors of farmer’s loan repayment performance. The probability of households torepay the loan to microfinance institutions with in the loan repayment period is about 76.4%. The model validation statistics are also good enough for this analysis. High transaction costs, limited outreach, high loan interest rates, short repayment period, and financial literacy were significant constraints of farmers’ loan repayment performance in the study area. To enhance loan repayment performance among farmers in this area, it is crucial to implement educational initiatives that support family growth and stability, improve access to livestock ownership, and reduce transaction costs for loans. Additionally, streamlining application processes, lowering fees, improving proximity to development agents, and encouraging income diversification are essential steps to address the socio-economic factors at play.