DETERMINANTS OF LOAN REPAYMENT OF SMALL SCALE ENTERPRISES: THE CASE OF WOLKITE TOWN

Abstract

This study was conducted on the determinants of loan repayment of small-scale enterprises in Wolkite Town. The objective of the study was to investigate the socio economic, institutional and financial determinants of loan repayment of small-scale Enterprises in the study area. The primary data were collected from randomly selected 226 borrowers /sample of respondents. The secondary data were collected from relevant organizations and pertinent documents. The data were analyzed using both descriptive statistics and econometric models. The descriptive statistics such as mean, standard deviation, frequency distribution, percentages, t and Chi-square tests were employed to compare non defaulters and defaulters’ group, with respect to some explanatory variables. A binary probit model was selected and specified to analyze determinants of loan repayment of small-scale enterprises in the study area. The descriptive analysis revealed that from total of fifteen selected explanatory variables 12 variables illustrate there is significant difference between defaulter & non-defaulter groups. These variables includes:, members of borrower, age, annual income, family size, education, location of enterprises, sufficient of loan releases, loan diversion, timeliness of loan, amount of loan size, loan repayment period and suitable repayment period. Econometric result revealed that from total of 15 selected explanatory variables 9 variables illustrate there significant results. These variables are Age, education, members of enterprise, and suitability of repayment period were statistically significant at 1%, whereas purpose of loan, loan size and loan diversion were statistically significant at 5%. And also, location of enterprise and timeline for loan release were statistically significant at 10%. Based on the findings of the study, the researcher recommended that the variable age, group borrowers and education were empowered to loan repaid at a time. Thus, the institution should give adequate training programs and workshops in enhancing their skills on managing the money they took and the way how it is returned. Loan diversion and loan size are a major determinant affecting the loan repayment of borrowers. Therefore, government sectors like Wolkite town job opportunities creation and Enterprise Office and Omo microfinance institution should be solved the problems of the borrowers financial institution credit experience, appraisal of the project to determine the appropriate loan size and terms of the loan should be conducted to ensure the proper utilization of the loan for the intended purpose.