DETERMINANTS OF LOAN REPAYMENT PERFORMANCE OF GARMENT MANUFACTURING FACTORIES: THE CASE OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

This paper aims to identify the factors that influence the loan repayment performance of DBE’S garment manufacturing credit borrowers, and estimated the relative importance of factors that influence the loan repayment performance of the borrowers. To identify the factors behind successful loan repayment performance of the borrowers, probit model is used. In order to identify the order of their relative importance of determining variable, marginal effect model have been employed. In this study, secondary data has been collected from the individual files of thirty five garment manufacturing credit borrowers of DBE, which encompass the total population of the study. It is found that educational level of the borrowers, number of follow up conducted by the bank , Market demand level of the borrower factory product and loan utilization determine successful loan repayment performance of the borrowers positively and significantly. Other variables such as, other source of income, problems related to infrastructure and capital adequacy have positive sign, but are not statistically significant. On the other hand related experience show negative sign, and not statistically significant. The analysis of partial marginal effect shows that proper loan utilization of the credit borrowers is, the first, the level of Market demand level of the garment manufacturing credit borrower product, the second, the Education level of the borrowers and Follow-up/supervisory visits by the bank are the third and the fourth important factors affecting the loan repayment performance of the garment manufacturing credit borrowers of the bank. The policy implications of the study are, lending institution make sure that:- their garment manufacturing credit borrowers have educated general manager, the borrowers’ proper loan utilization of the disbursed loan for the proposed purpose ,the availability of sufficient market demand for the garment manufacturing credit borrowers both during loan approving and the operation time of the borrower, and undertaking of a close follow up or supervision work in order to provide information and technical assistance for the established project. Thus credit institutions or lending agencies should adhere to the factors that significantly influence loan repayment before granting loans and at the time of loan administration of garment manufacturing borrowers to reduce the probability of loan defaults.