Socioeconomic Factors Influencing Loan Repayment Performance of Microfinance Clients: The Case of Busa Gonofa Microfinance Institution - Ziway Branch, Oromia Regional State; Ethiopia

Abstract

Busa Gonofa Microfinance Institute (BG MFI) is engaged in development activities in Oromia Regional State, Ethiopia. BG mainly provides loan services to rural and urban poor, landless youth and smallholder farmers and, low income people who are capable to work in income generating activities. Its corporate objective has twin objectives: to contribute to the economic betterment of its target clients and getting return on its investment. This study was conducted with the objective of analyzing and identifying the socioeconomic factors that affect the loan repayment performance of the clients of Busa Gonofa Microfinance of Ziway branch. In order to achieve this objective, primarily data were collected from 118 randomly selected clients (49 defaulters and 69 non-defaulters) by using structured interview. Moreover secondary data were obtained from the record of BG MFI. For the data analysis, descriptive statistics including mean, frequency and percentages were used to describe the socio-economic characteristics of the borrowers. Moreover, a binary logistic regression model was used to analyze the socio-economic factors that influence loan repayment. A total of sixteen explanatory variables were included in the regression. Out of these, eight variables were found to be significant for the probability of being defaulter. These are family size, income from other activities, livestock holding, membership duration, loan diversion, loan supervision and monitoring, training on loan use and celebration of social ceremonies. Regarding the sign of the significant variables, loan diversion, family size, and celebration of social ceremonies have a negative significant effect on loan repayment rate while the remaining five variables have a significant positive effect. Therefore, consideration of these factors is vital as it provides information that would enable us undertake effective measures with the aim of improving loan repayment performance in the study area. It would also enable lenders and policy makers as to where and how to channel efforts in order to minimize loan defaults.