FACTORS INFLUENCING LOAN REPAYMENT PERFORMANCE OF MICRO AND SMALL SCALE ENTEPISE BORROWERS: THE CASE OF ADDIS CREDIT AND SAVING INSTITUTION

Abstract

Microandsmall scale enterprises(MSEs)havevitalcontributiontothe economicdevelopment andcreationofwideremploymentopportunity indeveloping countries like Ethiopia. However the growth ofthese enterprises have been impeded bymany factors of which financial constraint is a key challenge. Microfinance institutions (MFIs) were, therefore, established to fill the gap in the financial services by providing credit services to these enterprises. However, repayment problem is an obstacle to microfinance institutions (MFIs) that offer microfinance based lending methodologies to provide loan to micro entrepreneurs. And hence these overarching challenge initiated a research with the objective of examining and identifying factors that influence the loan repayment performance of micro and small scale borrowers in one of the biggest micro finance institution in Ethiopia named Addis Credit and saving institution(ADCSI). In order to achieve this objective, primary data were collected from 100 randomly selected clients (50 defaulters and 50 non-defaulters) by using structured interview. Moreover secondary data were obtained from the record of ADCSI. For the data analysis, descriptive statistics including mean, standard deviation, 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 13 explanatory variables were included in the regression. The results shows that ten variables were found to be statistically significantto influence loan repayment. Of this education, Sales volume,other source of income, business & credit experience, loan monitoring and supervision and being woman have increased the probability of non-default significantly, Whereas Dependency ratio, loan repayment size and loan size decrease the probability of non-default significantly though the level of significance differs. Therefore, consideration of these factors is vital as it provides information that would enable to undertake effective measures with the aim of improving loan repayment performance. It would also enable lenders and policy makers as to where and how to channel efforts in order to minimize loan defaults.