Assessment of Factors Affecting Default Risk in Project Finance: A Case of Omo Micro Finance, Hawassa Branch

doi:10.7176/rjfa/11-11-02

Abstract

This study assesses factors that Affecting Default Risk in Project Finance: A Case of Omo Micro Finance, Hawassa Branches. Primary data were used in the study. The required data were collected from 338 project finance beneficiaries of Omo Micro Finance institutions and these respondents selected by adopting a simple random sampling technique. Both qualitative and quantitative methods were used. The data collected through questionnaire were analyzed using SPSS software version 20. Descriptive statistics such as frequency and percentage were applied. Furthermore, inferential statistics Chi-square and binary logistic regression were used to identify major factors that affect the default risk. In addition, the data collected through interview were analyzed qualitatively using narrative for triangulation. The findings of the study show that 57% of borrowers in the study area did not repay the amount of money they borrowed as per credit schedules. The major factors that affect the default risk were sex of the borrower, educational level, family size, advisory visit, time lines of loan, repayment period, borrowing experience and training. The study therefore recommends that the stakeholders in the microfinance sector should ensure that the loan borrowers have access to adequate relevant technical training and follow-up in entrepreneurial microfinance businesses. Keywords: Default risk, Institution, Loan, Omo Micro Finance, Project Finance, DOI: 10.7176/RJFA/11-11-02 Publication date: June 30th 2020

Highlights

Project financing is the raising of funds on a limited-recourse or non-recourse basis to finance an economically separable capital investment project in which the providers of fund look primarily to the cash flow from the project as the source of funds to service their loans (Zinat, 2010)
The study done by Nam and Duy (2016) confirm that women are “better” in repaying loans than men. They explained that women are generally considered to be better borrowers because they are less likely to spend the loans on non-productive expenditure, they tend to be less mobile and they are more likely to spend the money on the well-being of the households
The impact is higher in seasonal loans especially agricultural loans

Summary

Introduction

Project financing is the raising of funds on a limited-recourse or non-recourse basis to finance an economically separable capital investment project in which the providers of fund look primarily to the cash flow from the project as the source of funds to service their loans (Zinat, 2010). It is an innovative financial technique that aims to fund the investment project based on the basis of Economic and Financial characteristics of the project itself, rather than on indebtedness capacity of the project promoter (Neila, 2012). The ability of the project lenders to recoup the advancements and interest thereon depend substantially on the performance of the project. This typically involves assessing the technical aspects of the project as well as its economic projections. While lenders would engage their own experts to evaluate the feasibility study submitted by the borrower, lenders must be capable of evaluating the technical and financial projections, as well as the assumptions used in their studies (Enzo, 2012)

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Conclusion