Abstract
The study examined the determinants of credit default by Micro Finance Institution borrowers the case Hawassa city. The researcher used a quantitative research approach with an explanatory research design to establish the effect of the independent variables on the dependent variable. The primary data were collected from 360 sampled borrowers of Micro Finance Institutions using a structured questionnaire. Both descriptive and inferential statistics analysis were done using SPSS version 21.0. Descriptive statistics were used to identify whether there is a large variance in data. The study also used correlation analysis to see the degree variation and direction of relationship among variables. Inferential statistics were used to test hypotheses. The researcher employed logit model to identify the impact of explanatory variables on dependent variable. The results of the study revealed that ten independent variables incorporated in the model that included gender, education, age, lack of experience, having other sources of income, lack of financial planning skill, loan diversion rate, repayment period, involvement in service sector business activity, and loan follow up have a statistically significant impact on credit default. Based on the findings of the study, the researcher forwarded possible recommendations for the Micro Finance Institutions to improve credit collection of borrowers more than the current status.
Highlights
The World Bank outlines microfinance as “Small-scale financial services such as credit and savings provided to people who small or micro enterprises at the local levels of developing countries, both rural and urban” [27]
P (y=1/x) is the probability that y=1 given x, y represents loan repayment and x denote the full set of explanatory variables such as gender of respondent (GEN), age of respondent (AGE), education level (EDL), lack of business experiences (LBE), Availability of other source of income (AOSI), Lack of financial planning skill (LFPS), loan diversion rate (LDR), involving in service sector (PT), loan repayment period (RPT), involving in service sector (PT) and project regular supervising and follow up (PFU) that affect credit default of MFIs borrowers
The result shows that gender (GEN) being male, education (EDL), lack of Business experience (BE), other source of income (OSI), loan diversion rate (LDR) positive, project type being service sector (PT) positive were found to be significantly correlated with credit default (CRD) at 1% significance level
Summary
The World Bank outlines microfinance as “Small-scale financial services such as credit and savings provided to people who small or micro enterprises at the local levels of developing countries, both rural and urban” [27]. Lower income group of society after obtaining credit from MFIs participate in productive economic activities to improve their living standards. According to Kitonga conducted factors affecting credit collection practice of commercial banks in Kenya and found that staff competency, management information system and resource allocation has statistically significant influence on non-performing loan [31]. Abreham, 2002, Binyam, 2013, Shaikand Tolosa, Ayele, and Girmastudied the same topic and found out that having other source of income, education, work experience, being male borrower, family size, age, loan size lack training, supervision, loan diversion rate, and loan repayment were factors affecting the loan credit default of MFIs in Ethiopia [6, 11, 16, 32].
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