Loan Repayment Performance of Micro and Small Enterprises: Evidence from Somali Region, Ethiopia

Yitbarek Kiros

doi:10.7176/dcs10-9-01

Abstract

Viable Micro Finance Institutions (MFIs) that reach large number of poor people who are not served by the formal financial institutions have been a prime element for growth of Ethiopia. To operate successfully MFIs have to make sure that loan they disburse have to be repaid back so as to have financially sustainable and viable operation and contribute its own share in poverty reduction of the country. In light of this, this research study was carried to investigate the factors affecting loan settlement of Micro and Small Enterprises(MSEs) financed by Somali Micro-finance institution taking lender characteristics in to consideration. Both primary and secondary data was employed used. The primary data was collected by distributing questionnaire and through interview. A total of 175 Micro and Small Enterprises (MSEs) were selected using purposive sampling technique. The secondary data was acquired from various issues of annual reports of Somali Micro Finance institution and other concerned institutions. Both descriptive analysis and econometric model (binary logistic regression) was employed to analyze the effect of the literature driven variables on loan repayment (dependent variable) by borrowers. The binary logistic regression result revealed that among the variables hypothesized to affect loan repayment period, grace period, and timeliness of loan release have statistically significant effect on loan repayment by the borrowers Whereas loan size have statistically insignificant effect on loan repayment performance by the borrowers. Keywords: Loan Repayment Performance, MSEs, MFI, Logistic Regression, Somali Microfinance DOI: 10.7176/DCS10-9-01 Publication date: September 30 th 2020

Highlights

Well-functioning and organized financial markets are pre-requisites for sustainable development
According to the respondents the following are the main reason for their default is that the business is not profitable. As it is well articulated in literatures loan default is critical and affects financial sustainability of microfinance institutions (MFIs)
In developing countries like Ethiopia where unemployment is high, micro and small enterprises have a crucial role in creating jobs

Summary

Introduction

Well-functioning and organized financial markets are pre-requisites for sustainable development. The poor are usually excluded from credit facilities because of many reasons These include insufficient collateral to support their loans, high transaction costs, unstable income, lower literacy and high monitoring costs (Mead & Liedholm, 1998). Microfinance institutions were established to fill the gap in the financial sector by providing funds to the lower income society which are usually involved in small and micro business activities. Majorities of MFIs are from semi-formal institutions and informal institutions that are not profit-oriented organization. They receive funds from government, local government and donors to run their activities. In most poor or developing countries the objective of Microfinance Institutions (MFIs) has been twofold: reducing the risk of income shocks to help reduce poverty and raising asset accumulation to encourage private activity (Armendáriz & Gollier, 2000)

Methods

Results

Conclusion