Loan Settlement Performance of Oromia Credit and Saving Share Company Borrowers and Its Determinants in Ada’A Barga District, Oromia National Regional State, Ethiopia

Mammo Agama

doi:10.7176/jesd/12-15-04

Abstract

In developing countries like Ethiopia Microfinance institutions are playing an essential role in poverty reduction; to provide the provision of micro-credit, savings, and other services to the poor that are excluded by the commercial banks for collateral and other reasons. However, there is a loan repayment problem, which discourages rural finance organizations from promoting and extending credit. Therefore, this study focuses on identifying the factors affecting the loan repayment performance of OCSSC borrowers in Ada’a Barga district, Oromia National Regional State, Ethiopia. Purposive and random sampling technique was used to select 139 sampled respondents. Both primary and secondary data sources were used for this study. Descriptive statistics and t-test and chi-square test analyses were employed to compare defaulters and non-defaulters with the explanatory variables. Also, binary logit econometric model was used to examine the factors that affect credit repayment performance of the selected sampled household borrows of OCSSC. The result showed that out of 139 chosen respondents, 56 were defaulters and 83 were non-defaulters. A total of twelve explanatory variables were included in the empirical model and out of the total hypothesized explanatory variables involved in the model, age, educational level, celebration of social ceremony and participation in off/non-farm activities were positively and statistically significantly affected loan repayment performance at 1% significance level. Moreover, livestock ownership positively affected loan repayment at 5% 1% significance level. On the contrary purpose of borrowing and family size was negatively and significantly affected loan repayment performance at 5% and 10% significance level. Therefore, the study recommended that the identified significant variables have to be a springboard for further interventions by financial institutions, stakeholders and policymakers to come with a breakthrough to significantly decrease or even avoid defaulting problems., Keywords: Binary logit; defaulters; loan repayment; non-defaulters; OCSSC DOI: 10.7176/JESD/12-15-04 Publication date: August 31 st 2021

Highlights

Smallholder farmers face a severe shortage of financial resources to purchase productive agricultural inputs
Loan Repayment Status of the Borrowers The loan repayment statuses of borrowers of the respondents were taken as the primary way to group the borrowers into defaulters and non-defaulters
When we compare the average age of non-defaulters with defaulters in the study area it is 40.88 and 34.04years respectively which shows non-defaulter households are somewhat older than defaulter households

Summary

Introduction

Smallholder farmers face a severe shortage of financial resources to purchase productive agricultural inputs. The hope of the subsistence farmers on financial institutions for credit has become substantially higher in recent times (Million et al, 2012). Development and adoption of new agricultural technologies and the use of credit facilities are vital for rapid growth in agricultural productivity. With the introduction of new production technologies, the financial needs of farmers increased by many-fold (Ayalew and Lemma, 2013). The increasing default rate is one of the significant problems of lending institutions (Mohammad, 2009). It is argued that high repayment rates reflect the adequacy of MFIs’ services to clients’ needs. They limit the incidence of cross subvention across the borrowers. Importantly, repayment performance is a crucial variable for donors and international findings agencies on which many MFIs still depend for their access to funds (Lewis, 2018)

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Conclusion