Eyob Aya PDF

FACTORS INFLUENCING LOAN REPAYMENT PERFORMANCE IN
MICROFINANCE INSTITUTION: THE CASE OF DEMBA GOFA WOREDA

ETHIOPIA
MBA Thesis
EYOB AYA
February: 2018
HARAMAYA UNIVERSITY
Factors Influencing Loan Repayment Performance in Microfinance
Institution: The Case of Demba Gofa Woreda, Ethiopia
A Thesis Submitted to the College of Business and Economics, Department of

Management
Postgraduate Program Directorate
HARAMAYA UNIVERSITY
In Partial Fulfillment of the Requirements for the Master’s of Business

Administration (MBA)
BY
Eyob Aya
February: 2018
Haramaya University
ii
POSTGRADUATE PROGRAM DIRECTORATE
HARAMAYA UNIVERSITY
As Thesis research advisor, I hereby certify that I have read and evaluated this Thesis prepared under
my guidance by Eyob Aya, Entitled: Factors Influencing Loan Repayment Performance In
Microfinance Institution: The Case of Demba Gofa Woreda, Ethiopia. I recommend that it be
submitted as fulfilling the Thesis requirement.
_________________________ _________________ _____________________
Major Advisor Signature Date
As members of the Board Examiners of the Final MBA Thesis Open Defense Examination, we
certify that we have read and evaluated the thesis prepared by Eyob Aya and examined the
candidate. We recommend that the thesis be accepted as fulfilling the Thesis requirement for the
Master of Business and economics (Business Administration).
Dr. ________________________ ________________________ _________________
Chairperson Signature Date
Dr. ________________________ ______________________ _________________
Internal Examiner Signature Date
Dr . ___________________________ ______________________ _________________
External Examiner Signature Date
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DEDICATION
I dedicate this work to my mother, Tamune Mengesha
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STATEMENT OF THE AUTHOR
I, hereby, declare that this thesis is my work and that all sources of materials used for this thesis have
been duly acknowledged. This thesis has been submitted in partial fulfillment of the requirements for
an advanced MBA. Degree at Haramaya University and is deposited at the University Library to be
made available to borrowers under the rules of the library. I solemnly declare that this thesis is not
submitted to any other institution anywhere for the award of any academic degree, diploma, or
certificate.
Brief quotations from this thesis are allowable without special permission provided that an accurate
acknowledgement of source is made. Requests for permission for extended quotation from or
reproduction of this manuscript in whole or in part may be granted by the Head of the school of
Business and Economics or the Dean of the School of Graduate Studies when the proposed use of
material is in the interests of scholarship. In all other instances, however, permission must be
obtained from the author.
Name of Candidate: Eyob Aya Signature …………….

Place: Haramaya University, Haramaya
Date of Submission February, 2018
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BIOGRAPHY
The author was born in Shale Mela kebele, Gamo Gofa zone, in 1976 (E.C). He completed his
primary school education in Jewula Village and junior Secondary education Sawla Botter. He
attended his high school education at Sawla Senior Secondary and Preparatory School (1992-1994).
He joined Mizan Tepi Agricultural College in September 1995 and graduated with Diploma in
Natural Resource in June 1997 E.C. After his graduation, he worked in Gamo Gofa Zone Boreda
woreda Agricultural and Rural Development Office. In 2000 he joined yardistic international open
and distance learning College and graduated in B.Sc Degree in Agribusiness management in 2003.
Then, he was employed in Demba Gofa Woreda Marketing and cooperative Office Development and
Promotion office as an expert of cooperatives by the year 2004 until he joined the Haramaya
University for his postgraduate study in August 2007 E.C.
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ACKNOWLEDGEMENTS
First of all, I express my deep thanks to God for his inexpressible help, protection and who has been
always by my side all through the difficult times that I have had while undertaking this project.
From the formative stages of this project of the final draft, I owe an immense debt of gratitude to my
advisor, Mohammednur Ahmed (PhD) for his sound advice and careful guidance. They were all
invaluable. It was a great opportunity to have him as my advisor.
I also would like to extend my profound and heartfelt thanks to all my family members whose help
and assistance have never been departed from me. Specifically, I am special thankful to my dear,
Mather Tamune Mengesha, for her unlimited and kind supports during my study.
I would also like to thank Demba-Gofa woreda MFIs for providing me all the necessary background
information used for this study, furthermore; I wish to thank the Denba-Gofa woreda, MFIs of their
assistance during the data collection time. Without their cooperation the data would not have been
collected in time.
Finally, I would like to extend my thanks to all other, who in one way or another have contributed to
the successful completion of my education and project.
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ABBREVIATIONS
MFI Microfinance Institution
MFED Ministry of Finance and Economic Development
MSEs Micro and Small Enterprises
NBE National Bank of Ethiopia
NGO Non-Governmental Organizations
OMFIs Omo Microfinance Institutions
SNNPRS Southern Nations Nationalities and People‟s Regional State
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TABLE OF CONTENTS
STATEMENT OF THE AUTHOR v
BIOGRAPHY vi
ACKNOWLEDGEMENTS vii
ABBREVIATIONS viii
TABLE OF CONTENTS ix
LIST OF TABLES xii
LIST OF FIGURES xiv
LIST OF TABLES IN THE APPENDEX xv
ABSTRACT xvi
1.1. Background of the Study 1

1.2. Statement of the Problem 2
1.3. Research Question 3
1.4. Objective of the Study 3
1.5. Significance of the Study 4
1.6. Scope and Limitation of the Study 4
1.6.1. Scope of the study 4
1.6.2. Limitations of the study 5
1.7. Organization of the Paper 5
2. LITERATURE REVIEW 6
2.1. Theoretical Literature 6

2.1.1. The Need for MFI 6
2.1.2. Theories on lending 7
2.1.3. Repayment performance of microcredit programs 7
2.1.4. Causes and the possible solutions of default 8
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2.2. Empirical Literatures 9
2.2.1. Studies in other countries 9
2.2.2. Studies in Ethiopia 11
2.3. Conceptual Framework 13
3. RESEARCH METHODOLOGY 16
3.1. Description of Study Area 16

3.2. Research Design 18
3.3. Study Population 18
3.4. Sampling Technique 18
3.5. Sample Size and Target population 19
3.6. Data Type and Source 21
3.7. Data Collection Instrument and Procedure 21
3.8. Data Quality Issue 21
3.9. Data Analysis and Tools 22
4. DATA PRESENTATION, ANALYSIS AND INTERPRETATION 23
4.1. The Respondents Profile 24

4.2. Loan Repayment and Processing Period 27
4.3. Effect of Loan Processing Time on Loan Repayment 28
4.4. Supervision, Advisory Visits and Training 29
4.4.1. Supervision and advisory visits 29
4.4.2. Training given by the Institution 31
4.4.3. Types of training and officials who gives the training 32
4.5. Loan Utilization and Repayment Trend 34
4.5.1. Loan utilization 34
4.5.2. Loan repayment trend of borrowers served by MFIs 35
4.6. Borrowers Related Factors and Loan Repayment Performance 38
4.6.3. Chi-square (X2) Test 45
4.7. Challenges Faced By Borrowers and Institution 48
4.7.1. Challenges Faced By Borrowers 48
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4.7.2. Challenges of the institution 49
5. SUMMERY, CONCLUSION AND RECOMMENDATIONS 50
5.1. Summary 50
5.2. Conclusion 52
5.2.1. Borrowers related factors 52
5.2.2. Institution Related Factors 52
5.3. Recommendations 54
6. REFERENCES 55
7. APPENDICES 60
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LIST OF TABLES
Table Page
Table 1 Summary of study population and sample size 20
Table 2 The respondent‟s profile 24
Table 3 Number of dependents supported by borrowers 26
Table 4 Responses on sources of family income 26
Table 5 Respondents feelings on repayment period 27
Table 6 Effect of loan processing period on timely loan repayment 28
Table 7 Supervision on loan utilization and repayment 29
Table 8 Respondents' opinion on the adequacy of supervision for loan repayment 30
Table 9 Respondents provided training before taking loan 31
Table 10 Employees responses on training given to borrows 31
Table 11 Borrowers' opinions on the effects of the training on their income 33
Table 12 Loan utilization trend 34
Table 13 Respondents purpose of spending and reason for spending on unintended business 34
Table 14 Borrowers received loan previously from MFIs 35
Table 15 The status of recent loans 36
Table 16 Reason for Defaults 36
Table 17 Types of benefits 37
Table 18 Factors forcing borrowers to repay loan in time 37
Table 19 Gender Distributions of Borrowers That Fully Repaid their Loans 38
Table 20 Age Distribution of Borrowers That Fully Repaid Loans 38
Table 21 Marital Status Distributions of Borrowers That Fully Repaid Loans 39
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Table 22 Education Level of Borrowers That Fully Repaid Loans 40
Table 23 Loan repayment and number of dependents 40
Table 24 Sources of income and loan repayment 41
Table 25 Borrowers in arrears by gender 41
Table 26 Borrowers in arrears by age 42
Table 27 Borrowers in default by martial state 42
Table 28 Borrowers in arrears by educational level 42
Table 29 Borrowers in default and number of dependents 43
Table 30 Source of income and defaulting loan repayment 44
Table 31 Loan diverter and loan repayment 45
Table 32 Chi-square tests 46
Table 33 Challenges faced by borrowers 48
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LIST OF FIGURES
Figure 1. Conceptual Framework of the study 13

Figure 2. Map of study area 17
Figure 3. Types of training given to the borrowers 32
Figure 4. Percentage of the trainers 33
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LIST OF TABLES IN THE APPENDEX
Appendeix table 1. Number of Clients Being Served By Demba Goffa woreda of MFIs 60
Appendeix table 2 repayment status by sub branch Error! Bookmark not defined.
Appendeix table 3 Name of clusters and their kebeles Error! Bookmark not defined.
Appendeix table 4 TablesStudy area clusters with their kebeles Error! Bookmark not defined.
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Factors Influencing Loan Repayment Performance in Microfinance
Institution: The Case of Demba Gofa Woreda, Ethiopia
ABSTRACT
This study was conducted with the aim of analyzing the factors that influence loan
repayment performance of borrowers in Demba-Gofa Woreda of Omo microfinance institution.
A total of 330 respondents were involved in this study, of this 314 were borrowers and 16 were
managers and credit officers. In order to give due emphasis for the generalization of the study
the sample size was determined by using probability confidence method to draw representative
samples. Primarily data were collected from respondents through structured questionnaire and
secondary data were collected from different literature sources. The result demonstrated that
age, educational level, additional income from other activity and loan diversion were factors
they showed significant association with loan repayment performance. Compared to male
borrowers, females’ barrowers were found to be better in terms of loan repayment performance.
It is also found, number of dependents has no effect on loan repayment. Regarding institution
related factors, the study results revealed that supervision made for loan utilization and loan
repayment by credit officers was inadequate and borrowers 'feeling toward repayment period in
this study, market problem, lack of adequate man power and shortage of resources were
identified as the main repayment challenges from the forgoing it can be concluded that both
barrowers and institution related factors are affecting loan repayment performance in the
branch. Hence the institution is recommended to see into these factors with great care and
should take a corrective action accordingly.
Key words: loan repayment performance, Borrowers, Omo microfinance institution,
institution.
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1. INTRODUCTION
1.1. Background of the Study
The term of loan repayment refers to the arrangement in which a lender gives money or property
to borrower and the borrower agrees to return in the form of property or money. It is an
important factor, variable that affects the financial sustainability of MFIs. Loan default is
operationally defined in this paper as a situation in which borrowers fail to repay their loan
outstanding when the loan matures. In developed as well as developing countries, Micro and
Small Enterprises play important economic and social roles. The American Development Bank
(2007) reported that micro enterprises make major contributions to aggregate employment,
production, and national income in Latin America and the Caribbean.
Budianttoro (2004) found that 30% of GDP of Indonesia was contributed by MSEs. MSEs
provide income and employment for significant workers in the rural and urban areas by
producing basic goods and services to meet the need of rapidly growing population. However,
the MSEs around the world are facing lack of access to financial institutions especially to the
conventional sector. Schoombee (2000) finds that lack of access to formal bank credits is one of
the important problems faced South African micro entrepreneurs in the informal sectors. Melet et
al. (2007) confirms that missing credit markets is the main limitation for small business to grow.
Microfinance institution is defined as the provision of financial services to low – income poor
and very poor self-employed people (Otero, 1999). These financial services generally include
savings and credit but can also include other financial services such as insurance and money
transfers services. According to Ledgerwood (1999), microfinance is a provision of a broad
range of financial services such as savings, credit, insurance and payment services to the poor
low-income group who are excluded from the normal banking sectors. Conroy (2002) also stated
that microfinance is the provision of a broad range of financial services such as deposits, loans,
payment services, money transfers, and insurance to poor and low-income households.
Sustainability refers to the long-term ability of a MFI to cover all its operational and financial
costs from internally generated revenues without external subsidy. Sustainability of MFIs is
influenced by a number of factors which include loan repayment performance and interest rates
charged on their loan products. Loan repayment performance of MFIs is a measure of whether
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the loans are repaid in full according to the loan contract. The higher the loan repayment
performance, the higher the probability of the MFI collecting interest revenues and lower the
loan losses, both of which enhance sustainability. The delivery of efficient and effective
microfinance services to the poor require conducive macroeconomic policies and the
establishment and enforcement of legal and regulatory frameworks of a country (Wolday, 2000).
In Ethiopia microfinance service were introduced after the demise of the Derg regime following
the economic liberalization. Proclamation No. 84/94 was issued to liberalize the financial sector.
The proclamation allows private domestic investors to participate in banking and insurance
activates, which were previously monopolized by the government. Accordingly proclamation
No. 40/1996 was enacted to provide the licensing and supervision of the business of micro
financing by empowering the NBE to license and supervise them (MFDR, 2000).
1.2. Statement of the Problem
Each MFI made attempts to achieve high repayment performances, whether it is profit oriented
or not. One indicator of effective MFIs is the loan repayment performance of its borrowers
(Sengupta and Aubuchon, 2008). High repayment rates are associated with benefits both for the
MFI and the borrowers (Godquin, 2004). High repayment rate helps to obtain the next higher
amount of loan and other financial services. In contrast, if there is low repayment rate, both the
borrowers and the MFI will be affected. In this case, the borrowers will not be able to obtain the
next higher loan and the lenders will also lose their clients (Bond and Rai, 2009 cited in Fikiret,
2011). Improving repayment rates helps to reduce the dependence of the MFIs on subsidies,
which would improve sustainability. It is also argued that high repayment rates reflect the
adequacy of MFIs services to clients need (Godquin, 2004). According to Jemal (2003), most
MFIs in Ethiopia are experiencing high default rate problems. The situation in Demba-Gofa
woreda OMFI is not different from this. The data obtained from the institution indicated that the
repayment rate by the year 2014 and 2015 were 86.9% and 94.6% respectively. Even though
there is an improvement, still the institution is facing considerable loan default rate.
Researchers have identified various factors which could significantly affect loan repayment
performance of MFIs. These factors can be categorized as borrowers‟ related and lender related
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factors. The main factors from lenders side are repayment period related suitability, loan
supervision and technical support or training given to borrowers (Jemal, 2003). (In addition,
timely disbursement of loans has also impacted the repayment rates Akwasi and Idowu, 2011).
From the borrower side, socio-economic characteristics such as, gender, educational level of
borrowers, marital status, additional income from other sources, number of dependents supported
by borrowers and loan utilization trend of borrowers (loan diversion) are identified as main
factors (Fikirte, 2011; Jemal, 2003). Loan repayment problems of Demba-Gofa Worda MFI is
loan beneficiaries are identified. These problems are informal credit, social festival, loan-to-
income ratio, distance to lender office, age of borrowers‟ businesses experience and period of
loan approval and loan monitoring. The study found that improvement in income and total sales
will increase the repayment performance of borrowers. Therefore by providing training on
accounting course to the borrowers such as how to market their products and manage the
financial resources, it is possible to improve their business and increase their profits.
1.3. Research Question
1. What are borrowers related major factors that influence loan repayment performance of the
borrowers of MFIs?
2. What are lenders related factors that influence the repayment performance of the clients?
3. What are the major challenges that faced by the borrowers in loan repayment process?
4. What are the challenges of MFIs in relation to loan repayment process?
1.4. Objective of the Study
The general objective of the study is to assess factors that influence loan repayment performance
of the borrowers of MFIs.
The research will have the following specific objectives:
 To identify borrowers related factors that influence loan repayment performances of the
borrowers of MFIs
 To analyzes lenders related factors that influences the repayment performance of the
clients
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 To investigate the major challenges faced by borrowers in the repayment process.
 To identify challenges of MFIs in relation to loan repayment process.
1.5. Significance of the Study
As output of the study, identifying factors that contribute to the successful loan repayment which
helps policy - makers to formulate successful credit policies and programs that again help in
allocating financial resources efficiently and effectively. Moreover, this study is expected to
establish a knowledge base that enables to make a sound decision and take corrective action for
the Woreda MFI. In addition, the information will be useful for policy makers, other lending
institutions and stakeholders.
Microfinance has evolved as an approach to economic development intended to benefit low

income women and men. There are number of factors from both side (lender and borrowers) that
affect efficient loan repayment performance of borrowers. Analyzing such factors and providing
valuable recommendation is essential to expand and strengthen the activity of MFIs. Although
some research has been conducted on this area, no empirical study has been done on identifying
factors that influence loan repayment performance of borrowers of Omo micro financial
institution in the study area (Demba-Gofa woreda OMFI in Gamo-Gofa zone) so far. So this
study attempts to provide a detailed empirical analysis on factors and challenges that affect the
loan repayment performance of borrowers financed by OMFIs in Demba-Gofa Woreda. It is
also expected to be a base for future research in the area.
1.6. Scope and Limitation of the Study

1.6.1. Scope of the study
The study was conducted only on Demba-Goffa Woreda of Omo MFIs in Gamo-Gofa zone,
SNNPR. It focuses on analyzing factors and challenges that influences loan repayment
performance of borrowers of micro finance institutions and identifying challenges of MFIs as an
institution in relation to loan repayment process.
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1.6.2. Limitations of the study
There are many factors affecting sustainability of MFIs such as outreach, repayment
performance and policy support. But this study was covered only the repayment aspects of
microfinance in the case of OMFI and focus on socio-economic and same lender related factors
that relate to loan repayment performance. The data was obtained from four sub-branches or
clusters out of eight sub-branches or clusters due to limited time frame.
1.7. Organization of the Paper
This study is organized into five chapters. Chapter one covers introduction, statement of the
problems, objective of the study, research question, significance of the study and scope and
limitation of study. Chapter two provides related literature review and conceptual frame work of
the study. Chapter three provides methodology and description of the study area. Chapter four
deals with data presentation, analysis and interpretation and chapter five provides the summary
of the key findings, conclusion and recommendation of the study.
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2. LITERATURE REVIEW
2.1. Theoretical Literature

2.1.1. The Need for MFI
For quite a long time, formal financial institutions were not serving a useful purpose for the poor.
In developing countries the poorer section of the community did not get access to formal
financial sectors. Because, formal financial sectors require collateral and credit rationing. They
prefer for high-income clients and large loans, the processes and procedures of providing loan
are bureaucratic and lengthy, they are often urban based and give lending to those engaged in
trade led industry, they usually consider the demand for loan by the poor as unattractive and
unprofitable (Bouman, 2008, cited in Parma and Getachew, 2005). There is no exception in
Ethiopia as rightly pointed out in several studies Dejene (2003) argues in his study on the
economic importance of the informal institutions in Ethiopia that the poor are often marginalized
in the formal credit markets. Wolday (2000) also states that the establishment of sustainable
microfinance institutions that reach a large number of rural and urban poor who are not served by
the conventional financial institution, such as the commercial Banks, has been a prime
component of the new development strategy of Ethiopia.
On the other hand credit from informal sources is inadequate and moreover the interest rate
charged is exorbitantly exploitative. (Fiddler and Webster, 1996, cited in Jemal, 2003) noted that
although informal credit markets operate widely in rural areas, moneylenders typically charge
very high interest rates inhibiting the rural poor from investing in productive income generating
activates.
Robinson (2002) defined microfinance as a development approach that provides financial as well
as social intermediation. The financial intermediation includes the provision of savings, credit
and insurance services, while social intermediation involves organizing citizens‟ groups to voice
their aspirations and raise concerns for consideration by policy makers and develop their self-
confidence.
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2.1.2. Theories on lending
The main business of most finance institutions is to grant loans and other microcredit of traders
and other customers. However, in their attempt to lend, they faced the challenge of overcoming
information asymmetries. Adverse selection and moral hazard has been the two main outcomes
of information asymmetries. In the case of adverse selection, the lender lacks information on the
riskiness of its borrowers. Riskier borrowers should be charged higher interest rates to
compensate for the increased risk of default than safer borrowers who are less likely to default.
Accordingly, safer borrowers should be charged less provided each type can be accurately
identified. Since the lender has incomplete information about the risked profile of its borrowers,
higher average interest rates are passed on to all borrowers irrespective of their risk profile
(Armendariz and Morduch, 2010).
Moral hazard on the other hand refers to the inhabit of the lender to ascertain whether the loan
granted to borrows are used for its intended purpose, or that the borrower applies the expected
amounts of complementary inputs, especially effort and entrepreneurial skill, that are the basis
for the agreement in order to get the loan provided. The borrower may then be less able to repay
if these inputs are less than expected. (Ghatak and Guinnane, 1999).
In the absence of collateral, the lender and borrower do not have the same objectives because the
borrower does not fully internalize the cost of project failure. Moreover the lender cannot
stipulate perfectly how the borrower should run the project (Berhanu, 2005). When the clients‟
borrow money from the lender, they make made promise to work hard and repay a loan. But,
once the loan is disbursed the borrower might not be keep their promise and they change their
behavior. Hence the borrower‟s business fails and he/she is declared as a defaulter. In this case, a
lender may not be able to know whether this failure was due to the uncontrollable factors of
putting less effort on the business activities and borrowers mishandling of the loan.
2.1.3. Repayment performance of microcredit programs
The term of loan repayment refers to an arrangement in which a lender gives money or property
to borrower and the borrower agrees to return the property or repay the money, usually along
with interest, at some future point (s) in time. Usually, there is a predetermined time for repaying
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a loan, and generally the lender has to bear the risk that the borrower may not repay a loan
through modern capital markets have developed may ways of managing this risk Mohd Noor
Mohd Shariff (2010).
Repayment generally takes the form of periodic payments that combine part of the principal sum
and interest in each payment. The amount of each installment is usually calculated as the
principal sum and interest due dividend by the number of installments. Alternatively, a lump sum
with interest is repaid at maturity. On the other hand, personal collection enables the drastic
reduction of financial transaction costs and improves the matching of the loan size to the clients‟
needs and repayment ability (World Bank 2004).
2.1.4. Causes and the possible solutions of default
Default on borrowed funds could be voluntary and involuntary. Involuntary default on borrowed
funds could arise from unfavorable circumstances that may affect the ability of the borrower to
repay. On the other hand, voluntary default, whereby a borrower does not repay even if he/she is
able to do so (Stigliz and Weiss 2008). Therefore, the lender must understand the causes and
possible solutions of default. According to Norell, (2001) the most common reasons for the
existence of defaults are the following: if the MFI staff are not responsible to shareholders to
make a profit clients‟ lives are often full of unpredictable crises, such as illness or death in the
family; if loans are too large for the cash needs of the business, extra funds may go toward
personal use; and if loans are given without the proper evaluation of the business (Norell, 2001).
Tedeschi (2006) notes that there are two possible reasons for default: strategic default is a default
due to a negative economic shock. The lending contract provides incentives to discourage
strategic default, but default due to an economic shock is unavoidable. According to Derban et
al. (2005). The causes of non-repayment could be grouped into three main areas: (1) the inherent
characteristics of borrows and their businesses that make it unlikely that the loan would be
repaid. (2) The characteristics of lending institution and suitability of the loan product to the
borrower, which make it unlikely that the loan would be repaid. (3) Systematic risk from the
external factors such as the economic, political and business environment in which the borrower
operates.
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Norell (2001) writes about some strategies for preventing or reducing defaults. Giving training to
the clients prior to the transaction of each loan and financial incentives for the credit officers can
be used to lower the default rates. Roslan Abdul Hakim et al. (2007) also conclude in their study
that close and informal relationship between MFIs and borrowers may help in monitoring and
early detection of problems that may arise in non-repayment of loans.
Norell agreed on the four categories of client in the MFIS: (1) willing and able to repay, (2)
willing but unable to repay, (3) unwilling but able to repay, and (4) unwilling and unable to
repay. For very late loans (group loans over five weeks without payment, individual loans at
sixty days without payment), credit officers should visit each late payer and the credit officer
should classify the client into one of the above four categories of client. Based on the
classification of borrowers, the loan officer should take corrective action. The appropriate action
taken by loan officer in each category are: (1) having the credit officer and the supervisor visit
the client‟s business, (2) rescheduling should be considered for clients with a very good excuse,
(3) the institution can pursue legal action or inform the community and influential persons of
clients‟ unwillingness to repay because religious and community leaders can push them to pay.
Moreover, their names can be publicly posted and (4) following up on such groups is a poor use
of staff time. They are best referred to debt collectors of written off the loan (Norell, 2001).
2.2. Empirical Literatures
Several studies have been conducted in many countries by different authors regarding to the
factors determining loan repayment among microfinance institutions borrowers. Some of the
studies are summarized below.
2.2.1. Studies in other countries
Study that attempted to assess factors determining loan repayment among borrowers of the
supervised agricultural credit scheme in Enugu state in Nigeria, Arene and Aneke (1999) found
that repayment increased with loan size, education level, farm size and household size. They also
found that borrowers who had higher gross income and levels of innovations adoption were more
likely to meet their loan repayment obligations than otherwise. In a study that investigated the
borrower‟s socio-economic determinants of loan repayments in microcredit programs that
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applied the group lending in the US, Bhatt and Yang (2002) found that repayment increased with
the level of education. On the other hand, the study found that the level of household income,
business type and borrower‟s experience were not significant predictors of loan repayment.
Eze and Ibekwe (2007) in their study on determinants of loan repayment in Imo state in Nigeria
identified loan size, age of beneficiaries, household size and number of years of formal education
and occupation as the key predictors of loan repayment.
In a study that examined social-economic factors influencing loan repayment among small scale
farmers in Ogbooso agricultural zone of Oyo state in Nijeria, Oladeebo, J. and Oladeebo, O.
(2008) found that repayment rate increased with loan size, years of farming experience with
credit use and education level of the borrower. However, they found repayment ability to
decrease with the age of the borrower.
In analyzing socio-economic characteristics of small scale farmers that influence their level of
loan repayments in Oyo state, Nigeria, Afolabi (2010) examined eight variables: farming
experience, gram farm income, farm size, family Size, non-farm expenses; expenses interest rate
charged and non-farm income. Of these, only four variables had significant impact on loan
repayment, namely loan amount, farm size, interest charged and non - farm income.
In studying the factors which Influence loan default among small scale farmers in North- West
Province of South Africa, Akwasi and Idowu (2011) found that repayment problems decreased
with education level, possession of financial management skills, timely disbursement of the
requested loan and technical support received by the farmers, On the other hand borrowers were
more likely to experience payment problems when faced with increased total monthly household
expenditures, increasing size or number of loans and the use of the loan fund for purposes not
applied for.
Acquah and Addo (2010) investigated determinates of loan repayment among fishermen in
Ghana. They found out that loan repayment increased with the fishing income, loan size and
amount of investment made.
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Godquin (2004) examined the microfinance repayment performance in Bangladesh. His result is
female borrowers did not proven to have a significant better repayment performance. The size of
loan and the age of the borrower showed the negative impact on the repayment performance.
2.2.2. Studies in Ethiopia
Fikirte (2011) studied on determinants of loan prepayment performance in the Addis credit and
saving institution, Addis Ababa. According to her study sex, business experience, dependency
ratio and business type have significant effect on group lending loan repayment performance.
Brehanu and Fufa (2008) studied the determinants of loan repayment rates for agricultural loans
in Ethiopia. They found that borrowers with larger farms, higher numbers of livestock and farms
located in areas with sufficient rainfall had a higher capacity to repay their loans. Moreover,
borrowers who had higher education level, extra business income and those who were
experienced in using agricultural technology had a good repayment performance. In addition,
Dayanandan and Woldesilassie (2008) in their study on loan determinants of small farmers in
northern Ethiopia, found that amount of credit, educational status and occupation, experience in
credit use, repayment period, ownership of livestock and credit follow-up by credit officers or
when there is close supervision of how the fund is being utilized were important factors in loan
repayment. Berehanu (2005) also studied on the determinants of loan repayment performance of
smallholder farmers in north Gondar, Ethiopia. He explore that land holding size of the family,
agro-ecology of the area, total livestock holding, number of years of experience, number of
contacts, sources of credit and income from off-farm activities significantly influence the
repayment performance.
Jemal (2003) analyzed the microfinance repayment performance of Oromia credit and saving
institution in kuyu, Ethiopia. According to his finding; sex, loan size and number of dependants
are negatively related to loan repayment. On the other hand, age was found to be positive.
Income from activities financed by loan, repayment period suitability and loan supervision are
positively and significantly related to loan repayment performance.
Abreham (2002) studied on the loan repayment and its determinants in small- scale enterprise
financing around Zeway area. He found out that other sources of income, education, and work
11
experience related economic activities before the loan are enhancing loan repayment. While
extended loan repayment period influences the repayment performance negatively.
From the literature review, we understand that the factors influencing loan repayment differ from
one programmer to another, differ according to the nature of supported activity, and differ
according to the demographic characteristics of the borrowers, their households and other
external factors facing both the borrowers and their businesses. Based on theoretical review and
empirical study, this paper proposes a conceptual framework to guide the examination of factors
affecting loan repayment performance of MFIs in Gamo-Gofa zone Demba-Gofa woreda.
12
2.3. Conceptual Framework
Borrowers related factors
 Age of borrowers
 Sex
 Education level
 Income from other sources
 Number of dependents
 Loan diversion
Loan repayment
Performance
Institution related factors
 Loan supervision
 Training Dependent variable
 Timeliness of loan
 Suitability of repayment
Period Independent variables
Figure 1 Conceptual Framework of the study
Source: Different Literature Review
The following explanatory variables are selected for this study. The loan repayment performance
could be affected by these factors either positively or negatively. Therefore, the assumption of
the effect of explanatory variables on the loan repayment performance is presented below.
Borrowers related factors
1. Age: age has expected to influence the repayment performance positively. With increase in
age, it is usually expected that borrowers get more stability and experience of their business
(Vigano, 1993). So they may be able to generate income and it leads to high repayment
performance. Moreover, elder borrowers may accumulate more wealth than youngsters and
they feel more responsibility for the loan. Therefore, we expect this variable to have a
positive impact on repayment performance.
13
2. Sex: there is a belief among many microfinance specialists that female are better payers than
male borrowers, taking into consideration their being more entrepreneurial that results from
assuming more responsibilities in the internal affairs of a household. (Vigano, 1993).
Todd (1996) also argues that women are more conservative or cautious in their investment
strategies and, therefore, have better repayment records. But some researchers have found the
opposite result. So nothing can be said about the sign of this variable in a priori.
3. Educational level: this variable is expected to have a positive impact on repayment

performance in general. Considering normal circumstances, a more educated borrower is
expected to use the loan effectively as compared to a less educated one. Because education
increases borrower‟s ability to get, process and use the necessary information. Berehanu and
Fufa (2008) states that a more educated client is expected to use the loan effectively as
compared to a less educated one. In this case, we expect a positive sign for the variable.
4. Income from other activities or sources: some borrowers may have other sources of income
like income from employment in government or private organizations or other members of
the family, pension, etc. such sources of income are expected to have positive contribution
towards loan repayment performance.
5. Number of dependents: defined as the total number of dependents in the family and
elsewhere that depend on the borrower for their livelihood expressed in percentage. As the
number of dependents increases, the borrower will need more money to fulfill their
requirements. Therefore, the borrower may use the loan directly for their daily consumption
and other expense. In this case, the default rate will be increased with the study result of
Jemal (2003).
6. Loan diversion: if borrowers do not use the loan they received for the intended and agreed on
purposes, it will have negative impact on loan repayment performance. But, in same case
they may use for more productive purpose than the intended ones. In this case the repayment
will be enhanced.
14
Lender related factors
1. Loan Supervision
If there is a continuous follow- up and supervision made by loan officer, the client could
efficiently utilize the loan for the intended purpose. There is a possibility to remind the
obligation and motivate the borrowers to repaying the loan. Norell (2001) stated that quick
follow- up and visits are helps to prevent the default rate.
2. Training
Training is one of the important requirements for the success of microfinance institution (Assefa,
2005). If the lender provide various training, the clients will be able to understand the rule and
regulation easily. They also develop skill on how to do business and money utilize. Training is
needed not only for clients but also for loan officers. In both case, it has a positive contribution to
the repayment rate.
3. Timeliness of Loan Release
If loan is disbursed in time, it is likely that it will be used for intended purposes. If the loan is
used for the intended activities, the repayment will be enhanced. Johnson and Rogaly (1997)
noted that timeliness of loan disbursement is important when loans are used for seasonal
activities such as agriculture. Therefore, timely loan disbursement could have positive effect on
loan repayment performance.
4. Suitability of Repayment Period
It is expected that borrowers who find the repayment period suitable, perform better. For
example, if there is grace period for some months after the loan disbursement, the borrowers can
run their business without shortage of working capital. Thus, the expected sign of this variable is
positive Abafita J (2003).
15
3. RESEARCH METHODOLOGY
3.1. Description of Study Area
The study area, Demba-Gofa woreda is one of the 15 woredas and two city administrations in
Gamo-Gofa zone in SNNPR located in the south western part of Ethiopia at a distance of 530 km
from Addis Ababa and 286 km from the capital of SNNPR, Hawassa. According to the
information obtained from Demba-Gofa Woreda of finance and economic development office,
the population of the woreda was projected for 2007 E.C was about 941,754 with a sex ratio of
472, 002 females and 469,752 males. The major economic activities in the woreda include
farming (crop production and animal husbandry) and off-farm activities especially for urban
dwellers. Financial services to the poor of the woreda are provided by the only Demba-Gofa
woreda of Omo micro finance institution. Currently, there are 8 sub branches serving 2,620
clients that constitute 1,750 males and 870 females. The survey mainly consider four sub
branches out of 8 sub branches or clusters which are located in different kebeles in the woreda.
Namely, Sazga, Borda, Zenga Awande and Lote sub branches/clusters/centers. The total
populations living in these areas are 628,214 with a sex ratio of 316,114 females and 312,100
males. The economic activities in the district are not different from the above described (Demba
Gofa Woreda Finance and Economic Development office, 2007).
16
Figure 2 Map of study area
17
Omo Microfinance Institution (OMFI) is operating in SNNPR. It is established on August
14/1997 as share company as per the requirements of proclamation No. 40/1996 for the provision
of licensing and supervision of businesses of micro finance institutions (MFIs) in the country. It
has been incorporated with five shareholders namely the Southern Nations Nationalities and
People‟s Regional State (SNNPRS), South Ethiopian People‟s Development Association
(SEPDA) , Wondo Trading Company and two natural persons shares (Tilahun, 2004). The
mission of Omo micro finance institution is to take part and play an important role in the
combating of poverty and bring about a sustainable economic development in the region by
providing financial services that stimulate individual initiatives for self-reliance and food
security.
3.2. Research Design
The cross-sectional survey method was used in this study because it is efficient to collecting
large amount of information within a short time. It can enable to assess factors that influence
loan repayment performance of borrowers of MFIs and challenges of the institution in order to
enhance successful loan repayment performance. Data is collected through questionnaires and
the questionnaires consisted of open ended and closed ended.
3.3. Study Population
The study population consisted of all borrowers (both individual and group), members of Omo
microfinance institution in the study area.
3.4. Sampling Technique
Census method was used to select MFIs. Four out of the eight sub branches of micro finance are
purposively selected considering the sub branch that have long time experience in lending and
relatively with higher loan repayment default rate. Respondents (i.e. borrowers) were drawn
systematically using the proportional random sampling procedure. However, the MFIs
employees were purposely selected based on their experience and trust that their provide
important and information to the research or study.
18
3.5. Sample Size and Target Population
The sample size comprised of 330 respondents, out of which 16 are staff members. The 314 were
select borrowers from the selected sub branch of MFIs which located in four sub branches or
centers namely, Sazga, Borda, Zanga Awande, and Lote. The total numbers of borrowers in these
sub branches/clusters are 1725. In total there are 2,620 borrowers, 16 saff members and 38
agents. To select respondents (borrowers) proportionately from the selected sub branch, the
following formula is adopted from Cochran, (1997) and C.R Kothari (2004).
Z 2  pq N
n
e 2  N  1  Z 2  p  q
Z= corresponding confidence 95% or generally given as 1.96
e=error which is 5% or 0.05
p = prevalence of problem in population which is 50% or 0.5 (estimated population of existence

of trait to conform/Reject hypothesis)
q =1- p which is 50% or 0.5 (the absence of trait)
N= total borrowers from selected MFIs
n
1.96  0.5  0.5 1725
2
 314
0.052  1725  1  1.962  0.5  0.5
To use proportionate allocation of sample size from four sub- branch borrowers the following
sample determination method/formula/will is used:
nxp /N
N= total number of borrowers in four sub branches =1725
n= total sample size=314
19
p1=total number of borrowers in one sub-branch. P2, p3 and p4 are second, third and fourth sub-
branch respectively.
(n1)=314xp1/N =314x305/1725 = 56
(n2)= 314xP2/N =314x362/1725 = 65
(n3)= 314xp3/N =314x532/1725 = 97
(n4)= 314xp4/N= 314x526/1725 = 96
Then, total sample size from borrowers will be = (n1+n2+n3+n4) = (56+65+97+96) =314
Table 1 Summary of study population and sample size
Respondents Target population Sample size

Loan borrowers from selected sub branch MFIs
Sazga
305 56
Borda 362 65
ZangaAwande 532 97
Lote 526 96
Total respondents from borrowers 1725 314
Managers and credit officers
Total respondents from staff 16 16
Total study respondents 1741 330
Source: Demba-Gofa Omo microfinance institution branch (2017)
20
3.6. Data Type and Source
This study used both quantitative and qualitative data. Regarding to data sources both primary
and secondary sources were used to collect appropriate data for the study. Primary sources were
the target population who are borrowers, staff of MFIs, whereas secondary sources were
published and unpublished materials and reports about the microfinance institution. These
materials were collected from OMF head office and sub branches/clusters of microfinance.
3.7. Data Collection Instrument and Procedure
The main data collection instrument in this study was questionnaires. Two sets of questionnaires
were used to collect data from employees and clients. The questionnaires include closed and
open ended questions. Attempts were made to make the questions clear and simple to avoid any
ambiguity and technical details.
In order to collect data the researcher obtained introductory letter from Haramaya University
College of Business and Economics Department of Management to respective organization
(MFIs). The letter was introduced the researcher and the aim of data to be collected.
Beneficiaries (respondents) were selected through the above mentioned sampling procedure from
the list provide by the sub branches of the institution. Questionnaires to employee of MFIs were
also administrated collect the data. Besides, were made with loan office managers and relevant
documents received for additional information relevant for the study.
3.8. Data Quality Issue
In order to collect reliable data, the researcher was designing the questionnaires through an
elaborate procedure which involve a series of revisions under the guidance of the advisors. All
questions were translated into gofign and Amharic language. To check the validity and
reliability; the questionnaire was tested before were administration.
21
3.9. Data Analysis and Tools
The collected data was compiled, sorted, edited, and classified and then entered into the
computer. The data was analyzed using the Statistical Package for Social Science (SPSS) version
20. The statistical methods used to analyze the data were percentage and frequency. The
relationship between determinants factors and loan repayment performance was tested using Chi-
square test. Tables and charts are used to present the data more elaborately in accordance with
their importance.
22
4. DATA PRESENTATION, ANALYSIS AND INTERPRETATION
This chapter presents findings in reference to the research questions and objectives. This findings
are summarized from the primary sources of data. For the purpose of demonstrating the
relationship among the various variables, the data were presented in the form of tables,
frequencies and percentage were applicable. Three hundred fourteen respondents (314 borrowers
and 16 employees) were selected for the study and all respondents filled and returned back
questionnaire to the researcher.
The chapter has four sections: the first section presents the socio-economic characteristics of the
respondents, the second section presents the analysis and interpretation of findings of the
remaining study variables which includes supervision and advisory visits and loan utilization and
repayment trend, the third section present the relationship between borrower‟s related factors and
loan repayment performance and the forth descries challenges faced by borrowers and MFIs.
23
4.1. The Respondents Profile
Table 2 The respondent‟s profile
Response of manager and Borrowers response

employee
Item Question Alternatives Frequency Percent Frequency Percent
1 Sex Female 5 31.3 133 42.3
Male 11 68.7 181 57.7
Total 16 100 314 100
2 Age Below 30 6 37.5 116 36.9
30 – 45 10 62.5 135 43.4
46 – 55 - - 54 17.1
Above 55 - - 9 2.6
Total 16 100 314 100
3 Marital status Single - - 92 29.4
Married - - 213 67.7
Divorce - - 3 0.9
Widowed - - 6 2.0
Total - - 314 100
4 No schooling at all - - 53 16.8
Education Primary school - - 189 56.6
Secondary school - - 70 22.8
Certificate - - 3 1.1
Diploma 12 75 9 2.6
Degree and above 4 25 - -
Total 16 100 314 100
5 Work Less than two - - - -
experience 2–5 9 56.3 - -
5 – 10 Year 7 43.7 - -
Above 10 year - - - -
Total 16 100 - -
Source: Survey Data 2017
24
Table 2 presents information about MFIs employees (managers and credit officers) and
borrowers of sex, age, education, marital status and work experience. From the total 314
borrowers 181(57.7%) were males while the rest 133(42.9%) were females. This shows that
majority of the respondents and clients of the sub braches were male. MFIs employees
10(62.5%) were in the age ranges of 30-45 and 6(37.5%) of them were below 30 years.
Regarding to the age of clients, the dominating age was also from 30 to 45, which consisted of
135 (43.4%); followed by below 30, 116(36.9%), 60(17.1%) and 9(2.6%) in the age category of
46-55 and above 55 years, respectively. As can be seen from the same table married borrowers
were dominant 213(67.7%), while 92(29.4%) were single and 3(0.9%), 7(2%) were divorced and
widowed respectively. This indicate that majority of borrowers served by MFIs are married and
have family responsibility.
In terms of educational background, most of the borrowers are on the study, i.e. 189(56.6%)
were at the level of primary school. Those who have attended secondary school were 80(22.8%)
and those who have certificate and diploma were 3(1.1%) and 9(2.6%) respectively, while
53(16.8%) of them were uneducated. The result shows that people with lower levels of education
use MFIs loan facilities more than those who have higher levels of education.
Regarding to the educational level of the MFIs employees 12(75%) were diploma holders and
4(25%) were first degree holders. This implies that the majority of credit officers of the sub
branch are diploma holders. Concerning with the experience of sample employee in the MFIs,
9(56.3%) were 2 years experienced and 7(43.7%) has 5-10 years of experience. These imply that
the employees have a lot of information and accumulated knowledge in MFIs lending activities
and challenges faced in repayment processes.
25
Table 3 Number of dependent supported by borrowers
Number of dependent Frequency Percent

None 27 8.6
1-2 77 24.6
3-5 112 35.4
Above 5 98 31.4
Total 314 100
It is important for the study to establish the number of dependent supported by the borrowers. As
the findings summarized in the table above, 112(35.4%) respondents have 3-5 dependents,
98(31.4%) have more than 5 dependents, 77(24.6%) have 1-2 dependents, and 27(8.6%)
respondents reported as they do not have dependent (Table 3). This indicates majority of the
borrowers were engaging in different economic activities to support their family and relatives.
Table 4 Response on source of family income
Source of family income Frequency Percent

From one business 165 52.6
From additional (more) business 113 35.7
From husband/ wife‟s monthly salary, pension etc 36 11.7
Total 314 100
The source of family income is indicated in Table 4, the source of income for 165(52.6%)
borrowers is from one business. Besides, 113(35.7%) respondents reported as they receive
income from additional business and 36(11.7%) have got their income from husband or wife‟s
monthly salary. This implies that source of family income from one business has an impact on
loan repayment performance.
26
4.2. Loan Repayment and Processing Period
Table 5 Respondents feeling on repayment period
Respondents feeling on the repayment period Frequency Percent
Happy 142 45.1
Unhappy 172 54.9
Total 314 100
Respondents perception on loan processing time Frequency Percent
100
Took long time 31.8
180
Took moderate time 57.3
Took short time 34 10.8
314
Total 100

Table 5 shows the respondents feeling on the repayment period set by MFIs. More than half of
the respondents 172(54.9%) feel unhappy about the repayment period set by MFIs, while 142
(45.1%) reported that they feel happy about it. This result showed significant number of
respondents were found to in inconvenience with the loan repayment time. Data in the same table
shows that 180(57.3%) of the respondents who are the majority considered the loan processing
times as moderate. Whereas, 100(31.8%) of the respondents perceives as the loan processing
activity take too long time and 34(10.8%) of the considered the process as too short. This
indicates in the process do delivering the serves to clients requires greater attention from the
institution management to address the problem of delay in processing loans. Otherwise, if
corrective actions are not taken proactively this may contribute to customer dissatisfaction in the
future that constrains the institution in achieving its objectives.
27
4.3. Effect of Loan Processing Time on Loan Repayment
Table 6 Effect of loan processing period on timely loan repayment
Does the delay on loan processing affect timely loan repayment? Frequency Percent
Yes 42 13.4
No 272 86.6
Total 314 100
Table 6 shows the effect of loan processing period on timely loan repayment. In response to the
question asked whether the delay on loan processing affect timely loan repayment. Majority of
the borrowers 272(86.6%) reflected that it does not affect the repayment performance, while
42(13.4%) replied that it has effect on the timely repayment. The impacts of delay on loan
processing identified by the respondents are: Leads to use loan for unintended purpose; reduce
the profit of the business due to seasonal activity; and Make the borrower to be disappointed.
However this calls for a further investigation, because many studies have considered attitude of
borrowers towards loan repayment and timeliness of loan issuance as important variables
affecting loan repayment performance. This may depends on the type of business or the purpose
of loan used.
28
4.4. Supervision, Advisory Visits and Training
4.4.1. Supervision and advisory visits
Table 7 Supervision on loan utilization and repayment
Have you ever been supervised regarding loan utilization by Frequency Percent
OMFs staff?
Yes 194 61.4
No 120 38.6
Total 314 100
Have you ever been supervised for loan repayment? Frequency Percent
Yes 235 74.9
No 79 25.1
Total 314 100
Frequency of supervision Frequency Percent
Frequently 7 2.3
Periodically 145 46.3
Occasionally 141 44.8
Rarely 21 6.6
Total 314 100
Another variable of concern in this study is how supervision and non-supervision of borrowers
influences the loan repayment financed by Demba-Gofa Woreda of OMFIs. To that effect the
research asked respondents if they had ever been supervised by MFIs staff regarding loan
utilization and repayment, whether they considered the supervision being important for the loan
repayments, and if they had received any training before getting loans.
Table 7 indicates the practices supervision of loan utilization and repayment by MFIs. As
indicated in the table, 194(61.4%) of borrowers had been supervised by MFIs staff on loan
utilization whereas 120(38.6%) had not been supervised. Regarding to supervision on loan
repayment as indicated in the same table 235(74.9%) of the respondents indicated that they had
been supervised by MFIs staff on loan repayments, while 79(25.1%) respondents indicated that
29
they had not been supervised MFIs. Some of the borrowers stated that nobody came to their
business and residence place since loan they secured the loan. The findings may show that MFIs
gave more emphasis to loan repayment supervision in contrast to loan utilization supervision.
The frequency of supervision of borrowers business by loan officer is also depicted in Table 7
above. The table shows that Demba-Gofa Woreda OMFs carried out loans repayment and
business supervisor periodically, occasionally and rarely, for 145(46.3%), 141 (44.8%) and
21(6.6%) customers respectively. MFIs employee were also asked how many times they visit
/supervise/ clients business and loan repayment status. About 80% visited /supervised clients
business quarterly and 18.7% did it once a month. This can be taken as good practice by the
employees for making visits periodically to assess the performance of the borrowers.
Table 8 Respondents opinion on the adequacy of supervision for loan repayment and on the
importance of supervision of loan repayment
Adequacy of supervision Frequency Percent

Yes 76 24.3
No 235 75.7
Total 314 100
Importance of supervision Frequency Percent
Yes 302 96
No -
Not sure 12 4
Total 314 100
The survey result indicates that, only 76(24.3%) of the borrower considered that supervision on
loan utilization as well as on loan repayment is sufficient, while majority of respondents‟
235(75.7%) perceived that supervision is not sufficient. The result call for attention from the
institution.
Supervision on loan utilization as well as on loan repayment is an important factor contributing

to a better loan repayment performance. Respondent‟ opinion on the importance of supervision
for loan repayment is depicted in Table 8. Almost all of the borrowers (96%) were agreed with
30
the importance of supervision and only 4% were not sure about its importance. This can be
considered as indicator for the importance supervision on loan utilization among the borrowers
in improving loan repayment rate.
4.4.2. Training given by the Institution
Table 9 Respondents received training before receiving loan
Received training Frequency Percent

Yes 314 100
No - -
Total 314 100
Table 10 Employees response on training given to borrowers
Received training Frequency Percent

Yes 16 100
No - -
Total 16 100
Another variable of concern in this study is the training provided to employes of MFIs and
borrowers. As indicated in Tables 9 and 10 both employees and borrower reported that training
has been given to borrowers before they receive loan. These imply that both borrowers and
employees indicated that the training is given by institution before the loan disbursement.
31
4.4.3. Types of training and officials who gives the training
120
100 100
Percent respondents
80 80
60
40 38
20
20
0
Saving Book keeping Marketing Business
Kind of training
Figure 3 Type of training given to the borrowers
The survey result indicates that, all borrowers, 100% of the respondent were trained on saving,
book keeping, marketing and business that constitutes 314 (100%), 258(82%), 162 (51.1%), and
82(26%) respondents respectively (figure 3). According to the employees the purpose of training
were arranged with the objective of facilitating loan repayment on time by making sure that the
amount disbursed is not diverted to unintended social and economic activities. However, the
result exhibits that attention is needed to the provision of other training in addition to the current
attention given to savings related trainings.
32
42% 42%
58% 58%
Figure 4 Percentage of the trainers
Result in the figure 4 above show that 181(58%) training were delivered only by MFIs officials
while 133(42%) reported that by external body and officials from MFIs. During discussion with
MFIs officials confirmed that training has been given to clients in collaboration with officials
from small scale enterprise office that aimed at enhancing different skills of the clients.
Table 11 Borrowers opinion on the effect of the training on their income
Training increase income Frequency Percent

Yes 280 88.9
No 34 11.1
Total 314 100
The borrowers‟ opinion on the effect of the training on their income showed in Table 11. The
table indicated that 280(88.9%) of respondents reported that training helped them increase their
income, while 34 (11.1%) %) reported that the training did not help them improve their income.
The positive perception about training among the borrower can be taken as an advantage in the
future in providing training that make them effect when the need arises.
33
4.5. Loan Utilization and Repayment Trend
4.5.1. Loan utilization
Table 12 Loan utilization trend
Training increase income Frequency Percent

Yes 201 64
No 113 36
Total 314 100
Source: Survey Data 2017.
As indicated in the Table 12, above 201(64%) of the respondents reported that they have utilized
the loan for the purpose they borrowed. On the other hand, 113(36%) of the borrowers have
indicated that they used the money to finance activities other than the agreed one. This may
majority of the borrowers have been using the borrowed fund for the intended purpose.
Table 13 Respondents purpose of spending and reason for spending on unintended business
Purpose of spending Frequency Percent

For consumption 5 4.4
For celebrating holiday 20 17.6
For children education 18 15.9
For other business activates 70 61.9
Total 113 100
Reason for spending on unintended business Frequency Percent
The loan was not accede timely 13 13
The loan agreement did not coincide with my initial intention 16 16
Market problem 50 50
Others 21 21
Total 100 100
According to the result above in the Table 13, out of the total of 113(36%) respondents, who
diverted their loan to other activities, have spent a portion of the loan to finance children
education, for household consumption, and celebrating holiday that constitutes 18(15.9%)
34
5(4.4%), and 20(17.6%) respectively. Besides, 70(61.9%) of then used the loan to finance more
profitable business.
The respondents have mentioned different reason for diverting the fund to other purposes. Lack
of market was mentioned by 50(50%) of the respondents. Moreover, 13(13%) reported that the
loan was not disbursed on time and 16(16 %) of them complained about the problem related with
the amount. Whereas, 21(21%) reported other reasons for not utilizing the loan in accordance
with the agreement. The expectation was if borrowers use the loan for productive purpose than
the unintended one, the repayment was enhanced. The situation in this study cannot be different
from this. These imply that most of respondents reported that the purpose of spending and reason
for spending unintended business is the market problem. Therefore, addressing marketing
problems of the borrowers can contribute in improving the repayment rate of the customers of
the institution as well as proper utilization of the borrowed fund for the intended purpose.
4.5.2. Loan repayment trend of borrowers served by MFIs
Table 14 Borrowers received loan previously from MFIs
Received loan from MFI previously Frequency Percent

Yes 234 74.6
No 80 25.4
Total 314 100
Table 14 shows number of borrowers have received loan previous from MFIs. Out of the total
314 borrowers 234(74.6%) have received loan from MFIs previously, while 80(25.4%) didn‟t
took loan previous, they are new customer of the institution. This implies that majority of
respondents reported that large number of clients received loan from MFIs.
35
Table 15 the status of recent loan
Recent loan repayment status Frequency Percent

Fully repaid 88 28.0
Repayment on schedule 185 58.9
Repayment in arrears 41 13.1
Total 314 100

The survey result in the above table indicates that majority of the respondents were fulfilling
their repayment obligation on time. Only 41(13.1%) of the respondent were not in a position to
meet the repayment schedule. This indicates the repayment rate among the borrowers is
encouraging that needs exertion of efforts to maintain the existing strength and reduce the rate of
defaulters from time to time.
Table 16 Reason for Default
Response Frequency Percent

Loan based business activity was not profitable 27 65.9
Sold on credit but did not get paid back on time 6 14.6
Loss of asset acquired by the loan 3 7.3
Personal problem (like sickness….) 5 12.2
Total 41 100
According to the survey result, 27(65.9%) of the borrowers failed to fulfill their repayment
obligation on time due to profitability problem of the planned business, while 6(14.6%)
borrowers sold on credit but did not get paid back on time, 3(7.3%) lost their assets and 5(12.2%)
of the respondents indicated due to personal problem.
36
Table 17 Types of benefit
Type of benefit Yes No Total

Frequency Percent Frequency Percent Frequency Percent
Access to next higher loan 175 86 29 14 204 100
Build good relationship 169 82.6 35 17.4 204 100
with the loan provider
Build social status 175 86 29 14 204 100
As indicated in table above 175(86%), 169(82.6%) and 175(86%) of the respondents reply
positive to access to next higher loan build good relationship with the loan provider and build
social status respectively. Hence, the survey result can serve as an indicator that borrowers are
meeting their obligation establishing good relations with the institution and build good reputation
among the community. This can be also considered as good opportunity for the institution in
building good relation with its customers.
Table 18 Factors forcing borrowers to repay loan on time

Claim against personal wealth 219 67.7
Social sanctions (loss of social status) 68 21.7
Fear of losing another loan in future 27 8.5
Total 341 100
The findings indicated (Table 18) that the majority of borrowers 219(67.7) responded as the most
important aspect forcing them to repay the loan in time was the claim against their personal
wealth, while 68(21.7) were forced to repay due to social sanctions and 27 (8.5%) were repaying
because of fear of losing another loan in future. Form the finding we can observe that claim
against personal wealth is important factors affecting loan repayment performance of borrowers.
37
4.6. Borrowers Related Factors and Loan Repayment Performance
4.6.1. Performance Borrowers: Fully Settled Loans

There are borrowers‟ related factors that the thought to influence the loan repayment
performance. This study also attempted to investigate how those factors or variables influences
the loan repayment performance of borrowers. The method used to investigating the effect of
those variables on loan repayment is simply by observing the relationship between borrowers in
arrears and their socio-economic characteristics. The association between variables was also
tested using chi-square at 95% confidence level.
Table 19 Sex of Borrowers Fully Repaid Loans
Loan repayment status

Sex Frequency Percent
Female 48 54.5
Males 40 45.5
Total 88 100
Table 19, shows that borrowers in Loan repayment status by sex. As can be seen in the table, out
of the total 88 borrowers in Loan repayment 54.5% were females, while the rest 45.5% were
male borrows. The finding in this study indicates that women found to be more performing well
in settling their loans in contrast with men borrowers.
Table 20 Age of Borrowers Fully Repaid Loans
Age category Frequency Percent

Below 30 20 22.7
30-45 18 20
46-55 24 27.3
Above 55 26 30
Total 88 100
The relationship between age and repayment performance is shown in Table 20. It is found that
30% borrowers in Loan repayment were above the age of 55 years, followed by 27.3% of
38
respondents were found within the age range of 46-55 years. Besides, among those who fully
settled their loans, 22.7% respondents were below 30 years of age. The remaining 20% of
respondents were found with the age range of 30-45 years. Whereas sample borrowers above the
age 55 has been paid their loan timely. The result in the above table shows different repayment
status within different age category. Loan repayment performance in the age group 30-45 is
lower than those of age below 30 and it became better above 45 years of age. However, similar
investigations undertaken on the proportion of borrowers in Loan repayment indicates that with
increase in age high repayment performance (Vigano, 1993). This implies that as the age of a
borrower increase the possibility of fully settling his/her loan repayment increases.
Table 21 Marital Status of Borrowers Fully Repaid Loans

Single 45 51.1
Married 38 43.2
Divorce 2 2.3
Widowed 3 3.4
Total 88 100
As can be seen form Table 21 (51.1%) respondents were single, while 43.2% of them were
married, 3.4% respondents were widowed and 2.3% were divorced. In addition to this when we
see proportion of single borrowers in loan repayment performance from total single borrowers
51.1 % (45 out of 88) is greater than that of the proportion of married borrows in loan repayment
performance 43.2% (38 out of 88). This could serve as indicator that those who are not married
were good in fulfilling their obligations in fully repaying their loans. This might be associated
with the need to take more loans in the future that enables them to generate more income.
39
Table 22 Education Level of Borrowers Fully Repaid Loans

No schooling at all 18 20.5
Primary school 27 30.6
Secondary school 35 39.8
Certificate 2 2.3
Diploma 6 6.8
Total 88 100
The finding in Table 22 shows that 39.8% of borrowers who fully repaid their loans have
attended secondary school, 20.5% were illiterate, and 30.6% have attended primary school, 2.3%
have attended certificate and 6.8% of them were diploma holders. The result indicates that
numbers of borrowers in loan repayment performance are higher at secondary school than
illiterate and it became higher at secondary school. The findings indicated that borrowers
repayment performance vary at different level of education which means the improvement in
education level on necessarily help to perform better in loan repayment. Prior expectation was as
education level increases borrowers use their loan and repayments performance improved.
Table 23 Loan repayment and number of dependents
Number of dependents Frequency Percent

None 37 42
1-2 30 34
3-5 21 24
Above 5 - -
Total 88 100
Result in Table 23 shows, 42% of borrows have no dependents followed by 34% of them were
have 1-2 dependents and 24 % of them have 3-5 dependents. According to this study loan
repayment performance is not related with number of dependents. The expectation was as
numbers of dependents increases borrowers will need more money to full fill their need (for
consumption) in turn loan repayment rate will decrease.
40
Table 24 Sources of income and loan repayment
Source of income Frequency Percent
From additional (more) businesses 44 50
From husband/wife‟s monthly salary, pension etc 19 21.5
Total 88 100
Table 24 shows source of income and loan repayment. For the majority of borrowers in areas the
source of income is from one business (28.5%), while 50 % of borrowers who have gain income
from more than one business.. From the finding we can understand that additional income helps
borrowers to pay their loan timely and reduce default rate. According to the evidence it can be
implied from this study that additional income has positive impact on loan repayment
performance.
4.6.2. Performance Borrowers: Defaulted in Settling Loans
Table 25 Borrowers in arrears by sex
Borrowers in arrears
Sex Frequency Percent
Female 17 41.5
Males 24 58.5
Total 41 100
Table 25 shows borrowers in default by sex. As can be seen in the table, out of the total 41
borrowers in default 58.5% are males, while the rest 41.5% are female borrows. The finding tells
that majority who failed to fulfill their loan repayment obligation were men.
41
Table 26 Borrowers in arrears by age
Age category Frequency Percent

Below 30 18 43.9
30-45 20 48.8
46-55 3 7.3
Above 55 - -
Total 41 100
The relationship between age and default performance is presented in Table 26. It is found that
48.8% sample borrowers in default were within the age range of 30-45 years followed by 43.9%
below 30 years of age. All the sample borrowers above the age of 55 years have been able to pay
their loan on time. The result in the above table shows different default status within different
age category. Repayment performance in the age group 30-45 is lower than those of age below
30 and it became better above 45 years of age. This implies that age and default has inversely
related.
Table 27 Martial status of borrowers defaulted

Single 11 26.8
Married 30 73.2
Divorce - -
Widowed - -
Total 41 100
As can be seen form table 27 (73.2%) of borrowers in arrears are married, while 26.8% of them
are single. In addition to this when we see proportion of married borrowers in arrears from total
married borrowers is greater than that of the proportion of single borrows in arrears. The finding
indicated that default rate is to be greater among married borrows than single.
Table 28 Educational level of Borrowers in arrears
42
No schooling at all 9 22
Primary school 20 48.8
Secondary school 11 26.8
Certificate - -
Diploma 1 2.4
Total 41 100
The finding depicted in Table 28 shows that 48.8% of borrowers in arrears have attended
primary school, 22% are illiterate, 26.8% have attended secondary school and 2.4% of them are
diploma holders. The result indicates that numbers of borrowers in arrears are higher at primary
school than illiterate and it became lower at secondary school. But, if we see the proportion of
borrows in arrears in each level of education out of total sample borrows 2.4 %( 1 out of 41)
were diploma holders. The findings indicated that borrowers repayment performance vary at
different level of education which means the improvement in education level on necessarily help
to perform better in loan repayment. Prior expectation was as education level increases
borrowers use their loan and repayments performance improved.
Table 29 Number of dependents of defaulted borrowers
Number of dependent Frequency Percent

None 2 4.9
1-2 9 21.9
3-5 13 31.7
Above 5 17 41.5
Total 41 100
Result in Table 29 shows, 41.5% of borrowers in arrears have above 5 dependents followed by
31.7% of them having 3-5 dependents and 21.9% borrowers in arrears have 1-2 dependents of
them have 4.9 not dependents. According to this study loan repayment default performance is
not related with number of dependents. The expectation was as numbers of dependents increases
43
borrowers will need more money to fill full their need (for consumption) in turn default rate will
increase However, the finding is inconsistent with this opinion.
Table 30 Source of income and defaulting loan repayment
Source of income Frequency Percent
From additional (more) business 7 17.1
From husband/wife‟s monthly salary, pension etc - -
Total 41 100
Table 30 shows source of income and defaulting loan repayment. For the majority of borrowers
in default category, the source of income is from one business (82.9%). Only 17.1% of
borrowers who have gain income from more than one business have paid their loan timely.
Besides, borrowers who have got income from spouse monthly salary have paid their loan on
time. From the finding we can understand that additional income helps borrowers to pay their
loan timely and reduce default rate. More over these borrowers who have fixed family income
repaid their loan without any problem. Prior expectation on this variable was to have either
negative or positive impact. According to the evidence from this study additional income has
positive impact in reducing the default rate among borrowers.
44
Table 31 Loan diverters and loan repayment
Borrowers in arrears Frequency Percent
loan diverter 8 19.5
keep agreement 33 80.5
Total 41 100
The other variable expected to affect loan repayment performance of borrowers was loan
diversion. As indicated in Table 31, 80.5% borrowers in arrears are from those who do not divert
their loan and the rest 19.5% are from loan diverters. The result implies that borrowers who
divert their rate of default are lower in comparison with those who do not divert their loan.
Diverting the fund may enable the borrowers to generate profit that contributes in settling their
loans.
4.6.3. Chi-square (X2) Test
In addition to the above descriptive result, chi-square test was also used to establish whether
there exist relationships between borrowers‟ related factors and loan repayment performance of
borrowers of MFIs.
45
Table 32 Chi-square tests
Item Borrowers related Chi-square test

1 Sex chi-square 9.655
D. f 3.000
p. value 0.022
2 Age chi-square 17.169
D. f 9.000
p. value 0.046
3 Educational level chi-square 24.611
D. f 12.000
p. value 0.017
4 Number of dependent chi-square 13.074
D. f 9.000
p. value 0.159
5 Source of income chi-square 25.024
D. f 6.000
p. value 0.001
6 Loan diversion chi-square 13.384
D. f 3.000
p. value 0.001
Table 32 shows that the relationship between borrowers related factors and repayment status of
borrowers at (p. value < 0.05 level of significant. The relationship between each variable is
discussed as follows:
There is an association between age and repayment status of borrowers (p=0.046<0.05). The
result of test confirmed the above discussion. Hence, this variable is significant. This result is
also in line with the study made by Jemal (2003).
There is an association between educational level and repayment performance of borrowers

(p=0.017<0.05). However, this result is consistent to the descriptive result. As it indicated in the
46
above descriptive analyses in Table 28, the default rate of borrowers is varying at different level
of education. Besides, the chi-square test indicated that there is significant association between
education and on time loan repayment performance of borrowers. The study conducted by
Berehanu and Fufa (2008) confirmed that education level is a significant determinant of loan
repayment.
There is an association between sex and repayment performance (p=0.022<0.05). The result
implies that between two sex (male and female) either of them performs better. The descriptive
result set out that female borrowers perform better than males. Moreover, this result is also in
line with the study made by Rita (2011). This variable is also significant.
There is no an association between number of dependents and loan repayment performance. The
result is in line with the above presented descriptive result in Table 29. This result is
contradicting with the study result of Jemal (2003).
There is a strong association between loan repayment performance and source of income and
loan diversion. The descriptive results are also in line with the test value. This result is also
consistent with the study conducted by Abreham (2002), Jemal (2003), Berehanu (2005), and
Berehanu and Fufa (2008).
47
4.7. Challenges Faced by Borrowers and Institution
4.7.1. Challenges Faced By Borrowers
Table 33 Challenges faced by borrowers
Critical Major Moderate No problem at all
Item Challenges Frequency Percent Frequency Percent Frequency Percent Frequency Percent
1 Market problem 112 39 135 43 58 18.3 - -
2 High interest rate - - 136 46.3 169 53.7 - -
3 Lag of loan disbursement - - 132 44 159 50.6 17 5.4
4 Poor customer handling - - - - 21 6.6 292 93.4

of the institution
5 Lack of knowledge to - - 156 53.1 148 46.9 - -

keep accounting record
6 Distance of micro finance - - 32 10.3 65 20.6 217 69.1

institution office
Source: survey data 2017
As indicated in table 33, the researcher wanted to find out challenges faced by borrowers.
Depending on the question, the sampled respondents rank problems that hinder the loan
repayment process. Accordingly, 112 (39%) of sample borrowers reported that market problem
was the critical, while 135(43%) of respondents identified it as a major problem and 58(18.3%)
of respondents categorized it as moderate challenge.
About 136(46.3%) of respondents identified high interest rate as major problems, while
169(53.7%) of respondent identified as moderate.
48
Lag of loan disbursement was identified as major problems by 132(44%) of respondents, while
159(50.6%) of respondents said moderate and 17(5.4%) of respondents considered it as no
problem at all.
Lack of knowledge to keep accounting record was identified as a major problem by 156(53.1%)
of the respondents.
About 32(10.3%) of respondents identified distance of micro finance institution office as major
problem and 65(20.6%) of respondents said moderate. This implied that market problem is
critical one and high interest rate, lag of loan disbursement, lack of knowledge to keep
accounting record, distance of micro finance institution office are the major problems.
4.7.2. Challenges of the institution
Even though every organization planned to be effective through the implementation of different
activities, there are also challenges that hinder the effective functioning of the organization and
needs action for further improvement of the organization. The most typical challenges faced by
any MFI are credit risk. Moreover, the cost of debt collection per loan amount is, on average,
higher than in formal intermediation, especially in developing countries lending (Vento 2004) in
addition to this bonga branch of omo MFIs has many problems as an institution.
Lack of adequate man power is one of the major problems facing the institution. Due to this, the
officials explore that, the organization is not providing adequate support to its clients. The other
problem related to this is shortage of resource. Loan diversion by borrowers is also another
problem as MFIs. Same of loan disbursed was not used for the intended purpose, consequently,
the loan become in arrears. The officials also identified low collaboration with other
organizations as a problem. For instance, the court does not give timely decision on defaulters
which in turn leads to wastage of time as well as money.
49
5. SUMMERY, CONCLUSION AND RECOMMENDATIONS
5.1. Summary
One of the main problems of the poor performance of financial institutions is high rate of non-
repayment of loan. Demba-Gofa Woreda of Omo microfinance institution was characterized by
the same problem (Appendix 1).
This study was intended to identify the factors that influence loan repayment performance of
microfinance institution with reference to Demba-Gofa Woreda. A total of 330 respondents (314
borrowers and 16 employees) were including in this survey. Descriptive statistics were employed
in order to identify and analyze factors affecting loan repayment performance. According to the
descriptive results, all respondents (both borrowers and employee) were male dominant.
Majority of respondents are within the age range of 30-45. Regarding education level, most of
the borrowers have been attended at least primary school. A large proportion of borrowers are
married. Most of borrowers have dependents that need their support. Not more than half of the
sample borrowers had additional source of income. Regarding loan utilization, 36% of the
respondents have violated loan agreements, their main reasons being market problem and the
loan was not accede timely. However, majority of them have diverted loan on productive
purpose. Chi-square test indicated that except number of dependents the rest of borrowers related
factors showed an association with loan repayment performances. These are sex, age,
educational level, source of family income and loan division.
The entire respondents reported that they receive training before receiving loan and majority of
them confirm training helped them to increase their income, however, training focused on saving
than other aspects. Similarly, a large proportion of borrowers reported that as they are supervised
on loan utilization and loan repayment. In addition to this, almost all respondents considered the
importance of supervision for loan repayment. However, numbers of respondents reported for
loan utilization are more than respondents that reported for loan repayment. The finding also
indicated that time of supervision is inadequate.
50
More than half of the respondents reported that they feel unhappy with repayment period; this
belief is likely to have a negative impact on loan repayment. Regarding to loan processing period
majority of the respondents reported it time was took moderate.
All of the respondents perceive that the cost of default loan and understand the obligation to
repay loans in time; borrowers who paid timely their loan reported that they benefit from timely
payment. These beliefs are likely to have positive impacts on loan repayment. Respondents
identified the major challenges in the loan repayment process such as, market problem, lack of
knowledge to keep accounting record, high interest rate, lag of loan disbursement. In line with
this, the institution has many challenges such as, lack of adequate man power, shortage of
resources and low collaboration of other organizations.
51
5.2. Conclusion
5.2.1. Borrowers related factors
Male borrowers have performed worse on loan repayment performance than females. Even
though women outperform in term of loan repayment than men, the number of female borrowers
served by the institution are lower than that of male borrowers. This needs special attention on
empowering women.
Age of the borrowers is one of the significant determinants of loan repayment performance. As
the age increases repayment performance becomes improved. The elder borrowers assume more
responsibility to repay their loan than the younger ones.
The borrowers who have additional income source have good repayment performance.
Obviously, this is due to the availability of more income in order to cover expenditure of
consumption.
Borrowers who violated loan agreement or who diverted their loan for unintended purpose have
showed good repayment performance. It is not recommended to motivate to divert loan. The
secret behind this is the diverted loan is used on productive purpose and the reason to divert is
lack of markets.
5.2.2. Institution Related Factors
It is known that continuous follow- up and supervision is important for loan repayment, because
it makes borrowers to be committed on loan repayment. However, the result of this study
concluded that supervision made by the institution is inadequate. MFIs need to have mandatory
supervision for borrowers on loan utilization and repayment, which should be done continuously.
Even though the institution gives training in collaboration with other organization before
disbursing the loan, kind of training is more focused on saving. Lack of knowledge to keep
accounting record and marketing problem is still a major challenge to borrowers.
With regard to repayment period, clients of MFIs are unhappy. No grace period and the time is
not enough to effect repayment. According to evidence from this study in the of loan number of
dependents has no effect on loan repayment, majority of borrowers reported that lag time, release
52
does not affect the repayment performance. This finding needs to be under future research. Also
there may be a need to test if there is some sort of association between loan repayment and type
of business.
53
5.3. Recommendations
The institution should give special attention on the current male borrowers and as well as other
concerned organization has to do much in this direction.
The MFIs should give special attention to those of young borrowers by continuous follow up and
supervision and it should give more emphasis to low income borrowers to make them profitable
on their business. It is not recommended to motivate to divert loan. The secret behind this is the
diverted loan is used on productive purpose and the reason to divert is lack of market. Hence,
market study should be conducted before starting the business.
It is known that continuous follow- up and supervision is important for loan repayment, because
it makes borrowers to be committed on loan repayment. However, the result of this study
concluded that supervision made by the institution is inadequate. MFIs need to have mandatory
supervision for borrowers on loan utilization and repayment, which should be done continuously.
Even though the institution gives training in collaboration with other organization before the
disbursement of the loans, the training is focused more on saving. Lack of knowledge to keep
accounting record and marketing problem is still a major challenge to borrowers. Hence, training
of borrowers before and after receiving loans should be done by focusing on areas such as
business management and book keeping in addition to saving.
Lastly, the institution should focus on the repayment challenges which are stated by the
borrowers and take corrective actions. Among all market problem that are ranks high, so it is
recommended to conduct market study before starting business. Since clients demand low
interest rate, they identify the interest rate of MFI as major problem. The institution should make
proper awareness regarding the fairness of MFIs interest rate considering high cost of capital. In
order to solve the problems of the institution, one should improve which in turn solve the
subsequent problem financial capacity of the institution. The institution also needs to make
continuous of discussion with other concerned organizations to obtain their collaboration when
necessary. Taking the recommendation in to consideration Demba-Gofa Woreda Microfinance
Institution should attempt to increase the loan repayment rate of the borrowers.
54
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Reserve Bank of st. Louis review, January/February 2008, 90(1): 9-30.
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senior essay, department of economics Ethiopian civil service college, Addis
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Ugbomh, G., Achoja, f, Ideh, v and Ofuoku, a. 2008. Determinants of loan repayment
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59
7. APPENDICES
Appendix table 1. Number of Clients Being Served By Demba Gofa woreda of MFIs and
Repayment Rate (2014-2016)
Year Number of clients Amount of loan disbursed (Birr) Repayment rate (%)
Male Female Total Male Female Total Male Female
2014 892 680 1572 902,112 608, 170 1,510,282 82.23 93.53
2015 1024 800 1824 1,025,788 1,008,720 2,214,508 90.64 97.17
2016 1436 904 2340 1,430,650 1,024,960 2,455,610 90.47 92.35
Appendix table 2 repayment status by sub branch
Year Repayment rate (%) sub branches
Saziga Borda M. karza Z. Awande Lote Falka Laymas tsala Uba
2014 73.1 76.2 85 92 79 93 74 74
2015 78.3 83.2 81.3 87.6 95 86 96 90
2016 87.3 90.1 89.9 98 99.3 98.8 100 100
60
Appendix table 3 Name of clusters and their kebeles
Loan beneficiaries
Cluster Kebeles
M F Total
A. Sazga Tsala Tsanba 35 20 55
Yala 40 28 68
Dakisho Subo 28 19 47
Karcho Mela 30 20 50
Sazga 50 35 85
B. Uba Uba banda 20 18 38
Uba Pisgo 38 15 53
Uba Barie 31 16 47
Uba Sello Gacha 20 11 31
Uba Barguneh 20 14 34
C. Borda Gurade 60 36 96
Suka 75 30 105
Zelele 40 21 61
Borda 60 40 100
D. Mehal Kariza Donbe 38 17 55
Bola 26 10 36
Kariza 39 11 50
Zulizi Tsila 40 33 73
E. Zanga awarde Z. Zeligo 75 40 115
Z. Dormale 86 53 139
Awande 35 28 63
Z. Meagaza 155 60 215
F. Lote Zadha dola 140 70 210
Gayla Chaliber 80 55 135
Toja Sibe 75 38 113
Tsenga Darara 90 45 135
Shale Mitsa 25 8 33
61
G. Falika Warchi Layma 45 38 83
Falka tsawaye 38 32 70
Docha dambala 46 34 80
H. Layma tsala Tsala bana 21 20 41
Yalo Azliza 50 39 89
Darginsa 38 25 63
Chana gerfa 20 15 35
Shasha kolta 18 16 34
Zafa delle 30 10 40
Appendix table 4 Tables Study area clusters with their kebeles
Loan beneficiaries
Cluster Kebeles M F Total
A. Sazga Tsala Tsanba 35 20 55
Yala 40 28 68
Dakisho Subo 28 19 47
Karcho Mela 30 20 50
Sazga 50 35 85
B. Borda Gurade 60 36 96
Suka 75 30 105
Zszelele 40 21 61
Borda 60 40 100
C. Zanga Awarde Zeligo 75 40 115
Dormale 86 53 139
Meagaza 35 28 63
Awande 155 60 215
D. Lote Zadha Dola 140 70 210
Gayla Chaliber 80 55 135
Toja Sibe 75 38 113
Tsenga Darara 90 45 135
Shale Mitsa 25 8 33
62
Appendix 5 Questionnaire for clients/Borrowers
HARAMAYA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMIC
DEPARTMENT OF MANAGEMENT
Topic: Factors Influencing Loan Repayment Performance: A Case Study of Demba-Goffa

woreda of Omo Micro Finance Institution, SNNPR.
Dear respondents:
This questionnaire is prepared to collect data for the fulfillment Masters degree of MBA
specializing with the above research topic in college of business and economics. The information
given to as is highly privileged and will only be used for academic research purpose. Every
information‟s which will be provided by you is kept confidential. The finding will help to
improve loan repayment performance of borrowers of MFIs.
Thank you in advance of your cooperation.
Note:-
 Do not write your name (interviewer please don‟t write the name of respondents)
 For the questions requiring your opinion, please make tick (√) where you feel correct and
write your explanations opinions when you are requested on the space provided make it
clear and precise.
1. Personal Details
1.1 Sex: Male B. Female
1.2 Age: Below 30 B. 30 – 45 C. 46 - 55 D. Above 55
1.3. Marital Status
Single B. Married C. Divorced D. widowed
63
1.4. Your educational level is
A. No schooling at all B. primary school completed
C. high school completed D. Certificate
E. Diploma F. Degree and above
1.5. Number of dependent:
A. Non B. 1 – 2
C. 3 – 5 D. Above 5
1.6. What are your sources of income in the household?
A. from one business B. from additional (more) business
C. from husband/wife‟s monthly salary, pension etc
D. from more household member salary
E. Other __________________________________________________________
2. Institutional related questions
2.1. If yes do you think that period is enough to commence your repayment?
A. Yes B. No
2.2. If no what is the reason?
__________________________________________________________________
__________________________________________________________________
2.3. How do you feel about the repayment period set by OMFIs?
A. Happy B. Unhappy
64
2.4. If you feel unhappy, what are the reasons?
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
2.5. How do you perceive the loan processing time taken by MFI?
A. Took long time B. took moderate time C. took short time
2.6. If loan processing time is “Too long” what could be the reasons for the delay in your
opinion?
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
2.7. Does the delay on loan processing affect timely loan repayment?
A. Yes B. No
2.8. If yes, what was the impact of the delay? _______________________________________
________________________________________________________________________
2.9. Have you ever been supervised regarding loan utilization by OMFIs staff?
A. Yes B. No
65
2.10. Have you ever been supervised for loan repayment?
A. Yes B. No
2.11. If yes to either on #2.9 or # 2.10, how many times the loan officer visits your business
and checks your repayment status?
A. Frequently B. Periodically
C. Occasionally D. Rarely
2.12. Was the times of supervision adequate in your opinion?
A. Yes B. No
2.13. If No, what is the time required?
2.14. Do you consider supervision as being important for loan repayment?
A. Yes B. No
2.15. If yes, why it is important ____________________________________________?
2.16. Did you take training from omo micro finance before receiving loan?
A. Yes B. No
2.17. If yes, what kind of training was it?
A. Business plan 1. Yes 2. No
B. Marketing 1. Yes 2. No
C. Saving 1. Yes 2. No
D. Book keeping 1. Yes 2. No
E. other (specify) __________________________________________________
2.18. By whom this training was given?
66
A. By officials from MFI
B. by external bodies such as managers from other sectors
C. by external bodies and officials from MFI (with collaboration)
2.19. Do you think that the training has helped you increase your income?
A. Yes B. No
3. Loan Utilization and Repayment Related Questions
3.1. Did you spend the entire loan on purposes specified in the loan agreement?
A. Yes B. No
3.2. If No, for what purpose do you spend?
A. Consumption B. For celebrating holiday
C. For children education D. For other business activities
E. Other _________________________________________________________
3.3. If your answer is for other business activities what was/were the reason (s) for spending
part/entire loan on none intended business purposes?
A. The loan was not accede timely
B. The loan agreement did not coincide with my initial intention
C. Market problem
D. other (specify) ____________________________________________________
3.4. Have you received loan from MFI previously?
A. Yes B. No
67
3.5. What is the status of recent loan?
A. Fully repaid
B. Repayment on schedule
C. Repayment in arrears
3.6. What was the problem for the loan to be in arrears?
A. Loan based business activity was not profitable
B. Used some of the loan for household living expense
C. Sold on credit but did not get paid back on time
D. Loss of assets acquired by the loan
E. personal problem (like sick death …)
F. Inadequate supervision by the loan officer
G. Other __________________________________________________________
3.7. Did you enjoy „benefits‟ for timely fully repayment of previous loan?
A. Yes B. No
3.8. If yes, what are the benefits?
A. Access to the next higher loan 1. Yes 2. No
B. Build good business relationship with the loan provider 1. Yes 2. No
C. Build social states 1. Yes 2. No
3.9. If yes, which of the following is the most important in forcing our to repay the loan in
time?
A. Claim against personal wealth
68
B. Social sanctions (loss of social status)
C. Fear of losing another loan in future
D. Other (specify) _________________________________________________
3.10. Indicate the major challenges you face during loan repayment process
Appendix Tables 4
Critical Major Moderate No problem at all

Market problem
High interest rate
Lag of loan disbursement
Poor customer handing of the
institution
Lack of knowledge to keep accounting
record
Distance of micro finance institution
office
Thank You Very Much
69
Appendix 6 Questionnaire for Mangers and Loan Officers of MFIs
HARAMAYA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF BUSINESS ADMINISTRATION
Topic: Factors Influencing Loan Repayment Performance: A Case Study of Demba Gofa
Woreda Micro Finance Institution, Gamo-Goffa Zone, SNNPR.
Dear respondents:
This questionnaire is prepared to collect data for the fulfillment of degree of MBA with the
above project topic in college of business and economics. The information given to as is highly
privileged and will only be used for academic research purpose. Every information‟s which will
be provided by you is kept confidential. The finding will help to improve loan repayment
performance of borrower of borrowers of MFIs.
Thank you in advance of your cooperation.
Note:-
 Do not write your name

 For the questions requiring your opinion, please make tick (√) where you feel correct and
write your explanations opinions when you are requested on the space provided make it
clear and precise.
1. Personal Information
1.1. Genders A. Male B. Female

1.2. Age category
A. Below 30 B. 30 – 45 C. 46 – 55 D. Above 55
70
1.3. Education level
A. High school completed B. Certificate C. Diploma
D. 1st Degree E. 2nd Degree and above
1.4. Work experience
A. Less than one year B. 1 – 5 Year
C. 5 – 10 Year D. above 10 year
2. Work Related Question
2.1. Do your organization give training to borrower?
A. Yes B. No
2.2. If yes, for what purpose?
A. Enhancing the entrepreneurial capacity of clients
B. Helps to repay their loan on time
C. Not to divert loan to other purpose
D. Other (specify) __________________________________________________
2.3. When do you provide the training?
A. Before loan disbursement
B. Most of the time before loan disbursement and some times before disbursement
C. Most of the time after loan disbursement and some times before disbursement
D. After disbursement
71
2.4. How many times you visit / supervise/ clients business and loan repayment status?
A. Two times a month B. Once a month
C. Quarterly D. Semi annually
2.5. Do you believe that the training and supervision given to clients are adequate?
A. Yes B. No
2.6. If no, what is the reason?
A. Lack of adequate man power
B. Lack of qualified man power
C. Shortage of resource
D. Unwillingness of clients to train
E. Other _________________________________________________________
2.7. What are the major challenges you face during loan repayment process? Please state on
the lines provided below.
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Thank You Very Much!
72

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FACTORS INFLUENCING LOAN REPAYMENT PERFORMANCE IN

MICROFINANCE INSTITUTION: THE CASE OF DEMBA GOFA WOREDA

A Thesis Submitted to the College of Business and Economics, Department of

Postgraduate Program Directorate

In Partial Fulfillment of the Requirements for the Master’s of Business

_________________________ _________________ _____________________

Major Advisor Signature Date

Dr. ________________________ ________________________ _________________

Chairperson Signature Date

Dr. ________________________ ______________________ _________________

Internal Examiner Signature Date

Dr . ___________________________ ______________________ _________________

External Examiner Signature Date

Name of Candidate: Eyob Aya Signature …………….

MFI Microfinance Institution

MFED Ministry of Finance and Economic Development

MSEs Micro and Small Enterprises

NBE National Bank of Ethiopia

NGO Non-Governmental Organizations

OMFIs Omo Microfinance Institutions

SNNPRS Southern Nations Nationalities and People‟s Regional State

STATEMENT OF THE AUTHOR v

LIST OF TABLES xii

LIST OF FIGURES xiv

LIST OF TABLES IN THE APPENDEX xv

1.1. Background of the Study 1

2.1. Theoretical Literature 6

3.1. Description of Study Area 16

4.1. The Respondents Profile 24

Table 1 Summary of study population and sample size 20

Table 2 The respondent‟s profile 24

Table 3 Number of dependents supported by borrowers 26

Table 4 Responses on sources of family income 26

Table 5 Respondents feelings on repayment period 27

Table 6 Effect of loan processing period on timely loan repayment 28

Table 7 Supervision on loan utilization and repayment 29

Table 8 Respondents' opinion on the adequacy of supervision for loan repayment 30

Table 9 Respondents provided training before taking loan 31

Table 10 Employees responses on training given to borrows 31

Table 11 Borrowers' opinions on the effects of the training on their income 33

Table 12 Loan utilization trend 34

Table 14 Borrowers received loan previously from MFIs 35

Table 15 The status of recent loans 36

Table 16 Reason for Defaults 36

Table 17 Types of benefits 37

Table 18 Factors forcing borrowers to repay loan in time 37

Table 19 Gender Distributions of Borrowers That Fully Repaid their Loans 38

Table 20 Age Distribution of Borrowers That Fully Repaid Loans 38

Table 21 Marital Status Distributions of Borrowers That Fully Repaid Loans 39

Table 23 Loan repayment and number of dependents 40

Table 24 Sources of income and loan repayment 41

Table 25 Borrowers in arrears by gender 41

Table 26 Borrowers in arrears by age 42

Table 27 Borrowers in default by martial state 42

Table 28 Borrowers in arrears by educational level 42

Table 29 Borrowers in default and number of dependents 43

Table 30 Source of income and defaulting loan repayment 44

Table 31 Loan diverter and loan repayment 45

Table 32 Chi-square tests 46

Table 33 Challenges faced by borrowers 48

Figure 1. Conceptual Framework of the study 13

1.2. Statement of the Problem

1.3. Research Question

_________________ _ _____________

Dr. ________ _

Dr. ______ _

Dr . _________ _