Habtamu Ggashaye111

NEW BLUE COLLEGE
BAHIRDAR
FACTORS AFFECTING LOAN REPAYMENT PERFORMANCE OF MICRO

FINANCE INSTITUTIONS: THE CASE OF AMHARA CREDIT AND SAVING
INSTITUTION DEMBECHA CITY ADMINISTRATION SUB BRUNCH IN WEST
GOJJAM ZONE
A Research Paper Submitted to New Blue College of Business and

Economics in Partial fulfillment of the requirements for the BA
Degree In management
Prepared By Habtamu Gashaye Temesgen

ID NO: ………………………
ADVISER: -----------------------
BAHIR DAR, ETHIOPIA
August, 2022
I
Declaration
I, Habtamu Gashaye, do here by declare that this study is my original work and that it has
not been submitted partially or in full by any person for an award of degree in any other
university/institution/.
Declared by:
Name: Habtamu Gashaye
Signature: --------------------------
Date: --------------------------------
II
Certificate
I certify that this Research work entitled ‘‘Factors affecting loan repayment performance of
micro finance institutions in Amhara Regional State: The case of Dembecha Town
Administration’’ has been under taken independently by Habtamu Gashaye under my guidance
and supervision.
Name of Advisor: -------------------------------
Signature of Advisor: -----------------------------------
Date of Submission: -------------------------------------
Place: New Blue College
III
Approval
We, the undersigned certify that we have read and here by recommended to the New Blue
College to accept the study by Habtamu Gashaye, entitled ‘‘Factors Affecting Loan
repayment Performance of Micro Finance Institutions in Amhara Regional State: The case
of Dembecha Town Adminstration’’ in partial fulfillment of the requirement for the award
of BA Degree of in Management.
Name of the Advisor: ---------------------------- Signature---------------Date-------------
Name of Head of Department: -----------------------------Signature---------------Date--------
IV
ACKNOWLEDGMENTS
I would like praise and honor the almighty God for the opportunity and capacity given to me to
realize my aspiration.
Several individuals and organizations deserve acknowledgement for their contributions to the study.
My foremost appreciation and thanks go to my Coordinator m/r Amanu for his valuable and
constructive comment, suggestions and overall assistance from the early stage to the completion of
the study.
I would also like to carry my gratitude to ACSI Dembecha sub brunch for providing me support
during the process of data collection. Special thanks go to Ato Getnet Amanu sub branch manager
who provided available information about the study respondents throughout the data collection
period.
My special gratitude goes to the members of the sample borrowers of ACSI Dembecha sub
branch, who responded numerous questions by devoting their golden time. Generally I would
like to say thank you for all individuals who participate directly or indirectly in this research
work.
V
Table of Contents
CONTENTS PAG
Declaration..................................................................................................................................................II
Certificate...................................................................................................................................................III
Approval....................................................................................................................................................IV
ACKNOWLEDGMENTS...........................................................................................................................V
List of figures............................................................................................................................................VII
LIST OF ACRONYMS............................................................................................................................VIII
ABSTRACT................................................................................................................................................9
CHAPTER ONE..............................................................................................................................................1
INTRODUCTION...........................................................................................................................................1
1.1. Background of the study...................................................................................................................1
1.2 Statements of the Problem................................................................................................................3
1.2.1 Research Questions.....................................................................................................................4
1.3 Objectives of the Study......................................................................................................................4
1.3.1 General objective........................................................................................................................4
1.3.2 Specific objectives......................................................................................................................4
1.4 Significance of the Study...................................................................................................................5
1.5. Delimitation of the study..................................................................................................................5
1.7. Limitations of the Study....................................................................................................................6
CHAPTER TWO.............................................................................................................................................6
REVIEW OF RELATED LITERATURE...............................................................................................................6
2.1. The Need for MFI..............................................................................................................................6
2.2. Group lending...................................................................................................................................7
2.3. Credit Markets and Rationing...........................................................................................................7
2.4. Impact Assessment and Sustainability..............................................................................................9
2.5. Empirical Literature..........................................................................................................................9
2.6.1 Empirical studies of other countries...........................................................................................9
2.6.2. Empirical Studies in Ethiopia....................................................................................................10
2.7. Conceptual frame work..................................................................................................................12
CHAPTER THREE...................................................................................................................................13
VI
RESEARCH METHODOLOGY..............................................................................................................13
3.2. Research design and approach.......................................................................................................14
3.2. Target population...........................................................................................................................15
3.3 Sample size and Sampling technique...............................................................................................15
3.4 Sources of Data................................................................................................................................16
3.5. Data collection instruments and procedures..................................................................................16
3.7. Data Analyses Techniques..............................................................................................................16
CHAPTER FOUR.....................................................................................................................................17
4. DATA ANALYSIS AND INTERPRETATION OF RESULTS.......................................................17
4.1 Response rate.............................................................................................................................17
4.1 Characteristics of the sample respondents......................................................................................17
4.2. Regression analysis Logistic......................................................................................................31
CHAPTER FIVE.......................................................................................................................................33
5 SUMMARY, CONCLUSION AND RECOMMENDATIONS.........................................................33
5.1 Summary of Major Findings......................................................................................................33
5.2 Conclusion.................................................................................................................................34
5.3 Recommendations......................................................................................................................34
Bibliography...............................................................................................................................................35
List of figures
Figure1 1: conceptual frame work (own model) ------------------------------------------------23
Figure1 2 Location Map of Dembecha Woreda-------------------------------------------------25
VII
LIST OF ACRONYMS
ACSI Amhara Credit and Saving Institution
CSA Central statistics authority
DBE Development bank of Ethiopia
CBE Commercial bank of Ethiopia
DCA Dembecha city Administration
GDP Gross Domestic Product
MFDR Micro Finance Development Report
MFI Microfinance institution
NBE National Bank of Ethiopia
VIII
ABSTRACT
Microfinance institutions in Ethiopia are playing an important role in poverty reduction
strategies initiated by the government of Ethiopia. These institutions have a mission of creating
and facilitating credit and other financial schemes to enhance self-employment opportunities and
poverty reduction. The study was aimed at identifying and analyzing the potential factors that
affects repayment performance of borrowers using the structured questionnaires. Accordingly,
in order to achieve this objective 190 sample borrowers were selected from the total of 508
borrowers served by those selected MFIs. The result shows the variables including sex,
residence, education, age level and marital status, loan size, and loan diversion, availability of
other credit sources, loan supervision, suitability of loan repayment period and income were the
most contributing factor. Number of dependents and being male and non using financial
recording reduce the loan repayment performance, Borrowers who are younger, applied for
larger loan amount, whose income support more dependents are disfavored. The credit scheme
has contributed positively towards improving the income, access to education, access to health
service, and nutritional status of borrowers. Thus, it is recommended that the lending institutes
needs to focus on monitoring loan utilization systems of borrowers and technical support needs
of the target borrowers through delivering better awareness creation to organize the more viable
borrowers, close supervision and follow-up.
Key words: Borrower, Default, Defaulter, Group loan, interest rate, Lender, Loan, Loan
repayment, Rationed
9
CHAPTER ONE
INTRODUCTION
1.1. Background of the study
Ethiopia is one of the ongoing developing countries in east Africa which has different
administrative zones and regional states. Amahara regional state is one of the regional states in
the Federal Democratic Republic of Ethiopia. It is located in the north western part of the
country between 9-20-140 North latitude and 36-20-40-20 east longitude. The region comprises
15.3% the country’s territory (Yassin Ahmed 1997) .Compared with other developed countries
Ethiopia is one of the lowest income countries in the world. Its economy, which is mainly
dependent on agriculture, has been hit by several internal and external shocks. Devastating wars,
frequent draughts, high population growth, distorted investment environment, volatile primary
product prices, etc have been some of the shocks the economy has been experiencing. These and
a lot other factors resulted in the decline of the economy as a whole, while the living conditions
of the population have been continuously deteriorating. Specifically during the Derge period
(1974 -1991) the Ethiopian economy was performing very poorly under a socialist oriented
command economy.
Earlier than 1973 the Ethiopian financial system was fairly stable. Other than after 1974, the
economy began to face major political, social and economic instabilities, which reduced the
relative performance of the various sectors. Private investment was severely undermined due to
policies followed by the Derge.
Following the go down of the Derge, however, the government of Ethiopia has taken several
measures to reverse the economic decline and worsening poverty situation in the country (Jemal
A. 2003). Then after according to the report by MEDaC (1999) the Ethiopian economy has
registered a recovery in economic performance since the introduction of economic reform
program after a period of stagnation and decline for nearly two decades.
1
Even though the reform programs and policy changes resulted in economic recovery and growth
in GDP, the achievement towards eradication of poverty was not satisfactory. This is because of
the fact that without ensuring adequate private sector activities, thereby creating higher
employment opportunities, it is difficult to reduce the existing unemployment problem in the
country (Berhanu, 1999).
Although provision of credit to rural agricultural household for purchase of agricultural inputs
and tools has since long been practiced in Ethiopia, credit schemes targeted at the urban or rural
poor were non-existent until recently. Since the 1970s however some NGOs have been providing
credit to poor households in some parts of the country, side by side with activities like delivering
relief and development services (MFDR, 2001; Mengistu, 1997).
Since micro-credit delivery and saving mobilization in Ethiopia are being carried out by NGOs,
government departments, co-operatives and others in a fragmented and inconsistent way, the
government took the initiative to establish a regulatory framework in order to facilitate sound
development of the micro finance industry. Accordingly proclamation No. 40/1996 was enacted
to provide for the licensing and supervision of the business of micro financing by empowering
the NBE to license and supervise them (MFDR, 2000).
These MFIs aim at poverty alleviation through targeting specific groups (reaching the poor) and
group based lending. In a short period of time the MFIs have managed to reach a sizable portion
of the rural and urban poor, and in so doing have gained significant experience (MFDR, 2000).
Among such MFI established in response to proclamation No 40/1996 ACSI is the one which is
operating in Amhara national regional state. The operation of ACSI is traced back to 1995 it was
initially initiated by the Organization for the Rehabilitation and Development in Amhara
(ORDA), an indigenous NGO engaged in development activities in the Amhara region. ACSI
had undertaken its pilot activities in 1996, and was licensed as a microfinance share company in
April 1997. Its primary mission is to improve the economic situation of the low income,
productive poor in the Amhara region – primarily through increased access to lending and
savings services. The institution makes predominantly agricultural loans using group-lending
methodology through a regional network of 10 branches and 174 sub-branches (ACSI, 2004).
2
1.2 Statements of the Problem
In Ethiopia the vicious circle of poverty –low capital – low productivity – low income - low
savings for investment activities – low capital formation make it difficult to initiate or expand
agricultural and non-agricultural activities of the smallholder production in the rural area where
85% of the population is residing.
The accessibility of insufficient financial service providers in many rural areas brings its own
complex problems in the poverty alleviation campaign. To solve this problem the regional
government provides comprehensive financial services facilities, through microfinance,
cooperatives and NGOs (MoARD, 2006).
It is generally accepted that credit, which is put to productive use, results in good returns. But
credit provision is such a risky business that, in addition to other reasons of varied nature, it may
involve fraudulent and opportunistic behavior. The lender in the formal financial system is at a
disadvantage of information on the burrower's behavior. Fortunately, group based micro
financing system that involves peer pressure and joint liability has evolved to counter the
problems of a conventional bank that provides a collateral backed credit alienating the poor
(Mengistu, 1997).
For such MFIs to be successful, they should be sustainable both financially as well as
institutionally. On top of sustainability one has to include developmental effects like income on
the target group as core measure of success. For agencies that are involved in the development or
in assisting the development of a micro-credit institution, it is recommended that profitability and
sustainability should be the final goals, and therefore the only indicators of success (Rudkins,
1994).
Even though MFIs gives such a remarkable service to the poor the borrower’s experiencing
default problems as it has been seen in their declining repayment rates. To outreach large number
of poor and lift themselves out from poverty, the numbers of defaulters have been challenging
the institution’s social as well as financial objectives by retaining large amount of loan, as a
result this hinder it not to combat to ward poverty reduction strategy and its realization of
sustainability by diminishing loan repayment rate.
3
Loan default may also deny new applicants access to credit as the bank's cash-flow management
problems augment in direct proportion to the increasing default problem.
It is obvious that many rural credit schemes have sustained heavy losses because of poor loan
collection. And yet a lot more have been dependent on government subsidy to financially cover
the losses they faced through loan default. But such dependence will not prove helpful for
sustainability. MFIs should rather depend on loan recovery to have a sustainable financial
position in this regard, so that they can meet their objective of alleviating poverty Hunte (1996).
1.2.1 Research Questions

Based on the problem stated and the objectives outlined above, the study was try to answer the
following research questions:
 What are some of the factors that enhance the loan default problem in micro financing
schemes?
 What characteristics of borrowers should be taken into consideration by such institutions
in the process of screening their clients in a way that will not put in danger their financial
position due to the default problem?
 What are the benefits from such lending schemes for poor beneficiaries? In an attempt to
answer these questions this study will try to analyze the factors behind loan repayment
problem, and the impact of the micro financing scheme on the poor beneficiaries by
taking the case of ACSI's operation in Dembecha Town Administration of Amhara
region.
1.3 Objectives of the Study

1.3.1 General objective
The main objective of this study is to investigate determinants of loan repayment performance of
ACSI in Dembecha City Administration.
1.3.2 Specific objectives:
 To investigate the factors that influences the loan repayment performance of borrowers
financed by ACSI.
 To evaluate the efficiency of ACSI’ screening mechanism.
4
 To assess the effect of the credit scheme on the beneficiaries in terms of reducing
poverty.
1.4 Significance of the Study
MFIs were important in developing countries like, Ethiopia for poverty reduction and creating
employment opportunity for borrowers and also it Play important role by offering financial
service such as loans, savings, money transfer services, micro insurance and other financial
products targeted at poor and low income people”. For such institutions to give these service in
consistent they should be profitable and sustainable. This depends on efficient loan repayment
performance.
This research has important for the following bodies
For the organization: because this research suggests different solutions for the existing
problems and the organization will draw mechanisms for selecting borrowers it will benefit.
For people living in rural areas: since the research shows the benefits of credit for poverty
reduction including rural people those who produce many plants using fertilizers borrowing
money from ACSI.
Generally the research is very important for adults, university graduates, merchants, and others.
1.5. Delimitation of the study

The researcher believed that this type of problems may be found in different areas. But due to
different constraint this research was delimited on Dembecha city administration of Amhara
region.
1.6. Organization of the Study
The study has five chapters. The first chapter deals with background of the study, which
includes statement of the problem, objectives of the study, research questions, significance of
the study, delimitation of the study, operational definitions of key terms and organization of the
study. The second chapter reveals the review of related literature which provides detailed
information related to MSEs in particular with opinion of different writers. The third chapter
deals with the descriptions of the study area, research design and methodology, population and
5
sampling techniques, data sources, data gathering tools, validity and reliability of the
instruments, data collection procedure and methods of data analysis. The fourth chapter comes
with the analysis and conclusions. Finally list of reference.
1.7. Limitations of the Study

The study will affected with the following limitations
 Limited number of sample

 Time shortage
 Lack of budget
CHAPTER TWO
REVIEW OF RELATED LITERATURE
6
2.1. The Need for MFI
The formal financial institutions played little role in financing development efforts in the rural
areas. This is because they are clustered in urban areas, concentrate on funding large enterprises
and are inaccessible to the rural poor especially in terms of distance.
In addition the rural poor can’t fulfill banking requirement to get loans. The requirements for
collateral and intrinsic banking procedures are in most cases very difficult for the poor to deal
with. The volume of loan demanded by small farmers is not appealing to banks. Such loans are
difficult to manage and their processing not financially feasible. Jemale (2003).
Dejene (2003) argues that the poor are often marginalized in the formal credit markets. This can
be explained partly in terms of: 1) a lack of collateral, which makes lending to the poor a risky
venture; 2) transaction cost of lending to and borrowing by the poor is often high; and 3) utility
loss from repayment is higher for the poor as compared to the rich.
Johnson and Rogaley (1997) defined micro finance as the provision of financial services to the
poor involving small deposits and loans. MFIs use peer monitoring and joint liability structure to
overcome the screening, monitoring and enforcement problems commonly encountered by
formal lending institutions (Sinha,1998).
2.2. Group lending
Since the 1970s, group-lending programs have been promoted in many developing countries.
Common characteristic of group lending is that the group obtains the loan under joint liability; so
each member is made responsible for repayment of loans of his or her peers. Joint liability, but
possibly more so, the threat of losing access to future credit, incites members to perform various
functions, including screening of loan applicants, monitoring the individual borrower’s efforts,
fortunes and shocks, and enforcing repayment of their peers’ loan (Zeller, 1996).
The existing theoretical models of peer monitoring deduce that repayment performance in group
lending programs is positively related to the homogeneity of members with respect to the
riskiness of their projects (Stiglitz, 1993; Besley and Coate, 1995).
Zeller (1996) argues that probably the most important rationale for group lending is the
information and monitoring advantages that group-based financial institutions at the community
7
level have, compared to individual contracts between a bank and borrower. Group members get
important information like reputation, indebtedness and asset ownership of the loan applicants at
a lower cost. They can also easily monitor individual efforts made towards ensuring repayment.
2.3. Credit Markets and Rationing

The market for credit differs from standard markets for goods and services in two important
ways. As we know from the classical competitive theory, the first difference lies in the fact that
in standard markets a number of agents take part in buying and selling a homogenous
commodity. The second difference lies in the fact that the handover of the good or service and
the payment for it occur simultaneously in such markets.
In contrast, credit received today by an individual is exchanged for a promise of repayment in the
future. Since promises differ from person to person, and are frequently broken, there may be no
objective way of determining that a promise will be kept. That is, moral hazard and adverse
selection may affect the likelihood of the promise being kept and hence of that of loan repayment
(Jaffe and Stiglitz, 1990)
As Stiglitz and Weiss (1981) noted, one way of explaining this condition associates it with
shorter long term disequilibria. In the short term it is viewed as temporary disequilibrium
phenomenon; i.e., the economy has incurred an exogenous shock, and for reasons not fully
explained, there is some stickiness in the prices of capital (interest rates) so that there is
transitional period during which rationing of credit occurs. On the other hand long term credit
rationing is explained by governmental constraints such as usury laws or minimum wage
legislation.
Jaffe and Stiglitz (1990) discuss certain features of loan contracts and loan markets that make
standard demand and supply model inapplicable, giving rise to credit rationing. These features
include uncertainly the nature of loan contracts, and borrowers risk behavior. For instance,
uncertainty concerning the borrower’s ability, or willingness of repaying loans when they are
due, results in divergences between promised and actual repayments, creating risk of default.
Since the response of lenders to uncertainty is determined in part by the extent of their risk
aversion, they may use credit rationing to reduce default risk.
8
Since lenders are not able to control all the actions of their borrowers directly, they formulate the
terms of loan contract in such a way that induces the borrower to act in the interest of the lender.
For this reason the expected return by the lender may rise less rapidly than the interest rate; and,
beyond a point may actually decline. Clearly at such an interest rate beyond which the expected
return to the lender starts to decrease, the demand for credit exceeds the supply of loans. The
lender wouldn’t give a loan to an individual who offers higher interest rate since its expected
return is lower. Hence there are no competitive forces resulting supply to equal demand and
credit is rationed. The same is true with increasing the collateral requirements beyond some
point. (Ibid)
2.4. Impact Assessment and Sustainability
Microfinance institutions have become an increasingly important component of strategies to

alleviate poverty. Hence, knowledge about the achievements of such programs is important.
Impact assessment studies are essential to evaluate the success of the program or to see whether
the program brings the desired benefits to the target groups. Hulme (2000) noted that impact
assessment studies have become increasingly popular with donor agencies, and in consequence,
have become an increasingly significant activity for recipient agencies.
According to Khandker et al. (1995) the concept of sustainability of micro finance can be divided
into four interrelated ideas; namely, financial viability, economic viability, institutional viability
and borrower viability. Financial viability relates to the fact that a lending institution should at
least equate the cost per each unit of currency lent to the price it charges its borrowers (i.e. the
interest rate). Economic viability relates to meeting the economic cost of funds (opportunity cost)
used for credit and other operations with the income it generates from its lending activities.
Institutional viability is related more to efficient management and decision-making process.
Borrower viability however, refers to whether the borrowers of the institution have achieved
higher flows of income over time and is able to repay back their loans. It is this concept of
sustainability (in addition to financial sustainability) that is given more emphasis in this study.
9
2.5. Empirical Literature
2.6.1 Empirical studies of other countries

There have been a number of studies conducted in different developing countries regarding loan
repayment performance of MFIs .We begin by those that focus on loan repayments.
Ajayi (1992) employed correlation and multiple regression analysis in his study about factors
affecting default in residential mortgages of the Federal Mortgage bank of Nigeria. His results
revealed that cost of construction, monthly repayment, loan to valve ratio, market value of
property, age of borrower and annual income of borrower enhance loan defaults, while expected
rental income from property reduces loan default.
Vigano (1993) in his study about the case of development bank of Burkina Faso employed
accredit-scoring model. He found out that being women, married, aged, more business
experience, value of assets, timeliness of loan release, small periodical repayments, project
diversification and being a pre-existing depositor are positively related to loan repayment
performance. On the other hand, loan in kind, smaller loan than required, long waiting period
from application to loan release and availability of other source of credit were found to have
negative relation with loan repayment performance.
Zellar (1996) analyzed the determinants of loan repayment of credit groups in Madagascar with
the purpose of quantifying the effect of intra-group pooling of risky assets or projects by
controlling for community level and program design factors that influence the repayment rate of
group’s loan. He employed a to bit model using a data set on groups from six different lending
programs. The results showed that socially cohesive groups pool risks by diversifying the
members’ asset portfolio so that their repayment performance is improved even in communities
with high risk exposure Groups with higher level of social cohesion as measured by the number
of common bonds, have a better repayment rate. Moreover the results also indicated that it is not
the level of physical and human assets of group members but the degree of variance of such
assets among members that leads to better repayment, by pooling risks among group members.
2.6.2. Empirical Studies in Ethiopia
Looking at the situation of Ethiopia empirical studies on the analysis of determinants of loan
repayment and impact analysis are very few. Regarding loan repayment an econometric
10
estimation was conducted by Mengistu (1997) taking the case of micro enterprises in Awasa and
Bahir Dar towns. The analysis consisted of estimating two equations, one for loan repayment and
the other for loan rationing. According to the estimation results (employing binomial probit
model for loans repayment) he reported that the number of workers employed has positive
relation with full loan repayment for both towns, while loan size and loan diversion were
negatively related. Age and weekly repayment period had positive relation with repaying loan
infull for Awasa. In the case of Bahir Dar, loan expectation and number of workers employed
have a positive relation with full repayment, while loan diversion and availability of other
sources of credit have a negative impact. The predicted probabilities of full loan repayment were
53% and78% for Awasa and Bahir Dar respectively.
In relation to loan rationing for the case of Bahir Dar, six out of nine variables are significant.
Accordingly, loan size, expectation for another loan and availability of other credit sources are
positively related with loan granting without rationing. On the other hand number of workers
employed, supervision visits and loan diversion have negative impact. For the case of Awasa,
five variables are significant; namely, loan size, age, education, and weekly repayment period
and loan diversion. Literate borrowers and borrowers with relatively higher level of age were in
correctly rationed despite being good payers.
In his study on the Project Office for the Creation of Small–Scale Business
Opportunities(POCSSBO) in Addis Ababa, Berhanu (1999) using probit model found that
education; timely loan granting and the use of accounting system are negatively related to the
proportion of loan funds diverted. However loan size, numbers of dependents with in the
household and consumption expenditure is positively related to loan diversion. He reported that
loan diversion and loan size are negatively related to full loan repayment while age is positively
related.
With regards to loan rationing mechanism, it was found that borrowers who secured high value
of collateral and those with relatively longer period were favored while those with higher equity
share and extensive experience in related activity were disfavored. This leads to the conclusion
that the bank's rationing mechanism didn't much with the repayment behavior of the borrowers.
Coming to studies on impact analysis, Kassa (1998) in his study of the impact of micro financing
11
gander the micro enterprise project scheme in southern Ethiopia has reported growth in income,
employment, consumption and medical expenditure of the beneficiaries after the loan. Using
Wilcoxon Matched Pairs Non-Parametric test, he also indicated that the average income after the
loan is greater than that before the loan, in all the three loan cycles.
Berhanu (1999) also used Wilcoxon test and found that health, education and
consumptionexpenditures have increased after loan compared to that before loan. Employment
and householdincome have also increased after the loan. But he found unsatisfactory results for
savingmobilization, as POCSSBO did not attach the saving facility with its credit program or
facility.
2.7. Conceptual frame work

Different scholars wrote about the loan repayment mechanisms periods and other loan related facts.
The accessibility of insufficient financial service providers in many rural areas brings its own
complex problems in the poverty alleviation campaign.
The lending policy was mainly oriented to financing foreign enterprises and wealthy clients
while domestic small borrowers were rationed out and forced to seek credit from informal
finance (Mauri, 1997). In addition according to Solomon (1996) the banks serve big businessmen
and disregard poor households as bankable loan repayments is affected with different variables
due to different researchers put so this research have used this conceptual frame work
12
13
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter was present the research methodology used in the study. It describes the study
design, research approaches to be used and the target population from which the sample is to be
drawn. Furthermore, the chapter provides sampling procedures used for data gathering in this
study and data collection techniques. It also explains how data will be analyzed, presented and
discussed. Lastly, the chapter explains research procedures, methods of data analysis.
3.1. Description of the Study Area
Dembecha is one of the woredas in the Amhara Region of Ethiopia in West Gojjam Zone

surrounded on the west by Bure,, on the northwest by JabiTehnan, on the north by DegaDamot,
and on the east and south by the East Gojjam Zone. According to dembecha municipality, the
relative location of Dembecha town, surrounded by lejet kebele in east and north, mekelamo
kebele in west and berenzima kebele. On the other hand the absolute location of Dembecha town
has a latitude and longitude of 10°33′Nand 37°29′E) with an elevation of 2083 meters above sea
level (CSA 2007). The geographical location map of Dembecha town is looks like the following
shape where generated from geographic information system. Dembecha town has a population of
26728 with an area of 9720 hectare area at location. The major economic activates in the town
are trade, manufacturing, hotels service and other social services. The town has classified in to
two urban Keble (01 and 02 Keble) administrations.
14
Figure 1: Location map of Demebecha Woreda
3.2. Research design and approach

The main purpose of this study will investigate the factors that influence the loan repayment
performance of borrowers financed by ACSI, to evaluate the efficiency of ACSI’s screening
mechanism and to assess the effect of the credit scheme on the beneficiaries in terms of reducing
poverty at Dembecha town. The study employed descriptive survey design. This will because
descriptive survey design enables to obtain information concerning the status of the phenomena
to describe, “What exists” with respect to variables or conditions in a situation (Chandran, 2004).
It can also enable the researcher to analyze and identify the factors that influence loan repayment
performance of MFIs. The approach followed was quantitative and qualitative research
approach, otherwise mixed approach (Creswell, 2006).
15
3.2. Target population
A population can be defined as all people or items (unit of analysis) with the characteristics that
the researchers wish to study. The analysis may be a person, group, country, organization, object,
or any other entity that the researchers wish to draw scientific suggestions (Bhattacherjee, 2012).
The borrower’s data has been collected from borrower loan ledger profile of the institution
(ACSI Dembecha town). The study populations will both defaulters and non defaulters during
the data collection period. Currently the institution (ACSI Dembecha sub branch) has 508
borrowers. Among these male, 330 are female178 In place of residence.
3.3 Sample size and Sampling technique.

The main purpose of this study was investigate the factors that influence the loan repayment
performance of borrowers financed by ACSI, to evaluate the efficiency of ACSI’s screening
mechanism and to assess the effect of the credit scheme on the beneficiaries in terms of reducing
poverty at Dembecha town. The study will employed descriptive survey design. In order to
achieve the aim of the study, the researcher used both stratified random sampling technique and
simple random sampling techniques for the study. Finally each stratum samples were selected
using simple random sampling technique. The study has applied a simplified scientific formula
provided by (Yemane 1967) sample size determination formula; it is possible to determine the
sample size, at 95 % confidence level and 0.05 precision levels.
n= N
1 + N (e) 2
Where n is number of respondents
N = population size =508
e = sampling error/level of precision = 0.05
n =508/1+508(0.05)2
The total sample size of respondents based on the above sample size determination will be 224
This total sample size is proportionally distributed to each stratum.
Stratum Total number (population) No. of sample
Male 330 145
female 178 79
Total 508 224
16
3.4 Sources of Data
The choice of particular method of collecting data depends upon the purpose of collecting data,
the information being collected, and the resources available for the researcher and the skills of
the researcher (Kumar, 1996). Accordingly, the data for this study will collected from primary
sources. Hence, this study was conducted by collecting primary data, using a structured
questionnaire with the help of trained enumerators. The primary data were collected by face to
face interviews using structured questionnaire.
3.5. Data collection instruments and procedures.

According to Ogula, (1995), the instruments recommended for data collection in descriptive
research studies include use of questionnaires, interview schedules. Thus, the researcher used
questionnaire to gather the intended primary data. According to Polit&Hungler (1997), a
questionnaire is a tool for getting self-report information from the respondents about their
attitude, knowledge, beliefs and feelings.
After the questionnaire items are developed, they were translated to Amharic version for ease of
administration.
3.7. Data Analyses Techniques

The objective of the analysis is for drawing important conclusions that reflects the researcher’s
interest of inquiry stated right at the beginning of the study. Based on the general concepts, the
factors influencing loan repayment performance of MFIS evaluate the efficiency of ACSI’s
screening mechanism and assess the effect of the credit scheme on the beneficiaries by using
qualitative and quantitative analysis. More specifically, data from the questionnaire items
collected from 145 male and 79 female will plugged into the SPSS software program (Version
24) and descriptive and inferential out puts were drawn. Accordingly, data from this instrument
was analyzed by using percentage, mean, one sample t-test and one way ANOVA including
Tukey post hoc comparison. The alpha level used as test statistics was 0.05. The qualitative data
collected through open ended questions were analyzed through narration.
17
CHAPTER FOUR
4. DATA ANALYSIS AND INTERPRETATION OF RESULTS
This chapter presents and discusses the results from the descriptive and econometric analysis.
The first section of this chapter presents the descriptive statistics results and the second section
presents the regression logit model results of the study.
4.1Response rate
Table4. 1 Response rate
Response rate frequency Percentage
Complete 190 84.8%

Incomplete 34 15.2%
Total 224 100
Source: - Own survey 2020
The study targeted 224 borrowers was selected randomly using lottery method for this study
within Dembecha town. Out of these, 190 were completed and retrieved successfully and giving
a response rate of 84.8%. This response rate was excellent and conformed to (Mugenda &
Mugenda, 2003) argument that for generalization of findings to the whole population the least
acceptable response rate should be 50% and a response rate of above 70% is excellent.
Out of the total respondents 161 (84.7 %) have repaid their loans in full (non-defaulters) the rest
29(15.3%) are defaulter.
4.1 Characteristics of the sample respondents

Table4. 2 Information of respondents by sex borrowers
Sex Sex of Borrowers

frequency percent
Male 126 66.3

Female 64 33.7
Total 190 100
Source: Survey results
18
As the table 4.2 above indicated, from the total selected number of borrowers in the sample
126(66.3%) male and the rest 64(33.7%) were female participants for this study. From table
above, it is easy to observe that the proportion of female borrowers is very much smaller than
male borrowers.
Table4. 3One way ANOVA on loan repayments on different variables
Sum of df Mean F Sig.

Squares Square
Total 28.220 198
age Between 21631.683 8 2703.960 20.817 .000
Groups
Within Groups 27017.663 207 129.893
Total 48649.346 215
Marital Between 17.473 8 2.184 4.412 .000
Status Groups
Within Groups 102.969 207 .495
Total 120.442 215
Educational Between 15.498 8 1.937 5.259 .000
eve Groups
Total 92.120 215
Number of Between 17.473 8 2.184 4.412 .000
dependents Groups
Total 123.442 215
Post hoc comparison between age levels
No Age Level Mean 1 2 3 4 5
1 Under 20 8.47 -
2 21-30 38.63 -
3 31-40 36.12 * * * * *
4 41-50 17.14 -
5 Above 51 1.23 -
Table- 3 displayed the one way analysis of variance displayed in revealed that there was a
statistically significant difference in the repayments of loan between listed variables who had
different educational background, age level and marital status and number of dependents. This is
because at df =8,198 and 0.05 alpha level; the obtained value of F (5.259) was found greater than
its table value of (2.07).So that, the perceived mean practice of loan repayment reported by
different age level increased the use of loan accurately increased, when education level increased
19
the use of financial recording also increased and they would repay their loan timely. Being
female has also the positive relation with loan repayments.
Table4. 4 One-Sample Test on different variables on loan repayment
Test Value = 0
T Df Sig. (2- Mean Difference 95% Confidence Interval of
tailed) the Difference
Lower Upper
residence 66.725 187 .000 1.730 1.68 1.78
Sex 4.587 190 .000 3.184 1.71 4.58
As table 4 shows above there is significant difference between age level and where the
borrowers live because the confidential interval of the difference indicate 95% mean that it has 5
percents of probability i. e 0.05 of alpha level and also the mean 1.68 and 1.71 is greater than the
table value given. This implies residence and sex significantly influence loan repayment
performance.
Table4. 5 Information of Sample Respondents by age group
Age group frequency percent

Under 20 21 11%
21-30 44 27.2%
31-40 65 34.2%
41-50 48 25.3%
Above 51 12 6.3%
Total 190 100%

Table 4.5 above assured that most of the clients of Dembecha town brunch borrowers were found
in the age between 31-40 and 41-50 so to Generalize the age level of the borrowers we can
merge the cut pointes mean that most of the borrowers were to be found in between 31-50
because as we have observed from the above table more than half of the clients i.e113 (59.5%) of
the participants were found in this age level. What the above data told us is that most of the
borrowers of ACSI lay in the age group 31-50 at the hard working age.
20
As Vigano (1993) noted that with increase in age, it is usually expected that borrowers get more
stability and experience. So we expect this variable to have a positive impact on repayment
performance. However, since as people get older, their ability to effectively use finance and
generate income declines, the variable could also have a negative impact. It may also have a non-
linear relationship with loan repayment, where up to a certain level of age loan there is a positive
relationship, but beyond that age the relationship changes to either negative or becomes more or
less constant. Then as the data obtained and analyzed above most of the sample respondents are
in between the age of 31-50.because maturity has its own impact in loan repayments, the age
level found in this study is directly related with the loan repayment performance as mentioned by
scholars.
Table4. 6 Information of samples on age group, level of education
age Levels of education Total
Grade 1-8 Grade 9-12 Certificate Diploma Degree & above
Under 20 9 3 5 4 - 21
21-30 10 16 6 7 5 44
31-40 14 29 4 12 6 65
41-50 17 13 9 5 4 48
Above 51 4 - 5 3 - 12
Total 54 61 29 31 15 190

Among the educated 61(32.1%) respondents were attended from Grade 9-12, educated
54(28.4%)respondents were attended from Grade 1-8,educated 31(16.3%)respondents were
attended from diploma, educated 29(15.3%) respondents were attended certificate and the rest
15(7.9%) respondents were attended from degree and above. This entails that educational level
of borrowers has a positive impact on repayment performance in general.
Table4. 7. Samples information’s about financial habits of recording with their educational level.
Information Level of education Total
21
about using Grade 1-8 Grade 9- Certific Diploma Degree & above
financial 12 ate
Norecording 14 16 9 5 0 44
Yes 40 45 20 26 15 146
Total 54 61 29 31 15 190
As can be seen from the table shows 146(76.8%) of the respondents were used financial
recording. The rest 44(23.2%) of the respondents responded that they didn`t use financial
recording for their business. This implies that most of respondents were educated and they good
exercise using financial recording habit. Due to being non-users of financial recording the clients
may have distorted use of plans rather they use what they plan before. Which is reported lack of
knowledge as the main reason for not recording their financial transactions while, the remaining
42.2% reported their financial position as being too little to keep records.
If borrowers keep records, it will be easier for them to follow up their loan
utilization situation. Otherwise, they are likely to confuse the loan proceeds with
other incomes, thus finding themselves in a situation where they unintentionally
divert loan to other purposes. Hence we expect a negative sign towards loan
repayments.
The real situation found from the respondents assured that most of the respondents were
educated and there are relationships between education level and financial recordings, loan
repayment would be affected by financial recording.
Table4. 8Respondents by opinion on sufficiency of loan size
Sufficiency of loan frequency percent

amount
No 41 21.6
Yes 149 78.4
Total 190 100
22
Table 4.8 above shows us about the sufficiency of the loan that the borrowers obtain from the
institute (ACSI). In terms of adequacy of the loan amounts most of the respondents that is
149(78.4%) of the borrowers in the sample respondents reported that the loan they received was
sufficient for the purpose for which they have planned. The rest 41(21.6) of the borrowers in the
sample respondents reported that the loan they received was insufficient. This data has some
implication because some of the borrowers were affected by little size of loan from the
institution. This causes some implication for loan repayment performance. When the loan
received from the institution isn’t sufficient the client may use the loan for unintended purpose
this in turn affects loan repayment performance of borrowers.
Table4. 9. Respondents by the purpose for which they took the loans.
Purpose of borrowing from respondents frequency percent
Weaving and tailoring 11 5.3

Food processing 31 16.3
Metal work 32 16.8
Wood work 31 16.3
Urban agriculture 12 6.3

Construction 21 11.0
Baltina and petty market 28 14.7
Service provider 24 12.6
Total 190 100

Table 4.9 above elaborates about the purpose in which for what purpose the borrowers borrow
the loan from the institution in order to analyze the relationship between the purpose and the loan
repayment performance of the borrowers. As can be understood from the table most of borrowers
were borrows for the purpose of purchase of metal work, woodwork, food processing, baltina
and petty market and service providing. This implies that there may a relationship between
purpose for which the loan received and loan repayment performance even if it need further
investigation.
23
Ttable4. 10. Respondents by repayment status and purpose of borrowing
Purpose of borrowing from Defaulters Non Defaulters Total
respondents
frequency percent frequency percent
Weaving and tailoring 2 6.9 9 5.6 11
Food processing 3 10.3 28 17.4 31
Metal work 4 13.8 28 17.4 32
Wood work 6 20.7 25 15.5 31
Urban agriculture 3 10.3 9 5.6 12
Construction 4 13.8 17 10.6 21
Baltina and petty market 2 6.9 26 16.1 28
Service provider 5 17.2 19 11.8 24
Total 29 15.3 161 84.7 190

Table 4.10 above portray that at all rationale of borrowing has some relationship with loan
repayment performance, with constructed from the survey data. Accordingly 20.7%, 17.2%, 13.8
%and 13.8 % of those who borrowed for the purpose of Wood work, Service provider,
Construction and Metal work were high defaulters respectively. 17.4%, 17.4% and 16.1 %
borrowers of food processing, metal work and baltina and petty market respectively were high
non defaulters. Other mini percents about defaulters and non defaulters were also observed in the
table above but for the data analysis purpose the researcher organize in the nearest way of
response.
Table4. 11. Business specific characteristics (discrete variables)
Variables defaulters Non- Total Sample

defaulters
no percent
Market study /Yes 6 93 99 52.1
Business information /Yes 13 134 147 77.3
24
Business status Yes 17 153 170 89.4
Sources: Survey results

With regard to information, most of the non-defaulters were able to access business information.
According to them, the sources of information were friends and media like TV and radio. From
the market assessment perspective, more than half of the respondents did not assess the market
before they were doing business (Table 4.11). The finding of the survey indicates that the
reasons for not conducting market study before starting business are:
 they already had an experience before,
 they started business when they had no choice of income generation, and
 no idea about market study.

About 58.6% of defaulter’s business was successful but due to many reasons they were not
willing to pay their loan. As Norell (2001) described this is one category of clients ‘unwilling but
able to repay’. On the contrast 5% of non-defaulters’ business was not successful; however they
were paying their loan from the other income sources. There was significant percentage
difference (Table 4.9).
About 78% of non-defaulters repaid their loan in full amount on the due date and 22% of them
paid their loan partially on time. According to non-defaulters, they benefited by fully and timely
paying their loan. Some of the benefits are:
 Access to the next higher loan (28%),
 To make the family stable (17%),
 build good relationship with the loan provider (12%) and
 Freedom from penalty (7%).
On the other hand, according to defaulters the reasons for not repaid their loan are:
 Cost of doing business is higher than revenue/ loss (32%),
 Low supervision by the loan officer of the institution (7%),
 personal problem of borrowers like illness (11%), Norell (2001) also stated in his article
this is one of the reason for default,
 improper use of loan (3%), this is also the other reason for default (Norell, 2001),
 Shortage of working capital and problem in working place (11%).
Table4. 12. Descriptive statistics on number of dependents
25
Items N Minimum Maximum Mean SD.
Number of Dependents 190 0 8 3.04 2.49
With in the Household

Number of Dependents 190 0 4 1.62 0.97
Outside the Household

Total number of 0 12 4.66 2.46
dependents
The descriptive statistics on number of dependents on table 4.12 above tells about the effect of
number of dependents on loan repayment that is Family size is an additional important erratic
carefully considered in this study. The mean number of dependents within the households is 3.04
varying between a minimum of 0 and a maximum of 8. The mean number of dependents
supported outside of the households of borrowers that constitute 1.62 of the sample respondents
ranging between 1 and 4. Overall the mean number of dependents stands at 4.66 varying between
0 and 8. So number of dependents is the important factor which negatively affects the loan
repayments mean that when the number of dependents increase the number of defaulter
customers of the institution increase.
Table4. 13. Respondents by household annual income before and after loan
Income range Before the program After the program

Frequency Percent Frequency Percent
<1000 35 48.56 48 25.3
1001-2000 22 30.5 67 37.78
2001-3000 5 6.9 55 35.3
3001-4000 3 4.1 15 7.9
4001-5000 7 9.7 3 1.6
>5000 0 0 2 1.1
Total 72 100 190 100
26
Table 13 above illustrate about the samples income before they started the program and after
starting the program. The big difference were observed on sample respondents before and after
the program since for comparisons samples who have annual incomes 1001-2000 before the
program were 22 in number but after the program automatically it was shifted in to 67 in
number. As a whole the table shows and the program assists the borrowers with creating
additional income because as they assured that only 72(37.8%) of the borrowers have had less
income before the program but after the program all 190(100%) of samples responded that they
have had greater income than that of before the program. The sample borrowers have managed to
create additional sources of takings after contribution in the credit scheme as it is elaborated.
Table4. 14. Response on availability of savings before and after program
Response given Before the program After the program

Frequency Percent Frequency Percent
Yes 31 16.3 169 88.9
No 159 83.7 21 11.1
Total 190 100 190 100
Pearson Correlation on saving before and after the program

[1] [2]
Before the program [1] 1 -
17 -
After the program[2] .088
.203 -
190
**. Correlation is significant at the 0.088 level (2-tailed).
We can observe the correlation between before the program and after the program which is
significant at alpha level of 0.0880.
Table 4.14 compares the saving habit of sample borrowers before and after joining the credit
scheme of ACSI. As seen from the table above only 31(16.3%) of respondents have saving
account and save some money where 159(83.7%) of the respondents have no saving account. As
27
seen from table above after the program most of the respondents have saving accounts even
though saving is compulsory that is 169(88.9%) of the respondent have saving account and save
periodically some money no greater than that of compulsory saving set by the institution. From
the survey the researcher found that after the program the saving habit of the respondent
increased. This result shows that much have to be done in terms of mobilizing more savings by
inviting people to participate in the program.
Table 4.15
Table4. 15. Response on the bearer of medical expenditure
Bearer of medical expenditure Before Loan After Loan
Borrower him/herself 43(48.3%) 166(87.3%)
Other family members 25(28.0%) 15(7.9%)
Relatives 2(2.2%) 1 (.5%)
Free service 3 (3.4%) 3(1.6%)
Borrower and other family members 16(18%) 5 (2.6%)
Total 89 (100%) 190(100%)

Pearson Correlation of medical expenditure before and after the program
1 2
Before the Pearson Correlation .239**

program[1]
Sig. (2-tailed) .000
N 179
After the 1
program[2]
Sig. (2-tailed)
N 190
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.15 elaborates that what medical expenditure change come from using the program?
Looking from the table simply we can understand that the change from 48.3% to 87.3% and the
other decreasing percents because more bearers were dependent on other relatives, family
28
members and from other borrowers but after the program this percent of dependency become
lower and lower.
The number of borrowers who reported who cove their family medical expense themselves as
being bearer of medical expenditure increased from 43 to 166. This implies that the living
condition of the respondent have been improved after the program. As seen clearly in correlation
survey table above.
Table4. 16. Respondents borrowing frequency
frequency Number of respondents percent
1-2 93 49
3-5 72 37.9
6-9 25 13.2

In Table 4.16, the data that was collected and analyzed shows 49% of the respondents have
responded that they only borrowed two times in their life before. The rest of the respondents
responded that 3-5 (37.9%) and 6-9 (13.2%) borrowed from the institution. The effect is that
borrower who repeatedly borrowed; the borrower acquired more experience on the institution’s
rules and regulations, and hence could repay the loan effectively. That’s why among the sample
respondents who borrow repeatedly there is no defaulter but those who borrow 1-2 have 21
defaulters. It implies that number of times borrowed have a positive impact on loan repayment
performance.
Table4. 17. Responses of samples on timeliness of the loan given
Items Yes No
The loan were Number percent Numbe percent
release timely r
170 89.5 20 10.5
Total 170 89.5 20 10.5
29
As seen from table 4.17 above most of sample respondents reported that the loan issue timely it
makes comfortable to the borrowers as they responded 89.5% of the respondents from the total
sample population were believed that the loan was released timely.
As Rogaly (1997) noted that timeliness of loan disbursement is important when loans are used
for seasonal activities such as agriculture. They argued that complicated appraisal and approval
procedures, which might delay disbursement, influence a program of seasonal loans for farmers
who use to buy inputs. In this respect the respondents responded that the loan release timely and
uses for what the plan except 10.5% of the respondents.
Table4. 18. Responses of samples related with suitability of repayment period
Items Yes No
The loan repayment period frequency percent frequency percent
is suitable. 173 91.05 17 8.9
Total 173 91.05 17 8.9
From table 4.18, 91.05% of the respondents were satisfied with the period given to repay their
loan. This shows that the institution designed a repayment period which fit with the clients. It is
expected that borrowers who find the repayment period suitable, perform better in loan
repayment than those they think it is not suitable. Hence the variable which is related with
suitability of repaying period were positive because of the period that was given by the
institution was available.
Table4. 19. Respondent perceived cost of default
Perceived cost of default Frequency Percent

Claims against personal wealth 31 16.3
Claims against the wealth of guarantors 23 12.1

Social sanctions 89 46.8
30
Fear of losing another round of loan 37 19.4
Other 10 5.3
Total 190 100
Depending on the results of the sample survey, all the borrowers in the sample believed that loan
should be repaid. Likewise most of the samples borrowers interviewed have reported that the
loan was issued timely. Many studies have considered attitude of borrowers towards loan
repayment and timeliness of loan issuance as important variables affecting loan repayment
performance. These two variables, however, are not going to be used in this study for regression,
since they perfectly predict the probability of repaying loan in time. ACSI use a group based loan
that group members are jointly liable for loan repayment, group lending can achieve better
screening to dilute adverse selection, induces peer monitoring to contend moral hazard and
provides group members with incentives to enforce loan repayments. Relies on peer strain and
social sanctions that exist among borrowers, questions regarding these issues were included in
the survey questionnaires. Almost all of the Borrowers responded “yes” to questions regarding
peer group that they know each other very well, feel responsible for each other and monitor each
others’ action. Another variable of concern in this study is borrowers’ attitude to cost of default.
Of the total respondents almost all reported that cost of default is high. Such an attitude has a
clear implication in terms of improving loan repayment performance. Regarding the perceived
costs of default the majority 89(46.8%) of the borrowers responded social sanction as the most
important factor forcing them to repay their loans on time. So the researcher observed that group
pressure and social sanctions are important factors affecting loan repayment performance of
borrowers by serving as social security for the lending organization.
Table4. 20. rationed vs. non rationed borrowers

Count
frequency percent
yes 172 90.5
31
Was amount of loan no 18 9.5
you took enough for
Total 190 100
purpose intended
As table above shows 18(9.5%) of the respondent were rationed the rest 172(90.5%) of the
respondent is none rationed. This shows that the screening mechanism of ACSI is good. This
implies the institution is probably stricter on those borrowers who request loan amounts that are
abnormally larger, so that they are rationed to some extent; though the extent of rationing being
not so severe that such borrowers still receive loan amounts that are on average larger than those
who apply for a reasonable amount of loan according to the institution’s preference. Here we
observe that the more borrowers apply for larger loans the more they are rationed, just in the way
explained above.
Table4. 21. Status of household diet currently after credit
Frequenc Percent Valid Cumulative

y Percent Percent
Va Improved 130 68.4 68.4 68.4
lid . Same 51 26.8 26.8 95.2
Worsened 9 4.7 4.7 100.0
Total 190 100.0 100.0
As it is portrayed in table 4.21 above 130(68.4%) of the respondent reported that their household
diet is improved, 51(26.8%) of the respondent reported that their household diet has no change
the rest and 9(4.7%) of the respondent reported that their household diet has worsened. This
implies that the program positively contributes to improve their life by using the loan proceeds in
income generating activities and improve their living condition and status of their diet
simultaneously.
4.2. Regression analysis Logistic

Regression is used to predict the presence or absence of a characteristic or outcome based on
values of a set of predictor variables. It is similar to a linear regression model, but suited to
32
models where the dependent variable is dichotomous (Bian, 2013). For the purposes of
determining the extent to which the explanatory variables explain the variance in the explained
variable, Logistic regression analysis was employed. The results of such analysis are narrated
under.
Table4. 22. Omnibus test and model summary
Omnibus test of model coefficient
Chi-square Df Sig.
Model 18.240 3 .006
Model summary
-2 Log likelihood Cox & Snell R Square
180.042a .124 .256
Dependent variable: loan repayment performance
Predictors: (constant),DGF, SOEF,INSF
(Source: Own Survey, SPSS 2020)

This is the table 4.7 that shows the output of Omnibus test and model summary. Omnibus test of
mode coefficient shows the result of X2 test to determine whether loan repayment performance
has significant relationship with predictors. Can write in the form of; X2 (3, N=190) = 18.240,
P<0.006. As it shows in the above table this X2 produce significance value of 0.006(i.e.,
P=.006), which is below 0.05 making our loan repayment performance model significant. Model
summary part shows how much of the variation in loan repayment performance is explained by
the model. Cox & Snell and Nagelkerke R Square indicated that between 12.5% and 25.6% of
the variation in loan repayment performance is explained by DGF, SOEF,INSF.
Table4. 23. Variables in the Equation
β S.E Wald Df. Sig. Exp(β)
DGF .304 .271 1.260 1 .004 1.606
33
SOEF .652 .329 5.924 1 .008 1.911
INSE .144 .256 5.14 1 .009 2.197
Constant 3.020 1.366 7.655 1 0.003 43.678
Variable(s) entered on step 1: DGF,SOEF and INSE.

(Source: Own Survey, SPSS 2020)
Key: Demographic factors, Socio economic factors and Institutional factors
When we see direction and significance relationship of independent variables to dependent
variable loan repayment performance, all variables have positive and statistically significant
relationship with the independent variable; Demographic factors (β = .304, p= .004), Socio
economic factors (β = .652, p= .008) and Institutional factors (β = .144, p= .009). Logit(loan
repayment performance) = 3.020+(.304 Demographic factors) + (.652 Socio economic factors) +
(.144 Institutional factors
CHAPTER FIVE
5 . SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Major Findings

In this study, the attempt was made to look into the factors that affect the repayment performance
of micro finance borrowers and to evaluate the loan screening mechanism used by the institution.
Moreover it assessed the impact of the credit scheme on alleviation of poverty. Descriptive
statistics was carried out to accomplish the above-mentioned tasks.
The descriptive statistics show that in the sample population number of female were less than
those of male. Most of the respondents reported that the repayment period is suitable. This belief
is likely to have a positive impact on loan repayment. All of the respondents believe that loan
from such lending institutions is something to be repaid back. Similarly almost all reported that
loan was released timely.
Concerning credit operation of the respondents have dishonored credit conformity, their main
reasons being inconsistency of the agreement with their initial intention and market problems.
More than half of the respondents had some source of income prior to the loan scheme. After
34
using the loan from ACSI the improvement has to be seen against the average number of
dependents. A large proportion are now saving some amount of money with the institution, while
only some of the borrowers were saving personally before the launching of the credit scheme.
This is one area of a positive contribution of the program, although most of the borrowers are
saving just the compulsory by ACSI.
Other variables were used efficiently and accurately to identify borrowers into creditworthy and
non- creditworthy. Mengistu (1997) got similar results regarding educated borrowers who were
actually found to be good payers, and failing to financial recording those who applied for larger
loan amounts despite the fact that they were found to be non-creditworthy.
Regarding impact, it was found that the credit scheme has contributed positively towards
improving the income, access to education, access to health service, and nutritional status of
borrowers. Overall it seems that the scheme is contributing towards reducing poverty.
When we see direction and significance relationship of independent variables to dependent
variable loan repayment performance, all variables have positive and statistically significant
relationship with the independent variable; Demographic factors (β = .304, p= .004), Socio
economic factors (β = .652, p= .008) and Institutional factors (β = .144, p= .009).
5.2 Conclusion
Depending on the data which was collected and analyzed by different instruments, the number of
female was less than the number of male borrowers in sample population. Most of the
respondents believed that the repayment period given by ACSI was comfortable and enjoyed
them; the loan was released timely education, loan size, age, number of dependents, suitability of
loan repayment period. Number of dependents and being male reduce the loan repayment
performance, Borrowers who are younger, applied for larger loan amount and It was found that
the credit scheme has contributed positively towards improving the income, access to education,
access to health service, and nutritional status of borrowers.
5.3 Recommendations
Based on the major findings of this study, the following recommendations could be drawn to be
brought the attention of ACSI and any other stakeholders.
35
 From the findings of the study the evidence assured that the overall repayment
performance of the ACSI clients and the screening technique that the
organization used were to be sound and the credit schema has contributed
positively in terms of improving the income. Then ACSI should outreach its
activities and techniques for improving income.
 The repayment period should be revised, because to be profitable and repay the
loan easily adequate repayment period is required.
 Hence male borrowers are large in number and more male borrowers were
defaulters than female borrowers, especial training should be given to male
borrowers.
 Finally, the researcher didn’t believe that all factors were found but there are
some important points that may need further in-depth research. These issues may
serve as snapshot for further research. In addition it would be better to use the
control group approach of assessing impact of such credit schemes, probably by
employing the tactic suggested by scholars.
36
Bibliography
Abreham Gebeyehu (2002), “Loan repayment and its Determinants in Small-Scale
EnterprisesFinancing in Ethiopia: Case of private
borrowers Around ZewayArea”, M.Sc. Thesis, AAU
ACSI (2004)https://www.microlinks.org/sites/microlinks/files/resource/files/ML4619_
mr_58_amhara_credit___savings_institute.pdf
Adams, D.W. (1988), “The Conundrum of Successful Credit Projects in Floundering

Rural Financial Markets”, Economic Development and Cultural
Change, Vol.36,No.198
Adeyemo, R. (1984), “Loan Delinquency in Multi-Purpose Cooperative Union in
KawaraState”, Savings and Development, Vol.7 No.3
Ajayi, C.A. (1992), “An Analysis of Default Factors in Residential Mortgages of the
Federal Mortgage Bank of Nigeria”, African Review of Money,
Finance and Banking, No. 2
37
Arene C.J (1992), “Loan Repayment and Technical assistance among Small Holder
Maize Farmers in Nigeria”, African Review of Money, Finance and
Banking, No. 1
Besley, T. and Coate, S. (1995),”Group lending, repayment incentives and Social
Collateral”, Journal of Development Economics, Vol.46
BerhanuLakew (1999), “Micro Enterprise credit and poverty alleviation in Ethiopia:
The case of the project office for the creation of small-scale Business
Opportunities (POCSSBO) in Addis Ababa”, M.Sc. Thesis AAU.
Chirwa E. W. (1997), “Econometric Analysis of the Determinants of Agricultural
CreditRepayment in Malawi”,African Review of Money,
Finance and Banking, Vol.16No.
Christencer, G (1993) The Limits to informal Financial Intermediation. World
Development. 21(5):7212731.
DejeneAredo (1993), “The informal and semi-formal financial sectors in Ethiopia: A
Study of the Iqqub, Iddir and savings and credit cooperative”,
African EconomicResearch Consortium, Research paper 21
-------------- (2003), “Informal Financial Institution: The Economic Importance of Iddr,
Iqqub,andLoans”, Proceedings of the National Workshop on
Technological ProgressinEthiopia,Agriculture, Nov. 20-30, 2001,
AAU, Addis Ababa
Fidler P. and Webster L. (1996), “The Informal Sector and Micro Finance Institutions
In West Africa”, World Bank Regional and Sectoral Studies, the World
Bank, Washington DC
Gibbouns, D.S. (1992), The Grameen Reader, 2nd edition, Grameen Bank, Dhaka.
Gujarati, D.N. (1988), Basic Econometrics, 2nd Edition, New York, McGraw-Hill.
Gujarati, D.N. (1995), Basic Econometrics, 3nd Edition, New York, McGraw-Hill
Hanke, S.H. and A.A.Walters, (1991) Financial and Capital Markets in Developing
Countries. CA: ICS Press San Francisco.
Hodgman, D.(1960), “Credit Risk and Credit Rationing”, Quarterly Journal of
Economics,Vol.74
Hossain M. (1988),”Credit for alleviation of Rural Poverty: The Grameen Bank in
Bangladesh”, International Food Policy Research Institute, Research Report 65
38
Hunte C. K. (1996), “Controlling Loan Default and improving the lending
Technology in Credit Institutions”, Savings and Development,
Vol.xx, No.1.
Hulme D. (2000), “Impact Assessment Methodologies for the Micro Finance: Theory
Experienceand Better Practice”, World Development, Vol.28, No.1
ItanaAyana (1994), “Credit policy, financial institutions and private investment in
Ethiopia”,Proceedings of the Third Annual conference on the
Ethiopian Economy.
Jaffe, D. and Stiglitz, J. (1990), “Credit Rationing, in Handbook of Monetary
Economics”, Vol. 2, Chapter 16, Holland, Amsterdam
JemalAbafita. (2003), Micro finance and Loan repayment performance: A Case
Study of theOromia Credit and Savings ShareCompany
(OCSSCO) in KuyuM. ScThesis, AAU.
Johnson S. and Rogaley B. (1997), Micro Finance and Poverty Reduction,
OXFAM,(UK and Ireland)
Karima, R. and Osada, M. (1998),” Dropping out: An Emerging Factors in the Success of
Based Poverty alleviation programs”, Journal of
Developing Economies, Vol.XXXVII No. 3
Karlan, D.S. (2001), “Microfinance Impact Assessments: The Perils of Using New
Members as a Control Group”, Web Site http://www.google
Kassa W/Senbet (1998), “Impact Analysis of Southern Ethiopia Microenterprise
Project on Beneficiaries’ social and Economic Conditions”, Paper
Presented tothe NationalMicroenterprise Project Workshop,
(Amharic Version), June 9-11, Addis Ababa.
Khandker, Shahidur R., BaquiKhalily, Zahed Khan (1995), “Grameen Bank
Performance and Sustainability”, World Bank Discussion
Paper, the World Bank,Washington, D.C.
Kashuliza, A. (1993), “Loan Repayment and its Determinants in Smallholder
Agriculture: ACase Study in the Southern Highlands of
Tanzania”, East Africa Review,Vol. 9, No.1
Mauri A. (1997), “The Rise of Banking in Ethiopia", African Review of Money,
39
Finance and Banking, No. 1-2, Addis Ababa Ethiopia
McKinnon, R.I., (1973). Money and Capital in Economic Development. Brookings
Institution, Washington, D.C.
MEDaC (1999), ‘Poverty situation in Ethiopia, Welfare monitoring, Survey of the
Ethiopian economy, Review of post reform Developments (1992/93 - 1997/98)’, AddisAbaba
Maddala, G.S. (1983), Limited Dependent and Qualitative Variables in
Econometrics, NewYork, Cambridge University Press
MengistuBediye (1997), “Determinants of Micro enterprises loan Repayment and
Efficacy ofscreening mechanism in Urban Ethiopia: The case of
Bahir Dar and Awas Towns’, M.Sc. Thesis, Department of
Economics, A.A.U. Micro Finance Development Review(2000),
Vol. 1, No.1, Addis Ababa (2001), Vol. 2, No. 1, Addis Ababa.
Njoku J.E and Odii M.A.C.A (1991), “Determinants of Loan Repayment under the
Specialemergency Loan Scheme in Nigeria”: A Case
Study of Imo State, AfricanReview, ofMoney, Finance
And Banking, No.1NSADD (North Agricultural
Development Department) (1999) Unpublished
Document
Ogula,P. A. (1995). A handbook on educational Research.Nairobi: NewKemit
Publishers.
Pehlvan, H. (1996), “Financial Liberalization and Bank Lending Behavior in

Turkey”, Savingsand Development Quarterly Review, Vol.XX, No. 2
Reinke, J. (1996), “Alternative Models for Micro-credit in South Africa: Theoretical
Foundations and Two Case Studies”, Savings and Development,
No. 3, Vol. XX
RettaGuddisa (2000), “Women and Micro Finance: The Case of Women Fuel Wood
Carriers in Addis Ababa”, M.Sc. Thesis, AAU.
Rudkius, T. (1994), “Sustainability in micro credit- the need to eliminate access
Barriers”, Small Enterprise Development, Vol.5, No.1..
Stiglitz, J. and Weiss, A. (1981), Credit Rationing in Markets with Imperfect
Information,American Economic Review, Vol. 71, No.3
40
Stighitz, E., (1989). Financial Markets and Development. Oxford Review of Economic
Policy. 5(4): 55268.
TeferiZewdu (2000), “Micro Finance and the Poor: The Case of Dedebit Credit and
Saving Institution(DESCI) in Tigray”, M.Sc. Thesis, AAU.
Vigano, Lawra (1993), “A Credit Scoring Model for Development Banks: An African
Case Study”, Saving and Development, Vol. XVII, No. 4
Von Pischke, J.D. (1991), ‘Finance at the Frontier: Debt Capacity and The Role of
Credit in the Private Economy’, EDI Development Studies, The
World Bank, Washington D.C.
WoldayAmha (2000) “The Establishment of AEMFI: Forum to Learn from Others’
Experience”, MFDR, Vol. 1, No. 1
Yaqub, S. (1992), “Empowered to Default? Evidence from BRAC’s Micro-Credit
Programs”, Small Enterprise Development, Vol.6 No.4
Yaron, Jacob (1994), “What makes Rural Finance Institutions Successful?” The
WorldBank Research Observer, Vol. 9, No. 1
Yaron, J., Benjamin, M., and Piprek, G. (1997), “Rural Finance: Issues, Design and
Best Practices”, Washington DC, Agriculture and Natural
ResourcesDevelopment,World Bank
Zellar, Manfred (1996), “Determinants of Repayment Performance in Credit Groups:
The role ofProgram Design, Intra-group Risk Pooling, and Social
Cohesion.
International Food Policy Research Institute. No. 384
http://www.google
41
NEW BLUE COLLEGE
DISTANCE EDUCATION
Research paper
Research Title: “Factors affecting loan repayment
performance of micro finance institutions in Amhara Regional State:
The case of Dembecha Town Administration ”

Name:Habtamu Gashaye Temesgen
Sex:M
Department:Management
42
Center:Dembecha
ID no:………………..
Signature……………..
August, 2022
BAHIR DAR,ETHIOPIA
43

Habtamu Ggashaye111

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Habtamu Ggashaye111

Uploaded by

Copyright:

Available Formats

NEW BLUE COLLEGE

FACTORS AFFECTING LOAN REPAYMENT PERFORMANCE OF MICRO

A Research Paper Submitted to New Blue College of Business and

Prepared By Habtamu Gashaye Temesgen

BAHIR DAR, ETHIOPIA

Name: Habtamu Gashaye

Name of Advisor: -------------------------------

Signature of Advisor: -----------------------------------

Date of Submission: -------------------------------------

Place: New Blue College

Name of the Advisor: ---------------------------- Signature---------------Date-------------

Name of Head of Department: -----------------------------Signature---------------Date--------

ACSI Amhara Credit and Saving Institution

CSA Central statistics authority

DBE Development bank of Ethiopia

CBE Commercial bank of Ethiopia

DCA Dembecha city Administration

GDP Gross Domestic Product

MFDR Micro Finance Development Report

MFI Microfinance institution

NBE National Bank of Ethiopia

1.2.1 Research Questions

1.3 Objectives of the Study

1.3.2 Specific objectives:

1.4 Significance of the Study

This research has important for the following bodies

1.5. Delimitation of the study

1.7. Limitations of the Study

 Limited number of sample

REVIEW OF RELATED LITERATURE

2.2. Group lending

2.3. Credit Markets and Rationing

2.4. Impact Assessment and Sustainability

Microfinance institutions have become an increasingly important component of strategies to

2.6.1 Empirical studies of other countries

2.6.2. Empirical Studies in Ethiopia

2.7. Conceptual frame work

3.1. Description of the Study Area

Dembecha is one of the woredas in the Amhara Region of Ethiopia in West Gojjam Zone

3.2. Research design and approach

3.3 Sample size and Sampling technique.

3.5. Data collection instruments and procedures.

3.7. Data Analyses Techniques

Response rate frequency Percentage

Complete 190 84.8%

4.1 Characteristics of the sample respondents

Sex Sex of Borrowers

Male 126 66.3

Source: Survey results

Sum of df Mean F Sig.

Table4. 4 One-Sample Test on different variables on loan repayment

Age group frequency percent

Source: Survey results

age Levels of education Total

Grade 1-8 Grade 9-12 Certificate Diploma Degree & above

Source: Survey results

Sufficiency of loan frequency percent

Yes 149 78.4

Total 190 100

Weaving and tailoring 11 5.3

Urban agriculture 12 6.3

Baltina and petty market 28 14.7

Service provider 24 12.6