ASSESSMENT ON FACTORS THAT AFFECT BORROWER’S ABILITY

TO REPAY LOAN: A CASE OF OMO BANK OF ETHIOPIA, ARBA

MINCH BRANCH.

A RESEARCH SUBMITTED TO THE DEPARTMENT OF ECONOMICS FOR THE

PARTIAL FULFILLMENT OF THE REQUIREMENTS OF BACHELOR OF ARTS
DEGREE IN ECONOMICS FROM PARAMED COLLEGE.

BY:

Aselefech Aduto …………………..….….REC\015\14

Kibralem Bekele………………………....REC\023\14

Yohannes Abebe…………………………REC\001\14

Alemenesh Tiko…………………………..REC\014\14

Meskerem Aba……………………………REC\022\14

Advisor: Brahan. G (Ma)

JULY, 2023

ARBA MINCH, ETHIOPIA

I
 DECLARATION

Declaration we, the undersigned, declare that this thesis was our original work and has not been
presented or submitted partially or in full by any other person for a degree in any other
college/university, and that all sources of materials used for the purpose of this thesis have been
duly acknowledged.

DECLARED BY SIGNATURE DATE

1. ASELEFECH ADUTO _________________ ____________________

2. KIBRALEM BEKELE _________________ ____________________
3. YOHANNES ABEBE ________________ ____________________
4. ALEMENESH TIKO _________________ ____________________
5. MESKEREM ABA ________________ ____________________

II
 CERTIFICATION
This is to certify that a research prepared by the group entitled assessment of loan recovery
performance and submitted in partial fulfillment for requirement for the degree of bachelor art
(BA) in Economics complies with the regulation of the College and meets the accepted standards
with respect to originality and quality.

APPROVED BY

Advisor Signature Date

_______________________ ______________________ _______________

Examiner Signature Date

_______________________ ______________________ _______________

III
 ACKNOWLEDGEMENT
First and foremost, we have to begin with thanking God from whom we have received strength
and endless love.

Secondly, I would like to thank Paramed College, Department of Economics, for giving us
opportunity to do this Research.

Thirdly, our special gratitude goes to our Advisor Mr. Brahan. G (Ma), for his unreserved
constructive comments and suggestion throughout the proposal development up to the final
research paper.

Last but not the least; I would like to extend our gratitude to Omo Bank of Ethiopia, Arba Minch
Branch for providing relevant baseline information and cooperation. And special thanks to study
participant.

IV
 TABLE OF CONTENT

Table of Contents

DECLARATION............................................................................................................................II

CERTIFICATION.........................................................................................................................III

ACKNOWLEDGEMENT.............................................................................................................IV

TABLE OF CONTENT..................................................................................................................V

LIST OF TABLES......................................................................................................................VIII

LIST OF FIGURES.......................................................................................................................IX

LIST OF ACRONYM....................................................................................................................X

ABSTRACT..................................................................................................................................XI

CHAPTER ONE..............................................................................................................................1

1.INTRODUCTION........................................................................................................................1

1.1 Background of the study...................................................................................................1

1.2 Statement of the Problem..................................................................................................3

1.3 Research Questions...........................................................................................................4

1.4 Objectives of the Study.....................................................................................................5

1.4.1 General objectives.....................................................................................................5

1.4.2 Specific objectives.....................................................................................................5

1.5 Significance of the Study..................................................................................................5

V
 1.6 Scope of the Study............................................................................................................6

1.7 Limitation of the Study.....................................................................................................6

1.8 Organization of the study..................................................................................................6

CHAPTER TWO.............................................................................................................................7

2.LITERATURE REVIEW.............................................................................................................7

2.1 Introduction.......................................................................................................................7

2.2 Concepts and definitions...................................................................................................7

2.2.1 Definition of Loan Repayment......................................................................................7

2.5 Effects of loan default.....................................................................................................11

2.6 Determinant Factors Affecting Loan Repayment...........................................................12

2.7 Empirical studies on determinant of loan default...........................................................18

2.7.1 Empirical studies of other countries........................................................................18

2.7.2 Empirical Studies in Ethiopia..................................................................................21

2.8 Conclusions and identification of knowledge gap..........................................................24

CHAPTER THREE.......................................................................................................................26

3.RESEARCH METHODOLOGY...............................................................................................26

3.1 Introduction.....................................................................................................................26

3.2 Back ground of the study area.........................................................................................26

3.3 The Research Design......................................................................................................26

3.4 Research Approach.........................................................................................................27

VI
 3.5 Types and Sources of Data..............................................................................................27

3.5.1 Sources of Data........................................................................................................27

3.5.2 Population................................................................................................................28

3.5.3 Sampling frame........................................................................................................28

3.5.4 Sampling Techniques and Procedures.....................................................................28

3.6 Data Collection Instruments and procedures..................................................................29

3.6.1 Data Collection Instruments....................................................................................29

3.6.2 Procedure of data collection....................................................................................30

3.7.1 Reliability Test.........................................................................................................31

3.7.2 Validity Test............................................................................................................31

3.8 Method of Data Analysis................................................................................................32

3.9 Ethical Consideration......................................................................................................32

CHAPTER FOUR.........................................................................................................................34

4.DATA ANALYSIS....................................................................................................................34

4.1 Introduction.....................................................................................................................34

4.2 Response Rate.................................................................................................................34

4.3 Demographic data of respondents...................................................................................35

4.3.1 Sex of Respondents..................................................................................................35

4.3.2 Age Distribution......................................................................................................35

4.3.3 Educational Level of Respondents..........................................................................36

VII
 4.3.4 Work Experience of Respondents...........................................................................37

4.4 Factors which affect borrower’s ability to repay loan....................................................37

4.4.1 Loan default in the bank..........................................................................................37

4.4.2 Factors accounting borrowers to loan default...............................................................39

4.5 The procedure used to adopt to retrieve credit................................................................48

4.6 The effects of loan default on the bank...........................................................................50

4.6.1 Measures that can be used to mitigate factors affecting borrower’s ability to repay
loan 51

CHAPTER FIVE...........................................................................................................................57

5.CONCLUSIONS AND RECOMMENDATIONS.....................................................................57

5.1 Introduction.....................................................................................................................57

5.2 Conclusions.....................................................................................................................57

5.3 Recommendations...........................................................................................................58

REFERENCES..............................................................................................................................61

APPENDIX-1...............................................................................................................................65

APPENDIX-2................................................................................................................................69

KEY INFORMANT INTERVIEW GUIDE..................................................................................69

VIII
 LIST OF TABLES

Table 3.1: Reliability Statistics......................................................................................................31

Table 4.1: Response Rate..............................................................................................................34

Table 4.2: Loan default..................................................................................................................37

Table 4.3: Loan repayment performance borrowers of Omo bank Arbaminch branch in past three
years from 2020-2022....................................................................................................................38

Table 4.4: Customer going bankrupt.............................................................................................39

Table: 4.5 Debtors delaying in making loan repayment................................................................40

Table: 4.6 Customer falling out of business unexpectedly............................................................40

Table: 4.7 improper selection of borrower....................................................................................41

Table: 4.8 Income from business activities...................................................................................42

Table: 4.9 Purpose of borrowing...................................................................................................43

Table: 4.10 Training on loan use...................................................................................................44

Table: 4.11 Lack of follow up measures.......................................................................................46

Table: 4.12. Inadequate collateral..................................................................................................47

Table: 4.13 Develop a payment plan.............................................................................................48

Table: 4.14 written communication...............................................................................................49

Table: 4.15 reschedule the debt.....................................................................................................50

Table: 4.16 flexible payment plan.................................................................................................52

Table: 4.17out sourcing bank recovery to collection agencies......................................................52

Table: 4.18 proactively reaching customers..................................................................................53

Table: 4.19 Extend or lower interest rates.....................................................................................54

Table: 4.20 legal warning..............................................................................................................54

Table: 4.21. Reposition of security................................................................................................55

IX
 LIST OF FIGURES

Figure: 4. 1 Sex of respondents.................................................................................................................35

Figure: 4. 2 Age Category of Respondent..................................................................................................36

Figure: 4. 3 Educational level....................................................................................................................36

Figure: 4. 5 Work Experience....................................................................................................................37

X
LIST OF ACRONYM

CBE Commercial Bank of Ethiopia

OB Omo Bank

OBAMB Omo Bank of Ethiopia Arba Minch Branch

KYC Know Your Customer

NBE National Bank of Ethiopia

NPL Non-Performance Loans

SNNPR Southern Nation Nationalities People Region

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 ABSTRACT

The main purpose of this study was to assess factors which affect borrowers’ ability to repay
loan in case of Omo Bank Ethiopia, Arba Minch Branch. Descriptive design with mixed research
approach was employed. The study involved 39 subject employees and one branch manager from
the selected bank branch through available sampling technique. Questionnaires, interview
guides and document analysis were used as data gathering instruments. The collected data were
analyzed quantitatively using frequency and percentage and qualitatively using narration. The
findings revealed that the customer going bankrupt, debtors delaying in making loan repayments
or unwillingness, a customer falling out of business unexpectedly, improper selection of
borrower, income from business activities, lack of training on loan use, purpose of borrowing,
lack of follow up measures and inadequate collaterals were the major determinants that affect
borrower's do not repay their loan due time. Based on the major findings of the study, it is
proposed that the bank carefully select its borrowers, strict monitoring of loans, revise its loan
policy documents, develop and implement different software’s, create partnership with other
banks and prepare payment plan for borrowers who have difficulties repaying their debts.

Keywords: Loan repays, Omo Bank, Loan default.

XII
 CHAPTER ONE

1. INTRODUCTION

In this chapter, the overall background of the study, the statement of the problem, the objective
of the study, the significance of the study, scope of the study, the limitations of the study and
organization of the paper were discussed in details.

1.1 Background of the study

Banks have always played a vital role in the country’s economy. Moreover, it plays a decisive
role in the development of the industry and trade. Banks are acting not only as the custodian of
wealth of the country but also as resource of the country, which are necessary for the economic
development of a nation. In this modern time money and its necessity is very important.
Therefore, a modern bank plays a vital role in the socio-economic matter of the country.
Delivering/facilities/ loan for the organization and peoples, promote saving habits of the peoples,
capital formulation and promote industry, smoothing of trade and commerce functions, generate
employment opportunity and support or interest are specified in loan agreement (Aryeetey, 1995)

As stated by Genet, (2018), empirical evidence worldwide confirms that countries with well-
developed financial systems tend to have better economic performance, while countries with
weak financial systems are associated with low economic performance. Financial institutions
transform financial assets acquired through market and constitute them in to a different and more
widely preferable type of assets. Financial intermediaries include depository institutions
(commercial banks, saving & loan associations, savings banks & credit unions, insurance
companies, pension funds and finance companies). These intermediaries obtain funds by issuing
financial claims against themselves to market participants, then investing those funds. The
investment made by financial intermediaries can be in the form of loans and/or in securities
(John, 1984).

1
Among the depository institutions, banks are the most important financial institutions in the
economy. They are the principal source of credit for many households, for most local units of
government and business men. The principal economic function of banks is to make loan. For
most banks, loan accounts for half or more of their total assets and about two thirds of their
revenue. (Encyclopedia Deluxe, 2004).

The term loan may be explained as the provision of financial accommodation to a person, in
return for a promise to repay it at some future date. Loan may be extended as a cash loan, or
through the medium of deferred payment for the supply of goods and services. Loan repayment
is the act of paying back money previously borrowed from a lender repayment usually taken the
form of periodic payment that normally includes part principal & interest in each payment. Loan
payment performance is critical feature of credit, because persistent poor payment performance
ultimately leads to financial failures in any lending institution. Financial failures are defined as
hard term in ability to cover cost and interest income and fees (Aryeetey, 1995).

According to Selma (2020), repayment performance is critical feature of credit because

persistent poor repayment performance ultimately leads to financial failure in any lending
institution. Financial failure is defined in hard term as the inability to cover cost out of the
interest income and fees, or in soft term as a failure to attract fund sufficient to maintain the
institution in a nut shell. If there will be low repayment performance for a continuous period, it
exposes the financial position of the lending institution It also undermines public confidence in
formal financial market and causes savers to withdraw their funds In addition, it increases staff
turnover due to doubt on the capacity of the institution. If a bank neglects to do so or the
recovery process is unduly protracted, the impact on it may be severe. The bank may end up with
a large loan portfolio in amount overdue, which in turn would affect the bank's capital ratios. In
such circumstances, the bank may find itself having to offer higher than average deposit rates to
attract more capital. Inevitably, these higher rates will be reflected in the bank's lending rate.
Higher lending rates may in return adversely affect the average quality of future lending, forcing
the bank to lend high-risk borrowers. If the bank is to lend to the more credit worthy borrowers,
it may be forced to cut margins to levels, which would be insufficient to generate profits
(Meghana, 2020). Evidence from many countries in recent years suggests that collateral values
and recovery rates can be volatile and, moreover, they tend to go down just when the number of

2
defaults goes up in economic downturns (Chakraborty, 2015). Nevertheless, most banks financial
statement shows that the collections of loans from borrowers are not satisfactory. This result
shows a huge amount of non-performing loans (NBE, Annual Report, 2019).

1.2 Statement of the Problem

The loan extended to various sectors of the economy must be recovered in full if the objective
of circulating more and more financial resources to meet the increasing demand for credit and to
keep the bank in sound financial health is to be achieved. The major source of income for the
banking industry is interest on loans. Both the principal and interest must be recovered. The bank
collects the principals and interest from the clients on the due date. But default may occur on the
side of the client due to various reasons. If there is high incidence in the deficit of client, this
leads the bank to be insolvent and weak in its financial position. Finally this situation will
paralyze the investment program as well as the economy as a whole (Genet, 2020).

Various studies have been conducted to assess the non-performing loan in different countries. A
set of studies have been conducted in relation to NPLs and its implication for the economy. The
high level of non-performing loan in the banking industry has been a hindrance to economic
stability (Kwambai, 2013). According to (Hossain, 2017), if the invested funds in an economy
are not recovered, it limits the recycling of the funds is reduced by the amount of classified loans
which may lead to economic stagnation. NPL affects banks' profitability adversely because of the
provision of classified loans and consequent write-off as bad debts, reduces return on investment
(ROI), and disturbs the capital adequacy ratio (CAR). It also increases the cost of capital, widens
assets and liability imbalance and upsets the economic value additions (EVA) by banks. EVA is
equal to the net operating profit minus cost of capital. Banks may face liquidity problem due to
high rate of NPL amount.

In our country case there are a research conducted on other commercial banks. According to
(Feyisa, 2009) the amount of fund that is being lent by the bank is being decreased which has a
negative impact up on its profit. These research was classifies the recovery performance by
sectorial out of eight loan sectors of CBE under study five of sectors’ recovery rates are less than
22%. And out of the total loan demand of CBE during the period, on average only 34% was
recovered. This implies on average 66% of the total loan demand was not recovered. Also,

3
according to Abraham, (2002) the repayment problem can arise from different factors. Such as
change in lending policy, change in structure of the bank, failure in properly appraising the
project document (technical capability, marketability, financial and economic viability of the
project) and lack of responsibility of the staff members on the supply side. The borrowers age,
sex, educational level, loan utilization, bank credit experience, household size, management
capacity, availability of other source of income and specific situation of the lenders (market
condition, technical capability, specific location etc.) on demand side.

Therefore, this study was find out the loan recovery performance and investigates the major
factors affecting loan recovery performance of the bank. Factors such as associated with lack of
obtaining potential creditors, estimating and checking appropriate values of collateral and loan
documentation of creditors, preparing customer’s disbursement instruction and follow up their
periodic loan repayments was assessed in depth. When comes to studies done on loan recovery in
banks specifically in Ethiopia. There are very few studies that have been done on loan recovery
in banks. This made the study a little difficult as there was no way of gaining a point of view
from the Ethiopian perspective.

A study conducted by Genet, 2020 in Ethiopia looked at the loan repayement in banks. The
researcher gave detailed loan recovery procedures for banks but there was not enough
information on how best banks can recover loan. Also, Selam, 2018 conducted a study on the
recovery management system in Ethiopia. The study gave detailed information on the causes of
or reasons for loan default in banks which proved to be of great help to the Ethiopia. They gave
little to no information on the ways in which banks can reduce loan default. Finally, there is no
research done on factors which affect borrowers’ ability to repay loan on Omo Bank of Ethiopia
Arba Minch Secha Branch so far to our knowledge is concerned, therefore, this study will fill
this gaps by taking the case of Omo Bank of Ethiopia, Arba Minch Secha Branch.

1.3 Research Questions

This study was aimed to answer the following basic research questions:

 What are the factors accounting borrowers to loan default

 What are the loan recovery procedures of banks

4
  What are the effects of loan default on Banks?
 What are the measures that can be used to mitigate factors affecting borrower’s ability to
repay loan?

1.4 Objectives of the Study

1.4.1 General objectives

 The general objective of this study was to the factors which affect borrowers’ ability to
repay loan in case of Omo Bank Ethiopia, Arba Minch Branch.

1.4.2 Specific objectives

The following points are the specific objectives of the study: -

 To analyze the factors accounting borrowers to loan default

 To examine the effect of bad loans on the banks.

 To understand the loan recovery procedures of banks

 To examine measures that can be used to mitigate factors affecting borrower’s ability to
repay loan

1.5 Significance of the Study

The study was helping lessen problems of loan recovery by offering possible solutions. The
results of the study will be of enormous importance to bankers in the industry as well as Arba
Minch Branch Omo Bank of Ethiopia in particular. It were help Arba Minch Branch Omo Bank
of Ethiopia to be mindful when paying out loans and to help them to determine better the people
that they will grant loans to. It were also help improve the revenue status of the bank in question
and other banks as well and the function of the banking industry as a whole. It was also provide
useful information to those who want to embark on future research on the topic as it were add to
literature available and finally it was also play an important role in the partial fulfillment of a
Bachelor’s Degree in Accounting and Finance.

5
 1.6 Scope of the Study

The study was delimited geographically, conceptually, methodologically and timely. Regarding
geographical delimitation, it was scoped to Arba Minch Branch Omo Bank of Ethiopia.
Conceptually, the study was scoped to assess factors that affecting borrower’s ability to repay
loan and measures taken to mitigate the problems. These delimitations were because of the topic
is broad and couldn’t addressed within a specific time and it needed deep investigation from time
constraints and data availability. Also, the study was methodologically scoped to descriptive
research design and finally, the study scoped timely from September, 2023 to June, 2023.

1.7 Limitation of the Study

Undeniably, every study has its own limitation. No study can be perfect and carried out as
expected to recurring change in the environment. This study was carried out with the following
limitation facts. While conducting the study there may be certain problems associated with data
collection. The study covers only one branch in the Gamo Zone. Due to shortage of time and
material resources, the study could not cover many local woredas that would have given a more
tangible data that can contribute more for the accuracy of the research. Nevertheless, researcher
belief that this branch would represent the other branches and the findings were gave solutions
for problems related with loan recovery.

1.8 Organization of the study

The paper was organized in five chapters. The first chapter was highlight introduction of the
study. The second chapter consists of related literature review and the third chapter deals about
methodology and the fourth chapter presents about data analysis and interpretation. The fifth
chapter were provides major finding, conclusion and recommendation.

6
 CHAPTER TWO

2. LITERATURE REVIEW

2.1 Introduction

In this section, the review of related literature presented. It starts on the theoretical foundation of
the study. Subsequently the relationship between lending and credit repayment performance
types of loan, and factors of loan repayment performance were present respectively. At the end,
empirical evidence that shows the determinants of loan repayment performance in Ethiopia and
outside the country was also presented.

2.2 Concepts and definitions

2.2.1 Definition of Loan Repayment

Loan defined as a type of debt instruments, which entails the redistribution of financial assets
over time between the lender and the borrower according their agreement. It is also typically, the
money which is expected to paid back in regular installments or partial repayments periodically
that each installment being of the same amount (Savio, 2017). Additionally, success of loan
repayment defined as the ability to repay the loan full as per the loan agreement and loan
defaulting as the inability to repay the loan by either failing to complete the loan as per the loan
agreement or neglect the loan.

2.2.2 Definition and role of microfinance institutions

Different authors and organizations have defined Microfinance institutions in different ways.
However, the meaning of the definitions is usually the same. Which means microfinance refers
to the provision of financial services; primarily savings and credit to the poor and low-income
households that do not have access to commercial banks service.

2.3 Theoretical arguments on loan default problem

7
A loan default occurs when a borrower fails to make a payment on time after an agreement
reached between the lender and the borrower. It also occurs when the borrower does not comply
with any other agreement made on the promissory note. Loan default is essential of two basic
types. The first and the most common type occur when the debtor defaults on a payment of
interest or principle. This might be because the debtor is either unable or unwilling to repay the
debt. The second type of default occurs when the debtor violates any of the agreements made on
the promissory note either purposely or unintentionally.

The loan may be either formal or informal one. When we think of small businesses in LDCs, the
major source of finance so far is an informal sector. The probability of default of small-scale
enterprises loan from informal sources is low because informal financial markets are much closer
to their clients and potential clients, and through gossip and daily contact, they are much more
aware of their activities than a formal banker is, thus they know the risks they exposed. On the
other hand, small-scale credit scheme from formal financial markets has experienced a high rate
of default in many developing countries. Non-defaulters are those who repaid the loan in due
date and the defaulters are those who did not repay the loan within the due date. The proper
recovery of loan is not only a prerequisite for rapid expansion of microfinance service but also a
question of life or death for any credit agency (Abebe, 2012).

Loan default is a tragedy because failing to implement appropriate lending strategies and
credible policies often result in the demise of credit institutions. Default problems destroy
lending capacity as the flow of repayment declines, transforming lenders into welfare, in the
head of viable institutions. Loan defaults deny new applicants access to credit. In the context of
third world lending programs, the cost of defaulting include not only the loss of future credit but
also public embarrassment and the loss of social standing. It is advice that one should pay back a
borrowed loan in the shortest time possible, as this will avoid him or her paying a lot of
unnecessary money in the form of interest. One would borrow money in order to make money.

There could be thousands of reasons people borrow money. For consumption, farming activities,
cushioning the jolt of temporary shocks, asset buildings like buying a car, a home, to take a
vacation.

2.4 Lending methods of microfinance institutions

8
Lending methodologies may differ with respect to clients whether loans made to groups and
individuals lending mode. The selection of lending methodology greatly influences product
design, client selection, the way of application or approval process, and loan repayment
monitoring and portfolio management activities of microfinance institutions. Lending
methodology also effects the institutional structure and staff requirements, including training and
compensation (Wood, 2013).

2.4.1 Individual Based Lending

Individual based lending requires greater honest on analysis of clients and their cash flows it
times physical collateral and frequent close contact with clients during the term of the loan
approvals and amounts. Based on an applicant’s eligibility and debt capacity, which is in turn are
dependents number of factors, including personal and business characteristics, age, gender,
sources, amount of income, age of business, cash flow, and available collateral (Wood, 2013).

2.4.2 Group Based Lending

Group based lending is one of the approaches of lending small amounts of money to a large
number of clients that organized by group who cannot offer collateral. The size of the group can
vary, but most of the time groups have between 4 to 8 members. The group selection is one of
the factors that influence the member’s loan repayment activities.

According to Nawai (2010) group-based borrowers has to form a group before applying loans
because they are responsible to all of their members. If one member fails to pay the loan, the
others will be responsible to pay the loan otherwise; they would deny access for the next loans.

Group lending is an approach of lending small amount of money to a large number of borrowers
who cannot offer collateral. Group members are jointly accountable for the repayment of each
other loans through peer pressure. The entire group members would disqualify and will not be
eligible for further loans, even if one member of the group becomes a defaulter. The size of the
group can vary, but most groups have between three to eight members, the group self-selects its
members before acquiring a loan.

9
This part of the paper takes a closer look on theoretical foundations and contributions on the
subject matter. A bank exist to perform a number of functions chiefly, accepting deposits and
granting credits (loans and advances) categorically provided as primary or banking functions; in
fact banking means accepting for the purpose of lending of investment of deposits of money
from the public. Granting of credit facilities by commercial banks which is the primary function
as pointed out earlier, expose them to credit risk. Credit is a device for facilitating transfer of
purchasing power from one individual or organization to another. As indicated by
(Oyatoya,1983) credit provides the basis for increased production efficiency through
specialization of functions thus bringing together in a more productive union the skilled labor
force with small financial resources and those who have substantial resources but lack
entrepreneurial ability.

In more explicit analysis of the association between finance and economic development
(Schumpeter, 1933) treated the banking system and entrepreneurship as the two key enabling
agents of development The banking system’s capacity to supply initiative and entrepreneurship
in addition to credit creation enabled it to transfer resources from less productive uses to more
economically rewarding uses because those who control existing resource or have claims on
current wealth are not necessarily those best suited to use these resources. Banks in many
developing countries hold a truly alarming volume in non-performing assets. Differences
between promised and actual repayments on loans are the result of uncertainty concerning the
borrower’s ability or willingness to make the repayments when they are due which creates the
risk of borrowers default (Pischke, 2006), (Vigano, 2010) , ( Kitchen, 2009). The inapplicability
of the standard demand and supply model for credit market give rise to credit rationing
phenomena.

There are those who argue that the failure of lending agencies in playing their roles in loan
disbursement and recovery process is a major contribution to loan default (Vigano, 2010). They
contend their view that determining credit worthiness requires investment of time and resources
to evaluate firm specific and industry wide variable, structural or cyclical, by analysts with
specific professional skills. A mistake on the evaluation of the borrowers’ characteristics or the
introduction of inappropriate loan conditions may increase the total risk of the transaction
(Vigano, 2010).

10
 2.5 Effects of loan default

Loan default is the most serious hazard to any lending institution, as it has a wide-ranging impact
on the organization's performance (ibtissem and Boun, 2013). The consequences of loan default
are as follows. Loan failures have far-reaching consequences for lending institutions. One is that
it has an effect on the institution's growth and reduces its lending capacity (Karim, C., and
Hassan, 20Kuo et al., 2010). ZANACO is dependent on the interest rates it charges its clients for
the loans it makes. They get funds at the same interest rates. According to Nguka and Huka
(2015), lending institutions with a higher loan default rate have a more difficult time amassing
reserves and adequate cash to lend to other borrowers who wish to spend more than their income
or invest in enterprises. The loan default affects not just the Bank but also the borrower's credit
score. Before making a loan to anyone, lenders must assess the borrower's capacity to repay the
amount. A credit score is one of the techniques that lenders (banks) use to determine a customer's
creditworthiness. It is determined by the consumer's credit history, the number of open accounts,
the total amount of default, and repayment history, as well as whether or not the borrower has
ever defaulted on a loan. Borrowers with higher credit scores look more enticing to potential
borrowers. If a borrower has previously failed on a loan or does not satisfy the credit score, the
odds of securing a loan are slim. Borrowers who have defaulted before are charged high-interest
rates on future loans as they are considered to be very risky. According to research, the impact
of non-performing loans on the net financial performance of lending institutions is both
conceivable and reasonable. Karim et al. (2010) discovered that lending institutions with a weak
credit risk management system or a high incidence of loan default may face a host of problems.
When a bank is unable to collect on a loan, it is classified as bad debt. The bank must continue to
reimburse 10 depositors whenever they need their cash. In this case, the bank must deduct the
deposited amount from its profit, lowering the bank's overall profit. Many lending organizations
are in the loan industry to earn a profit. As a result, losses must be avoided at all costs. A greater
rate of loan default might also lead to liquidity issues. Lending institutions with a lower default
rate will be able to satisfy their consumers' financial demands by providing more value, but an
institution with a higher credit risk may not be able to meet its consumer demand and may even
fail. Unsecured loans have a direct influence on the earnings of lending institutions, according to
a review of bank financial statements. This is because non-performing loans are deemed profit
expenditures and are thus removed from good loans or income, which has a negative influence

11
on the institution's profit position. Price Waterhouse Coopers (PWC), 2009. According to Fofack
(2005), lending institutions with failures on their books may face insolvency if they are unable to
collect their bad debt. It has an impact not just on the profitability of institutions, but also on
shareholder earnings and dividend payments. The dividend payments of institutions are
determined by the company's performance or net profit. If a corporation performs well, its
owners are handsomely compensated; but, if it has a greater incidence of defaults, capital
mobilization may be hampered since no investor wants to engage in an institution or bank with a
high proportion of non-performing loans.

2.6Determinant Factors Affecting Loan Repayment

Education level: Sylvester, I., Okpara, C., & Chukwudi, J. (2013) assessed the determinants of
loan repayment performance. The educational level coefficient had a positive sign indicating that
education has direct relationship to the repayment rate and this showed that as level of education
increases, borrowers enhances their ability to access, evaluate, and understand new production
techniques. This underpins the assertion that educated farmers are more amenable to risk taking
and change than the non-educated ones. The result of this study showed that the higher the
literacy level of the clients, the higher will likely be non-default.

According Jemal Abafita (2003) fount result that showed education was important and
significant factor that enhances the loan repayment performance. As per education affects loan
repayment positively. In addition, Samuel, S. A. (2011) found out that education is important and
significant factor that enhances the credit repayment performance. Tnsue, G. (2011), also found
that educational status is significant determinants of the probability of loan repayment. Million,
S., Nyikal, R., & Wania, S. (2012), conducted a study on the factors affecting loan repayment
performance. They found that education is an important determinant of loan repayment. An
educated client is able to use modern technologies, perform farming activities based on cropping
calendar, and manage resources properly. All these factors boost production, which improves
loan repayment.

Nearness of borrower’s residence to institutions: Haile F. (2015), clearly showed that 69.16%
of the defaulter respondents’ residence and businesses were near Harari Microfinance
institutions, whereas 30.84% were not near to Harari MFI. As a result, distance of borrowers

12
from the offices doesn’t affect the loan repayment rate of borrowers. This implies being far
and/or near to the Microfinance institutions was not related to the loan repayment performance
and thereby to loan default. Also he indicated that the distance of borrowers from institutions
don’t have significant impact on the loan repayment problem. However, Assefa B. (2002) found
that distance of borrowers has significant effect on the loan default.

Family size: Olagunju, F. I., & Adeyemo, R. (2007) have analyzed the determinants of
repayment decision among small holder farmers in Southwestern State of Nigeria. The result
showed that borrowers with lower number of household members would meet their repayment
obligation better than those with high number of household members. They argued that family
size had negative influence on the level of loan repayment. The result of the model showed that
family size was statistically significant factor influencing timely loan repayment performance
positively Abebe, B. (2002). However, Berhanu A., Fufa B. (2008) argued that family size had
insignificant effect on loan repayment performance of smallholder farmers.

Income from activities financed by the loan: Samuel, S. A. (2011) found out that income from
activities financed by the loan is important and significant factor that enhances the credit
repayment performance. Tnsue, G. (2011) found that income from the loan activities financed by
institution is significant determinant of the probability of loan repayment. Jemal Abafita (2003)
analyzed the microfinance repayment performance of Oromia Credit and Saving Institution
(OCSI) in Kuyu, Ethiopia. According to his finding income from activities financed by loan is
positively and significantly related to loan repayment performance and thereby reduces loan
default.

Celebration and participation on social festivals: According to Berhanu A., Fufa B. (2008),
expenditure for social festivals was found to have insignificant effect on loan repayment
performance of smallholder farmers. Belay Abebe (2002); found that celebrating social festival
can negatively influence loan repayment performance.

Loan diversion rate: Jemal Abafita (2003) analyzed the microfinance repayment performance
of Oromia Credit and Saving Institution (OCSI) in Kuyu, Ethiopia. According to his finding,
loan diversion is significant and negatively related to loan repayment rate. The negative sign

13
implies that the use of diverted funds for non-income generating purposes. Samuel, S. A. (2011)
argued that credit diversion was found to be significantly increase credit default.

Loan size: Statham, C. (2008), carried a study on determinant of loan repayment performance in
Southeast State of Nigeria. They hypothesized that loan size to have a negative relationship with
repayment rate. In other words, the higher the loan size given by the institution, the lower was
the repayment rate of the clients. Their regression results strongly disagreed with this hypothesis.
It stipulated that the higher the size of the loan to clients, the higher the repayment rate. This
situation appears to be most unlikely because the amount to be repaid was relatively larger and if
the loan was from development oriented institution with subsidized interest rate and little chance
of repeat loans, the pressure or inclination of such clients would be to delay repayment.

Natukunda, J. (2010) described micro finance credit lending terms and repayment performance
and stated the loan sizes in most cases affect the nature of business and type of investment for the
borrowers. The small loan size is often advanced by the micro finance institutions as a way of
minimizing risks. However, when the clients are not given adequate funds to cater for their
business needs, they tend to resort to multiple borrowing. This in turn affects their repayment
and increases the risks of the loan. The respondents were divided as to whether Brac Uganda is
giving them enough credit to cater for their business needs with some indicating that it was
enough while others indicated that it was not.

According to Jemal Abafita (2003) loan size was found to be significantly increase loan default.
Jemal Abafita (2003) suggested that credit/loan size was found to negatively influence the
borrowers’ loan repayment performance. Tnsue, G. (2011) found that loan size was significant
determinant of the probability of loan repayment. But, Berhanu A. (2008) studied the
determinants of loan repayment performance of smallholder farmers in North Gondar, Ethiopia.
His finding revealed that loan amount was found to have insignificant effect on loan repayment
performance.

Interest rate: Mohamed, K. (2003) argued that high interest rate caused delay in repayments of
agricultural credit. Mansoori, H. (2009) studied the factors influencing on repayment
performance of farmers in Khorasan-Razavi province of Iran during 2008. The logit model was
used to explain the probability of loan on time repayment as a result of any of the identified

14
independent variables. The signs of the coefficient of independent variables and significance of
the variables were used determining largely the impact of each variable on probability of
dependent variable. His study’s result shows that loan interest rate implies a negative effect on
repayment performance of recipients. By another way, as the loan interest rate increases the
probability of loan default increases and thereby, negatively affects loan repayment performance
of borrowers.

Method of lending: Many of the MFIs in Ethiopia provide similar financial products and use
predominantly the group lending methodology, while individual lending is employed to a limited
extent Amha W. (2008). Because group lending methodology addresses the asymmetric
distribution of information by transferring the burden of default risk to the contracting borrowers,
thus transfers the costly screening to be done by the borrowers themselves. Screening borrower’s
risk is critical since, it affects loan repayment and lenders profit thereby.

In the view of Saloner, R. (2007), group lending will also minimize loan default. Many
microfinance institutions borrow in groups and choose to lend to groups of borrowers rather than
on an individual basis. As opposed to this, the microfinance institutions provide the loans so that
the borrowers are not limited to the money that they themselves can contribute. The general
organization of group lending consists of a group of borrowers who work together, support, and
mentor one another to maximize the impact that the loan can have on each individual.
Additionally, in many group lending situations, the members of the group are responsible for

The general consensus in the literature on group lending and group liability is that group lending
benefits both the borrowers and the institutions. The borrowers receive the additional support and
assistance from a group of individuals dealing with the same types of issues. Furthermore, the
institutions are able to lower costs by relying on the lending groups to provide these services that
otherwise would be required from the institution itself. Group lending also works to move
institutions into a more client-led realm, which has proven to be more effective in creating
sustainable development programs.

Training: the finding of Statham, C. (2008) stated that one of the important requirements for the
success of microfinance institutions is to create awareness to potential clients by giving
appropriate training to borrowers about loan utilization, loan terms and obligations. In addition,

15
Admassie, A. (2005) agreed on the loan utilization and technical training should be given to
improve the skill of potential and actual clients. Technical support is important to increase the
productivity of borrowers.

Training is one the important requirements for the success of Microfinance institutions Assefa B.
(2002). If lender provides various training, the clients will able to understand the rules and
regulations easily. They also develop the skill how to do business and money utilization.
Training is needed not only for clients, but also for loan officers. In both cases, it has positive
contribution to the repayment rate. Norell D. (2001) also agrees on the importance of training
due to decreasing default rate. Among the determinants of loan repayment of microfinance
institutions, training duration had positive impact on loan repayment Onyeagocha, S., &
Chidebelu, D. (2012). But, Gedifew A. (2015) study reveals that there is statistically insignificant
association between training and loan repayment performance because the training may not be
continuous, relevant, timely and not catering the borrowers’ requirement.

High Interest Rate: Banks that charge high interest rate would comparatively face a higher
default rate or non-performing loans. Study by (Sinkey&Greenwalt, 2001) on large commercial
Banks in US depict that a high interest rate charged by banks is associated with loan defaults.
(Rajan& Dhal 2003)who used a panel regression analysis indicates that financial factors like cost
of credit has got significant impact on NPLs. Study by (Waweru&Kalini , 2009) on the
commercial banks in Kenya using statistical analysis indicates that high interest rate charged by
the banks is one of the internal factors that leads to incidence non-performing loans. Besides,
studies by (Berger and DeYoung, 1997), for the US; (Jimenez G. & J. Saurina.2006), for Spain;
(Quagliariello, 2007), for Italy; Pain, 2003, for the UK; and (Bikker and Hu, 2002), (for 29
OECD countries) banks profit margin exhibited by high interest rate affects occurrence of NPLs.

Collateral: Collateral (also called security) is the assets that the borrower pledges to the bank to
mitigate the bank’s risk in event of default (Sinkey, 2002).It is something valuable, which is
pledged to the bank by the borrower to support the borrower’s intention to repay the money
advanced. Security is taken to mitigate the bank’s risk in the event of default and is considered a
secondary source of repayment (Koch & MacDonald, 2003). Supporting of the aforementioned,
(Rose & Hudgins 2005) define secured lending in banks as the business where the secured loans

16
have a pledge of some of the borrower’s property (such as home or vehicles) behind them as
collateral that may have to be sold if the borrower defaults and has no other way to repay the
lender. The purpose of security is to reduce the risk of giving credit by increasing the chances of
the lender recovering the amounts that become due to the borrower. Security increases the
availability of credit and improves the terms on which credit is available. The offer of security
influences the lender’s decision whether or not to lend, and it changes the terms on which he is
prepared to lend, typically by increasing the amount of the loan, by extending the period for
which the loan is granted and by lowering the interest rate Norton and Andenans, (1997).

Loan Follow up (Monitoring): Lending decision is made on sound credit risk analysis/appraisal
and assessment of creditworthiness of borrowers. Nevertheless, past records of satisfactory
performance and integrity are no guarantee future, though they serve as useful guide to project
trend in performance. Loan granted based on sound analysis might go bad because of the
borrower may not meet obligations per the terms and conditions of the loan contract. It is for this
reason that proper follow up and monitoring is essential.

“A stitch in time saves nine” Follow-up measures taken regularly and systematically keep the
borrowing unit under constant vigil of the banks. Many ills are often checked through such
follow-up measures by keeping the borrowing units on their alertness and guiding them to rectify
their mistakes within the first opportunities or extending them a hand (Shodhganga, 2020)
Performance of the borrowing units, if carefully and systematically monitored through regular
inspections by scrutiny of returns, annual record and inspection of site, are often significantly
improved. Naturally, such inspections prevent the borrowers from deviating from the terms and
conditions of the loan or from diverting any fund for purpose aside from those earmarked n the
sanction letter and keep the financial health of the units in good orderThere are three types of
loan follow up systems. These are: Physical follow up, (Fredrick O, Nyasak) financial follow up
and legal follow up. Each was discussed in section that follows.

Physical Follow -up

Physical follow-up helps to ensure existence and operation of the business, status of collateral
properties, correctness of declared financial data, quality of goods, conformity of financial data
with other records ( such as taxes ,register books), availability of raw materials, labor situation,

17
marketing difficulties observed, undue turnover of key operating personnel, change in
management set up among others.

Financial Follow- up
Financial follow up is required to verify whether the assumptions on which lending decisions
was taken continues to hold good both in regard to borrowers’ operation and environment ,and
whether the end use is according to the purpose for which the loan will given.
Legal Follow- up
The purpose of legal follow up is to ensure that the legal recourse available to the Bank is kept
alive at all times. It consists of obtaining proper documentation and keeping them alive,
registration, proper follow up of insurances. Specific issues pertaining to legal follow up include:
ascertaining whether contracts are properly executed by appropriate persons and documents are
complete in all aspects, obtaining revival letters in time (revival letters refer to renewal letter for
registration of security contracts that have passed the statutory period as laid down by the law),
ensuring loan/mortgage contracts are updated timely and examining the regulatory directives,
laws, third party claims among others Hable Asratp, (2001).

2.7 Empirical studies on determinant of loan default

The empirical related literatures tried to review several studies that conducted in Ethiopia and
others country by different researchers on loan repayment performance of clients of microfinance
institutions and summarized as follows.

2.7.1 Empirical studies of other countries

Several studies has conducted in different countries regarding determinants that affect loan
repayment performance and some of them can be reviewed and summarized as follows:

Determinants of loan repayment performance of fishermen on Ghana employed multiple

regression analysis in their study. Their results revealed that low level of education, lack of
alternative income generating activity, cumbersome loan processing procedures, they are likely
to have high loan default. The study identified fishing income, amount borrowed and size of loan
invested into fishing as significant predictors of loan repayment (Acquah and Addo, 2011).

18
Mamun (2011) conduct the study on examining the critical factors affecting the repayment of
microcredit provided by Amanah Ikhtiar Malaysia. The researcher employs a cross sectional
design with stratified random sampling method to examine how common household factors
affect repayment performance. According to the finding household income, number of gainfully
employed members, and number of sources of income significant model fit and negative linear
relationship between repayments.

Munene (2013) in his study of factors influencing loan repayment default in microfinance
Institutions: The experience of Imenti North district, revealed that there was significant
relationship between the type of business, age of the business, number of employees, business
profits and loan repayment default. There is strong link between technical training for loan
beneficiaries and the performance of entrepreneurial businesses among the remote communities.

The study conducted on Microfinance institutions in Kenya to establish the causes of repayment
defaults in Imenti North district, Kenya using a descriptive survey design by incorporating 400
respondents of individual microfinance loan beneficiaries and microfinance institution officials
using census and cluster sampling procedures for micro finance institutions officers and loan
beneficiaries respectively. The data collected use both structured and unstructured questionnaires
and analyzed using descriptive and inferential statistics.

Mukono (2015) conducted study on the determinants of loan repayment by small and medium
enterprises in Nairobi country, Kenya. He employed logit regression model, descriptive
statistical tools and inferential statistics to analyze the data. The analyzed data reveals that firm
characteristics (ownership structure type of firm, firm location, firm size, age of the business,
registration status, profitability, asset ownership, type of business and type of business activity).

Borrower characteristics (age of borrower, gender of the borrower, level of education, business
experience, household size, credit use experience, household income, non- business income, type
of business activity, amount of business investment, borrower’s attitude and family background)
are positively influence loan repayment by small and medium enterprises. Whereas loan
characteristics (loan size or amount, loan repayment period ,collateral value ,number of
installments ,loan application costs ,loan type, purpose of loan ,previous loan repayment mode
and length of time before repayment). In addition, lender or firm characteristics (interest rate,

19
penalty for lateness, credit analysis procedure, lending policies, time lag between loan
application and disbursement, and stringent loan procedures) are negatively influence loan
repayment performance of small micro enterprises.

Samwel and Kevin (2016) had conducted stud on the factors affecting clients on loan repayment
for microfinance institutions: a case study of pride Arusha Tanzania, based on analysis the
factors that affect clients on loan repayment for microfinance institutions by applying both
quantitative and qualitative techniques to investigate factors affecting loan repayment
performances. They used primary and secondary data and used randomly sampling techniques to
select from a total population of clients and staffs. According to their findings, results from
clients’ characteristics age, household size, gender and level of education variables, from nature
of business characteristics business type, business stability and income level variables and loan
characteristics repayment period, repayment mode, and repayment amount variables were among
the factors that influenced borrowers in repaying their loans. In additionally Lack of business,
knowledge and borrowers age of 40 years and above are another factor mentioned by clients. In
addition, the institution used reasonable and acceptable lending policies and procedures. It also
good loan application procedures, loan approval system, loan disbursement, and collection
techniques.

Wafula (2016) conducted study on determinants of loan repayment by borrowers from micro
financial institutions in Nakuru Country Kenya. The researcher employed a descriptive analysis
and linear multiple regression model to analyze the data. His results revealed that low education
levels and yet they are associated with loan repayment better than those educated counterparts
and as income level increases loan repayment decreases (Lower income borrowers repaid loans
than higher income borrowers). It also younger is associated with loan repayment than their old
counterparts. This study identified the education level, income level and age have negative
coefficient but significant determinants of loan repayment.

Yogendrarajah and Semasinghe (2016) had studied on the empirical analysis of micro credit
repayment in Northern Sri Lanka. According to the researchers the all variables such as Amount
of Loan, Loan interest, Decision making, control over assets and Loan management were
positively influence on repayment of micro credit. The researchers had employed Linear multiple

20
regression model to estimate the equation of loan repayment and they analyzed and presented the
results of the study by using the SSPS software 16 versions. In addition, they were used multi-
stage stratified random sampling technique to select the sample from population of self-
employable women who have experience more than two years and collected the data through
structured questionnaire.

Benjamin (2017) examined the Microcredit Loan Repayment Default among Small Scale
Enterprises in the Upper West Region of Ghana by Applying the Tobit and the double hurdle
models. The results showed that enterprise size, interest rate, loan duration, level of profit and
loan amount are the simultaneous determinants of probability and rate of default. However, the
age and educational attainment of the enterprise owner, number of dependents and loan
repayment schedule influence the probability of default but not the rate of default. The result
shows more educated clients are 26.6 percent less likely to default entrepreneurs with more
dependents are 59.6 percent more likely to default, Enterprises that have operated for relatively
longer years record smaller default rates as compared to young enterprises. Enterprises that
secured loans with higher interest rates are more probable of defaulting, enterprises that make
large profits are 7.1 percent less likely to default in loan repayment and amount of loan is a
positive determinant of probability of loan repayment default. This means that enterprises that
secured larger loan amounts are 6.1 percent more likely to default.

2.7.2 Empirical Studies in Ethiopia

Abafita (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 dependents
are negatively related to loan repayment. On the other hand age was found to be positive, while
age squared turned to be negative. Income from activities financed by loan, repayment period
suitability and loan supervision are positively and significantly related to loan repayment
performance. Moreover, loan diversion is significant and negatively related to loan repayment
rate. The negative sign implies that the use of diverted funds for non-income generating
purposes.

Assefa, (2002) employed a logit model to estimate the effects of hypothesized explanatory
variables on the repayment performance of rural women credit beneficiaries in Dire Dewa,

21
Ethiopia. Out of the twelve variables hypothesized to influence the loan repayment performance
of borrowers, six variables were found to be statistically significant. Some of these variables are
farm size, annual farm revenue, celebration of social ceremonies, loan diversion, group effect
and location of borrowers from lending institution.

Girma, (2011), examined “credit risk management and its impact on performance in Ethiopia
Commercial Banks” and his finding revealed that is a significant impact on the profitability of
the bank performance and he concluded that the bank with good or sound credit risk
management policy have lower loan default rate (bad debt loan) and higher interest income
(profitability). Girma, (2011) Suggests Possible Causes of Loan Defaults like fund Diversion,
sickness or inability to work, loss of a job, failed of Business & over committed by high interest
debts.

Abay, (2015) who conduct study on “assessment of loan recovery performance in construction &
business bank” considered the bank must have to develop a strong credit assessment and follow
up to facilitate the control of NPL status of loan and improve its service Balamurugan (2017)
assessed the credit default risk in Oromia credit and saving Share Company. His finding
outcomes revealed that the Oromia credit saving and share company default rate increased over
the review period. The major causes of default found to be poor business performance, in terms
of low profitability or business losses. Besides, credit diversion to unprofitable uses, poor timing,
inadequate supervision to borrowers, inadequate loan size, unfair screening mechanism, non-
flexibility of the nature of repayment period, not quick process were other factors that caused
credit default and in addition natural disaster, poor infrastructure, poor management and presence
of negligent staffs were identified and taken as causes for credit default risk. Further, the
inference results of the descriptive statistics show that awareness creation is important and
significant factors that enhance the credit repayment performance. He used stratified sampling
method and collected the primary data by using structured and unstructured questionnaires. The
researcher employed descriptive statistics and SPSS version 20 software to analysis the collected
data.

Garomsa (2017) conducted a study on the assessment of factors affecting loan repayment
performance of borrowers on selected microfinance institutions in Oromia region. He employed

22
the descriptive statistics analysis and probit regression model to analyze the results of findings. It
also used multistage sampling methods and he has collected the primary data by using the
structured questionnaires, semi-structured interviews and focus group discussions. According to
the study that income from other sources, monitoring utilizations of other members in a group,
credit timeliness, repayment time suitability, repayment trend on monthly basis and training
adequacy are found significant and positively influence loan repayment performance of
borrower. While loan utilization for the intended purpose, repayment trend on irregular basis and
visit and follow-up on irregular basis found negatively, influence the repayment performance of
borrowers. In addition, he revealed that male borrowers in a given enterprise found to be more
defaulters than females although they have relatively higher utilization rate of the loan for the
intended purpose as compared to that of females.

Savio.et. al (2017) carried a study on the loan repayment performance of micro small enterprises
in Wolaita Sodo and concluded that variables relating to smell micro enterprises loan repayment
form the most dominant group of determinants of bad loans, accounting about 82.7 percent of the
variability. The variables are beneficiary size of the enterprises, business related experience, loan
size, loan supervision, loan initiation and suitability of repayment situation. Also that the
evidence of both descriptive analysis and multiple regression show that business related
experience is found to be one of the major determinants adversely affecting the loan repayment
performance having the value of 64.2 percent by taking the variable while others are constant.

This indicates that in the study area, micro small enterprises did not have enough business related
experience to manage their own activities properly and as the results, they fail to repay the loan
they received. Another important point to rise is loan size and that decreasing the loan size
increases the loan default rate. Stratified Random sampling method was used and data collected
by structured questionnaire. Regression model (multiple regression models) and descriptive
statistical tools was employed to estimate the equations and analysis the results.

Alemu (2018) conducted study on the determinants of loan repayment of micro and small
enterprises in Jimma town, Ethiopia by using binary logistic regression model. He result of
explanatory variables sex and experience positive and significantly affect loan repayment. The
inconvenience of loan payback period, lack of financial skill and planning negatively and

23
significantly affected loan repayment of enterprises. Lack of marketing skills, follow up and
supervision positively and significantly influenced loan repayment of micro and small
enterprises.

Geleta (2018) conducted study on the determinants of loan repayment performance of micro and
small enterprises the case of Oromia credit and saving Share Company branches under Oromia
special zone around Addis Aababa by using binary logistic regression model. The results of
explanatory’s variable group leader, education level, training, and loan follow up or loan
supervision, market accessibility and technology loan positive and significantly affect loan
repayment. Also the results of interest rate, internal rules and regulations, loan accessibility, lack
of group leaders experiencing in business, enterprise size and enterprise group formation were
negatively influenced the loan repayment performance of micro and small enterprises sectors in
the study area.

2.8 Conclusions and identification of knowledge gap

In this section the researcher summarizes more of studies done in our countries because of more
specifying the case was important for this study. A study conducted by Migwi Mwangi in Kenya
looked at the debt recovery procedures in banks. The researcher gave detailed debt recovery
procedures for banks but there was not enough information on how best banks can recover debt.
Genet, (2018) conducted a study on the loan recovery management system. The study gave
detailed information on the causes of or reasons for loan default in banks which proved to be of
great help to the Ethiopia. She gave little to no information on the ways in which banks can
reduce loan default. Also Girma, (2011) shows the bank with good or sound credit risk
management policy have lower loan default rate and higher interest income. He also suggests
possible pauses of loan like defaults fund diversion, loss of a job & failed of business. This is
what the researcher of this study agrees. And also according to Abay Zembelachew, (2015), the
bank must considered and develop a strong credit assessment and follow up to facilitate the
control of NPL status of loan and improve its service delivery.

Factors such as associated with lack of obtaining potential creditors, estimating and checking
appropriate values of collateral and loan documentation of creditors, preparing customer’s
disbursement instruction and follow up their periodic loan repayments was not looked by the

24
above researchers. Therefore, this study was find out the loan repayment performance and
investigates the major factors affecting borrower’s ability to repay loan of the bank specifically
the case of Arba Minch Branch Omo Bank of Ethiopia.

25
 CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1Introduction

This chapter was discussing various methodologies that were employed in completing this study.
It provided a general framework for the procedures and techniques used in data collection and
analysis. This included the study design, approach, sources of data, sampling frame, sample size,
sampling technique, data collection tools, data analysis method, reliability and validity and
ethical consideration.

3.2 Back ground of the study area

The main purpose of this study will be to examine the factors affecting borrower’s ability to
repay loan in case of Omo Bank of Ethiopia Arba Minch Sech Branch. The study area is located
in Gamo zone of SNNPR in regional state that locates 505 KM from Addis Ababa and 257 KM
away from Hawassa.

Omo Bank started its operations in the mid-1990s and today has a network of around 200 outlets
across Ethiopia, focusing on supporting the country’s low-income population and promoting
financial inclusion among these outlets Arba Minch Secha Branch was the one that has been
selected for current study.

3.3The Research Design

The study conducted to assess the factors that affecting borrower’s ability to repay loan in Omo
Bank Arba Minch Branch. The researchers employed descriptive research design. A research
design is a plan for study that provides arrangement of procedures to be followed by the
researcher in order to achieve the research objective as well as, to test the hypothesis Creswell
(2004). In order to answer the basic research question raised the researchers employed
descriptive type of research design. The major purpose of descriptive research is to describe the
state of affairs as it exists. It gives a brief description of the statistical units under the

26
investigation. To present a profile of group of people and relevant events and to identify the
event, characteristics of the phenomenon and this type of study is an appropriate and measure the
attitudes of employees and department management towards loan recovery performance and also
for collecting original data from target population. It was recommended that descriptive survey
design gives a better and deeper understanding of a phenomenon which helps as a fact finding
method with adequate and accurate interpretation of the findings.

3.4Research Approach

In this study, the researchers were applied mixed research approach or used both qualitative and
quantitative approach. These methods involved the processes of collecting, analyzing,
interpreting, and writing the results of a study. Similarly, several research approaches can be
adopted for the conduct of a research, this was because employing the mixed approach helped to
converge or confirm the findings from different data sources (Creswell, 2003, 2005). The
quantitative research approach has its own strength. Its main strengths have been that important
to generate precise, numerical data from large survey sizes. The limitation of quantitative
research findings was not usually used for a generalized small number of participants, the
findings were interpretative and subjective (Sekaran, 2000). Qualitative approaches have been
also used in the questionnaire and interview questions to generate a detail view point by using
both open ended and multiple-choice questionnaires. So, to achieve the study objective, the
researchers used mixed research approach to analyze data collected from selected respondents
using close ended questionnaire and semi structured interview.

3.5Types and Sources of Data

3.5.1 Sources of Data

Krishna swami (2002) classified data gathering into primary and secondary sources. The
researchers used both primary and secondary sources of data. To achieve the objective of this
study, the researchers collected the necessary data from the subject of the study with different
tools of data collection. The study was largely depending on primary data, which was collected
through the survey method by using self-designed close ended questionnaires and interviews.
The primary sources of data were collected from sampled Omo Bank Staffs’ Secondary sources

27
of data were obtained from the annual reports, publications, written documents, internets and
others.

3.5.2 Population

This research was conducted to study the factors that affecting borrower’s ability to repay loan in
banks and using Omo Bank of Ethiopia Arba Minch Branch as a case study. Population of study
was limited to the staff and managers of Omo Bank of Ethiopia Arba Minch Branch (43
employees).

3.5.3 Sampling frame

The sampling frame is the list of all elements in the population from which the sample is drawn
(Kothari, 2004). The sampling frames of this study were the list of all staff and managers of the
bank obtained from human resource department of the bank. .

3.5.4 Sampling Techniques and Procedures

For the purpose of this research, the researchers employed probability and non-probability
sampling method for its suitability to this study. Since collecting data from all banks were costly
and bulky, the researchers were forced to choose purposefully Omo Bank of Ethiopia Arba
Minch Branch.

The total survey respondent populations in this study were 43employees. Different authors use
different formulas to determine the sample size of the study. The formula set by Yamane, (1967)
is used by considering the level of acceptable margins of error 0.05% and 95% confidence level.

n= N
1+N (e) 2
Whereas: on= total sample size;

N= the number of the total populations;

e= level of precision.

Therefore n = N = 43 = 39
1+N (e) 2 1+ 43 (0.05)2

28
As a result, from the target population size of N = 43 a total number of 39 samples were drawn.
Therefore, 39 respondents were used as sample for this study to gather data through
questionnaire.

Finally, sample respondents were selected through simple random sampling method using lottery
and non-probability sampling method were employed to take key informant interviewer /one
manager of the bank purposively.

3.6Data Collection Instruments and procedures

3.6.1 Data Collection Instruments

In the fieldwork, mainly three data collection instruments namely questionnaire, interview and
document review have been used to collect the required quantitative and qualitative data.

3.6.1.1 Questionnaire

Questionnaires were used as the main instruments to collect data from the employees. It is
preferred to other methods of data collection hoping that it may provide an opportunity for
obtaining reliable and valid information from a greater number of respondents. According to
Khomba (2011) stats that closed ended questionnaire gives confidentiality to the respondents to
complete the questionnaire honestly; and it also tends to increase the response rate. Due to the
benefit the researcher used structured questionnaire for the fact that gives the respondent
sufficient time for reading and understanding the questions and answer freely, and it provides
wider coverage to the sample and also facilitates collection of a large amount of data. It was
prepared in English because all of the sample can have the necessary skills to read and
understand the concept that is in the questionnaire. Finally, the questionnaire was pre-tested
based upon the result of the pre- test exercise, time, clarity, logical flow (skip rules), content and
other necessary corrections and amendments were done.

3.6.1.2 Interview

Semi structured interview was prepared to the key informant. Interview were selected in order to
obtain information with regard to issues that required clarification such as annual reports,
policies and vital information that was not expected to access using questionnaires; and it were

29
used concurrently with the design of the questionnaire. In in-depth interviews, the interviewer
can get a nugget of data by letting the subject to narrate all his/her experience. The inclusion of
interview in the study enabled the researchers to cross check the data that collected through
questionnaire and used to obtain additional ideas from the respondents (Kvale, 1996).

In this study, the researchers dealt with people who have knowledge and experience on loan
recovery and have detailed information about the current situation of practice in the study area;
this was helped the researchers to get more significant information. The selected key informant
was manager of the bank. The interview question were prepared in English language and
translated into Amharic language to minimize communication barriers.

3.6.1.3 Document Analysis

In addition to primary sources, relevant information was included from secondary sources. This
technique would help the researchers to cross check the data that would be obtained through
primary sources (i.e. questionnaire and interview). Document analysis was focused on such
documents annual plans, reports, self-assessment tools, borrower’s selection procedures,
evaluation tools and over all bank practices records.

3.6.2 Procedure of data collection

To answer the research question raised to confirm cross validate or corroborate finding within a
study researchers passed through a series of data gathering procedures. The expected relevant
data is gathered by using questionnaires, interview, and document analysis. Having letters of
authorization from Paramed College, the researchers have directly led to sampled respondents
according to the schedule outlined. Then, the researchers in every step followed all important
procedures until all required data collected and complete from intended sample respondents from
beginning to end.

The processes of interview conducted in Amharic language. The recorded data categorized based
on similarities of responses and then transcribed into English language.

30
 3.7Reliability and Validity Checks

3.7.1 Reliability Test

Checking the validity and reliability of data collecting instruments before providing for the
actual study subject is the core to assure the quality of the data. In order to proceed for further
analysis, it is crucial to check the reliability of the instrument. To measure the internal
consistency the scores, analysis is used to test to what extent the separate items measure the
similar concept. In the same way Trochim, (2000) stat that the reliability of the tool can be
judged by estimating how well the items that reflect the same construct yield similar results
(Reliability is the statistical measure of the equivalence, consistency, and stability of the survey
instrument (Sekaran, 2006). In this research the researcher tests the reliability of the data by
using Cronbach’s Alpha. It is most commonly used on multiple Likert-scale questions in a
survey questionnaire to determine if the scale is reliable (Lund Research Ltd, 2007). The
Cronbach’s Alpha Coefficient of this study was 0.933 which have excellent internal consistency
and reliability of the item that can show below in Table 3.3.

Table 3.1: Reliability Statistics

Reliability Statistics
Cronbach's
Alpha N of Items
.933 20
Source: Own Survey, 2023

3.7.2 Validity Test

Validity indicates a degree to which a test, measurement and instrument is capable of achieving
certain aims. Validity is often defined as the extent to which an instrument measures what it
significances to measure. According to Carole I.et.al (2008) Validity needs that a device is
reliable, but a device can be reliable without being valid. Validity is an integral, mandatory
component of any type of measurement, test or instrument. In order to test the strength of
questionnaires, the researchers was undertook a pilot test for questionnaires and all the necessary

31
amendments such as reorganization of questions along research questions, eliminating of
unnecessary questions, and eliminating of grammatical errors were made. The pilot test was held
in Vision Fund Micro Finance, which was one of the micro finance institutions in Arba Minch
City Administration which was not included in the sample. Based on the data collected, the
validity and reliability of the tools were analyzed and necessary modifications were made.

3.8Method of Data Analysis

Data analysis is the process of inspecting, cleansing, transforming, and modeling data with the
goal of discovering useful information, suggesting conclusions, and supporting decision-making.
For this study both quantitative and qualitative data analysis techniques were used to analyze the
data gathered through questionnaires and semi-structured interviews as data gathering tools.
After collecting and sorting all relevant data using the data collection tools, quantitative
responses were sorted, coded, computed and analyzed using Statistical Package for Social
Sciences (SPSS) version 24. The data gathered through close ended questionnaires were
tabulated and analyzed with the help of descriptive statistical techniques, mainly using
percentage and frequency, and the data was presented using tables, graphs and diagrams. Finally,
the data gathered through interview and document analysis were analyzed qualitatively and
presented in narrative form for the purpose of triangulation.

3.9Ethical Consideration

Research ethics refers to the type of agreement that the researcher enters into with his or her
researcher participants. Ethical considerations play a role in all research studies and all
researchers must be aware of and attend to ethical considerations related to their studies.
Therefore, the researchers tried to clearly inform and explained to the participants that the data
was to be used only for an academic purpose and were requested to take part in the study with
their full consent in addition that they had the right to withdraw from the study any time
whenever they could not feel at ease. The researchers did not intend to enforce anyone to fill the
questionnaire or to be interviewed as long as he was not willing for the intended purpose and
there was no misrepresentation or alteration of the actual data collected from respondents the
researcher also not personalizes any of the response of the respondents during data presentations,

32
analysis, and interpretation. Finally, all the materials that were used for this research are
accordingly acknowledged.

33
 CHAPTER FOUR

4. DATA ANALYSIS

4.1Introduction

The main objective of this research was to assess factors that affecting borrower’s ability to
repay loan Omo Bank of Ethiopia Arba Minch Branch. The research data is presented according
to the objectives of the study and hence, the chapter is organized into the following sub-sections:
response rate, demographic data of respondents, factors accounting borrowers to loan default,
procedure used to adopt to retrieve credit, effects of loan default on the bank, measure to reduce loan
defaults in banks.

4.2Response Rate

To determine the total number of the respondents who participated in the study, the analysis of
the response rate was conducted as shown in the Table 4.1

Table 4.1: Response Rate

Frequency Percentage
Category

Response 35 89.74%
Non response 4 10.26%
Total 39 100

Source: Own Survey, 2023

As presented in the table 4.1 the response rate comprised of 35 respondents who were 89.74% of
the total response rate. The non-response comprised of 4 respondents who were 10.26% of the
total response rate. The response rate of 89.74% of the respondents indicates that the gathered
data have met the generalization standards according to Cooper & Schindler (2003) a response
rate above 50% of the total sample size can be generalized to represent the opinions of the entire

34
population. The gathered data was hence enough to explore the factors which affect borrowers’
ability to repay the loan Omo Bank of Ethiopia Arba Minch Branch.

4.3Demographic data of respondents

The data collected regarding age, sex, educational level and work experience of selected
respondents (employee) obtained from primary data for the purpose of the study were analyzed
and presented below.

4.3.1 Sex of Respondents

Figure 4.1 represents the sex distribution of the respondents. From the figure, 25 (72%) of
respondents were male, while 10 (28%) of respondents were female this indicates a high number
of male employees in the bank.

Figure: 4. 2 Sex of respondents

Sex
28.0

Female
Male

72.0

Source: Own Survey, 2023

4.3.2 Age Distribution

Figure 4.2 shows the respondents age brackets. The study was represented by respondents with
the age bracket of between 20 to 29 years accounted for 14(40%), and 30 to 39 years accounted
for 21(60%). Therefore, majority of the respondents were ≤39 years of age.

35
Figure: 4. 1 Age Category of Respondent

Source: Own Survey, 2023

4.3.3 Educational Level of Respondents

The respondents were asked to provide information on their levels of education. Figure 4.3
clearly depicted that, the majority of the respondents were first degree holders 18 (51%), 7 (20%)
were diploma holder respondents and the remaining 10 (29%) were second degree holder
respondents.

Figure: 4. 3 Educational level

Source: Own Survey, 2023

36
 4.3.4 Work Experience of Respondents

In a similar vein, respondents were sub-categorized in terms of their working experience in

years. Accordingly, figure 4.4 a considerably big number i.e. 16 (45.7%) of the respondents
served for 6-10 years. This was followed by 13 (37.1%) and 6 (17.1%) which corresponded to
the respondents who had served the bank above 10 years. This could be interpreted to mean that
most of the respondents were young employees with less than 10 years of experience and they
have better exposure on study subject.

Figure: 4. 2 Work Experience

250

200
100
150 45.71428571
42857 17.14285714
37.14285714 28572
100 28572

50
0
0
1-5 year 6 to 10 year Above ten Total
year
Experience in banking Valid

Source: Own Survey, 2023

4.4Factors which affect borrower’s ability to repay loan

4.4.1 Loan default in the bank

Table 4.2: Loan default

Loan default in the bank

Valid
Frequency Percent Percent Cumulative Percent
Valid Yes 29 82.9 82.9 82.9
No 6 17.1 17.1 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

37
As described in Table 4.2, the respondents were asked to indicate their level of agreement on
whether there is loan default in their bank or not. Accordingly, the majority 29 (82.9%)
respondent replied that there is non-repayment of loan in the Bank and the remaining 6 (17.1%)
was said no non-repayment is there in the bank and this is also decreasing from time to time, as
we can understand from table above non repayment of loan is there in the bank due to the
borrowers fail to repay their loan. Mostly when we see that in Ethiopian agricultural system uses
a back ward system so the products are depend on the weather condition. If the weather
condition is unfavorable it is clear that the farmer's productivity will be diminished so they
cannot pay their debt (Solomon, 2006).

Table 4.3: Loan repayment performance borrowers of Omo bank Arbaminch branch in
past three years from 2020-2022

Items Years Remark

2020 2021 2022
Amount of total 23,570,108 21,053,815 32,301,889
loan
Amount of 17,027,204.38 21,959,103.31 22,513,350.52
collected loan
Amount of 6,542,903.62 - 9,788,538.48
default
Default rate 27.7 - 30.3

Source: Omo Bank of Ethiopia Arba Minch Branch, 2023

As depicted in Table 4.3 above, borrowers of Omo Bank of Ethiopia Arba Minch Branch loan
repayment performance the default rate is increasing for the subsequent three years, i.e., 2020 to
2022 with default rate of 27.7% to 30.3%. From this result it can be concluded that, Omo Bank
of Ethiopia Arba Minch Branch loan repayment performance is decreasing and amount of loan
default increasing form time to time that can badly affect its financial sustainability of OBAMB.
This leads to increase in the overall annual default rate that is higher than the rate that the
National Bank of Ethiopia (NBE) set for all financial institutions, i.e., <5 percent (or >95 percent
expected to be collected). According to Samuel (2012), a series of defaults could lead to liquidity
problem in the banks and would consequently limit the ability of the banks to extend credit/loan
to other applicants.

38
 4.4.2 Factors accounting borrowers to loan default

Customer going bankrupt

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on customer going
bankrupt as a factor which affect borrower’s ability to repay their loan properly . The findings were
represented below.

Table 4.4: Customer going bankrupt

Customer going bankrupt

Frequency Percent Valid Percent Cumulative Percent

Valid Disagree 5 14.3 14.3 14.3
Neutral 2 5.7 5.7 100.0
Agree 17 48.6 48.6 62.9
Strongly Agree 11 31.4 31.4 94.3
Total 35 100.0 100.0

Source: Own Survey, 2023

The Table 4.4 shows that most of the respondents with a highest percentage of 17 (48.6%)
agreed that customer going bankrupt as one of the biggest obstacle affect borrower’s ability to
repay their loan properly, 11 (31.4%) strongly agreed, 5 (14.3%) disagreed and 2 (5.2%) were
neutral. The study revealed that banks need to halt their collection efforts, once a customer
(person or business) declares itself bankrupt. Because bankruptcy may be a detailed and lengthy
process, it can sometimes take years for a bank to receive money, if in the least it does. Several
bad loans are suffered by banks because of this reason. (Chakraborty, 2015)

Debtors delaying in making loan repayment

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on debtors delaying in
making loan repayment as a factor affecting borrower’s ability to repay loan. The findings were
represented below.

39
Table: 4.5 Debtors delaying in making loan repayment
Debtors delaying in making loan repayment
Frequency Percent Valid Percent Cumulative Percent
Valid Disagree 4 11.4 11.4 11.4
Neutral 3 8.6 8.6 100.0
Agree 18 51.4 51.4 91.4
Strongly Agree 10 28.6 28.6 40.0
Total 35 100.0 100.0

Source: Own Survey, 2023

Table 4.5 above shows that a debtors delaying in making loan repayment is one of the obstacles
of loan recovery shown by 51.4% agree, 28.6% strongly agreed, 11.4% disagreed and 8.6% were
neutral. The result of the study shows that a debtors delaying in making loan repayment is one of
the obstacles of loan recovery and banks are finding it increasingly difficult to recover their
money from defaulting borrowers as bad loans still pressurize their capital base and threaten their
ability to grow during a competitive environment. Interview with branch manager confirms that,
customers failing to pay due to genuine reasons are few, whereas people who use tactics to delay
or flout payment are many. Banks are breaking their backs over these customers, trying hard to
access them and to get them tell the bank their reasons.

A customer falling out of business unexpectedly

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on a customer falling out
of business unexpectedly as a biggest obstacle of bank loan recovery in the bank. The findings were
represented below.

Table: 4.6 Customer falling out of business unexpectedly

A customer falling out of business unexpectedly

Frequency Percent Valid Percent Cumulative Percent
Valid Disagree 2 5.7 5.7 5.7
Neutral 5 14.3 14.3 20.0
Agree 27 77.1 77.1 97.1
Strongly Agree 1 2.9 2.9 100.0
Total 35 100.0 100.0

40
Source: Own Survey, 2023
Table 4.6 above shows that most of the respondents with a highest percentage of 27 (77.1%)
agreed that customer falling out of business unexpectedly as one of the biggest obstacle of bank
loan recovery, 5 (14.3%) neutral, 2 (5.7%) disagreed and 1 (2.9%) were strongly agreed. The
result of the study and managers supported that debtors in recent three year take heavy loans as
business investment then fall through different natural and human made problems (covide-19,
war, drought.etc) and therefore the business collapses hard. This engenders the debtor helpless
and unable to pay off any loans. The study revealed that customer falling out of business
unexpectedly is often a cardinal obstacle that the bank faces.

Improper selection of borrower

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on improper selection of
borrowers as a factor affecting borrower’s ability to repay loan. The findings were presented
below.

Table: 4.7 improper selection of borrower

Improper selection of borrower

Frequency Percent Valid Percent Cumulative Percent

Valid Neutral 10 28.6 28.6 28.6
Agree 10 28.6 28.6 57.1
Strongly Agree 15 42.9 42.9 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

According to Table 4.7 above, the result indicates improper selection of borrower is one of the
cause of loan defaults in bank shown by 15(42.9%) strongly agree, 10(28.6%) agree and
10(28.6%) neutral. The study revealed that single biggest contributor to bank failures and or
distress is poor management of lending. This is often where the bank’s staff fails take particular
note and analyze their customers/ borrower’s information before they approve and release loans

41
to them and also fail to observe and follow abreast of how the borrowers are faring on with
repayments causing poor return on assets. In at most half the bank failures, poor management of
the loans and quick approval of loans to unqualified borrowers accounted for a considerable
proportion of reduced return on assets as a consequence of high default rates on payment of bank
loans Karanja (2010). The study confirmed that client appraisal was a crucial process that needed
to be done whenever a member requested for a loan to avoid extending credit facilities to clients
who were financially incapable to repay credit borrowed as per the terms and conditions
stipulated considering qualities like credit history of the member, income of the client, collateral
substitutes, character of clients and other loan delinquencies that were key in credit appraisal
process. The results concluded that if a case is appraised properly, default rate is low thus
reduced provision on bad debts translating to higher performance.

Income from business activities

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on income from business
activities as a factor affecting borrower’s ability to repay loan. The findings were presented
below.

Table: 4.8 Income from business activities

Income from business activities

Valid Cumulative
Frequency Percent Percent Percent
Valid Disagree 8 22.9 22.9 22.9
Neutral 10 28.6 28.6 51.4
Agree 11 31.4 31.4 82.9
Strongly 6 17.1 17.1 100.0
Agree
Total 35 100.0 100.0

Source: Own Survey, 2023

Regard to Table 4.8, respondents was asked to reveal their agreement on lack of income from
nonfarm activities is one of the factors affecting borrower’s ability to repay loan. Accordingly,
the majority 17 (48.5%) of respondents agreed that lack of income from nonfarm activities was

42
one of the factor affecting borrower’s ability to repay loan and the rest 10 (28.6%) neutral and 8
(22.9%) disagree on the similar issue under study. From this one can conclude that getting
income from nonfarm activities is another economic factor that positively and significantly
affected the loan repayment rate of smallholder clients. This might be because nonfarm activities
were additional sources of income for borrowers and the cash generated from these activities
could back up the borrower’s income to settle their debt even during bad harvest seasons and
when the repayment period coincided with low agricultural prices. Borrower’s participation in
nonfarm activity decreases the probability of being non defaulter and for each additional income
received from such activities, the rate of loan repayment on will increases. The interview result
of branch manager also confirms that borrowers who had other alternative source of income were
found to better payers relative to those who did not have other sources of income. This result is
consistent with the study result of Amare (2005), Brehanu and Fufa (2008), Medhin (2015),
Fentahun et al. (2018), and File and Sori (2019). Each additional income received from such
activities increases the proportion of loan repayment among smallholder borrowers. However,
this result is contrary to the result obtained by Dorfleitneret al. (2016).

Purpose of borrowing

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on purpose of borrowing
as a factor affecting borrower’s ability to repay loan. The findings were presented below.

Table: 4.9 Purpose of borrowing

Purpose of borrowing
Valid Cumulative
Frequency Percent Percent Percent
Valid Disagree 4 11.4 11.4 11.4
Neutral 6 17.1 17.1 28.6
Agree 14 40.0 40.0 68.6
Strongly 11 31.4 31.4 100.0
Agree
Total 35 100.0 100.0

Source: Own Survey, 2023

43
Concerning to Table 4.9 above, respondents was asked to disclose their agreement on purpose of
borrowing is another factors that affecting borrower’s ability to repay loan. Accordingly, the
majority 25 (71.4%) of respondents agreed that purpose of borrowing was among the factor that
affects borrower’s ability to repay loan and the remaining 6 (17.1%) and 4 (11.4%) of
respondents neutral and disagree on the similar issue under study respectively. From the output it
will be concluded that purpose of borrowing is another factor that influence loan repayment rate
of borrowers in Omo Bank Arba Minch Branch. This may be because of the way that clients who
utilized the loan for a productive purpose such as purchased agricultural inputs (chemical
fertilizers and improved seeds) and livestock that produced enterprises that would give maximum
benefits to the clients. These borrowers are the recipient of the utilization of loan that would
build their pay capacity and repay their loans timely. Effective utilization of available loan for
productive purpose decreases the probability of being a non defaulter and on average increases
the rate of loan repayment. The result of this study is supported by Shimelles and Zahidul (2009)
and File and Sori (2019). The interview with branch manager similarly, supported that loans
granted to clients were not used for the intended primary objectives because some clients used
the loans for consumption and social festivals instead of production; therefore, a small portion of
loan received was then used to run their ongoing businesses so, this will lead the borrowers to
loan default.

Training on loan use

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on training on loan use as
a factor affecting borrower’s ability to repay loan. The findings were presented below.

Table: 4.10 Training on loan use

Training on loan use

Valid Cumulative
Frequency Percent Percent Percent
Valid Disagree 2 5.7 5.7 5.7
Neutral 9 25.7 25.7 31.4
Agree 12 34.3 34.3 65.7

44
 Strongly 12 34.3 34.3 100.0
Agree
Total 35 100.0 100.0

Source: Own Survey, 2023)

Concerning to Table 4.10 above, respondents was asked to disclose their agreement on training
on loan use was a factor that affecting borrower’s ability to repay loan. As a result, the majority
24 (68.6%) of respondents agreed that training on credit utilization was among the factor that
affects borrower’s ability to repay loan and the remaining 9 (25.7%) of respondents neutral on
the issue under study. From the output it will be concluded that lack of training on loan use is
another factor that influence loan repayment rate of borrowers in Omo Bank Arba Minch
Branch. Training received on loan use is very important to run the business effectively and
efficiently. This is because training enables borrowers to increase their knowledge as well as
improves their skills. The interview result also confirms that delivering organized and adequate
training on loan use for borrowers in the appropriate time has a positive contribution to the
repayment rate. Similarly, the study by Karlan and Valdivia (2011) and Lensink et al. (2011)
revealed that entrepreneurship training may improve micro business performance and, therefore,
loan repayment rates. While this result is inconsistent with the study results that showed training
interventions fail to improve loan repayment rates, strikingly, clients monitoring does improve
repayment rates, irrespective of the clients’ educational level, business experience or gender
(Agbeko et al., 2017).

Lack of follow up measures

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on lack of follow up
measures as a factor affecting borrower’s ability to repay loan. The findings were presented
below.

45
Table: 4.11 Lack of follow up measures

Lack of follow up measures

Frequency Percent Valid Percent Cumulative Percent

Valid Disagree 7 20.0 20.0 20.0
Agree 13 37.1 37.1 57.1
Strongly Agree 15 42.9 42.9 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

According to Table 4.11 above, the result indicates lack of regular follow up is one of the cause
of loan defaults in bank shown by 15 (42.9%) strongly agree, 13 (37.1%) agree and 7 (20%)
neutral. “A stitch in time saves nine” Follow-up measures taken regularly and systematically
keep the borrowing unit under constant vigil of the banks. Many ills are often checked through
such follow-up measures by keeping the borrowing units on their alertness and guiding them to
rectify their mistakes within the first opportunities or extending them a hand. This result is
consistent with the findings of Shodhganga, 2020, he found that the performance of the
borrowing units, if carefully and systematically monitored through regular inspections by
scrutiny of returns, annual record and inspection of site, are often significantly improved.
Naturally, such inspections prevent the borrowers from deviating from the terms and conditions
of the loan or from diverting any fund for purpose aside from those earmarked in the sanction
letter and keep the financial health of the units in good order. This result is also similar to the
findings of Feroze et al. (2011) and Al-Azzam and Sudipta (2007) which stated that regular visit
among clients reduce loan delinquency rate. From this result, it can be summarized that clients
regularly visits have positive effect on loan repayment performance as expected.

Inadequate collateral

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on inadequate collateral
as a factor affecting borrower’s ability to repay loan. The findings were presented below.

46
Table: 4.12. Inadequate collateral

Inadequate collateral

Frequency Percent Valid Percent Cumulative Percent

Valid Strongly disagree 6 17.1 17.1 17.1
Neutral 3 8.6 8.6 25.7
Agree 26 74.3 74.3 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

Regard to Table 4.12, respondents was asked to reflect their agreement on inadequate collateral
is one of the factors affecting borrower’s ability to repay loan. Accordingly, the majority 26
(74.3%) of respondents agreed that inadequate collateral was one of the factor affecting
borrower’s ability to repay loan and the rest 6 (17.1%) strongly agreed and 3 (8.6%) neutral on
the similar issue under study respectively. Collateral Security by way of mortgage of immovable
property or other fixed assets, thereby creating a charge, trains the mind of the borrower to be
prepared to pay the dues to the lenders. But when he's free from this fear of losing his
encumbered asset within the event of his defaulting within the payment of dues to banks, he
often takes the freedom, and tends to weigh the pros and cons vis-à-vis default. Security against
loan, though sometimes may fall harsh on the borrower serves a worthwhile purpose therein it
creates promoters’ stake within the borrowers and thus, disciplines the borrower to be more
committed in paying the dues to Banks.

Interview with Branch managers were used to solicit the backup information on the observed
results. The concerns among two interviewed Branch managers was that loan recovery efficiency
was one of the challenge faced the bank because loan recovery practices utilized by the Bank
were not to ensure that loan repayment value equals to the expected value in the particular period
of time. Rather, it was almost below the expected loan repayment values over period of time. It
was noted that:

“Getting loan collection the same or above expected loan collection levels from
clients is something very challenging not only for in my Bank branch, but elsewhere
you go. For those who are outside the Bank not involved in this business would see

47
 this situation (low repayment) as the weaknesses of the Bank, staff or the whole
system. But experiencing loans repayment value below expected repayment value in a
given repayment period is something very common and is being caused by
multifaceted involvements into lending business. This is because loan recovery level
is dependent on a number of factors such as business health of the borrowers. Once
the business faces unhealthy situation, the repayment is highly affected and value of
loan repayment would be below the expected repayment value in a given repayment
period. (Interview extract with Branch managers of the Bank, 2023).”

The extract by interviewed Branch manager reflected claims by Ayder and Amanuel (2022)
which warned that it is not an easy task to maintain 100 percent recovery rate, since some of the
borrowing clients may create a number of problems with different circumstances. Also, the note
reflected report by Sinkey and Mary (2013) pointing inefficiency of loan recovery measures such
as rigid payment plan, lack of out sourcing bank recovery to collection agencies, unproactively
reaching customers, higher interest rates, loans restructuring measures, credit monitoring
practices and loan characteristics among the factors of loan repayment below expected
repayment level.

4.5 The procedure used to adopt to retrieve credit

Develop a payment plan

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on developing a payment
plan as a procedure used to adopt to retrieve credit in the bank. The findings were represented
below.

Table: 4.13 Develop a payment plan

Develop a payment plan

Frequency Percent Valid Percent Cumulative Percent
Valid Neutral 4 11.4 11.4 22.9
Agree 23 65.7 65.7 88.6
Strongly Agree 8 22.9 22.9 100.0
Total 35 100.0 100.0

48
Source: Own Survey, 2023

According to Table 4.13 above, the finding indicates a developing a payment plan is one of the
procedure adopt to retrieve credit shown by 23(65.7%), 8(22.9%) and 4(11.4%) agree, strongly
agree and neutral respectively.

Written communication

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on written communication
as a procedure used to adopt to retrieve credit in the bank. The findings were represented below.

Table: 4.14 written communication

Written communication
Cumulative
Frequency Percent Valid Percent Percent
Valid Neutral 2 5.7 5.7 28.6
Agree 23 65.7 65.7 94.3
Strongly Agree 10 28.6 28.6 100.0
Total 35 100.0 100.0
Source: Own Survey, 2023

According to Table 4.14 above, the finding indicates a written communication is one of the
procedure adopt to retrieve credit shown by 23(65.7%), 10(28.9%) and 2(5.7%) agree, strongly
agree and neutral respectively.

Reschedule the debt

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on reschedule the debt as
a procedure used to adopt to retrieve credit in the bank. The findings were presented below.

49
Table: 4.15 reschedule the debt

Reschedule the debt

Frequency Percent Valid Percent Cumulative Percent

Valid Disagree 4 11.4 11.4 11.4
Neutral 9 25.7 25.7 37.1
Agree 22 62.9 62.9 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

Table 4.15 above, the findings indicates a reschedule the debt is one of the procedure adopt to
retrieve credit shown by 4 (11.4%) disagree, 9 (25.7%) neutral, and 22 (62.9%) agree. A
financial organization should consider rescheduling a debt when it’s determined that the
rescheduling is within the government's interests which recovery of all or a share of the debt is
fairly assured. With installment payments, before rescheduling a debt, the bank should reassess
the debtor's financial position and the flexibility to repay the debt if rescheduled. The agency
should also determine if it should in the least require the debtor to use pre-authorized debit for
making payment. In reference to any repayment arrangement, the terms and conditions of the
rescheduling, including the acceleration clause, must be in writing and signed by the debtor. The
bank shouldn't encourage informal workout arrangements with debtors. Each bank should
establish uniform policies, procedures and criteria for rescheduling. Its policies and procedures
should leave the popularity of gains and losses on rescheduled accounts in accordance with the
provisions of credit management standards.

4.6The effects of loan default on the bank

Respondents were asked to express how they agreed on reduction in lending ability, capital
diminishes and higher rate as loan default affects the bank. The findings were presented below.

Table: 4.16. The effects of loan default on the bank

The effects of loan default on the bank

Valid Cumulative
Frequency Percent Percent Percent

50
Valid Reduction in lending 11 31.4 31.4 31.4
ability
Capital diminishes 12 34.3 34.3 65.7
Higher rate 7 20.0 20.0 85.7
All 5 14.3 14.3 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

In terms of the impact of loan failures on Omo banks, the study found that 12 (34.3%) of
respondents believe that when a debtor or debtors default, the bank's capital is at risk of
shrinking. This is the bank's capital decreasing as a result of the number of creditors who have
not serviced their loans. According to 7 (20.0%) of respondents, higher rates are a result of loan
defaults on banks, which simply means that the bank boosts its lending rates to compensate for
the loss caused by loan default. 11 (31.4%) of respondents believe that a loss in lending ability is
an effect of loan default on the bank this occurs when a bank is unable to lend to the extent that it
would want due to loan defaults. When debtors default on their loans, 5 (14.3%) of respondents
believe that all three variables stated have an impact on the bank. Defaults are inevitable, but
once it occurs a bank should take appropriate remedial action. If the bank neglects the recovery
process is said to become lengthy, the impact on the bank could also be severe, the bank may
find itself with very large outstanding loan portfolio, which in turn would affect the bank’s own
capital ratios. The study by (Karim, C., and Hassan, 20Kuo et al., 2010) confirms that loan
failures have far-reaching consequences for lending institutions. One is that it has an effect on
the institution's growth and reduces its lending capacity and lending institutions with a higher
loan default rate have a more difficult time amassing reserves and adequate cash to lend to other
borrowers who wish to spend more than their income or invest in enterprises.

4.6.1 Measures that can be used to mitigate factors affecting borrower’s ability to repay
loan

Flexible payment plan

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on flexible payment plan
as a measure to reduce loan defaults in banks. The findings were presented below.

51
Table: 4.16 flexible payment plan

Flexible payment plan

Frequency Percent Valid Percent Cumulative Percent

Valid Disagree 7 20.0 20.0 20.0
Neutral 6 17.1 17.1 37.1
Agree 22 62.9 62.9 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

According to Table 4.16 above, the result indicates flexible payment plan is one of a measure to
reduce loan defaults in banks shown by 22(62.9%) agree, 6(17.1%) neutral and 7(20%) disagree.
This result is consistent with the findings of Gatimu et al. (2018) proclaim the existence of
relationship between loans restructuring practices and performance of the Bank in recovering the
loans. According to them, the problem of failure to repay the loan would be minimized if the
Bank restructures the loan concern by discussing with the borrower flexible ways of making
payments. Similar results were reported by Sakilu (2006) during assessment of the factors
influencing default in a group lending model among Micro-Finance Institutions (MFIs) in
Tanzania. According to Sakilu (2006), in order to assure good repayments, banks should
restructure the loans by providing borrowers a grace period.

Out sourcing bank recovery to collection agencies

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on out sourcing bank
recovery to collection agencies as a measure to reduce loan defaults in banks. The findings were
presented below.

52
Table: 4.17out sourcing bank recovery to collection agencies

Out sourcing bank recovery to collection agencies

Valid Cumulative
Frequency Percent Percent Percent
Valid Neutral 18 51.4 51.4 51.4
Agree 17 48.6 48.6 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

According to Table 4.17 above, the findings indicates out sourcing bank recovery to collection
agencies is one of the measures to reduce loan default shown by 18(51.4%) neutral, 17(48.6%)
agree.

Proactively reaching customers

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on proactively reaching
customers as a measure to reduce loan defaults in banks. The findings were presented below.

Table: 4.18 proactively reaching customers

Proactively reaching customers

Frequency Percent Valid Percent Cumulative Percent
Valid Neutral 3 8.6 8.6 8.6
Agree 17 48.6 48.6 57.1
Strongly Agree 15 42.9 42.9 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

According to Table 4.18 above, the findings indicates proactively reaching customers is one of
the measures to reduce loan default shown by 17(48.6%) agree, 15(42.9%) strongly agree and
3(8.6%) neutral.

Extend or lower interest rates

53
Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on extend or lower
interest rates as a measure to reduce loan defaults in banks. The findings were presented below.

Table: 4.19 Extend or lower interest rates

Extend or lower interest rates

Frequency Percent Valid Percent Cumulative Percent
Valid Neutral 9 25.7 25.7 25.7
Agree 23 65.7 65.7 91.4
Strongly Agree 3 8.6 8.6 100.0
Total 35 100.0 100.0

Source: Own Survey, 2023

According to Table 4.19 above, the findings indicates extend or lower interest rates is one of the
measures to reduce loan default shown by 23(65.7%) agree, 3(8.6%) strongly agree and
9(25.7%) neutral. Therefore, the researchers concluded Banks that charge high interest rate
would comparatively face a higher default rate or non-performing loans. The study coincide with
the study of (Sinkey & Greenwalt, 2001) on large commercial Banks in US depict that a high
interest rate charged by banks is associated with loan defaults. Similarly, study by (Waweru &
Kalini, 2009) on the commercial banks in Kenya using statistical analysis indicates that high
interest rate charged by the banks is one of the internal factors that lead to incidence non-
performing loans or loan defaults.

Legal warming

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on legal warning as an
action taken by the bank when debtor defaults. The findings were presented below.

54
Table: 4.20 legal warning

Legal warning

Frequency Percent Valid Percent Cumulative Percent

Valid Disagree 1 2.9 2.9 2.9
Neutral 5 14.3 14.3 17.1
Agree 22 62.9 62.9 80.0
Strongly Agree 7 20.0 20.0 100.0
Total 35 100.0 100.0

Source: Own survey, (2023)

According to Table 4.20 above, the findings indicates that when a debtor defaults, the bank can
issue a legal warning to the customer shown by 22(62.9%) agree, 7(20%) strongly agree,
1(2.9%) disagree and 5(14.3%) neutral.

Reposition of security

Using 5 – point Likert scale where 5 was Strongly agree, 4 Agree, 3 Neutral, 2 Disagree and 1
Strongly disagree, respondents were asked to express how they agreed on reposition of security
as an action taken by the bank when debtor defaults. The findings were presented below.

Table: 4.21. Reposition of security

Reposition of security
Frequency Percent Valid Percent Cumulative Percent
Valid Agree 28 80.0 80.0 80.0
Strongly Agree 7 20.0 20.0 100.0
Total 35 100.0 100.0

Source: Own survey, (2023)

According to Table 4.21 above, the study revealed that 100% of the respondents were in favor of
the bank issuing a reposition of security. This is aimed toward recovery of dues and not in any
way to deprive the borrower of the property. The recovery process through repossession of

55
security will involve the repossession, valuation of security and the attainment of security
through appropriate means. These would be administered in a very just and transparent manner.
Repossession is done only after issue of the notice as detailed above. The due process of law of
law is going to be followed while taking repossession of the property. The bank will take all due
care for ensuring the protection and security of the property after takes custody, within the
ordinary course of the business.

56
 CHAPTER FIVE

5. CONCLUSIONS AND RECOMMENDATIONS

5.1Introduction

This chapter presents conclusions and recommendations of the finding. These are informed by
the literature reviewed as well as the study findings, analyses and interpretations presented in the
previous sections.

5.2Conclusions

To conclude based on the information taken from the data analysis and interpretation part of the
study for assessment factors that affects borrower's ability to repay loan on Omo Bank. Majority
29 (82.9%) of respondent said that there is the probability of non-repayment and the remaining 6
(17.1%) respondents replied that there is no repayment of loan exist in the Bank. According the
analysis the maximum number of respondents revealed that borrower's do not repay their loan
due to customer going bankrupt, debtors delaying in making loan repayments or unwillingness, a
customer falling out of business unexpectedly, improper selection of borrower, income from
business activities, lack of training on loan use, purpose of borrowing, lack of follow up
measures, inadequate collaterals.

The study established that the bank has various strategies of debt recovery; it as well established
there are various challenges experienced by OB in reference to loan recovery. The procedure
adopted by the bank to retrieve credit was developing a payment plan, written communication
and reschedule the debt.

The study also, established that higher lending rate and capital diminish with 11 (31.4%) and 12
(34.3%) respondent’s agreement as the biggest loan default affects the bank.

Finally, the conclusion drawn by this study is that loan recovery was very important factor for
the performance of banks. However, the bank was not yet to achieve efficiency in loan recovery
because loans repayment value was below the expected repayment value in a given period.

57
While loans recovery practices examined revealed flexible payment plan, proactively reaching
customers, extend or lower interest rates, legal warning and repossession of security among the
major measures taken by the bank to reduce loan default

5.3Recommendations

Basing from findings of this study and subsequent analyses that were triangulated with existing
literature, this section highlights the key recommendations under listed below

 Omo Bank should contribute to the creation of wealth and hence the reduction of poverty
by creating employment and income; the government should seek to assure their success
and prosperity by enacting regulations that foster a favorable environment for businesses
and financial institutions to function. Tax laws, lending policies, the business
environment, the economic environment, and other factors all contribute to the success of
firms. The creation of strong solidarity networks may be a potential remedy for averting
high defaults.
 Omo Bank should have clear and effective credit or lending policies and procedures to be
reviewed regularly. The credit supervisor should check in with credit officers daily to
ensure that policies are being followed, and the supervisor should respond rapidly to
credit officers' difficulties. It makes little sense to have robust policies on paper if they
are not implemented in practice. Next, credit officers can visit customers more
frequently; limiting geographic scope lowers the time and money wasted driving from the
office to clients' enterprises. More visits allow credit officers to build relationships in
their communities. Clients should be closely supervised and monitored regularly; clients
who are having difficulty repaying should be identified early on, and appropriate steps
should be taken to ensure repayment.
 Loan is the main source of starting venture of any size to earn profits to most the
entrepreneurs. But profitability of repayment is not as much as expected or the borrowers
do not repay the loan according to the repayment schedule. This affects the objective of
the firms due to minimizes this risk the financial institution must analyzes the repayment
capacity reliability, trust worthless and antecedent of the loan applicants. This means the
institution must have the ability of forecasting inflation, deflation, or other economic

58
 crises, if there is good character, but the borrowers are not able to repay loan or an able to
create income, the Omo Bank should have to be give the consult service and additional
time on due date and also follows interview, institution own record and inspection of the
applicant the most mechanism used for reduction of non-repayment performance.
 The proper evaluation of information contained in financial statements is great
importance in the credit analysis process. In order to minimize default risk, the loan
offers must analyzes everything about the loan applicant, because it is not simple and
easy to select borrowers and also if the bank provides enough and meaning full addition
services, it is impossible to minimizes default risk. But it is impossible to avoid risk
totally since there may be factors beyond control or per caption like, covid-19, earth
quake, wars, drought, inflation and famines and all other unexpected risks.
 To compensate the credit risk, different financial institution set different risk controlling
mechanism. Thus this institution should have to be provided better controlling
mechanism Because all borrowers do not repay their loan according to repayment
schedule of the institution, the Omo Bank uses punishment and selling collateral, but the
above two controlling mechanism discourage the borrowers future needs of loan. Before
selling the collateral the bank must investigate the borrowers problem and after that, if
the problem is lack of money or any other natural disaster, rehabilitation or reschedule of
the loan may be considered rather than rooting out the activity immediately and the loan
officer visits the place of business or activity of the borrowers and if the problem is from
the borrowers intentionally of them self the above two methods of punishment can be
used as solution.
 Conducting borrower’s follow-up/supervision visits has also a direct bearing on loan
repayment performance. In other words, implementing effective and timely follow-up or
supervision system and practices considered as a major part of credit activity because a
borrower who gets robust and continuous information and technical advices from the
lenders institutions is more likely to be successful.
 Providing training to borrowers refers to the facilitation of different trainings, which
assists the operators of the borrowers to perform in a suitable way. Capacity building
trainings, confidentiality to pay within period would better prepare borrowers to perform
in the invested activity they engaged. Therefore, borrowers, which have sufficient access

59
 of training, repaid their loan than those less trained. In other way delivering of well-
organized and sufficient training properly for borrowers, reduces the probability of
defaulter. Therefore, lender banks should provide training or creation awareness for their
financial management activities like saving habit, the financial recording experience that
enables them to manage the expense and revenue related activities of their investing
activity in the study area..
 In order to solve the problem of borrowing purpose by borrowers, they access the income
generating from activity that investing by loan and preparing their plan study to borrow
from microfinance and the lenders identify their plan before lending the money, then
controlling them by following according their proposal. In addition, Policy makers are
understands the problems and revising their police how to minimize loan delay or
defaulting.
 Omo Bank should also develop software that can easily access the services that the bank
provides and to pay the loan using the software developed by the bank without limited to
the branch of the bank. Finally, strength and develop cooperation and partnership with
other bank.

60
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 APPENDIX-1

PARAMED COLLEGE

DEPARTMENT OF ECONOMICS

Dear respondent:

This questionnaire is prepared to collect data about the factors that affect borrower’s ability to
repay loan in Omo Bank Arbaminch branch. This study is to be conducted by students of
Paramed College in partial fulfillment of the requirements for the award of Bachelor of Arts
(BA) degree in economics. The information that you are going to provide will help the researcher
to identify the issues in the study and will be used for academic purpose only. Each of your
responses will have high value for this study and it will be kept strictly confidential. Therefore
you are kindly requested to give your genuine response.

N.B You are kindly requested to respond sincerely to the questions for warded below and
provide your opinion whenever necessary.

SECTION 1: RESPONDENTS BACKGROUND

1) Gender
☐Female ☐Male
2) Age
☐20-29 ☐30-39
☐40-49 ☐50 and above
3) Level of education
☐Diploma ☐Bachelors ☐Masters
4) Experience in banking:
☐Less than one year ☐1-5 year
☐6 to 10 year ☐Above ten year

SECTION 2: LOAN RECOVERY PROBLEMS AND PROCEDURE

2.1. Question related to factors accounting borrowers to loan default

65
000 Is their loan default in your ☐1. Yes Remarks
bank? ☐2. No

001 Customer going bankrupt is the ☐1. Strongly disagree

factors accounting borrowers to ☐2. Disagree
loan default. ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
002 Debtors delaying in making loan ☐1. Strongly disagree
repayments are the factors ☐2. Disagree
accounting borrowers to loan ☐3. Neutral
default ☐4. Agree
☐5. Strongly Agree
003 A customer falling out of ☐1. Strongly disagree
business unexpectedly is the ☐2. Disagree
factors accounting borrowers to ☐3. Neutral
loan default. ☐4. Agree
☐5. Strongly Agree
004 Improper selection of borrower ☐1. Strongly disagree
is a factors accounting ☐2. Disagree
borrowers to loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
005 Income from business activities ☐1. Strongly disagree
was a factors accounting ☐2. Disagree
borrowers to loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
006 Purpose of borrowing was a ☐1. Strongly disagree
factors accounting borrowers to ☐2. Disagree
loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
007 Lack of training on loan use was ☐1. Strongly disagree
a factors accounting borrowers ☐2. Disagree
to loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
008 Lack of follow up measures was ☐1. Strongly disagree

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 a factors accounting borrowers ☐2. Disagree
to loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
009 Inadequate collateral was a ☐1. Strongly disagree
factors accounting borrowers to ☐2. Disagree
loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree

2.2. Question related to procedure used to adopt to retrieve credit.

001 Developing a payment guide is a ☐1. Strongly disagree 001
procedure used to adopt to ☐2. Disagree
retrieve credit. ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
002 Written communication is a ☐1. Strongly disagree 002
procedure used to adopt to ☐2. Disagree
retrieve credit. ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
003 Reschedule the debt is a ☐1. Strongly disagree 003
procedure used to adopt to ☐2. Disagree
retrieve credit. ☐3. Neutral
☐4. Agree
☐5. Strongly Agree

SECTION 3: EFFECT OF LOAN DEFAULT ON THE BANK

3.1. Question related to how loan default affects the bank

00 How loan default affects the bank ☐1. Higher lending rate 001
1 ☐2. Reduction in lending ability
☐3. Capital diminishes
☐4. All

SECTION 4: MEASURES TO REDUCE LOAN DEFAULT

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4.1. Question related to measures that can be used to mitigate factors affecting borrower’s ability
to repay loan

001 Flexible payment plan is a measure ☐1. Strongly disagree

that can help to reduce loan default ☐2. Disagree
☐3. Neutral
☐4. Agree
☐5. Strongly Agree
002 Out sourcing bank recovery to ☐1. Strongly disagree
collection agencies is a measure that ☐2. Disagree
can help to reduce loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
003 Proactively reaching customers early ☐1. Strongly disagree
is a measure that can help to reduce ☐2. Disagree
loan default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
004 Extend or lower interest rates is a ☐1. Strongly disagree
measure that can help to reduce loan ☐2. Disagree
default ☐3. Neutral
☐4. Agree
☐5. Strongly Agree
005 Legal warning letter is an action ☐1. Strongly disagree
taken whenever a debtor defaults ☐2. Disagree
☐3. Neutral
☐4. Agree
☐5. Strongly Agree
006 Reposition of security is an action ☐1. Strongly disagree
taken whenever a debtor defaults ☐2. Disagree
☐3. Neutral
☐4. Agree
☐5. Strongly Agree

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 APPENDIX-2

KEY INFORMANT INTERVIEW GUIDE

Part A: Identification Panel

Position/Qualification___________________________

Part B: Questions

1. Is their loan default in your bank?

2. From experience, what are the factors affecting borrower’s ability to repay
loan?
3. what are the effects of loan default on the bank

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 4. In your own opinion, what measures can be used to mitigate factors affecting
borrower’s ability to repay loan?

APPENDIX-3

DOCUMENT REVIEW

Loan repayment performance borrowers of Omo bank Arbaminch branch in past three
years from 2020-2022

Items Years Remark

2020 2021 2022

Amount of total
loan

Amount of
collected

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Amount of
default

Default rate

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