Determinants of Loan Repayment Performance of Micro and Small Enterprises: Empirical Evidence from Somali Regional State, Ethiopia

Abstract

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