Credit Default Risk and its Determinants of Microfinance Institutions in Ethiopia
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Date
2011-06
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A.A.U
Abstract
Despite the current enthusiasms in applying the concept of microfinance as a poverty
alleviation tool in many countries, the risk management aspects of micro-financing
should 1101 be overlooked. This paper highlights several incidences of default risks ill
microfinance institutions. The problem identified was that micro finance programs
perform scantily because of delay in repayment and high default rates. Hence, it was
important to scantily if these limitations prevailed in the selected 6 MFls ill Ethiopia
schemed by determining the default rate and the grounds of the observed trends.
Therefore, in order to address those issues, the researcher used primary data collected
through structured questionnaire and referred secondary sources of data. As a result, the
collected data and information were compiled and analyzed for possible indications of
problem areas. So, the outcomes revealed that the MFls default rate increased over the
review period and averaged 27.1 per cent as well. The core factors of default were found
to be poor business performance, in terms of low profitability or business losses. Besides,
credit diversion to unprofitable uses, domestic problems, numerous dependents, and
tenancy problems were other factors that caused credit default. Further, the inference
results of the descriptive statistics and the probit model show that education, income,
loan supervision, suitability of repayment period and availability of other credit sources
are important and significant factors that enhance the credit repayment performance,
while credit diversion and credit/loan size are found to significantly increase credit
default. there were serious problems observed ill the screening mechanism the
intuitions employed, i.e. borrowers who are good payers like literate were rationed
more, while those who contribute to the default problem like male and who apply for
larger loan amounts were rationed less. So, the lending institutions are particularly
recommended to improve these problems observed in its rationing mechanism. Moreover,
the processes should be worked out to identify borrower capacity and any obligations
That may interfere with repayment. Finally, the selected MFls should intensify recovery of
outstanding balances from defaulters through increased borrower follow-up.
Key Words: MFls, credit default, credit diversion, loan rationing, impact, creditworthy.
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Keywords
Credit Default, Credit Diversion