Credit Default Risk and its Determinants of Microfinance Institutions in Ethiopia

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title




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.



Credit Default, Credit Diversion