Credit Default Risk and its Determinants of Microfinance Industry in Ethiopia
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Date
2011-06
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Addis Ababa University
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 not be overlooked. This paper highlights several incidences of default risks in
microfinance industry. The problem identified was that microfinance programs perform
scantily because of delay in repayment and high default rates. Hence, it was important to
establish if these limitations prevailed in the selected 6 MFIs in 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 MFIs 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 in the screening mechanism the institutions 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 MFIs should intensify recovery of outstanding balances from
defaulters through increased borrower follow-up.
Key Words: MFIs, credit default, credit diversion, loan rationing, impact, creditworthy
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Keywords
MFIs, Credit default, Credit diversion, Loan rationing, Impact, Creditworthy