Determinants of MFIs Group Loan Repayment Performance: A Case of MSEs’ Service Sector in Mekelle City, Ethiopia

Abstract

Dedebit Credit and Saving Institution (DECSI) has been facing increase in loan default rate from time to time on group owned MSEs for the past five years. Thus, the aim of this study was to  identify  and  analyze  the factors that  influence  group  loan repayment performance of the clients of DECSI operating  in  the service sector  as  group  owned  MSEs.  This study applied descriptive and explanatory research approach, cross-sectional primary data, stratified sampling techniques, and finally employed binary logistic regression model to identify and analyze the impact of each independent variable on the loan repayment performance. A total of eleven explanatory variables were included in the binary logit regression model test. The binary logistic regression result revealed that among the variables  hypothesized  to  affect  loan  repayment social ties,  business experience,  group formation (screening), internal rule and regulation, saving, suitable loan  repayment period (loan term), and supervision have statistically significant effect on loan repayment of the  group borrowers. Therefore, among others, DECSI should encourage self-screened group borrowers; enhance saving programs, and revise loan term by considering the time required for the service sector to generate income, and regular supervision for borrowers should be in place to increase loan repayment performance of the clients.

Keywords: Binary Logit, DECSI, Determinant, Ethiopia, Group Loan, Mekelle, MFIs, MSEs, Service Sector.