Empirical Analysis of Factors Affecting Loan Diversion of Microfinance Group Borrowers: The Case of Omo Microfinance Kucha Sub-branch, Southern Ethiopia

Abstract

Microfinance institutions play a pivotal role in poverty reduction by providing various financial services (micro-credit, saving and other services) for the rural small-scale farmers who cannot afford to adopt new technologies and to startup new business activities from their own source; hence, sometimes called ‘Rural Banks’. The major objective of the present study is to identify factors affecting loan diversion of microfinance’s small-scale group borrowers in the Kucha woreda. A pre-tested structured questionnaire was used to gather information from 131 smallholder farmers from six kebeles (villages), using the multistage sampling technique. Descriptive statistics and multinomial logit model were used to analyze the data collected. Eleven independent and one dependent, variables were selected for analytical purpose. The study revealed that of the total sample households 67 (51.1 %) were not diverted the loan (used for intended purposes), while the remaining 64 (48.9%) were diverted their loan to some other unintended goal. Among these, 46 (35.1%) were diverted to non-productive investments while 18(13.7 %) were diverted the loan to more productive schemes. A multinomial logit regression model was employed to identify factors that influence the loan diversion. The results indicate that purpose of the loan, dependency ratio, supervision and perception of borrower towards repayment have statistically significant explaining power to impact the probability of loan diversion to other more productive investments relative to not diverting the loan, assuming ceterius paribus. In the same talk, the probability of diverting the loan to non-productive investments in reference to base category is significantly affected by sex of the borrower, group size, number of females within the group and perception toward repayment. Based on the findings, it could be recommended that giving due attention for these significant variables is a paramount important for wise utilization of limited resources and to devise an appropriate policies that can actually improve the livelihood of the mass small-scale farmers.

Keywords: Microfinance, Rural bank, Development finance, Group borrowers, Loan Diversion Multinomial Logit