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

Abstract

Dedebit Credit  and  Saving  Institution  (DECSI)  is  a  microfinance  institution,  which  is  engaged  in development activities in Tigray regional state, Ethiopia. DECSI mainly provides credit services to low income people who are capable to work in income generating activities. Its corporate objective is to  promote  micro  and  small  enterprise  to  alleviate  poverty  and  unemployment.  However, the institution 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 association of loan repayment with 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 explanatory research approach, cross-sectional primary data, stratified sampling techniques, and finally employed chi-square test to test the association of the independent variables and loan repayment performance. A total of eleven explanatory variables were included in the chi-square. According to the chi-square test, group formation (screening), peer monitoring, loan size, loan term and supervision have significant association with loan repayment performance. Therefore, DECSI, among others, should encourage self-screened group borrowers, revise loan term by considering the time required for the service sector to generate income, regular supervision for borrowers should be in place, and set loan size based on business scope to increase loan repayment performance of the clients.

Keywords: Chi-square, DECSI, Ethiopia, Factors, Group Loan, Mekelle, MFIs, MSEs, Service Sector.