Loan Utilization and Repayment Practices of Rural Microfinance Clients: The Case of Wereilu District-Amhara Regional State of Ethiopia

Abstract

The main objective of the study is to assess loan utilization and repayment behavior of rural microfinance clients. It particularly provides a descriptive assessment on five themes: socio-economic characteristics, loan utilization behavior, sources of financial for loan repayment and perceived delinquency/default  reasons of clients as well as capacity of the lending institution. To this end, a survey questionnaire was administered to a sample of 200 rural microfinance clients. For data triangulation, the study incorporated focus group discussion and in-depth interview methods. The study finds that clients are composed of adult working age and less educated individuals largely dependent on vulnerable smallholding agriculture. In addition, the loan packages are somewhat ‘directed type’ and supply-driven. Clients’ borrowing purpose vis-à-vis actual loan utilization deviates to a certain extent, suggesting loan diversions. Clients have also undiversified and risky financial sources to repay MFI loan. Perceived reasons for loan delinquency/default are also linked to seasonal income variability, ACSI funded-project failure, loan diversions and the lending institution’s defects. The group lending modality tends to screen out the poorest of the poor. Peer pressure is effective to ensure timely ‘loan repayment’, but it is weak to guarantee proper ‘loan utilization’ per se. The loan product design is homogeneous and inflexible to meet target market needs. Further, the lending institution’s ‘loan utilization monitoring’ incurs higher institutional transaction cost and information asymmetry than ‘loan repayment monitoring’ does. On top of that, clients bear transaction costs in terms of absenteeism penalty fee, frequent long-distance travel and regular group meeting. Last, the lending institution inclines to financial intermediation (minimalist) rather than both financial intermediation and social intermediation (integrationist). Therefore, the lending institution and policy makers should pay attention to demand-driven loan packages, rural microbanking service, intra-group microinsurance, reforming client-screening policy and integrating financial intermediation with social intermediation.

Keywords: Rural microfinance, Repayment, Loan utilization, Financial source, Default/delinquency,Institutional aspects, ACSI, Ethiopia