Assessment of Microfinance Loan Repayment Problems in the Informal Sector :( The Case of DECSI Mekelle Debub Sub Branch)

Abstract

The aim of microcredit is to help the poor and lower income group to get funds for their business activities and to improve their lives. Usually, the loans given are very small, in short term period, no collateral needed and required monthly repayment. However, repayment problems become the main obstacle for the microcredit institutions to continue providing microcredit services.  This  is  because  most  of  the  microcredit  institutions  are  Non- Governmental Organizations (NGOs), where they received funds from the government and  donors and there are not profits oriented organizations. The investigation of various aspects  of credit default, whether it is random and influenced by erratic behavior or whether it is  influenced by certain factors in a specific situation  is a great important for both policy  makers and practitioners. Therefore, the major concern of this study was to assess the microfinance loan repayment problems in the informal sector of DECSI Mekelledebub sub branch.  This study is an attempt to assess, some of the main factors that influence microfinance level loan repayment performance of the informal sector. Data for the study was collected through a structured questionnaire and informal discussion with the experienced borrowers and higher officers of the sub branch. The collected data was analyzed using descriptive statistics and probit technique to ascertain those factors constraining repayment performance of microfinance credit. Results of the study indicate that better repayment performance is strongly and directly associated with Suitability of repayment period and educational level of the borrower. The institution should negotiate the time to repay the loan with its clients. That means, special attention must be given to this factor in order to improve the microfinance loan repayment and the institution should provide a specific loan class for the borrowers from higher institutions in addition to the group lending facility made by it.  Since most of the informal sector does not have any or little access to formal education.  Therefore, DECSI can increase its borrower’s repayment performance by creating conducive environment for education to the illiterates in cooperation with other NGO’s or government.