Factors Affecting Loan Repayment Performance of Smallholder Farmers: The Case of Microfinance Institutions in Toke Kutaye District, West Shoa Zone Oromia Region, Ethiopia

Abstract

The main purpose of this study was to identify factors determining the loan repayment performance of smallholder farmers, and evaluate the loan related performance of the microfinance institutions operating in Toke Kutaye district. Primary data was collected using structured and semi-structured questionnaires from 122 randomly selected smallholder farmer clients. Secondary data was obtained from annual reports and financial statements issued by microfinance institutions. The results of descriptive analysis revealed a significant mean difference between the defaulter and non-defaulter households in terms of total annual farm income, expenses on social ceremonies, livestock units, and distance from credit source. Although the repayment status in the study area was insignificant, there was a variation among institutions where the numbers of non-defaulters decline from Oromia Credit and the Saving Share Company, Vision Fund Microfinance and Eshet Microfinance successively along with ratio statistics result. The logit model revealed that age, education level, tropical livestock unit, participation on off-farm activities, repayment period suitability and gender was found to be positively significant whereas expense on social ceremonies, family size and loan diversion were found to have a negative impact on loan repayment performance of smallholder farmers. Hence, consideration of these factors is vital to enabling effective measures with the aim of improving loan repayment performance and helps to direct microfinance institutions, non-governmental organizations and policy-makers on where and how to channel efforts to minimize loan defaults in the study area. Key words: Binary logit; Loan repayment; Microfinance institution; Smallholder farmers