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Credit Default Risk and its Determinants of Microfinance Industry in Ethiopia (1)

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Despite the current enthusiasms in applying the concept of microfinance as a poverty alleviation tool in many countries, the risk management aspects of micro-financing should not be overlooked. This paper highlights several incidences of default risks in microfinance institutions. The problem identified was that microfinance programs perform scantily because of delay in re Despite the current enthusiasms in applying the concept of microfinance as a poverty alleviation tool in many countries, the risk management aspects of micro-financing should not be overlooked. This paper highlights several incidences of default risks in microfinance institutions. The problem identified was that microfinance programs perform scantily because of delay in repayment and high default rates. Hence, it was important to establish if these limitations prevailed in the selected 6 MFIs in Ethiopia schemed by determining the default rate and the grounds of the observed trends. Therefore, in order to address those issues, the researcher used primary data collected through structured questionnaire and referred secondary sources of data. As a result, the collected data and information were compiled and analyzed for possible indications of problem areas. So, the outcomes revealed that the MFIs default rate increased over the review period and averaged 27.1 per cent as well. The core factors of default were found to be poor business performance, in terms of low profitability or business losses. Besides, credit diversion to unprofitable uses, domestic problems, numerous dependents, and tenancy problems were other factors that caused credit default. Further, the inference results of the descriptive statistics and the probit model show that education, income, loan supervision, suitability of repayment period and availability of other credit sources are important and significant factors that enhance the credit repayment performance, while credit diversion and credit/loan size are found to significantly increase credit default.


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Despite the current enthusiasms in applying the concept of microfinance as a poverty alleviation tool in many countries, the risk management aspects of micro-financing should not be overlooked. This paper highlights several incidences of default risks in microfinance institutions. The problem identified was that microfinance programs perform scantily because of delay in re Despite the current enthusiasms in applying the concept of microfinance as a poverty alleviation tool in many countries, the risk management aspects of micro-financing should not be overlooked. This paper highlights several incidences of default risks in microfinance institutions. The problem identified was that microfinance programs perform scantily because of delay in repayment and high default rates. Hence, it was important to establish if these limitations prevailed in the selected 6 MFIs in Ethiopia schemed by determining the default rate and the grounds of the observed trends. Therefore, in order to address those issues, the researcher used primary data collected through structured questionnaire and referred secondary sources of data. As a result, the collected data and information were compiled and analyzed for possible indications of problem areas. So, the outcomes revealed that the MFIs default rate increased over the review period and averaged 27.1 per cent as well. The core factors of default were found to be poor business performance, in terms of low profitability or business losses. Besides, credit diversion to unprofitable uses, domestic problems, numerous dependents, and tenancy problems were other factors that caused credit default. Further, the inference results of the descriptive statistics and the probit model show that education, income, loan supervision, suitability of repayment period and availability of other credit sources are important and significant factors that enhance the credit repayment performance, while credit diversion and credit/loan size are found to significantly increase credit default.

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