DETERMINANTS OF LOAN REPAYMENT PERFORMANCE OF RURAL YOUTH GROUPS: THE CASE OF OMO MICRO FINANCE INSTITUTION ARBAMINCH ZURIA WOREDA SUB BRANCH, GAMO ZONE, SOUTHERN ETHIOPIA

Abstract

This study was conducted with the aim of analyzing the factors that influence loan repayment performance of rural fund beneficiary youth groups in the case of Arba Minch zuria woreda. Primarily data was collected from respondents through structured questionnaire and secondary data was collected from different literature sources. A multi-stage sampling technique was employed to draw district, kebeles and loan borrowers. At first stage, the woreda was purposively selected. At second stage, three rural kebeles were selected randomly. At third stage, rural youth groups were stratified into loan defaulter and non-loan defaulter in the sampled kebeles. Finally, a total of 101 rural youth groups were selected from each stratum by a simple random sampling technique. This study was used a cross sectional survey method of research design and it applied both descriptive and correlation or explanatory research approaches for the data collected through questionnaire. Both descriptive and econometric model were used to analyze the collected data. Descriptive statistics were used to summarize and describe the socio-economic, institutional & demographic characteristics of the respondents. Moreover, Pearson correlation coefficient analysis was used to analyze there is a significant relationship between two variables (the strength of independent variable with loan repayment performance). The result of two limit Tobit model indicated that out of 13 explanatory variables, Saving habit, Team sprite, group formation process and Business experience of the group members were statistically significant at 1% significant level and Loan size, Suitability of repayment period, Loan supervision & follow up were statistically significant at 5% significance level were found to be the most significant variables to contributing loan repayment performance of rural youth groups positively. Loan diversion influence loan repayment performance of youth groups significantly and negatively. A rural youth group has a number of challenges like high interest rate and monthly penalty, lack of market linkage, increase in the price of manufactured goods and improper interference of third party in the decision of loan approval. Therefore, this study recommends that MFI better to revise the loan repayment period and scheduled the time to collect the loan that would be suitable for selling the output of their products, so a flexible repayment period should be designed in order to improve the existing probability of repayment.