Small Farmers’ Agricultural Loan Repayment Performance in Southern Ethiopia

Rural farmers often look for credit facilities during the agricultural seasons and other constructive activities. However, most developing countries face the severe challenges of getting enough financial support through proper means. Providing low-cost, efficient credit services and recovering a high percentage of loans granted are the ideal aims in rural finance. On the other hand, low repayment performance discourages the lender from promoting and extending credit. Therefore, thoroughly investigating the various aspects of loan defaults is vital for policymakers and lending institutions. Therefore, this thesis was concerned with analyzing factors affecting the agriculture loan repayment performance of borrowers of agricultural lending institutions of the study area and the effect of credit risk on lending institutions’ financial performance. The study was based on secondary data from the District and Zonal Microfinance Institutions and Marketing and Cooperative development departments. Primary data were collected from 140 smallholder agriculture credit borrower farmers. The data were used to describe the respondents' socio-economic, demographic and attitudinal characteristics and institutional factors. T-test and chi-square were used to measure the potential power of continuous and discrete variables in differentiating non-defaulters and defaulters. The logit model was also used to identify variables that determine loan repayment performance. Of 16 explanatory variables, only five: household income, business development services made by the lending institutions, loan disbursement time (suitability of loan disbursement time), loan diversion status of borrowers and celebration of social ceremonies were statistically significant factors affecting repayment performance of agriculture loan of lending institutions. The partial marginal effect analysis shows that borrowers' loan diversion status is the most critical factor among the other five variables. Based on the findings, policy implications were drawn for improving loan repayment performance and sustainability of credit services and institutions in the study areas.