Microfinance and Loan Repayment Performance: A Case Study of the Oromia Credit and Savings Share Company (OCSSCO) in Kuyu

This study was conducted with the aim of analysing the factors that influence microfinance loan repayment, evaluating the loan rationing mechanism and also assessing the impact of the program on the livelihood of borrowers, using primary data collected through structured questionnaire. The estimation results of the descriptive statistics and the probit model show that education, income, loan supervision, suitability of repayment period, availability of other credit sources and livestock are important and significant factors that enhance the loan repayment performance, while loan diversion and loan size are found to significantly increase loan default. In addition female borrowers were found better in terms of loan repayment. According to these findings the institution is recommended to see into these factors with care and design a better lending strategy focusing on effective supervision, training and approval of appropriate loan size so as to minimize the loan default problem observed. Moreover, it should pay attention to expanding of its services so that more poor women join the program and benefit from it there by contributing to the improvement of the repayment performance. Regarding the loan rationing, borrowers who are literate, loan diverters, support more dependents and earn more income, were disfavored; while those who are older, male, apply for larger loan amounts, own livestock of higher value, perceive supervision as adequate and the repayment period as suitable were favored. There were some serious problems observed in the rationing mechanism the institution employed, i.e., borrowers who are good payers (like those who are literate) were rationed more while those who contribute to the default problem (like those who are male and who apply for larger loan amounts) were rationed less. The institution is particularly recommended to improve these problems observed in its rationing mechanism. The credit scheme was also found to have positive impact in improving the income, education, health and nutritional status of the borrowers as evidenced by the Wilcoxon test that compares the situations before and after participation in the credit scheme. Key Words: microfinance, loan repayment performance, loan diversion, loan rationing, impact, creditworthy