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Assessment of Causes of Loan Default in Wasasa Microfinance S. C. Sabata Town Branch Office

Received: 18 January 2019     Accepted: 21 February 2019     Published: 7 March 2019
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Abstract

The study was conducted on the assessment of causes of loan default in Wasasa Microfinance S.C Sabata town branch office in order to indicate information that enables to ensure its future sustainability. Both questionnaire and interview guide were used to collect data which was analyzed using descriptive analysis. The survey made on 99 clients and 10 employees shows that the majority of clients are females which is prioritized by the institution to empower poor female household heads. More than half clients of the institution work in their own business generating income of 5000 -50,000 birr per month. Based on the result, poor loan appraisal, Burden of interest, operational inefficiency and Poor customer handling are the four major internal causes of the loan default while political instability, poor business plan, existence of illegal business and price fluctuation are four major external causes of loan default. Wasasa Microfinance uses different mechanisms to control default like negotiation with customers, writing letter of warning to defaulters, penalizing according to loan agreement and taking to court. It is recommended that Wasasa Microfinance S. C control different causes of loan default by awareness creation through training both customers and employees, and increasing institutional efficiency in operational procedures and policies. It is better for the institution to focus on capacity building, incentivizing the model staffs and using clear monitoring and evaluation system.

Published in American Journal of Management Science and Engineering (Volume 3, Issue 6)
DOI 10.11648/j.ajmse.20180306.11
Page(s) 84-94
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2019. Published by Science Publishing Group

Keywords

Microfinance, Microcredit, Loan Default, Customer, Wasasa, Sabata Town

References
[1] CGAP (2010). Measuring microcredit delinquency: Occasional paper no. 3 CGAP secretariat1818 h street. Government printers in 2010.
[2] Girma Gudde (2018). Determinants of Loan Repayment: The Case of Microfinance Institutions in Gedeo Zone, SNNPRS, Ethiopia. Universal Journal of Accounting and Finance 6(3): pp 108-122.
[3] Pagadala Suganda Devi (2017). Credit Risk Management Practices of Micro Finance Institutions in Ethiopia– A Brief Literature Review. SSRG International Journal of Economics and Management Studies (SSRG – IJEMS) – Volume 4 Issue 1.
[4] Daba Moti (2003). The Impact of Microfinance on Poverty Reduction: A case Study of Oromia Credit and Saving Share Company (OCSSCO) in Eastern Wollega Zone of Oromia National Regional State. M.Sc. Thesis, AAU.
[5] Wasasa MF (2018). Wasasa MF S.C Sabata town branch Core banking solution report, Sep. 30, 2018. A Monthly Report document published on the core banking system of the Wasasa Microfinance Share Company. Addis Ababa, Ethiopia.
[6] Bichanga, W. O., and Aseya, L. (2013). Causes of loan default within Microfinance institutions in Kenya. Interdisciplinary journal of contemporary research in Business. Vol. 4, No.12.
[7] Ameyaw-Amankwah, I. (2011). Causes and effects of loan defaults on the profitability of Okomfo Anokye Rural Bank.
[8] Murray, J. (2011). Default on a loan. United States Business Law and Taxes Guide.
[9] Addae-Korankye, A. (2014). Causes and Control of Loan Default/Delinquency in Microfinance Institutions in Ghana. American International Journal of Contemporary Research , pp 36-45.
[10] Kohansal, M. R. and Mansoori, H. (2009). Factors Affecting on Loan Repayment Performance of Farmers in Khorasan-Razavi Province of Iran, Conference on International Research on Food Security, Natural Resource Management and Rural Development, University of Hamburg, Germany.
[11] Warue, B. N., (2012). Factors affecting loan delinquency in Microfinance in Kenya. International Journal of Management Sciences and Business Research. Vol.1 Issue 12.
[12] Sheila Arishaba L. (2011). Lending Methodologies and loan losses and default in a Microfinance deposit-taking institution in Uganda. A case study of Finca Uganda Kabala Branch (MDI). Research report presented to Makerere University, Uganda.
[13] Shaik Abdul Majeeb PASHA & Tolosa Negese (2014), performance of loan repayment determinants in Ethiopian micro finance. Eurasian Journal of Business and Economics, 7 (13), pp 29-49.
[14] Akinwumi, J. A. and Ajayi, A. O. (1990). The Role of Loan Repayment Capacity in Small Scale Farmers Credit Administration. Quarterly Journal of Credit Administration, 15(2).
[15] Bichanga, W. O., and Aseya, L. (2013). Causes of loan default within Microfinance institutions in Kenya. Interdisciplinary journal of contemporary research in Business. Vol. 4, No.12.
[16] Mohammed Aidoo and Sessah Mensah (2018). The causes of loan Default Risk in Microfinance Institutions in Ghana: Case Study of some selected Microfinance Institutions in Kumasi and Accra. Global Journals of Management and Business, pp 23-37.
[17] Gezahegn Olana (2016). Assessment the Causes of Loan Default in Microfinance Institutions: The Case of Wasasa Microfinance Institution-Nekemte Branch. M.Sc. Thesis, WU.
[18] Okpugie, G. (2009). High Microfinance Interest Rates Cause Loan Defaults in Nigeria Policy,” Journal of Socio-Economics, 30: pp. 193-198,
[19] Mosses Eliud Mungure (2015). The Causes and Impacts of Loan Default to Microfinance Institutions activities: The Case of Pride Tanzania Ltd Pamba Branch. A Research Dissertation Submitted in Fulfillment of the Requirements for Award of the Masters of Business Administration in Corporate Management (MBA-CM) of Mzumbe University. Mzumbe University, Tanzania.
[20] STD/NA. (2002). “The macroeconomic statistical treatment of Non-Performing Loans Publication of the Organization for Economic corporation &Development. Discussion Paper Prepared by Adriaan M. Bloem and Cornelis N. Gorter of the Statistics Department of the International Monetary Fund.
[21] Evans Brako Ntiamoah, Emmanuel Oteng, Beatrice Opoku, Anthony Siaw (2014). Loan Default Rate and its Impact on Profitability in Financial Institutions. Research Journal of Finance and Accounting Vol.5, No.14, pp 67-72.
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  • APA Style

    Diriba Merga Eren, Hundessa Adugna Yadeta. (2019). Assessment of Causes of Loan Default in Wasasa Microfinance S. C. Sabata Town Branch Office. American Journal of Management Science and Engineering, 3(6), 84-94. https://doi.org/10.11648/j.ajmse.20180306.11

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    ACS Style

    Diriba Merga Eren; Hundessa Adugna Yadeta. Assessment of Causes of Loan Default in Wasasa Microfinance S. C. Sabata Town Branch Office. Am. J. Manag. Sci. Eng. 2019, 3(6), 84-94. doi: 10.11648/j.ajmse.20180306.11

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    AMA Style

    Diriba Merga Eren, Hundessa Adugna Yadeta. Assessment of Causes of Loan Default in Wasasa Microfinance S. C. Sabata Town Branch Office. Am J Manag Sci Eng. 2019;3(6):84-94. doi: 10.11648/j.ajmse.20180306.11

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  • @article{10.11648/j.ajmse.20180306.11,
      author = {Diriba Merga Eren and Hundessa Adugna Yadeta},
      title = {Assessment of Causes of Loan Default in Wasasa Microfinance S. C. Sabata Town Branch Office},
      journal = {American Journal of Management Science and Engineering},
      volume = {3},
      number = {6},
      pages = {84-94},
      doi = {10.11648/j.ajmse.20180306.11},
      url = {https://doi.org/10.11648/j.ajmse.20180306.11},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ajmse.20180306.11},
      abstract = {The study was conducted on the assessment of causes of loan default in Wasasa Microfinance S.C Sabata town branch office in order to indicate information that enables to ensure its future sustainability. Both questionnaire and interview guide were used to collect data which was analyzed using descriptive analysis. The survey made on 99 clients and 10 employees shows that the majority of clients are females which is prioritized by the institution to empower poor female household heads. More than half clients of the institution work in their own business generating income of 5000 -50,000 birr per month. Based on the result, poor loan appraisal, Burden of interest, operational inefficiency and Poor customer handling are the four major internal causes of the loan default while political instability, poor business plan, existence of illegal business and price fluctuation are four major external causes of loan default. Wasasa Microfinance uses different mechanisms to control default like negotiation with customers, writing letter of warning to defaulters, penalizing according to loan agreement and taking to court. It is recommended that Wasasa Microfinance S. C control different causes of loan default by awareness creation through training both customers and employees, and increasing institutional efficiency in operational procedures and policies. It is better for the institution to focus on capacity building, incentivizing the model staffs and using clear monitoring and evaluation system.},
     year = {2019}
    }
    

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    T1  - Assessment of Causes of Loan Default in Wasasa Microfinance S. C. Sabata Town Branch Office
    AU  - Diriba Merga Eren
    AU  - Hundessa Adugna Yadeta
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    T2  - American Journal of Management Science and Engineering
    JF  - American Journal of Management Science and Engineering
    JO  - American Journal of Management Science and Engineering
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    EP  - 94
    PB  - Science Publishing Group
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    UR  - https://doi.org/10.11648/j.ajmse.20180306.11
    AB  - The study was conducted on the assessment of causes of loan default in Wasasa Microfinance S.C Sabata town branch office in order to indicate information that enables to ensure its future sustainability. Both questionnaire and interview guide were used to collect data which was analyzed using descriptive analysis. The survey made on 99 clients and 10 employees shows that the majority of clients are females which is prioritized by the institution to empower poor female household heads. More than half clients of the institution work in their own business generating income of 5000 -50,000 birr per month. Based on the result, poor loan appraisal, Burden of interest, operational inefficiency and Poor customer handling are the four major internal causes of the loan default while political instability, poor business plan, existence of illegal business and price fluctuation are four major external causes of loan default. Wasasa Microfinance uses different mechanisms to control default like negotiation with customers, writing letter of warning to defaulters, penalizing according to loan agreement and taking to court. It is recommended that Wasasa Microfinance S. C control different causes of loan default by awareness creation through training both customers and employees, and increasing institutional efficiency in operational procedures and policies. It is better for the institution to focus on capacity building, incentivizing the model staffs and using clear monitoring and evaluation system.
    VL  - 3
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Author Information
  • Internal Audit Department, Wasasa Microfinance Share Company, Addis Ababa, Ethiopia

  • Central Ethiopia Environment and Forest Research Center, Ethiopian Environment and Forest Research Institute, Addis Ababa, Ethiopia

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