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ABSTRACT
The main objective of this study was to examine the determinants of loan repayment of Micro
and Small Enterprises (MSEs) in Jimma town, Ethiopia. This study examined the effect of
Individual characteristics, loan characteristics and firm characteristics on loan repayment of
micro and smallenterprises in Jimma town only. The study used descriptive researchdesign.
Primary data was collected through self administered questionnaire and it was collected from
random samples of 341 Micro and SmallEnterprises (MSEs) by stratifying into Five group.
Secondary data were also collected frombooks, journals and internet. Once the relevant data
was gathered, the collected data was analyzed through descriptive and inferential statistics as
well as econometric model known as binarylogistic regression model was used in order to
examine determinants that impedingMicro and smallenterprise’s loan repayment by
distinguishing characteristics of MSEs.The descriptive result of analyzed data revealed that
individual characteristics, loan characteristicsand firm characteristics influenced loan
repayment of enterprisesin the study area. In addition,the result of binary logistic regression
model indicated that Sex of respondents and Experience positively and significantly affect loan
repayment. Theinconvenience of loan payback period, Lack of financial skill and planning
negatively and significantly affected loan repayment of enterprises. Lack of Marketing Skills,
Follow up and supervision positively and significantly influenced loan repayment of micro and
small enterprises. This study recommends thatthe involvement of women in ownership and
management of MSE’sshould be improved, the town MSEs bureau should be setting suitable
payback periods by communicating and integrating with the federal government and other
concerned body, Experience sharing activities on Marketing Skills should be set by bureau of
MSEs with supporting institutions to acquire better knowledge and experiences from each other,
Financial skill and planningshould be also improved by eliminate traditional work routine by
replacing qualified personnel, banks and micro finance institutions should develop means of
support , take close control, continuous follow up and supervision.
Keywords: - Micro and small enterprises, Lack of loan repayment, Individual
characteristics, Loan characteristics, Firm characteristics, Jimma town
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1.2. Background of the Study Area
Jimma is one of the historical towns of Oromia Regional State. It’s was founded in the late
1830’s. The name of today’s Jimma was derived from Mecha-Oromo clan called Jimma Wayyu.
These people had started to live in the main quarters of the town namely Jiren, Hirmata and
Mendera(BOFED, 2017).
The town is located at 7
o
40
`
00” N latitude and 36
0
60`00`E longitude. The town administrative is
located in the southwestern part of Oromia National Regional State that far 352 kms from capital
city of Addis Ababa. It is bordered with Kersa Wereda in the east; with Manna wereda in north,
and Manna & Seka Chekorsa in west, Dedo in south direction(BOFED, 2017).
Population is one of the vital elements of economic development. Demographic characteristics
have a great influence on economic development and have vice versa relationships i.e. both
economic development and demographic characteristics do supplementary and complementary
effect either directly or indirectly to each other. Population dynamics is the result of fertility,
mortality and migration. Those demographic processes are complex phenomenon affected by
social, cultural, economic, political and psychological factors. Jimma Town was reported to
dwell a population of 120,960 during the third Ethiopian census (CSA, 2007), of which 50.3%
were males as compared to 49.7% females. The total sex ratio at the time indicates 101.14%,
which implies relative gender balance (that is about 101 males for each100 females). This
population is estimated to reach about 148,185 as of July 2014 based on medium population
growth scenario being noted in the area. Observations of the age distribution shows that about
27.8% of the population were below the age group of 14 (i.e., 0-14), whereas those within the
working age group (15-64) and old age (65 and above) account for 69.5% and 2.8%, in the order
of their mention (MoUDHC, 2016).
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The main economic activity in town is Agriculture, Manufacturing, Construction, Trade, and
Service. Among the main economic activity commerce (trading & catering service) and
manufacturing enterprises has significant contribution for local urban-rural exchange and it is
surrounding business. This is because of the commercial orientation of farmers in who have
consumption pattern similar to that of the urban. Agriculture in thetown includes horticulture
(vegetables and fruits), livestock like cattle, sheep and goats breeding.Trade has also played a
great role for economic growth. It is strongly linked with the development of transport and other
communication technologies. In addition to every day market day, the biggest market day in the
town is Thursday and Saturday. Micro and small enterprises have engaged indifferent
distributive retail service rendering commercial activities(BOFED, 2017).
There is no large-scale industrial activity is found in the town. The industries in the town are
small-scale industries and cottage industries like grain mils, oil mills, wood & metal workshops,
coffee hullers, hollow block manufacturing, bakeries and pastries. Based on the number of
employees they hire, the amount of power, type and amount of raw materials, and the process
they use in production all manufacturing industries in Jimma can be categorized as Micro and
small establishments(BOFED, 2017).
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Figure 1-1: Map of Jimma town
Source:(MoUDHC, 2016)
1.3. Statement of the Problem
The role of Micro and SmallEnterprises in Ethiopia is indispensable in poverty reduction through
employment generation since national MSEs Development Strategy was formulated in 1997, and
government strongly believes that MSEs are the right solution to reduce urban unemployment
and poverty. However, there are many critical challenges that hamper the growth and
development of MSEs in Ethiopia. According to Assefa, Zerfu, & Tekle (2014), key constraints
to MSE growth in Ethiopia were access to finance, collateral challenges, marketing challenges,
working and sales space, capital goods and machinery challenges, licensing and registration
challenges, attitudinal challenges, institutional coordination problem.
Among listed challenges in the above paragraph, accesses to finance are the chief factor affecting
MSEs. According to EEA (2015), initial capital for MSEs emanated from diverse sources, the
major one being loans. Since most MSEs have Lack of the initial start-up capital, facilitating
access to loan would definitely help to establish new MSEs and address working capital
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problems of existing ones. All those MSEs which have accessed loans for their businesses might
not repay their debts as scheduled.
Several factors have been identified as reason for lack of loan repayment such as individual
characteristics, loan characteristics, and firm characteristics. As indicated by Mukono(2015),
Individualcharacteristics include the age of borrower, gender, level of education, business
experience, household size, credit use experience, household income, non-business income, type
of business activity, and amount of business investment. Loan characteristics include the loan
size, repayment period, collateral value, number of installments, and application costs, previous
loan experience, and purpose of loan. Firm characteristics factors include the time lag between
loan application and disbursement, interest rate, access to business information, access to
training on loan use, cooperative membership and penalty for lateness to group meetings.
Therefore, the purpose of this study wasto examinethe major determinants behind the loan
default problem such as individual characteristics, loan characteristics, and firm characteristics.
Specifically, personal data, inconvenience of loan payback period, Lack of financial skills and
planning, lack of marketing skills, follow up and supervision.From firstly mentioned variable
Personal data was classified as background data of the respondents like sex and experience
affectedloan repayment because personal data is indicating the characters of loan payers.
Secondly, inconvenience of loan payback period or Loan delinquencywhich means the shortage
of time to repay loan successfully on maturity date. Thirdly, Lack of financial skills and planning
this also indicated the skill of financial recording, reporting and planning of loan payers.
Fourthly, lack of marketing skills this is related with place, sales, promotion, price and other
marketing skill that affect the successful loan repayment of borrowers. Finally, lack of followed
up and supervision means after provision of loan by banks and other financial intermediaries,
whether they are followed up or not because lack of followed up and supervisionwas affected
loan repayment of borrowers (MSEs).
All five determinants personal data, inconvenience of loan payback period, Lack of financial
skills and planning, lack of marketing skills and lack of followed up and
supervisionwereincluded under Individual characteristics,loan characteristics and firm
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characteristics in general,but specifically these determinantswere impeding loan repayment of
MSEs in Jimma town, Ethiopia.Hence, most of the studies in Ethiopia such as(Salem, 2016) ,
(Kebede, Tegegn, & Tafese, 2016),(Kibrom, 2010), &(Tadele, 2014)were mainly focused on
performance and non-performance of borrowers of banks and micro finance institution.
However, this study was focused on micro and smallenterprises sector by examiningdeterminants
of loan repayment of micro and smallenterprises in Jimma town, Ethiopia.
The study was addresses what are the determinants of loan repayment by MSEs’ in Jimma Town,
Ethiopia?
1.4. Objective of the Study
1.4.1. General Objective of the Study
The general objective of this study was to examine determinants of Loan repayment of Micro
and Small enterprises in Jimma Town, Ethiopia
1.4.2. Specific Objective of the Study
The specific objective of this study includes:
To examine the effects of borrower characteristics on loan repayment by MSEs
inJimma town, Ethiopia
To examine the effects of loan characteristics on loan repayment by MSEs in
Jimma town, Ethiopia
To examine the effects of firm characteristics on loan repayment by MSEs in
Jimma town, Ethiopia
1.5. Significance of the Study
This study will be significant. Firstly, it will be helpful for banks, financial intermediaries and
other concerned bodies who are unfamiliar with this problem. Secondly, owners and manager of
micro and small enterprises can use the study output as additional information more than basic
knowledge that they have towards their enterprises and take some corrective action. Thirdly,
Suggestions and recommendations that were provided at the end of the study are valuable for
concerned bodies. Finally, the study also serves for further and comprehensive investigation.