Determinants Of Loan Repayment During COVID-19 Pandemic: Evidence From OMO Microfinance Institution

Abstract

Default occurs when principal or interest payments are 90 days or more past
due. The objective of this study was to examine factors that influence loan
repayment among clients of OMO Microfinance Institution in Werabe City
during the COVID-19 pandemic. The study attempted to understand how far
the economic slowdown related to COVID-19 affected the loan repayment
performance of MFI clients in least-developed countries like Ethiopia,
incorporating religiosity and religious knowledge as explanatory variables in
addition to the borrower's personal characteristics and loan characteristics
that have been used as explanatory variables in most previous studies. To
achieve this objective, explanatory and descriptive research designs were
employed with a quantitative approach. The primary data was based on a
systematic random sample of 302 borrowers who had borrowed between the
years 2018 and 2021. A bivariate analysis was used to identify the association
between the loan repayment performance of borrowers and explanatory
variables. After identifying variables having a significant association with the
dependent variable, the study employed a binary logistic regression model.
Results of the study revealed that educational level, long repayment period,
large family size, loan size, and borrower’s business condition resisting the
effect of COVID-19 had significantly negative associations with borrowers
becoming defaulters, whereas absence of religious knowledge, being
unmarried, taking interest-based loans, borrowing for consumption, and
client’s tendency towards loan diversion had significant positive associations
with borrowers becoming defaulters. The study suggests that MFIs should
offer facilities to help borrowers cope with economic slowdowns due to crises
like COVID-19, ensuring loan repayment performance. It also recommends
interest-free loans to enhance overall performance. The study also emphasizes
the importance of helping borrowers understand their rights and obligations
based on their religion, ensuring they fulfill their loan commitments