DETERMINANTS OF LOAN REPAYMENT PERFORMANCE OF MICRO AND SMALL ENTERPRISES: THE CASE OF OMO BANK IN SILTE ZONE BRANCH OF CENTRAL ETHIOPIA REGION

ABSTRACT This study explores the determinants of loan repayment performance of micro and small enterprises the case of OMO Bank in Silte zone branch, central Ethiopia region, specifically focusing on MSEs borrowers at OMO Bank. Employing a mixed-methods approach that integrates both qualitative and quantitative data, the research examines the occurrence of loan defaults, identifies key determinants of repayment performance, and assesses the challenges encountered by these enterprises. A multi-stage sampling technique was employed, selecting a sample size of 384 MSEs across various sectors, including manufacturing, agriculture, and services. Data analysis involved descriptive statistics such as means, standard deviations and percentages to interpret the survey results. Chi-square tests were conducted to compare defaulters and non-defaulters based on various explanatory variables. To investigate the factors affecting loan repayment performance, a Tobit model was utilized for empirical analysis. The findings indicate that several factors significantly influence loan repayment performance among micro and small enterprises (MSEs), including the education level of managers, collateral requirements, loan utilization, managers' financial literacy, distance to lending institutions, and loan size. The study revealed the challenges that faced MSE includes market-related issues like competition, demand fluctuations, technological constraints, and infrastructure issues, hindering business competitiveness and operational efficiency. To address these challenges, it is recommended that stakeholders enhance managerial training focused on financial management and business operations; improve local infrastructure to facilitate better access to utilities; establish market support initiatives to help MSEs navigate competition and demand; implement comprehensive financial literacy programs; design tailored lending solutions that consider the unique needs of MSEs; promote access to modern technology along with necessary training; and strengthen support networks involving local business associations and government agencies to provide ongoing assistance and resources.