Loan repayment performance of micro and small-scale enterprise: evidence from North Wollo Zone, Ethiopia

Loan defaulting is a prominent challenge to financial institutions' outreach and sustainability. As it has been increasing and become a critical problem in the study area, this study aimed to analyze the loan repayment performance of Micro and Small-scale Enterprise (MSEs) in North Wollo Zone, Amhara Region, Ethiopia. The study used a multi-stage sampling technique to select 336 sample enterprises (181 non-defaulter and 155 defaulters). Both qualitative and quantitative data were collected from primary and secondary data sources. The descriptive statistics result showed that non-defaulting was higher in trade (29.28%) and manufacturing (21.55%) MSEs, while high defaulting pertains to MSEs engaged in agriculture (24.52%) and construction (21.93%) sectors, respectively. The findings of financial ratios revealed that the average current ratio, debt ratio, and debt-to-equity ratio were 0.65, 0.72 and 7.95, respectively. The logit regression result showed that enterprise manager education level, collateral security, and financial literacy positively and significantly affected loan repayment performance while distance to lending institutions, repayment period, and loan diversion negatively affected it. Therefore, this study recommends that lending institutions and other concerned organizations organize warranties for the loan, align repayment schedules with the production period of enterprises, inclusive monitoring and supervision, and provide financial and basic business training to enterprises.