Abstract:
This study empirically examines the determinants of credit risk for microfinance
institutions and interprets the results by relating them to theories, related empirical
reviews, and regulations. The study used multiple linear regression models and collected
the primary and secondary data from purposively selected four microfinance institutions
for seven years (2007–2014) that are currently operating in Ambo town by considering
the quarter reports. Accordingly, model selection was done by testing the assumptions
test to determine the most suitable model to be used in this study, and the result showed
that multiple linear regressions were appropriate. The study used one dependent
variable, credit risk, and eight independent variables: size of microfinance institution,
age of microfinance institution, loan growth, lending method, training, frequency of
collection, timeliness of loan release, and educational level. The result of the study
showed that training and frequency of collection have a positive and statistically
significant influence on credit risk, while loan growth, educational level, timeliness of
loan release and age of microfinance institutions show a negative and significant
relationship with credit risk of microfinance institutions in Ambo town. The study
recommends that microfinance institutions’ managers employ a more flexible approach
to dealing with the significant variables to decrease credit risk. There is a significant and
negative relationship between loan growth and the credit risk of microfinance
institutions. The study reveals that training, educational level, frequency of collection,
loan growth, timeliness of loan release and age of microfinance institutions play crucial
roles in determining the credit risk of microfinance institutions.
