Determinants Of Cridit Risk In Micro Finance Institution: In Case Of Ambo Town

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.