An assessment of Loan Provision and Causes for Default: A Case Study of Wisdom Microfinance Institution S.C. Wolkite (Main) Branch

Abstract

In many low-income countries, like Ethiopia, the prevailing operation of the formal financial institutions is inefficient to provide sustainable credit facilities to the poor. Hence, micro finance programs have been developed. Their main purpose is to provide financial service to the poor to become self-employed and thus escape poverty. The aim of WISDOM Microfinance Institution is also to provide financial service to the able poor who are not addressed by the formal financial institutions. One of the major problems in provision of financial service to the poor by WISDOM is loan default. This study was conducted with the aim of assessing loan provision and causes for default using primary data collected through open and closed ended questionnaire from both clients and employees and interview with employees. Out of 1379 active clients of WISDOM Wolkite (main) branch a sample of 150 was selected randomly for this study. The result from data analysis shows that higher proportion of female respondents in the sample. Therefore, it indicates that WISDOM has done better to improve the life of women in the community by providing microfinance service. The results from descriptive statistics shows that low level of education, single and low level of income for large size families, high interest rate, insufficient loan size, availability of other credit sources, purpose of loan, insufficient supervision and advisory visit, lack of skill based training and infrastructure facilities are the causes for loan default of the branch. The institution should collaborate with government and non-governmental organizations (NGOs) to provide microfinancing service for skill-based trained clients; and provide business-oriented trainings, and counseling services. Revisit sufficiency of loan size and the interest rate in accordance with national financial policy. Networking with all MFIs operating in the area, and local government structures to work together to avoid getting loan from different sources. The overall objective of MFIs in Ethiopia is to increase the productive potential of the poor and poverty reduction. Therefore, strengthening the existing operation of WISDOM is appreciated