ASSESSEMENT OF LOAN RATIONING AND FOLLOW UP PRACTICE THE CASE

STUDY IN AGGAR MICRO FINANCE.

BY GROUP {1}

1: AbezuMoges

2: AberuGirma

3: AbebaMekonin

4: MelishewuZeleke

5: BelayneshGutema

ADVISOR: DAGNACHEW ABERA

A SENIOR ESSAY PROPOSAL SUBMMITTED TO RIFT VALLEY UNIVERSITY

PARTIAL FULLFILMENT OF THE BACHELOR OF ART IN “BA” DEGREE IN
ACCOUNTING AND FINANCE.

RIFT VALLEY UNIVERSITY COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

APRIL, 2018

Woliso

Ethiopia
RIFT VALLEY UNIVERSITY

The research entitled “ASSESSMENT OF LOAN RATIONING AND FOLLOW UP

PRACTICE THE CASE OF AGGAR MICRO FINANCE WOLISO BRANCH” by
AbezuMoges,AberuGirma,Abebamekonin, BelayneshGutema and MelishewuZeleke is approved
for the degree of arts in accounting and finance.

BOARD OF EXAMINERS

Name Signature Date

Advisor…………………… ………………. ………………………

Examiner…………………. ……………....... ………………………..

 Final Research

Contents
List of the table………………………………………………………………………………………………………………………………………..I

Abstract.......................................................................................................................................................II
ACKNOWLEDGEMENT................................................................................................................................III
CHAPTER ONE INTRODUCTION...............................................................................................................- 1 -
1.1BackGroundofstudy........................................................................................................................- 1 -
1.2 Background of Organization..........................................................................................................- 2 -
1.3 statement of problem...................................................................................................................- 2 -
1.4Research Questions........................................................................................................................- 3 -
1.5Objective of the study....................................................................................................................- 3 -
1.5.1 General Objective.......................................................................................................................- 3 -
1.5.2 Specific Objective.......................................................................................................................- 3 -
1.6 significance of the study................................................................................................................- 3 -
1.7 Scope of the study.........................................................................................................................- 4 -
1.8 Limitation of the study..................................................................................................................- 4 -
1.9 Organization of the Study..............................................................................................................- 4 -
CHAPTER TWO LITERATURE RIVIEW........................................................................................................- 5 -
Definition of key concepts...................................................................................................................- 5 -
2.1Loan................................................................................................................................................- 5 -
2.2Type of loan....................................................................................................................................- 5 -
2.2.1Term loans...................................................................................................................................- 5 -
A, Short term loan...............................................................................................................................- 6 -
B, Medium term loan..........................................................................................................................- 6 -
C, Long term loan................................................................................................................................- 6 -
2.2.2 over draft facilities......................................................................................................................- 6 -
2.2.3 Merchandise loan.......................................................................................................................- 6 -
2.2.4 Personal loans............................................................................................................................- 7 -
2.3 Credit policy and procedure..........................................................................................................- 7 -
2.3.1Credit standard............................................................................................................................- 7 -
2.3.2 Collection effort..........................................................................................................................- 7 -
2.4screening........................................................................................................................................- 7 -
 Final Research

2.5Credit rationing..............................................................................................................................- 7 -
2.6 The Need for Credit Rationing.......................................................................................................- 8 -
CHAPTER THREE RESEARCH METHODOLOGY........................................................................................- 10 -
3.1Research Design...........................................................................................................................- 10 -
3.2population of the study................................................................................................................- 10 -
3.3sample size...................................................................................................................................- 10 -
3.4sampling techniques.....................................................................................................................- 10 -
3.5Source Of Data and Data Collection method................................................................................- 10 -
3.6Data Presentation and Analysis....................................................................................................- 10 -
CHAPTER FOUR DATA PRESENTATION AND ANALYSIS METHODS.........................................................- 12 -
4.1General back ground of the respondent......................................................................................- 12 -
Source- of questionnaire 2018..........................................................................................................- 12 -
Source –questionnaire 2018..............................................................................................................- 13 -
4.2 Length of Loan Borrower to Borrow from the Institution............................................................- 14 -
Source-questionnaire 2018...............................................................................................................- 14 -
Source-questionnaire 2018...............................................................................................................- 15 -
Source- of questionnaire 2018..........................................................................................................- 16 -
Source-questionnaire 2018...............................................................................................................- 17 -
4.3 Forming Group............................................................................................................................- 18 -
Source-questionnaire 2018...............................................................................................................- 18 -
Source-questionnaire 2018...............................................................................................................- 19 -
4.4 Structural Interview Analysis.......................................................................................................- 20 -
CHAPTER FIVE CONCLUTION AND RECOMMENDATION........................................................................- 22 -
5.1 Finding.........................................................................................................................................- 22 -
5.2 Conclusions..................................................................................................................................- 22 -
5.3 Recommendation........................................................................................................................- 23 -
Reference..........................................................................................................................................- 24 -
APPENDIX............................................................................................................- 25 -Interview question
..........................................................................................................................................................- 28 -
 Final Research

List of table

Table 4.1 background of client…………………………………………………….12

Table 4.2 educational level and service experience of client…………………….13

Table 4.3 the amount of requested by borrower and amount they have got…..14

Table 4.4 Consultation service by Aggar MFI……………………………………15

Table 4.5 the time duration to collect the loan and the length…………………..16

Table 4.6 customer repayment and the reasons for failure of customer………..17

Table 4.7 variable for loan rationing………………………………………………18

Table 4.8 factor influencing loan repayment of borrowers………………………19

ACRONYMS

MFIs: - Micro Finance Institutions

 Final Research

Abstract
This descriptive study will conducted on the assessment of loan rationing and follow up practice
the case of Aggar micro financewoliso branch.

The main aim for conducting this study is to deal with different related to assessment of loan
rationing and follow up practice in Aggar micro finance in woliso branch.

The significance of the study is to evaluate its screening criteria and revise it accordingly in
favour of credit worthy borrowers so as to alleviate on repayment constraints and the research
finding would help to identify the major characteristic that distinguish credit worthy borrowers
and defaulters so that act according for future screening and the follow up and it must be some
modified of loan rationing system to effective work.
 Final Research

ACKNOWLEDGEMENT
Frist and for most we would like to thank our GOD to stay in life to this day and to enable to
complete our paper. Next we would like to express our heartfelt gratitude to our advisor
DagnachewAbera for his careful criticism, suggestion and help whose valuable comments have a
decisive impact up on the outcome of the paper. And also we would like to thanks our families
for their unforgettable supports in every aspects of our life.

We also never close our acknowledgement without expressing a special gratitude to department
of accounting for giving as such types of opportunities to do this senior essay and we would like
to thanks our friends, Finally, we would like to thanks to Aggar micro finance of woliso Branch
manager, worker and client of the institution in providing as valuable information and data.

THANKS ALL WHO WISH OUR SUCCESS!

 Final Research

CHAPTER ONEINTRODUCTION
1.1BackGroundofstudy
MFIs required meeting their members’ socio economic objectives at the same time maintaining its
financial viability. Its success/failure in members financing as well as its financial position therefore
relies on its loan recovery performance. Credit has been recognized as one of the important financial
services that contribute to the success of a business venture. These successes enter to contribute the
major economic development of country. However the existence of credit facility alone does not
necessarily result in supporting economic development unless otherwise, it is accompanied by the
existence of factors conduct to the efficient utilization of credit funds. For example ,a loan has to be
repaid on time if the objective of making loanable funds available to those who want them for
productive proposes on continues base is to be met (oyatoya,1983)

Credit collection performance is a critical feature of credit. When collection was not made at the proper
time schedule, it affects the effort of lending performance. In any lending institution, the consequence of
this failure contributes to the increasing of provision for bad and doubtful debt expense that reduces
profit for the period which it was made. If the period result is a loss, the capital of lender was reduced by
amount of loss. Reduction of capital may affect the institutions new funds mobilization activities for
fresh lending due to doubt on the capability of the institution to stay in the market. Chronic over dues
become irrecoverable in course of time. The net worth of lending institution will be eroded and will have
serious impact on the volume of lending. The high incidence of over dues affects the overall liquidity
and solvency of credit institution and impairs their capacity to undertake fresh lending.
(Kumaricgita,1988)

It has also been recognized that MFIs were weak in credit rationing and in making follow up on loan
payment at the right time especially those in small towns and rural areas, thus resulting into loan
delinquency and hence affecting profitability and sustainability of MFIs(Befekadu,2007).The default
problem mentionedabove leads to pose the question of whether MFIsscreening criteria are efficient in
screening credit worthy borrowers as well as in determining the appropriate loan size, terms and
conditions that takes in to account the repayment capacity of borrower. It also necessitates the need for
making an empirical investigation on the factors behind the default problem so that the lending unit in
MFIs could make an appropriate precaution in its lending decision as well as revise it screening criteria
 Final Research

in order for potential credit worth borrowers not to be rationed wrongly, to ensure that organizations
finance are utilized productively(Befekadu, 2007).Generally, there are many MFIs operating in various
corners of the country of Ethiopia and AggarMFIs is the one that a branch inwoliso town.

1.2 Background of Organization

The waliso micro finance institution is located in Oromiawaliso town. It established in 2006 E.C started
with capital 4,500,000 ETB. The institution strives to play its vital role in the accelerated and sustainable
economic development of waliso town and the area through providing efficient, effective and
sustainable financial service to the economically active.

1.2.2 Vision
Aggar,s vision “to be the most preferred and pioneer private micro finance that services active
poor in Ethiopia ”.
1.2.3 Mission
Aggars mission is “to provide fast affordable and demand driven financial services on
sustainable basis to the economically active poor to improve their being and to generate profit for
its shareholders by displaying qualified and motivated staff and high tech services”.

1.3 statement of problem

MFIs help those who have been excluded from accessing financial services from formal financial
institutions and also contribute to reduce negative impacts of local money lenders in the areas where
they operate Hunte (1996)

Although the performance of MFIs in Ethiopia has been impressive since their establishment they are
experiencing default problems as can be observed in their declining repayment rates, as indicated in the
previous section. Hunte (1996) argues that default problems destroy lending capacity as the flow of
repayment declines, transforming lenders into welfare agencies, instead of a viable financial institution.
He also adds that default problems incorrectly penalize credit worthy borrowers whenever the screening
mechanism is not efficient Hunte (1996).

Arene (1992) argues that, whether default is random and influenced by erratic behaviour or whether it is
influenced by certain factors in a specific situation, there is a need for an empirical investigation so that
the findings can be used by micro financing institutions to manipulate their credit programs for the better
Arene(1992).
 Final Research

Aggar is micro finance institution in woliso town the study will conducted in customer profit, lending
experience and loan rationing and follow up of the institution.

1.4Research Questions
This paper would tackle the problems by addressing the following research questions:

1. What are the major factors used as a means of screening for loan rationing?
2. Are the factors used for credit rationing in AggarMFI influence loan repayment?
3. Howloanfollow up is practiced at AggarMFI?

1.5Objective of thestudy

1.5.1 General Objective

The general objective of the study was to assessloanrationing and follow up practice of Aggarmicro
finance Woliso branch.

1.5.2 Specific Objective

The study objectives of the study are as follows:

1. To identify the major factors used as a means of credit screening inAggar MFI.
2. To assess loan follow up practice in Aggar MFI.
3. To study whether the factors used for credit screening also influence loan repayment.

1.6 significance of the study

The research output will be helpful for AggarMFI and other MFIs to evaluate its screening
criteria and revise it accordingly in favour of credit worthy borrowers so as to alleviate loan
repayment constraints.
Research findings will also help MFIs to identify the major characteristics that distinguish credit
worthy borrowers and defaulters so that it could act accordingly for future screening purpose
.moreover, an analysis of factors affecting loan repayment performance of MFIs borrowers
would help policy makers to formulate successful credit policies and programmers that enable
them to allocate scarce financial resource to the development of basic sectors of the economy.
 Final Research

1.7 Scope of the study

There are a lot of problems facing MFI in Ethiopia regarding the general management,
operations and credit management just to mention a few. The finding of the research would have
been more satisfactory if it will be able to cover these problems in all branches of Aggar MFI.

1.8 Limitation of the study

The major limitations of the study are scarcity of resources such as time and money and sactredness
of the member. As a resultour research limited only in Aggar MFI in waliso town.

1.9 Organization ofthe Study

The study was organized in threechapters. The first chapter contains introductionparts consisting of back
ground of the study, statement of the problem, objective of study, and scope of the study. The second
chapter contains literaturereview, the third chapter contains research methodology andat the end of the
paper there isappendix and reference.
 Final Research

CHAPTER TWOLITERATURE RIVIEW

Definition of key concepts

2.1Loan
In finance, a loan is a debt by a note which specifies, amount other things, the principal amount
interest rate, and date of repayment. A loan entails the reallocation of the subject assets(s) for a
period of time, between the lender and the borrower (pandy1994).

In a loan, the borrower initially receives or borrows an amount of money, called the principal. From
the lender, and is obligated to pay back or repay an equal amount of money to the lender at the later
time. Typically, the money is paid back in regular instalments, or partial repayments: in an annuity,
each instalment is the same amount.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an
incentive for the lender to engage in the loan. In a legal loan, each of this obligation and restrictions
is enforced by contract, which can also place the borrower under additional restrictions known as
loan covenants (pandy1994).

2.2Type of loan
To address the credit needs of the business, banks have different categories of loans, however, each
category of the loan is granted to deserving business, so as to match the need of the type of facility
.There are same type of loan (pandy1994).

2.2.1Term loans
Term loan given by financial institution and banks have been the primary source of finance for private
and public firms, generally, term loan to business are into three depending on their period of maturity.

A, Short term loan with maturity period of one year or less.

B, Medium term loan this type of term loan has a maturity period more than one year but less than five
years.

C,Long- term loan with maturity period of more than five years
 Final Research

A, Short term loan

Short term loans are given to finance short term working capital. They are self-liquidating over a period
of time one year or less. I.e. it generates its own repayment. Short term loans are seasonal in nature.to
allow temporarily build- up of inventory in advance for peak selling season.

They are given to finance build-up of receivable during peak sale and for purchase of raw materials
when sales and cash inflow processes do not match. That means, a firm needs cash to purchase raw
material and pay expenses as there may not be matching between cash inflow and out flow (pandy1994).

B, Medium term loan

This loan isgrantedto business to keep them overcome permanent working capital shortage and for
acquisition of fixed assets. Such business is not expected to be bankrupt and repay from liquidation of
inventories allowances. Therefore repayment of a medium term loan is scheduled over a period not
greater than five years (pandy1994).

C, Long term loan

Long term loans are loans granted for more than five year (pandy1994).

2.2.2 over draft facilities

Overdraft facilities are providing by banks to allow customer to overdraw their current account up to an
agreed maximum amount. Interest is charged on the minimum balance to a close each day. The facility
usually lasts for twelve months and then can be renewed by mutual agreement. Overdraft facility favours
customer who borrow frequently (pandy1994).

2.2.3 Merchandise loan

Merchandise loan is a kind of loan facility granted against pledge of stocks of merchandise item in
secured premises. It is advanced at a certain percentage depending on the nature and marketability of
item pledge. Care should be taken on advancing loan against pledge of perishable items and items with
limited shelf. Consider deterioration in quality, and stock obsolescence when granting merchandizes
facility. Generally a merchandise loan is granted to relief short term working capital constraints
(pandy1994).
 Final Research

2.2.4 Personal loans

This type of loan granted to employees of the bank. As the name indicates personal loan is a lump sum
advance to a borrower to meet personal requirements. The purpose may be for repaid and maintenance
of house purchase and other personal need. Source of repayment for such loan is monthly salary. And
lower interest rate is charged and also secured by personal guarantees of persons of high integrity and
financial capacity (pandy1994).

2.3 Credit policy and procedure

The success or failure of business depend primary on the demand for its product/service. The firm credit
analysis often use the 5es of credit to focus their analysis on the key dimensions character, capital
capacity, condition, collateral are important to the credit policy(parasanna1998).

2.3.1Credit standard
Are criteria to decide the type of customer to whom credit approved. And the firms determine the nature
of the credit risk on the basis of prior records of payment financial stability, current net worth and other
factors. When credit approved credit has been extended to the customer who is expected to repay
according to the credit term (prasanna1998).

2.3.2 Collection effort

A collection effort policy is needed because all customers do not pay the firms loan on time. Some
customers are slow payer while some are nonpayer. The collection effort should. Therefore aim at
accelerating collection from slow payers and reducing bad debt losses (prasanna1998).

2.4screening
In whether on a form or with a list a written record of all applicants can be useful. Information can be
completed that will give them a picture of what kind of men or women are applying to them for loan and
what kind of loan requesting ,this information can be used to monitory changing client needs and market
demand .the question asked in the screening process should reflect the criteria they have selected for
their program (prasanna1998).

2.5Credit rationing

Credit rationing is broadly defined as a situation where the demands for loans exceed the supply of loans
at the going interest rate. Different types of credit rationing have been examined in the literature
padmanabham (1981).saw it from the angle of loan size where borrowers receive a lesser amount of loan
 Final Research

than they requested at a given loan rate. Credit rationing as defined by Jaffe (1971) as the difference
between the quantity of loans demanded and loans supplied at the ruling interest rate and identified three
of types credit rationing these are;

a) A situation where a borrower may receive a loan of smaller amount than desired
b) A situation where some individuals cannot borrow at the interest rate they consider appropriate
based on what they perceive to be there probability of default and
c) A situation where a borrower may be denied credit, when a lender thinks of not being able to
obtain its required return at any interest rate.

The concept that will be addressed in this study is the first type of rationing where a borrower receives
loan of smaller amount than desired Jaffe (1971).

Credit: The term loan and credit are used interchangeably. The study adopts the credit definition of
who defined credit as an arrangement in which lender gives money to a borrower agrees to repay the
money, usually along with interest, at some future point(s) in time.

He also adds that there is predetermined time for repaying a loan, and generally the lender has to
bear the risk that the borrower may not repay a loan Jaffe (1971).

Credit default: is the failure of the borrower to repay loan in accordance white the terms of the lender
Jaffe (1971).

2.6 The Need for Credit Rationing

Lending institutions are faced whit four major problems in the course of undertaking credit activity:

a) To ascertain what kind of risk the potential borrower is (adverse section)

b) To make sure the borrower will utilize then loan properly once made, so that he will be able to
repay it (moral hazard).
c) To learn how the project really did in case the borrower declares his inability to repay and
d) To find methods to force the borrower to repay the loan if the borrower is relocated to do so
(enforcement) (GhatakandGuanine, 1999).
 Final Research

The key elements of effective credit management therefore are well developed credit policies
and procedure; strong portfolio management; effective credit controls and the most crucial of all
a well-trained staffs that are qualified to implement the system (Ghatak and Guinnane 1999).
 Final Research

CHAPTER THREE RESEARCH METHODOLOGY

3.1Research Design
The study would adopt the case study design where by Aggar MFI would be used as case study. A case
study was adopted since the study aimed at an in depth and comprehensive study of credit rationing and
loan follow-up practices in Aggar MFI.

3.2population of the study

Population of the study comprised of one(1) manager, four (4)Loanofficer, two(2) Accountant, two(2)
casher and one hundred twenty four (1024) customer of MFI who had borrowed from the MFI. 260 of
the population are female and 764 of the population are male.

3.3sample size
The study sample size was comprised of the MFI, s manager and 2 credit officers who will be selected
purposively and 308(30% of the population) who would be selected by a means of simple random
sampling. The sample size adopted was due to scatteredness of members and limited resources.

3.4sampling techniques
The study used simple random sampling and purposive/judgemental sampling to select study
respondents. Simple random sampling method would be used to get participant from the MFI.

3.5Source Of Data and Data Collection method

In this study, data collection methods used interviews, questionnaires and documentary sources. Two
types of data would be collected for the primary and secondary data. The primary data was collected
through filed questionnaire administration and structured interview while the secondary data was
obtained from the MFI’s and other relevant documents. Interview was conducted with the MFI’
manager and two loan officers and a set of questionnaires used to administered to selected 308
borrowers whose repayment period had matured. Secondary data for the study was collected from
various sources which included audited financial reports.

3.6Data Presentation and Analysis

Qualitative and quantitative data was collected. Quantitative data was analysed by means of descriptive
statistics. Qualitative data was analysed descriptively using summarization technique to give clean
interpretation and they analysed and presented in forms of tables and figures after the raw data is
collected, it is organized to suitable for data analysis and interpretation in this study.
Final Research
 Final Research

CHAPTER FOUR DATA PRESENTATION AND ANALYSIS METHODS

4.1General back ground of the respondent
This part of the study deals with the analysis and interpretation of questionnaires distributed to
clients of Aggar credit and saving institution in woliso branch important data regarding the total
of questionnaires that were distributed 9 clients of the institution.
The following table shows the client(respondent) personal back ground including sex and age
group of the respondent.
Table 4.1 back ground of client

Q/no Item sex Respondent Quantity Percentage (%)

1 Male 7 75
Female 2 25
Total 9 100

2 Age
18-25 2 22.22
26-35 6 66.66
36-45 1 11.11
Above45 - -
Total 9 100

Source- of questionnaire 2018

The above table indicates the respondent back ground which comprises sex and age group
respondents from the above table the researchers can understand that most of the Aggar
borrowers were male 7(77.77%) and 2(22.22%) of the respondent are female also the researchers
can see that the second part of table which shows the age range of the client. The respondent out
of the total age group 18-25 years old has significant percentage 2(22.22%) on other hand the
age group between 26-35 accounts 6(66.66%) between
36-45 accounts 1(11.11%) and there is no respondents that the age of above 45from these the
researchers understand from the sample respondents above 88% are more productive 11.11% of
the respondent are less productive and above 45years old are unproductive section of society.

Table 4.2 educational level and service experience of clients

 Final Research

Q/no Item educational level Respondent Percentage (%)

Quantity
3 Illiterate - -
Grade 1-5 - -
Grade 6-8 - -
Grade 9-12 - -
Above 12 9 9
Total 9 9

4 Experience in years
Below 1 years - -
1-2 years 3 33.33
2-5 year 6 66.66
Above 5 year - -
Total 9 100

Source –questionnaire 2018

The above table 4.2 contains two items such as education level and experience of respondents. The first
part of table shows the educational level of the client there no respondents have their educational level
between 1-12, 100% of the sample respondent learned above 12 this indicated most of the respondents
learned above 12.regarding their experience of service in the 3(33.33%) of the respondent 1-2 year
experience 6(66.66%) of the respondents have 2-5years experience their no respondents that above
5years experience

4.2 Length of Loan Borrower to Borrow from the Institution

The length of loan the institution gives depends on the client needs because there is different term of
loan like long term and short term but most of the Aggar clients borrow 1-4 time 7(77.77%) of the
respondent are borrow 2(22.22%) respondents borrow above 4time.

Table 4.3 the amount requested by borrower and the amount they have got.
 Final Research

Q/no Item Respondents Percentage (%)

Quantity
6 Did you get enough or the
requested loan from the
institution?
Yes 7 77.77
No 2 22.22
Total 9 100
7 If your answer for question
number 6 is no what is the
reason?
Lack of collateral 1 11.11
Inability to repay 1 11.11
Other reasons 7 77.77
Total 9 100

Source-questionnaire 2018
According to above table 4.3 the first part of the above table shows 7(77.77%) of respondents said get
the amount they want and 1(11.11%) lack of collateral, 1(11.11%) of respondents said that inability to
repay and 7(77.77%) of the respondent other reasons from these the researcher understand the clients
have other reason

Table 4.4Consultation service by Aggar

Q/no Item Respondent Percentage (%)

Quantity
8 Does the Aggar service to its
customer regarding loan
repayment?
Yes 7 22.22
No 2 77.77
 Final Research

Total 9 100

Source-questionnaire 2018
From the above table 4.4 7(77.77%) of respondent said that give consultation service to its customer
regarding loan repayment and 2(22.22 %) respondents said they did not give the consultation service to
its customer about loan repayment. Consultation service is very important and from the researcher
understand Aggar not give consultation service about loan repayment to its customer. \

Table 4.5 the time duration to collect the loan and the length

Q/no Item Respondent Percentage (%)

Quantity
9 What is the time duration the
institution grants in collecting the
loan
Installment by monthly bases 7 77.77
Sami-annually
By yearly bases 2 22.22
Other specify
Total 9 100
 Final Research

10 What do you think of the time

given for loan processing
Fair 6 66.66
Lengthy
Unfair 3 33.33
Total 9 100

Source- of questionnaire 2018

From the above table 4.5 the researchers understand that most of the time Aggar instalment by monthly
bases 7(77.77%) and 2(22.22%) of the respondent said that in yearly from these researchers can see
most of the time the institution grants loan is instalment by monthly bases based on these the other
respondents were asked to give response about the time give processing their response 3(33.33%) said
that time is unfair. 6(66.66%) of the respondents said that the time given are fair and there is no
respondents said that the time given are lengthy from these the researchers understand more of the
respondent says the time duration for loan processing is fair.
 Final Research

Table 4.6 Customer repayment and the reasons for failure of customer

Q/no Item Respondents Percentage (%)

Quantity
11 Are you paid loan on time?
Yes 6 66.66
No 3 33.33
Total 9 100
12 If your answer for question
11 is no what is the major
problem to repay loan on
time?
Not generating profit
High interest rate
Less time to repay 1 11.11
Other specify 2 22.22
Total 3 33.33

Source-questionnaire 2018
The first part of the above table 4.6 shows 6(66.66%) of the respondents are paying loan on time and
3(33.33%) are not paying loan on time. The numbers of respondent not pay loan on time the reason for
less time to repay 1(11.11%) and other 2(22.22%) respondents have other different reason those are said
that by external factors political issue example in 2008 etc specify for merchant lenders and on the other
hand natural disaster for agricultural like flood, drought etc

4.3 Forming Group

When form a group to take the loan what was the institution major requirement?
 Final Research

If members of the group are familiar to each other or in the same kebele and also if their economics
status is the same, as a resultone members does not depend on the other. The group must contain at a
minimum of 1-5 members, the group is used as collateral for the institution, all the client is productive
age ,have no credit from other institution and all the member have identity card of theirkebele.

Table 4.7 Variable for loan rationing

Q/no Variable for loan rationing Frequency

14 Saving 2
Group guarantee 3
Deposit 0
Age 0
Education 0
Business running experience 4
Alternative source of income 0
Sex 0

Source-questionnaire 2018
As indicate in table 4.7 saving were indicate by 2(22.22%) to have factor for rationing, 3(33.33%) of the
respondents said that saving is the major requirement and 4( ) are said business running experience is
major requirement. the factor that deposit, age, education alternative source of income are not indicated
as factor for credit rationing.From this the researchers understand the major requirements of the
institution business running experience group grantee and saving.

Table 4.8 factors influencing loan repayment of borrowers.

Q/no Factors Agree Disagree Total % of % of Total

agree disagree
15 Business management 5 4 9 55.55 44.44 100
skill
Alternative source of 4 5 9 44.44 55.55 100
income
House hold size 5 4 9 55.55 44.44 100
Late delivery 3 6 9 33.33 66.66 100
Number of years 9 0 9 99.99 0 100
business experience
Age 8 1 9 88.88 11.11 100
Credit rationing 9 0 9 99.99 0 100
 Final Research

Source-questionnaire 2018
Table 4.8 shows the percentage of respondents with their views regarding the factors that influenced
loan repayment performance, 5respondents (55.55%) said that business management skill influenced
loan repayment performance and 4 respondents (44.44%) said that alternative source of income
influenced loan repayment performance,5(55.55%) respondent say that loan repayment performance
influenced by House hold size 3(33.33%) respondents said that the loan repayment performance
influenced by late Delivery,9(99.99%) said that number of year business experience influenced the
repayment performance, 8(88.88%) respondent said that Age and also 9(99.99%) of respondent said that
credit rationing influence performance of the institution.

4.4 Structural Interview Analysis

The under mentioned analysis made through an interview held with the manager and 2 credit officer of
Aggar micro finance Woliso branch.

The analysis is made by presenting the question first followed by responses and at last analysis is made
as follows

Q1.what is credit rationing step used by Aggar to give loan to its customer?

-Looking over background of the borrowers

-Inspecting borrowers loan application form

-Identify card and kebele support paper

-Checking borrowers saving and deposit capacity

-Examining borrowers loan objective

 Final Research

-looking over collateral but the borrower that have not collateral he/she borrow minimum amount of
money

Q2.Have you supervised for loan repayment

Yes, pre-supervised or before loan approval and post loan supervision or after loan disbursement once in
a month continuously and its desirable for portfolio quality.

Q3.what is the major problem to give the requested or enough loans to its customer.

-If the customer ability to repay the loan on time less.

-Before borrowed from the institutions the client may not have saving and deposit account.

Q4.What is the time duration used by the institution to collect the loan

-Only loan that for Agricultural activities are in yearly bases but other loan type are in monthly bases

Q5. Why do the institution unable to collect the amount lend in full and on time?

-The reason for not getting the amount borrowed were the customers invest on unprofitable areas

-Customer investing in agricultural activity and its risk because natural disaster, like heavy rain, drought
etc. ---
 Final Research

CHAPTER FIVECONCLUTION AND RECOMMENDATION

5.1 Finding
The researchers can understand most of the Aggar clients are male. The researchers can understand
that the institution focus on high interest rate to its customer to collect their loan on time.

From the data the researchers understand that loan rationing variable used by the institution was
weak since it failed to ensure timely loan repayment and loan rationing was also conclude to be
weak since it took into account only few factors that influenced loan repayment performance.

5.2 Conclusions
The main objective of the study was to assess of loan rationing and follow up practice of Aggar and
impact on the practical activity of the institution. In the sample survey of 9,almost 88.88% of the
clients are very hard working and productive part of the society. However in the sample survey out
of 9 sample 2(22.22%) are female and male 7(77.77%) and most of them have inadequate education
skill thus it’s hard for them to manage their business effectively.
 Final Research

The 7(77.77%) of the respondent said the institution give the consultation service to loan repayment.

The institution focus the time duration grant to collect the loan is instalment by monthly bases small
number of respondents said that the time for loan processing are unfair.

The 77.77% respondents get the amount requested and 22.22% of the respondents not get amount
requested the amount of loan requested were less than the loan received by the clients this implies that
Aggar applies some criteria to ration loans applied by the members, 1(11.11%) of the respondents lack
of collateral requirement, 1(11.11%) of respondents inability to pay and 7(77.77%) are other reasons.

-Where all applicants could not be get eligible for loan and even those who are eligible get less amount
than the amount requested.

-The problem encountered during repayment of loan which obstacles the less time to repay and other
reason like natural problem such as natural disaster, drought, and flood for farmers.

Forming the group is most important part of Aggar. The grouped formed by institution have the
advantage of being formed by the Willingness of the members and also fulfill the criteria for the group
formation.

-Business management experience, saving and group grantee are used as factor for loan rationing but
factor like deposit, alternative source of income, education and age were not as factors.

-Factors for influencing loan repayment performance of borrowers are business management skill,
alternative source of income, house hold size, late delivery, numbers of years business experience, age
and credit rationing but highly influenced by business management skill and credit rationing.

5.3 Recommendation
Based on the research finding the following recommendation are suggested

- From the finding the researchers can understand most of the Aggar clients are male. The
researchers recommend that institution was design to give equal opportunity to male and female
client.
- The researchers recommended that majority of the member in rural areas taking in to
consideration and the nature of their economic activities, to give the requests or enough loan to
its customer.
 Final Research

- Although the institution gives some consultation service on how to use the amount they
borrowed from and about loan repayment sometimes default of repayment by customer are seen.
This affects profit of the institution so the institution should give intensive technical advice to
borrower and seriously followup the proper utilization of the borrowed money.
- The researchers also understand from data analysis that most of the time the institution focus on
the time duration grant to collect the loan are installement by monthly bases and its unfair for
some clients so the researchers recommended that the institution should grant loan to other time
duration to effective collecting of loan.
- From the data the researchers understand that loan rationing variable used by the institutionwas
weak it failed to ensure timely loan repayment and it took into account only few factors that
influenced loan repayment performance.

Reference
Annual report (2018) wisdom micro finance woliso branch

Arene C.J (1992) loan repayment and Technical Assistance among small

Holder maize.

Baker c.bdaib (1987) default management in agriculture lending program

Befekadu B. (2007). Outreach and Financial performance Analysis of microfinance institution in

Ethiopia.

Conference proceeding. Addis Ababa HunteC.k. (1996). Controlling loan default and improving the
lending technology in credit institutions, saving and Dev.XXI.

I.M pandy financial management 6thed 1994

 Final Research

Jaffe md (1971) credit rationing and the commercial loan market, an econometric study of the structure
of the commercial loan.

Kumaricgita (1988).recovery ethics in rural lending.vol.10no.12.1BA bullet.

Oyatoya, W. (1983). Constraints to agriculture loan repayment.

Pandy (1994)

Prasanna. Chandra fundamental of financial management 3rd ed 1998

Padmanabhan KP (1981) hedging loan delinquency in rural credit project; lesson from Indian
experience.

Stanlyb.block /Goffrey foundation of financial management 12th ed 2005.

Stiglitz je, Weiss a(1981) credit rationing in markets with imperfect information

Rift valley university woliso campus

Program of accounting and finance

Questionnaire to be filled by Aggar customers

Dear respondents

This is questionnaire designed to collect data on the assessment of loan rationing and follow up practice
of Aggarmicro finance which will be used as an input for senior essay in a partial fulfilment of BA
degree in accounting and finance. Your genuine response is solely used for academic purpose and the
data will be treated utmost confidentiality. Therefore request you to respond to each of the questions
genuinely and honestly.

Part-1 Questions about Respondent’s Data

 Final Research

Instruction

Please read each questions and put a mark  h on your responses that most accurately
reflect your answer.

1. Generalbackground of respondent

1.1 Sex: Male Female

2. Education status

A. Illiterate
B.From 1-5 grades
C.From 5-8 grades
D. From 9-12 grades
E. Above

3. Age

A. from 18-25 C. from 36-45

B. from 26-35 D. Above 45
1 For how many years have you been served in the institution?
A. Below 1 year C. from 2-5 year
B. From 1-2 year D. above 5 years
2 How many b
times did you take loan from Aggar micro
finance…………………………………………………………………………….
3 Did you get enough or the required loan from the institution?
A. Yes B. No
4 If your answer for question number 6 is no what is the reasons?
A. Collateral requirement
B. Ability to pay the loan
C. Other specify…………………….
5 Dose the Aggar consultation service to its customer regarding loan repayment?
A. yes B. no
c
6 What is the time duration the institution grants in collection the loan?
 Final Research

A. Installment by monthly bases

c
B. Sami annually
C. By yearly bases c
D. D. Other specify c
7 c given for loan processing?
What do you think of the time
A. fair
B. lengthy c
C. unfair c

8 c the loan on time?

Are you paying back
A. yes B. no
9 c 11 is no what are the major problems to repay the loan on time?
If your answerc for question number
A. Not generating profit
B. High interest rate c

C. Less of time to repayc

D. Other specify c
c
13. When you form a group to take the loan what was the institution major requirement? Explain

____________________________________________________________________________________
___________________________________________________________________

14. The major factor considered to ration loan for members by Aggar microfinance institution.
Please rank it.
Saving
Group guarantee
Deposit
Age
Education
Business running experience
Alternative source of income
Sex
15. Factor influencing loan repayment performance of borrowers?
 Final Research

Factors Agree Disagree

Business management skill
Alternative source of income
House hold size
Late delivery
Number of year business
experience
Age
Credit rationing

Interview question
1. Job status
A. manager B. credit officer
2. What is the credit rationing step used by the Aggar to give loan to its customer?
____________________________________________________________________

____________________________________________________________________________________
______________________________________________________________________

3. Have you supervised for loan repayment?___________________________________

____________________________________________________________________________________
______________________________________________________________________

4. What is the major problem to give the requestor enough loan to its customer?
______________________________________________________________________________
______________________________________________________________________________
________________________________________________________
 Final Research

5. What is the time duration used by the institution to collect loan?

_____________________________________________________________________________

6. Why do the institution unable to collect the amount lend in full and on time?
______________________________________________________________________________
______________________________________________________________________________
________________________________________________________