DETERMINANT OF SUCCESSFUL LOAN REPAYMENT PERFORMANCE IN PROJECT FINANCING IN THE CASE OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

This study assesses the determinants of successful loan repayment performance of project financing in the case of Development Bank of Ethiopia. The study used explanatory design and quantitative research approach. Secondary data was used. The collected data were taken from individual borrowers’ files. Hence the total population was seventy five (75), of which 40 (53%) were successful financed projects (non-defaulters), whereas the rest 35 (47%) were non-successful ones (defaulters). The variables used in the study are accessibility of market, amount of loan, availability of raw material, distance from project location to raw material destination, distance from project location to output product market, educational level, equity debt ratio, loan processing time, managerial experience of project manager, number of project follow-up, project implementation period, type of management and type of market for the commodity financed. In the study, probit model was used to identify variables which determine successful loan repayment performance. The paper reveals that the managerial experience of project managers, loan processing time, educational level, number of project supervisions/ follow-ups by the bank, equity-to-debt ratio, delay in project implementation period and type of management for the financed projects were statically significant determinant of loan repayment performance of DBE’s financed projects. However, the analysis of the marginal effect shows that equity-to-debt ratio of borrowers is the most important determinant among the other six variables. The policy implications of the study suggest that Development Bank of Ethiopia should intensify its project monitoring and follow-up work in order to make well-informed decisions and provide technical assistance for its credit-assisted projects; increase debt– to-equity ratio of the borrowers to make the borrowers more ethically responsible; give due attention to minimize the bureaucracy that delays the loan processing time; critically analyze the project implementation period at the time of appraising projects and enhance its project implementation capacity; identify and redress the root causes of project delays; and improve its efficacy of customer recruitment system by giving special considerations to educational level of borrowers, managerial experience of project managers and type of management, among others.