Assessment of factors affecting loan diversion and repayment performance among small scale farmers in Cibitoke, Burundi

Abstract

Farmers use the borrowed funds to purchase productive inputs such as fertilizer, seeds, pesticides which are combined with family labor to produce more output. However, microfinance borrowers can sometimes divert their loans from the intended purposes to unproductive activities which may influence their repayment performances. The general objective of this study was to assess the factors influencing the loan diversion and loan repayment performance by farmers, borrowers of COSPEC (Solidarity Cooperative for the Farmers in Cibitoke to Save and to Lend), one of the Burundian Microfinance Institutions (MFI) located in Cibitoke province. The Ability to Pay Theory of default leads this study. The study adopted the explanatory research design and a census of 163 borrowers from all branches of COSPEC was used. The study used a structured questionnaire for primary data collection, and descriptive statistics were used to summarize and describe the socio- economic, farm and credit characteristics of the respondents. In addition, Tobit and Probit models were employed to identify factors influencing loan diversion and loan repayment performance of respondents, respectively. The estimation results employing Tobit model revealed that being older and loan delay are encouraging loan diversion (β= 0.212, p<0.01 and β= 0.066, p<0.05 respectively) while off- farm income is found to be discouraging loan diversion (β= -0.248, p< 0.10). Regarding the probit results, gender and farm income significantly enhance loan repayment performance ( β = 0.179, p <0.10 and β = 0.080; p <0.01 respectively) while loan diversion, loan delay and loan size were found to significantly increase loan default ( β = -0.017, p <0.01; β = -.003, p <0.01 and β = -0.074, p <0.05 respectively). Therefore, the study recommends a continuous supervision on loan utilization and training so as to reduce the problem of using loan for non-productive activities. MFIs should organize themselves and disburse funds to the beneficiaries at the right time (before the start of agricultural season) by reducing loan processing procedures.