The main purpose of this study was to identify the factors determining loan repayment performance of smallholder farmers; and to evaluate the based performance of the Microfinance Institutions operating in Toke Kutaye district. To select sample respondents for the study, multi-stage sampling method was used. Primary data were collected using structured questionnaires from 122 randomly selected smallholder farmer clients. Secondary data were obtained from the annual reports and financial statements of the Microfinance Institutions. The data were analyzed using descriptive statistics and binary logit regression models. The results of the descriptive analysis revealed a significant mean difference between the defaulter and non-defaulter households in terms of total annual farm income, expense on social ceremonies, livestock units, and distance from credit sources. Although the repayment status in the study area was insignificant, there was a variation among institutions where the numbers of non-defaulters decline from Oromia Credit and Saving Share Company, Vision Fund Microfinance and Eshet Microfinance successively along with ratio statistics result. The logit model revealed that age, education level, tropical livestock unit, participation in off-farm activities, repayment period suitability, and sex found to be have positive effects whereas expense on social ceremony, family size, loan diversion found to have negative effects on loan repayment performance of the smallholder farmers. The findings suggest, in order minimizing loan defaults in the study area, microfinance institutions, non-governmental organizations and policy makers have to effectively work on improving the constraining factors.

Keywords: Binary Logit, Customers, Defaulters, Loan repayment, Smallholder farmers