DETERMINANTS OF LOAN DEFAULT IN LEASE FINANCING A CASE OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

This study identifies determinants of lease loan default, including Lessor related, Lessee related and external factors, on lease loan default. The aim of this research was to examine determinants of lease loan default; there is a causal relationship between each factor and lease loan default. The study utilizes primary data collected through a close-ended questionnaire. The study presents the results obtained from 75 survey questionnaires completed by customers of selected districts of DBE. To present and describe the respondents' demographic characteristics, descriptive data analysis using tables was employed. For examining determinants of lease loan independent variable (Lessor related, Lessee related and external factors) on the dependent variable (lease loan default), an explanatory research design is adopted, employing regression analysis. The collected data is analyzed using descriptive statistics, correlation analysis, and regression analysis through SPSS software. The correlation analysis reveals a Moderate association between Lessor related factors, Lessee related factors weakly related with External factors and lease loan default (r=0.534, 0.0.617, and 0.0895 respectively, p<0.01). The regression result found that independent variables such as lack of credit monitoring, appraisal, KYC and longer lease processing time, lack of educational literacy, managerial experience and inappropriate business location, political instability, foreign currency fluctuation and inflation, significantly and positively influence lease loan default. Therefore, these factors primarily determine the lease loan default in Development Bank of Ethiopia. Therefore, the Development Bank of Ethiopia should prioritize improving its operations to mitigate the risk of defaults and consider location-based risk assessments when extending leases to lessees, particularly in regions with less favorable economic conditions. It is also crucial for DBE to factor external influences when assessing credit risk and designing lease agreements, and government and policy makers should have to maintain external factors in order to have sound finance through lease.