The study was conducted in Dendi district of West Showa zone (Oromia), Ethiopia. This study intended to assess the problems and challenges that affect both institution and borrowers regarding loan repayment process. The survey was conducted in four purposively selected Kebele Associations which having the maximum number of borrowers by selecting 130 sample households through systematic random sampling technique after defaulters and non-defaulters stratification of the respondents. Out of 130 borrowers 50% were defaulter, and the remaining half were non-defaulters. Pre-tested structured interview schedule and other secondary sources were used to collect primary and secondary data respectively. Key informant interviews and Focus Group Discussions mainly helped to generate the necessary qualitative data. The collected data were analyzed by employing simple descriptive statistics. Which model was initially fitted with twelve variables, of which five were found to be statistically significant, and all did not exhibit the expected signs. These significant variables were: loan diversions, loan sizes, family size, number of dependent within and out household, availability of training, time laps between loan application and disbursement, business types, family sizes, supervision and advisory visit were highly important. The qualitative result revealed that the probability of default increase as the family sizes increases, lack of borrowers perception on repayment period, lack of availability of training, low business experience, lack of saving objective and one source of income. Dendi microfinance institutions had a number of internal and external challenges like shortage of loanable funds for further expansion, competition and improper interference of the third part. On the basis of the study findings, it is recommended that reducing family size through expanding family planning program, providing training to bring attitudinal changes, increasing borrower’s perception on repayment period through training, selecting experienced person in the business, increasing their business entrepreneurs’ skills through provision of different and improving internal and external challenges of the institutions.
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