THE UNIVERSITY OF BAMENDA

FACULTY OF ECONOMICS DEPARTMENT OF

AND MANAGEMENT BANKING AND
SCIENCES FINANCE

LOAN REPAYMENT DEFAULT AND FINANCIAL PERFORMANCE OF

MICRO-FINANCE INSTITUTIONS IN MEZAM DIVISION -
CAMEROON

A Dissertation submitted to the Department of Banking and Finance in the Faculty of

Economics and Management Sciences in partial fulfilment of the requirements for the award
of a Master Degree in Banking and Finance.

By

MONJU GRACE MBUM

Registration Number:
UBA20MP141

Supervisor
PROF NJONG MOM ALOYSIUS

0
 DECLARATION

I, Monju Grace Mbum, registration number UBa20MP141, Department of Banking and

Finance, Faculty of Economics and Management Sciences, University of Bamenda, hereby

declare that this work titled “Loan Repayment Default and Financial Performance of

Micro-Finance Institutions in Mezam Division - Cameroon” is my original work. It has

not been presented in any application for a degree or any academic pursuit. I have sincerely

acknowledged all borrowed ideas nationally and internationally through citations and

references.

Date_______________________ Signature____________________

i
 CERTIFICATION

This is to certify that this research titled: “Loan Repayment Default and Financial

Performance of Micro-Finance Institutions in Mezam Division - Cameroon” is the

original work of Monju Grace Mbum. The work is submitted in partial fulfilment of the

requirements for the award of Master of Science (MS.C) Degree in Banking and Finance,

Faculty of Economics and Management Sciences, in the University of Bamenda, Cameroon.

________________________

Prof. Njong Mom Aloysius

(Supervisor)

_____________________________ _______________________

Dr. Nkiendem Felix Prof. Njong Mom Aloysius

(Head of Department) (Dean)

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DEDICATION

To my Family

iii
 ACKNOWLEDGEMENTS

My profound gratitude goes to my Supervisor Prof. Njong Mom Aloysius, whose

suggestions and criticisms helped improve this work in shape and content. Firstly, he helped

to make this topic researchable. With his criticisms and corrections on my work in every

correction session, he gave me inspiration and zeal to work harder and exploit important

documents, he also encouraged me when i was reluctant and lazy, his step by step help led to

the production of this piece of work.

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TABLE OF CONTENT

v
LIST OF TABLES

vi
LIST OF FIGURES

vii
ABSTRACT

viii
 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The history of microfinance in Cameroon is closely linked with poverty reduction. Although

the beginning of cooperative savings and credit activities can be traced back as far as in 1849

with the foundation in Rhineland of the first cooperative society of saving and credit by

Raiffeisen, it is truly with Yunus in 1976 with the creation of the Gramen Bank that one can

situate the birth of "modern microfinance" (Blondeau, 2006). Microfinance was originally

conceived as an alternative to banks, which in most developing countries serve only 5 to 20%

of the population (Gallardo et al., 2003), and informal moneylenders. With the passage of

time, the microfinance sector has evolved. Microfinance institutions now have more than 100

million clients and achieve remarkable repayment rates on loans (Cull et al., 2009).

According to Kassim (2009), some major reasons or causes of bad loans are poor

management skills and experience, non-existence of an efficient and effective loan policy,

insufficient loan analysis, documentation errors, much emphasis on profit as against the

quality of the loan to be granted, dishonest practices and attitudes, political and economic

challenges in terms of depression and instability, unhealthy competition, inconsistent policy

and regulation and political and social influences on the management of the banks.

Moreover, other adverse economic and market factors ranging various recessionary

circumstances, regulatory variations and others such as resource shortages of effectual

management and unsettled labour relations have obstructed on the health of businesses and

mostly leads to the none payments of such loan facilities because of their default risks. Bad

1
loans are credit risk to rural banks and it is the risk of loss arising as a result of inability of

debtors in honouring their payments obligation. These loans have tended to affect financial

instability in the larger economy and have at times resulted in the outright failure of

government projects.

Again, whenever public sector workers who mostly take credit from banks experience

irregularities in their salaries payment, they are unable to honour their obligation for some

tome resulting in growing NPLs. Most of the pensioners have borrowed from our banks when

they were in active service and hoping to complete the payment of the loan from their

privileges or monthly pensions. The non-payment of such privilege and due pensions (lump

sum) has recurrently resulted in bad debts and bad loans.

In the UK credit, dealings were a personal affair, as people tended to borrow from businesses

in their community. Whether borrowers were purchasing goods on credit from local

merchants or borrowing money from their local bank, lenders typically knew their borrowers

well – either personally or through their standing in the community. However, in larger

communities this was more difficult (Gallinger & Poe, 2008). So tradesmen would share

information on customers who failed to repay their debt. One such group were London

tradesmen who, in 1803, pooled their knowledge of customers to avoid. As tradesmen saw

the benefit of working together to protect their businesses, other units also formed across the

country.

In Africa, credit management is not a new concept, spanning back during the early colonial

days. During the 1950s, at the peak of colonial rule, indigenous credit institutions developed

alongside colonial ones (Seidman, 1986). However, while colonial credit institutions

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benefitted from centuries of experience in credit management, African institutions could not

build on the same traditions and the lax regulatory regime was not enough to prevent the

challenges associated with fraud, embezzlement and high default.

In Ghana Banks should also receive their portion of the blame because banks in Ghana

charge very high interest rates on loans mostly between thirty (30) to Forty-five (45) percent.

When loan facilities are disburse or approved to customers, financial institutions including

banks charge several interests on it as determined by these banks. The total of these interest

rates and other interests charges by these banks are usually on a high than the actual amount

sanctioned to them. This frequently escalates the loan portfolio collection as well as the

quantity of bad loans (Ghana Banking Survey, 2011).

Also, most officers in the credit department and other officers especially branch managers,

operations managers after granting or disbursing loan facilities to customers take certain

percentage from the loan granted as gratification which is usually referred to as “sule”, which

may significance in inadequate funds to implement the intended business and at the end of

the day, management may not have moral standing to request for the full repayment of the

money borrowed. Again, sometimes some banks‟ Executives and Credit officers take “ghost

loans” from these banks to develop their own personal businesses without any plan of

resettling the loan taken (Nguta & Huka, 2013).

Most board of directors and other top management members as noted by Okpara (2009),

often their highly placed positions to obtain other form of loose loans which, in some cases

goes contrary to the banks‟ statutory lending limits a strong violation of the regulation

stipulated in the lending policy of the banking system. Again, loans are approved to

3
acquaintances and relatives with no better documentation covering such loans which in the

process grow the potential of bad loans

In Cameroon, most financial institutions act as intermediaries to many enterprises both

private and public sector especially in the payment of salaries and wages, in this case many

state and private contractors acquired loan facilities from the banks to finish their projects,

and due to none or poor mobilisations from the government or private companies to finish up

the projects, the loans borrowed becomes bad and therefore problematic to the banks. The

state who also borrowed from banks for some projects but due to the poor priority of projects,

most of these projects are often abandoned and repayments of such borrowed amount often

become difficult and Many Rural banks in Cameroon have not survived in the banking

industry due to nonpayment of loans creeping most of their activities. These huge overdue

balances (loans defaults) in their books with its resulting consequences have resulted in the

collapse of rural banks such as COFFINESS Bank (Nawai & Shariff , 2017).

1.2 Statement of the Problem

It is generally accepted that credit, which is put to productive use, results in good returns. But

credit provision is such a risky business that, in addition to other reasons of varied nature, it

may involve fraudulent and opportunistic behavior. MFIs should rather depend on loan

recovery to have a sustainable financial position in this regard, so that they can meet their

objective of alleviating poverty. Whether default is random and influenced by erratic

behaviour or whether it is influenced by certain factors in a specific situation, therefore, needs

an empirical investigation so that the findings can be used by micro financing institutions to

manipulate their credit programs for the better performance of microfinance institutions

(Mwangi et al., 2009).

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It is generally accepted that credit, which is put to productive use, results in good returns. But

credit provision is such a risky business that, in addition to other reasons of varied nature, it

may involve fraudulent and opportunistic behavior. MFIs should rather depend on loan

recovery to have a sustainable financial position in this regard, so that they can meet their

objective of alleviating poverty.

Furthermore, the experiences of many microfinance institutions have exemplified the fact that

a strong repayment rate is a major aspect of financial success in the microfinance industry.

Strong repayment rate may be difficult to achieve because the target beneficiary clients are

poor, have low income, are illiterate, with no infinite credit history and no potential for

collateral. Yet, these are simply the challenges that microfinance institutions take on when

providing loans to marginalized people in developing countries. Since micro - finance cannot

rely on donor funds in the long run; they should be viable and sustainable by maximizing the

full loan repayment.

Despite many researches it is quite clear from the foregoing that very little research studies

has been done on effect of loan delinquency on the financial performance of banks as many

of the researches concentrates largely on credit allocation yet it is through improved credit

management that banks’ loan portfolios will enlarge and banks would meet their ultimate

goal of stimulating growth and performance in the economy and despite a growth in its loan

portfolio, Bank Limited in Cameroon is saddled with an alarmingly high level of Non-

Performing Loans which have adversely affected its net asset value and overall banks

financial performance and Repayment of loans by clients ensures sustainability of

microfinance institutions and therefore default by clients to repay loans (credit) tends to

affect the operations of every viable MFI. This loan default had its consequences and

5
implications on the operations of MFIs this fact therefore prompts the researcher to

investigate loan repayment default and financial performance of micro-finance institutions in

Mezam Division.

1.3 Research Questions

The research problem raises two fundamental questions to be answered: the main research

question and the specific research questions.

1.3.1 Main Research Question

What are the effects of loan repayment default on the financial performance of micro-finance

institutions in Mezam Division?

1.3.2 Specific Research Questions

The specific research questions are simply stated as;

1. How do ownership characteristics of loan affect financial performance of micro-finance

institutions in Mezam Division?

2. Does a borrower characteristic affect financial performance of micro-finance institutions

in Mezam Division?

3. Do loan-specific factors affect financial performance of micro-finance institutions in

Mezam Division?

4. How do lender characteristics affect financial performance of micro-finance institutions

in Mezam Division?

1.4 Objectives of the study

The objectives are segmented into two; the main objectives and the specific objectives of the

study.

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1.4.1 Main objective

The main objective is to investigate the effects of repayment loan default on financial

performance of micro-finance institutions in Mezam Division.

1.4.2 Specific Research Objectives

The specific research objectives are states thus;

1. To assess the effect of ownership characteristics of loan on financial performance of

micro-finance institutions in Mezam Division.

2. To evaluate the effect of borrower characteristic of loan on financial performance of

micro-finance institutions in Mezam Division

3. To determine the effect of loan-specific factors of loan on financial performance of

micro-finance institutions in Mezam Division

4. To determine the effect of lender characteristics of loan on financial performance of

micro-finance institutions in Mezam Division.

1.5 Hypotheses

1.5.1 Specific research Hypotheses

H01: Ownership characteristics of loan have no significant effect on financial performance

of micro-finance institutions in Mezam Division.

H02: Borrower characteristic of loan has no significant effect on financial performance of

micro-finance institutions in Mezam Division.

H03 Loan-specific factors of loan have no significant effect on financial performance of

micro-finance institutions in Mezam Division.

H04: Lender characteristics have no significant effect on financial performance of micro-

finance institutions in Mezam Division.

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1.6 Significance of the Study

To Students

The result of this research is intended to enhance and enrich the knowledge of every student

in learning about financial unit, banking branch and the predicted factors of loans

delinquency behind it influence to the financial performance of banks. This study also can be

used to help and guide students in knowing more and get better understanding about the

factors that influence and give impacts on brand performance of micro finance institutions in

Cameroon.

Practitioners

The result of this study is expected to give contributions in the development and surveillance

performance of micro finance institutions and commercial banks as well as giving

information and education both to borrowers and staffs of the respective micro finance

institutions on the factors which can influence load delinquency and probably load default.

Researcher

The result is expected to broaden the knowledge and horizon the next researchers and can be

used properly in conducting a new research with similar topics. In addition, the study is

hoped to provide accurate and appropriate information to support further research on load

delinquency and financial performance in the Banking system.

Government

The findings of this research are of interest to policy analysts, decision makers marketing

managers in their efforts to formulate policies, make decisions that impact positively on

financial unit, banking branch and performance of micro finance institutions, and retain more

financial series and products to reduced high rate of loan delinquency and load default.

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1.7 Operational Definition of Terms

Financial Profitability:

Financial Profitability could be defined as a measurement of the results of a firm’s polices

and operations in monetary terms. In assessing the overall financial condition of a company,

the income statement and the balance sheet are important reports, as the income statement

captures the company's operating performance and the balance sheet shows its net worth.

Financial performance:

Financial performance could be assessed using the following key measures which are

important to assess the current financial position and performance. These are descriptive and

analytical measures of financial position and performance. That includes current assets,

current liabilities, total assets, stockholders equity, total revenues, total expenses and net

income. And analytical measures of financial position and performance could include

profitability measures.

Return on Assets (ROA):

Measures how well firm resources are being used to generate income. It is the ratio of net

profit after tax divided n by total assets and is the most popular ratio for measuring the

relative performance of firms. (Weygandt et al.,2009). At this point in time maximizing ROA

was a common corporate goal and the realization that ROA was impacted by both

profitability and efficiency led to the development of a system of planning and control for all

operating decisions within a firm.

Return on Equity (ROE):

Is the measurement of profits per unit of capital and specifically used for computing the

return on shareholder’s equity? Higher return on equity is considered as better performance

in terms of profitability of firms return of equity is calculated by dividing net income by the

total equity (Gibson 2013).

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Expenses Ratio

It indicates a firm’s gross operating expenses to total assets. Here, gross operating expenses

include interest expense, non-interest expenses, and provision for losses. The lower the value

of expenses ratio, the more efficient a firm will be in controlling expenses/costs.

Capital turnover ratio:

It can be altered primarily by being more efficient and, thus, using fewer assets in the

business’s operations. However, it will only make a difference in ROE if the reduction in

assets is accompanied by an equivalent reduction in owner’s equity. It’s computed by

dividing net Sales upon invested capital.

1.8 Scope of the Study

The study examined the effect of repayment loan defaut on financial performance of micro-

finance institutions in Mezam Division. The verification methods applied to this study is

either the single or two methods of verification. However, this may not be very effective and

satisfactory to potential users.

Geographically, the scope of this study was delimited to micro-finance institutions in Mezam

Division was selected because it has major city of local industry, commerce, banking

activities, shopping malls and supermarkets, which intertwined with financial unit, and

banking branch to carry out their daily financial operation.

1.9. Organisation of the Study

This study comprises five chapters. The first chapter, which is an introductory part, looks at

the background and the context to the study, followed by a statement of problem, research

questions, objectives, hypotheses and its significance and the organization of the work.

Chapter two provides a review of the literature relevant to the outcome and each of its

10
proposed antecedents, consequences and previous, theoretical framework and empirical

research findings relevant to this study are discussed. Chapter three presents a conceptual

model, a detailed discussion of the research design, the research hypotheses to be tested, and

the methodology to be used to test the conceptual model and its hypotheses. Chapter four

describes the results of the statistical analyses that are used to test the hypotheses. Chapter

five identifies the findings of the study concerning the hypotheses, the implications derived

from the findings of the study, the limitations of the study, recommendations for future

research, and conclusions of the study.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Review

2.1.1Concepts of Loan Repayment

The ability of banks to recoup back the facility granted is the determinant factor for the bank

to sanction more loans. Banks must therefore be cautious in the administration of loans. The

possibility of customers hiding their real identity should not be taken for granted as the

information about them is to be used in determining the ability to pay back the loan. Absence

of this vital information about the clients will make it very difficult for banks to determine the

customer true identity in terms of repayment ability.

Most enterprises including organisations and SMEs ability to honour their loan obligation

often depends to some extent their receivables from their debtors which sometime influence

repayment pattern to the various banks. Banks should therefore take into consideration the

trend and the business lines of clients of these enterprises during loan acquisitions. Therefore

as noted by Bruck (1997), loan maintenance ought not be allowed beyond the agreed loan

facility. Thus effective mechanism and regular supervision of the arrears should be

undertaken to ensure prompt repayments.

Furthermore, loans defaults are loans that are ninety days or more past due (Jr, 2002). Loan

could also be delinquent if the debtor is either unwilling or unable to pay the amount

borrowed when it is due In microfinance, loan default occurs when a borrower fails to make a

loan repayment installment according to the agreed loan repayment schedule (Thuo & Juma,

2014). Lenders agree to an installment repayment plan with the borrowers, ranging from

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weekly to monthly repayments, depending on the type of enterprise and the loan amount

(Becchettia & Conzo, 2013).

Loan default is the single biggest threat to microfinance profitability and sustainability

globally (Ibtissem & Bouri, 2013; Kodongo & Kendi, 2013; Sama & Casselman, 2013).

Ibtissem and Bouri (2013) showed that loan default in microfinance operations was a

significant problem because it affected negatively the dual objectives for the establishment of

banks. Stakeholders aim to achieve both the social mission of alleviating poverty among the

poor and the financial purpose of making MFIs profitable (Ibtissem & Bouri, 2013).

Profitability occurs when bank’s borrowers make timely loan repayments (Dodson, 2014).

Reducing loan default achieves both the business and the social missions of establishing

banks.

Banks leaders attain sustainability for their businesses if they use proper strategies to reduce

loan default (Wongnaa & Awunyo-Vitor, 2013). Sustainability in microfinance refers to the

point at which an MFI has sufficient funds to cover all its costs and makes profits for the

services offered (Ibtissem & Bouri, 2013). In some cases, the Banks leadership chooses to

apply higher than normal market interest rates to make bank’s sustainable (Gan et al., 2013).

The application of above-normal market interest rates conflicts with the social goal of

establishing Banks. Turvey (2013) suggested mitigating this conflict by increasing the

efficiency of Banks risk portfolio management and applying specific pricing policies to

achieve a better equilibrium between sustainability and outreach. Improving the efficiency of

Banks would require Banks leadership to be innovative in creating an environment that

enhances the viability of the Banks industry through reducing loan default rates while

achieving the poverty alleviation goal.

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Interest rates are a cause for loan default in the bank’s business (Xiang, Jia, & Huang, 2014).

Kodongo and Kendi (2013) observed that the Banks leadership solved the problem of loan

delinquent after developing a graduated scale for charging interest rates. Kodongo and Kendi

explained that when a group of safe borrowers repays their loans consistently, the group

members increase their group size with the inclusion of other safe borrowers. The rise in the

group size reduces the total group and transaction costs, allowing the older members of the

group to pay lower interest rates than the new members (Thuo & Juma, 2014). An increase in

group size of safe borrowers and variation of interest rates produces two benefits. The

reduced loan default rate enhances the profitability of Banks, and the new group members are

motivated to follow the example of old members to repay loans regularly so they can start

paying low-interest rates.

2.1.1.1 Factors leading to loan default

The issue of loan delinquent should not be mistaken for a deliberate act. There might be

genuine reasons beyond the control of the borrower which might lead to loan delinquency.

Brehanu and Fufa (2008) classified them as voluntary and involuntary causes of loan

delinquency. However, the interest of this study is to delve into those factors which are

avoidable and traceable to the borrower or lender. Lending institutions will normally have to

assess their capability to grant credit to their clients (Bastos, 2010). This is done by giving

due consideration to the credit-worthiness of clients, availability of funds for onward

transmission, adequacy of borrower collateral and existing regulations regarding the granting

of loans by internal and external regulators (Barry, Mann, Mihov and Rodriguez, 2008). The

probability of loan delinquency is caused by many factors which could be clustered together

as borrower characteristics, lender characteristics and loan characteristics (Abid, Ouertani,

and Zouari-Ghorbel, 2014; Glennon and Nigro, 2005; Ghosh, 2015).

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Ownership characteristics

Coravos (2010) reported that the kind of business ownership or ownership structure could

bring about default. Usually, sole proprietors are more susceptible to higher loan delinquency

as compared to ownership types with more members. The kind of collateral an owner has has

the probability of causing default (Jimenez and Saurina, 2003). The writers reported positive

relation between the owner’s collateral and the likelihood of loan delinquency. In cases where

the owner has other source of income or any extra income, the possibility of default might be

positive (Brehanu and Fufa, 2008). When the borrower has extra income apart from the

business source, the tendency for reckless financial management is possible and default might

occur.

Borrower characteristics

The location or distance between borrower and lending institution was used as determinant of

demand for collateral (Jiménez, Salas & Saurina, 2009), but we try to test it for probability of

default. Usually, when the borrower is located very close to the lender, monitoring is easier

and might reduce the likelihood of default. The age of the borrower was also determined by

Mokhtar, Nartea, and Gan (2012) as possible cause of delinquent. When the business has

been in existence for long, they have enough experience to ensure sound financial

management practices which could avert possible default. At times, over reliance on

experience leads to financial indiscipline which could result in default. In the work of

Mokhtar et al. they found strong positive correlation between multiple borrowing (which they

referred to as extra loan) and the probability of loan delinquent. The same result was found

by Jimenez and Saurina (2003). Multiple borrowing increases the stress on the resources of

the business which can result in default. The size of the business can determine delinquent.

Usually, small businesses default more frequently than large ones (Brehanu and Fufa, 2008).

It was reported by Jimenez and Saurina (2003) that the kind of relationship a borrower has

15
with the lender has the tendency to trigger default. They found a positive relation between

borrower-lender relationship and probability of default. Borrowers with good relation have

disincentive to loan especially when the default is borrower-caused.

Loan characteristics

There are several loan-specific factors that can lead to possible default (Foster and Zurada,

2013); (Khieu et al., 2012). The length of time to maturity of the loan described by some

authors as loan age, or loan term has the probability of causing loan default. Loans that have

longer period to maturity have higher probability of loan were sought (Claessend, Krahnen,

and Lang, 2005). It is therefore the duty of the bank to ensure that there is evidence of the

loan purpose before it is approved. The interest charged which is the known as the price of

the loan can increase default probability. Exorbitant interest rates put heavy demands on the

borrowing thus making servicing of the loan very difficult. Coravos (2010) reported that high

interest rates increase the probability of loan default. (Roslan and Abd Karim, 2009). Even

though their study was with individual clients within the microfinance industry, their finding

is applicable to this current study. Mokhtar, Nartea and Gan (2012) found that the loan

schedule could bring about default. Depending upon the frequency with which money flows

into the business, servicing of loans should match the timing of the flow of money. It is most

advisable for business loans to be serviced in periods less than one month intervals. The

purpose of the loan could result in default. When the purpose is mostly different from

expanding the business or adding up to direct production or provision of services, default

looks very unavoidable (Herrington and Wood, 2003). The price of loan (interest rate)

determines the probability of loan default (Salas and Saurina, 2002).

Lender characteristics

Certain factors that are traceable to the lending institution can bring about default (Abid et al.,

2014; Louzis et al., 2012). Faulkender and Petersen (2006) reported that the timing of loan

16
approvals play critical role in the repayment capabilities of borrowers. When loan processing

takes unnecessarily long time, borrowers might miss opportunities which might be time-

bound and may lead to a diversion of the loan purpose. Herrington and Wood (2003) reported

that shortages in the amount applied for by the borrower could bring about default. When

financial institutions approve an amount lesser than what the applicant sought for, the

purpose for which the loan was intended becomes difficult to accomplish and borrowers

might divert the usage of the loan which can result in failure and possible default. The

probability of loan default increases when borrowers divert the purpose for which the loan

was sought (Claessend, Krahnen, and Lang, 2005). It is therefore the duty of the bank to

ensure that there is evidence of the loan purpose before it is approved. The interest charged

which is the known as the price of the loan can increase default probability. Exorbitant

interest rates put heavy demands on the borrowing thus making servicing of the loan very

difficult. Coravos (2010) reported that high interest rates increase the probability of loan

default.

2.1.1.2 The Influence of Loans Borrowers’ Characteristics on delinquent Rate

Christmann; Herr and Burt; Harrast; Woo,( 200, 2002, 2004 & 2005) they mentioned

categorically that the pre-college measures characteristics to include borrowers’ age, gender

and attitude as the factors influencing borrowers loan delinquency. According to Barone

(2006) pre-college measures refers to characteristics that reflect the students’ loans

borrowers’ experience before college attendance. Kinsler and Pavan (2011) supported that,

students brought with them the background characteristics, an institution has a little or no

ability to affect them, these characteristics includes age, gender and attitude.

However, according to Chapman and Migali (2006a; 2006) there are other factors affecting

default rate apart from poor or non repayments caused by age, gender or attitudes among

17
loans beneficiaries. They further argued that, defaulting among developing countries is

caused by poor record keeping and administrative structure as well as lack of qualified

personnel. Hossler, Gross, Osman and Hillman (2008) argued that, students’ loans borrowers

who are defaulters begin the loan process with different background characteristics and with

limitations that repayers do not have for example they have negative attitude towards debts

and repayment.

The Influence of Age

Students’ loans borrowers’ age has an influence on default rate (Kinsler & Pavan, 2011).

According to Podgursky, Ehlert, Monroe, Watson and Wittstruck (2002) each year the older

students’ as determined by their age raises the default ratio. However, Woo (2002a) argued

that, borrowers’ age was insignificant predictor to default. According to Flint (1997), default

probabilities are increasing by 3% each year beyond the age of 21. According to Herr and

Burt (2005), older students are more likely to default than younger students. They continue

by arguing that, older students have more financial commitments compared to younger

students for example family support,which leads into having less amount available for

repayments.

However Kesterman (2006) argued that, age has nothing to do with default rate among

students’ loans borrowers, instead default rate is affected by academic achievement as

measured by GPAs. He further argued that, students with higher GPAs tend to default less

than students who attained lower GPAs. However, according to Steiner and

Teszler (2003), younger students are more likely to default up to three times than the older

students. Although later study done by Steiner and Teszler at the same institution produces

different results.

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According to Christman and Harrast (2000; 2004), the likelihood of loan default increases as

the age of students’ borrowers increases even after controlling other factors such as income.

Woo (2002b) supported that, as a students’ borrowers get older, so do the weakening of ties

to parents and family who might give financial support, this situation results into older

students being more likely to default than younger students.

The Influence of Gender According to Podgursky, Ehlert, Monroe, Watson and Wittstruck

(2002), females are more likely to defaults less than males. However Lochner and Monge-

Naranjo (2008) found that, there is no significant difference between females and males

borrowers’ in the likelihood of defaulting. Volkwein and Szelest (1995) also supported that,

there is no significant difference in default rates between males and females.

Hofstede and Michael (2010) contented that, male borrowers default more than women

according to masculinity behavior as supported by cultural theory. They further argued that,

according to cultural theory the distribution of emotional roles between males and females

are different, males are competitive, assertation, materialist, ambitious, power oriented and

they don’t put value on relationships as well as quality of life. They concluded that, it become

easy for them to default from paying back the loan given. Choy and Li (2006) concluded that,

women take longer to repay loans as they are assumed to have low income compared to men.

According to Kesterman (2003) students who successful complete their studies tend not to

default on students loans given compared to drop outs regardless of their gender.

According to Hsu (2008) highest degree attained by either a male borrower or a female

borrower has an influence on default rate, that is student borrowers who attained certificate

level or who have no degree have a high rate of defaulting compared to students’ borrowers

19
who have graduated. In the study done in California Woo (2002a) found that borrowers’

chance of defaulting is decreasing by 36% by being a female. Likewise, Flint (1997) in the

national study done at Missouri supported that, default probability is increasing by 5.8% by

being a male. However, most of the literatures indicate that, gender among the students’ loans

borrowers’ has a significant influence on the repayment of already issued students’ loans,

hence can result into an increase or a decrease in default rate.

The Influence of Attitude

According to Kinsler and Pavan (2011) attitude among loans beneficiaries is defined as a

tendency of loans beneficiaries to respond positively or negatively towards loans repayment,

they further argued that, an attitude influences a loan beneficiaries individual choices towards

repayments hence influences the default rate. Steiner and Teszler (2003) argued that, students

borrowers’ attitude toward debt, default and dissatisfaction with the institution are the reasons

for their default behaviour.

Moreover Baum and O’Malley (2003) concluded that, students’ attitudes were related to

default rate. They continued to support that differences in attitudes towards debts have an

influence on students’ loans default rates. However Mower (2007) contented that apart from

attitude, financial support from, for example families affect more the students’ loans default

rate as students with financial support are less defaulters than those with no financial support

from their families. Likewise McMillion (2004) supported that, income and marital status of

a borrower affects default rate, he further argued that, students’ borrowers who are married

and have a small number of dependants are more repayers than students’ borrowers who are

single and have a big number of dependants.

20
Christman and Monteverde (2000; 2000) supported that, default is primarily influenced by

the borrowers’ willingness and ability to repay termed as attitude, not to anything the

institution is doing. According to Hossler, Gross, Osman and Hillman (2008) defaulters are

associated with different perceptions about borrowing, debts and credit, their perception

enhance and contribute to default rate.

2.1.1.3 Strategies used to reduced loan delinquent Rate

Group Lending Approach

The group lending approach is the main strategy some banks leaders use to reduce loan

default (Bourlès & Cozarenco, 2014; Hadi & Kamaluddin, 2015; Mukherjee, 2014). The

approach has different variations. Bourlès and Cozarenco (2014) found that group lending

was more prevalent in countries with weaker economies where borrowers lacked collateral.

Hadi and Kamaluddin (2015) elaborated that social collateral used in the group lending

approach provided some assurance that the loan recipients would repay the loans. Hadi and

Kamaluddin identified four constructs of trust, network, group pressure, and training as

foundations of the social collateral model. Mukherjee (2014) identified the self-help group

(SHG) model and the joint liability group (JLG) model as two types of group lending models.

In the SHG model, the group interacts with the MFI staff members, and in the JLG model, the

individual group members interact with the banks staff members. Banks leaders need to have

a clear understanding of these differences and variations in group lending to be able to

develop appropriate strategies suitable for the different borrowers to reduce loan delinquent.

The common characteristic of group lending is giving loans to group members without

collateral (Magali, 2013; Nasir, 2013; Siaw et al., 2014; Weber & Musshoff, 2013).

Collateral is a secondary protection a lender requires from a prospective borrower to

guarantee the performance of the borrower on a loan obligation before receiving the loan

21
(Magali, 2013). The borrowers sign a contract agreeing that if they fail to repay the loan, the

lender would possess the collateral stipulated in the loan agreement (Magali, traditional

collateral among poor populations in Bangladesh (Siaw et al., 2014). The bank used low

transaction costs, no collateral, small and short loan repayment intervals, quick loan

approvals with little or no paperwork, and no formalities (Nasir, 2013). An appreciation of

lending without collateral as the backbone of group lending in poor markets may help MFI

leaders to formulate appropriate strategies to reduce loan default while maintaining lending

without collateral, 2013).

Varian Group Lending Conceptual Framework

The Varian group lending model was the conceptual framework for this study. Varian (1989)

developed the group lending model to explain the success of group lending following the

success of the group lending strategy of the Grameen Bank. The Varian model uses three

principles to reduce loan default. The principles include joint liability, collective punishment,

and self-forming groups. These principles provide specific guidelines on how to manage

group lending to reduce loan default.

Principle of joint liability

Through joint liability, each group member is accountable for his or her loan and the loans of

other group members (Varian, 1989). Some researchers have demonstrated that the joint

liability principle plays a significant role in reducing loan default in group lending (Baklouti,

2013; Becchettia & Conzo, 2013; Mookherjee & Motta, 2016; Presbitero & Rabellotti, 2014).

Presbitero and Rabellotti (2014) found that microcredit was a potent tool to foster the build-

up of trust and to reduce informational asymmetries between lenders and borrowers. These

researchers explained that through the joint liability principle, the agency costs of the lender

are reduced or completely removed because of peer screening, forming own groups,

monitoring loan use, and enforcing loan repayment by the group members. In another study,

22
Baklouti (2013) found that MFI operators achieved good repayment records from low‐

income borrowers without requiring collateral because the joint liability principle reduced

information asymmetries and fostered trust among the borrowers.

In another study to investigate the impact of joint liability in a group without family ties,

Becchettia and Conzo (2013) found that the group lending mechanism induced assortative

matching with the consequence that, for group-mate neighbors, they demonstrated trust

through accepting a joint liability. The principle of the assortative matching model is that in

the marriage market, individuals become couples if they positively complement each other

(Becker, 1973). Becchettia and Conzo concluded that reduced loan default was a result of the

joint liability principle because group borrowers select each other based on positive

complementarity. In a related study in Bangladesh, Mookherjee and Motta (2016) showed

that using the information symmetry criteria to serve the requirement of joint liability, MFI

leaders always succeeded in attracting safe borrowers, a conclusion Sun and Im (2015)

arrived at earlier.

Principle of collective sanctions

The second principle of the Varian group lending conceptual framework is that if one or more

members of a group fail to repay their loans, all group members get punished, commonly in

the form of a ban from accessing more loans (Varian, 1989). Varian (1989) also referred to

this rule as the rule of collective punishment. Some researchers have clarified how lender

sanctions contribute to reduced loan default (Becchettia & Conzo, 2013; Chowdhury et al.,

2014; de Quidt et al., 2016; Ibtissem, & Bouri, 2013; Zeija, 2013).

Ibtissem and Bouri (2013) found that the application of the collective punishment principle

was more useful when used to reduce loan default than to simply punish group members

23
because some of the members defaulted on loan repayment. Chowdhury et al. (2014)

corroborated the Ibtissem and Bouri finding and added that some lenders used the collective

sanctions principle strategically by rewarding the groups that made timely loan repayments

with reduced interest rates and increased interest rates for those groups that did not make

timely repayments. Ibtissem and Bouri argued that by varying the interest rates for the good

and the bad performing groups, the lender motivates the bad performing groups to reduce

loan default, without expressly denying further loans to poor performing groups.

Zeija (2013) studied the impact of collective punishment to loan defaulting groups in Uganda

and found that government regulations concerning microfinance activities did not encourage

loan repayment. Zeija observed that laws that seemed more protective of lenders than

borrowers have an adverse impact on loan repayment because borrowers tend to collude with

each other to default on loan repayment. Moving away from the application of sanctions to

defaulting groups, Becchettia and Conzo (2013) and de Quidt et al. (2016) showed that

borrower-group members also applied the sanctions principle amongst themselves to

discourage loan default. While de Quidt et al. demonstrated that social sanctions within

groups discouraged loan default, Becchettia and Conzo gave a deeper explanation that

beyond the monetary incentive-based rationales, the loss of social recognition and self-esteem

that may result from loan non-repayment may be enough reason to discourage loan default.

Studies further explain showed that lenders were sometimes responsible for poor loan

repayment (Allen, 2016; Khavul, Chavez, & Bruton, 2013; Roberts, 2013). Allen (2016)

demonstrated that some lenders turn responsible borrowers into unreliable borrowers when

the borrowers experience an involuntary default. Allen found that when the lenders increase

the penalty for loan default in a joint liability contract, safe borrowers were willing to repay

24
the loans of their colleagues. However, when the penalty became too high, the borrowers

defaulted strategically instead of repaying the loan with a penalty (Allen, 2016). Earlier,

Roberts (2013) found that the objective of microfinance lenders needs to include recognition

that they serve the poor and aim to improve their livelihood, instead of focusing on profits at

any cost. Roberts advised that sanctions need to be differentiated for voluntary and

involuntary strategic defaulters to avoid turning safe borrowers into strategic defaulters. In

another study on the role of lenders in loan default, Khavul et al. (2013) found that lenders

can avoid giving loans to unreliable groups if the lenders use proper strategies to obtain the

creditworthiness of the loan applicants when appraising the loan applications.

Principle of self-forming groups

The third principle of the Varian group lending concept is that prospective borrowers form

own groups (Varian, 1989). Varian (1989) found that when group members selected each

other to belong to a borrowing group voluntarily, they considered their common

characteristics including having a good loan repayment record. Various researchers studied

the role of self-selection of borrower groups in loan repayment (de Quidt et al., 2016;

Lønborg & Rasmussen, 2013; Rajbanshi, Huang, & Wydick, 2015; Wydick, 2016).

In a study on the role of self-selection in the effectiveness of loan repayment among

borrower-groups in Northern Malawi, Lønborg and Rasmussen (2013) found that the

principle had both positive and adverse effects. The positive effect was that when the self-

selection process grouped good members, the group made good loan repayment (Lønborg &

Rasmussen, 2013). The adverse effect, however, was that the principle also brought together

bad members who, normally, perform poorly in loan repayment because they tend to collude

to default strategically (Lønborg & Rasmussen, 2013). In similar studies, de Quidt et al.

(2016) and Wydick (2016) found that self-selection attracted members with similar

characteristics. De Quidt et al. explained that although selfselection also brought together

25
poor performing groups, such groups did not survive longer because lenders became aware of

such groups and removed them from further loans through disqualification or hard borrowing

conditions such as high interest rates. Wydick observed that a proper self-selection process

enhances peer monitoring and reduces loan default.

Peer screening and the subsequent peer selection processes are necessary steps in self-

forming groups (Aggarwal, Goodell, & Selleck, 2015; de Quidt et al., 2016; Gan et al., 2013;

Jafree & Ahmad, 2013). In peer screening and peer selection, prospective group members

choose each other voluntarily based on the knowledge of each other for an agreed purpose

(Gan et al., 2013). Individuals outside the group may not know all the information about a

particular person in the group because of information asymmetry conditions that prevent

members of one group from knowing everything about members of another group. Members

of a group have the privilege of knowing everything about other members in the group

(Aggarwal et al., 2015; Nwachukwu, 2013). Gan et al. (2013) found that when people know

each other (peers), they can choose only those members they know would be trustworthy for

loan repayment. In that regard, peer selection prevents adverse selection (Gan et al., 2013).

Jafree and Ahmad (2013) also found that group lending with joint liability led to the

formation of relatively homogenous groups with either safe or risky borrowers. The logic

behind the tendency to form relatively homogenous groups with either safe or risky

borrowers was that each category attracted like-minded members. The trend occurs because

reliable partners prefer to work with fellow reliable partners while unreliable partners tend to

form a group of unreliable partners through the assortative matching process (Gan et al.,

2013). In group lending, members monitor each other against diversification to ensure easy

monitoring of each other’s businesses to reduce chances of joint liability (Jafree & Ahmad,

2013; Getu, 2015). Peer selection leads to peer monitoring and plays a decisive role in

reduced loan default among the borrowers.

26
Interest Rates

Interest rates are used in most lending transactions because they are the largest source of

income for lenders (Kamath & Ramanathan, 2015). An interest rate is a percentage of the

loan per one year that a borrower promises to pay the lender for the use of the loan (National

Bank of Rwanda, 2015). Expected inflation and default risk premium are the common factors

lenders consider when determining interest rates (Weber & Musshoff, 2013). Interest rates

are higher in the individual lending system than in the group lending system because the

default risk is higher in the individual lending system than in the group lending system

(Tchuigoua, 2014).

Researchers also investigated the role of loan subsidy in determining the interest rate. A

misconception exists among some development advocates that borrowers are poor and need

subsidized loans. Ugbajah and Ugwumba (2013) argued that providing rural farmers with

interest-free credit facilities reduced poverty and propelled the advancement of small-scale

businesses. Sun and Im (2015), however, disproved the misconception that rural people were

unable to pay market interest rates. In a study of rural financial markets in Bangladesh,

Sivachithappa (2013) found that the demand for loans by small farmers remained relatively

inelastic up to an interest rate of about 30%. The Sivachithappa finding contrasted the Guha

and Chowdhury (2013) and that poor borrowers were sensitive to interest rates.

Loan Size

Loan size is one of the important factors that lenders use to reduce loan default in both the

individual and the group lending systems. Loan size is the amount stated in the loan contract

that the borrower agrees to pay back (Kjenstad, Su, & Zhang, 2015). Kodongo and Kendi

(2013) investigated the role of loan size in loan repayment and found that loan size was

inversely related to loan default. Kodongo and Kendi attributed this finding to the practice

27
that MFIs typically extended smaller amounts to individual and younger borrowers, while

group borrowers usually received bigger loans. Kiros (2014) corroborated Kodongo and

Kendi findings that the larger the loan, the less likely the borrower would default. Loan

default reduced among Nigerian farmers when the farmers received bigger loans on time

(Ezihe, Oboh, & Hyande, 2014). The timeliness improved the effectiveness of the use of the

credit to guarantee better proceeds that in turn enabled the farmers to have access to cash for

loan repayment (Ezihe et al., 2014).

Simmons and Tantisantiwong (2014) provided technical explanations why bigger loans

registered lower default rates than smaller loans. Simmons and Tantisantiwong observed that

the loans evolved into increasing size to individual borrowers and that the size of individual

loans tended to be larger than of group loans because an increase in loan size reduced the cost

of the loan. Loan sizes are larger in individual loans because the method does not have peer

pressure (Ojiako & Ogbukwa, 2012). In group lending, consideration of joint liability makes

members avoid large loans that the group insurance would find difficult to cover in case of a

member’s default if the member had a big loan to repay (Kumar, 2012). The freedom that

individual borrowers have to receive any loan size without the peer pressure experienced in

the group lending makes individual lending superior in loan sizes and subsequent repayment

(Kumar, 2012).

Loan size is a significant determinant of loan repayment performance among farmer clients.

In a study to identify loan repayment constraints in Ogun State, Nigeria, Ojiako, Idowu, and

Ogbukwa (2014) found that increasing loan size enhanced loan repayment behavior. Larger

loan sizes increased the borrower farmer’s access to essential inputs and improved farm

management opportunities that led to higher productivity and higher income (Ojiako et al.,

2014). Ezihe et al. (2014), in agreement, established that smaller loans facilitated default

28
because farmers failed to realize higher yield to give them enough profit. Ezihe et al.

recommended that lenders should avail credit of larger loans to enable borrowers to satisfy

the basic farming practices. In agreement with this finding, Chisasa (2014) observed that

implementing full agricultural practices such as the purchase of improved input, the hiring of

labor, and the expansion of farm production gave better productivity results to enable loan

repayment. Rajbanshi et al. (2015) also found that the tendency of giving small loans to

farmers was responsible for the lack of progress in agriculture. The implication of these

findings for the microfinance leader is to understand the nature of investment that borrowers

will engage in to determine the appropriateness of the loan sizes that would facilitate loan

repayment.

Education Levels

Education levels are a critical factor in the success of MFI enterprises. Some researchers

focused on how education levels contributed to reduced loan default (Bauchet & Morduch,

2013; Dary & Haruna, 2013; Muhongayire, Hitayezu, Mbatia, & Mukoya- Wangia, 2013).

The impact of education levels applies to both the lenders and the borrowers. Bauchet and

Morduch (2013) conducted a study in Jordan to assess how education, as a measure of

productivity, reduced loan default. The researchers grouped each respondent into one of six

categories: whether the member could read, had elementary schooling, completed preliminary

education, finished high school, attended a 2-year, or a 4-year college. Bauchet and Morduch

found that groups with higher education levels had more days of late repayment compared to

those with lower education levels. The reason was that more educated groups tended to have

more outside credit options than the less educated and that they did not care much if they lost

one opportunity due to loan default (Bauchet & Morduch, 2013). In a similar finding,

Rehman, Moazzam, and Ansari (2015) found that despite the findings, education has not

helped to resolve social class differentiation because economic and social constraints that

29
prevail in society reinforce gender inequality in the family, the labor market, and in the

society. Siwale (2016) found a similar result among MFI workers in Zambia where MFI

leaders preferred to hire staff members with a maximum of two or three years’ college

education because university graduates were too qualified for MFI work.

By contrast, some researchers found that education was necessary to determine credit access

and repayment (Dary & Haruna, 2013; Muhongayire et al., 2013; Wongnaa & Awunyo-Vitor,

2013). Muhongayire et al. (2013) provided some evidence to demonstrate that some level of

education was necessary to reduce loan default in the microfinance business. As members of

a household got more educated, the family had more access to financing, used it in a

productive venture, and paid back the loan (Muhongayire et al., 2013). Muhongayire et al.

gave another scenario that in Kenya the majority of farmers could not obtain credit because

they did not know how to access or manage credit because of lack of education. Muhongayire

et al. showed that in China,

Pakistan, Uganda, and Zanzibar, participation in credit markets increased with the level of

education of the farmers.

2.1.2 Concept of Financial Performance

Performance measurement and reporting is now widespread across the private sector as well

as public sector of many industrialized and industrializing countries (Williams, 2003). The

common tool that is used for this process, key performance indicators (KPIs), have been

argued to provide intelligence in the form of useful information about a public and private

agency’s performance (Williams, 2003). Scholars like Modell (2004), Moynihan (2005),

Vakkuri and Meklin (2006) have maintained that the implementation of performance

measurement systems possess important symbolic value.

30
Cicea and Hincu (2009) state that commercial banks represent the core of the credit for any

national economy. In turn, the credit is the engine that put in motion the financial flows that

determine growth and economic development of a nation. As a result, any efficiency in the

activities of commercial banks has special implications on the entire economy. The

management of every commercial bank must establish a system for assessing investment

performance which suits its circumstances and needs and this evaluation must be done at

consecutive intervals to ensure the achievement of the Bank's investment objectives and to

know the general direction of the behavior of investment activity in the past and therefore

predict the future.

Profitability offers clues about the ability of the bank to undertake risks and to expand its

activity. The main indicators used in the appreciation of the bank profitability are: Return on

equity, ROE (Net income / Average Equity), Return on Asset, ROA (Net income /Total

assets) and the indicator of financial leverage or (Equity / Total Assets) (Dardac and Barbu,

2005). The indicators are submitted to observation along a period of time in order to detect

the tendencies of profitability. The analysis of the modification of the various indicators in

time shows the changes of the policies and strategies of banks and/or of its business

environment (Greuning and Bratanovic, 2004).

A commonly used measure of bank performance is the level of bank profits (Ceylan, Emre

and Asl, 2008). Bank profitability can be measured by the return on a bank’s assets (ROA), a

ratio of a bank’s profits to its total assets. The income statements of commercial banks report

profits before and after taxes. Another good measure on bank performance is the ratio of pre-

tax profits to equity (ROE) rather than total assets since banks with higher equity ratio should

also have a higher return on assets (Ceylan, Emre and Asl, 2008).

31
2.1.3 Conceptual Framework

Figure 1: Determinants of Loan defaults and its effect on financial performance

Ownership characteristics

Financial Performance
Return on Asset
Equity / Total Assets

Borrower characteristics

Loan-specific factors

Lender characteristics

Source: Author Computation (2021)

2.2 Theoretical Framework

2.2.1 Modern Portfolio Theory

Modern Portfolio Theory is an investment framework for the selection and construction of

investment portfolios based on the maximization of expected returns of the portfolio and the

simultaneous minimization of investment risk (Fabozzi, Gupta, & Markowitz, 2002). Overall,

32
the risk component of Modern Portfolio Theory can be measured, using various mathematical

formulations, and reduced via the concept of diversification which aims to properly select a

weighted collection of investment assets that together exhibit lower risk factors than

investment in any individual asset or singular asset class. Diversification is in fact, the core

concept of Modern Portfolio Theory and directly relies on the conventional wisdom of “never

putting all your eggs in one basket” (Fabozzi, Gupta, & Markowitz, 2002; McClure, 2010;

Veneeya, 2006).

Modern portfolio theory tries to look for the most efficient combinations of assets to

maximize portfolio expected returns for given level of risk (McClure, 2010). Alternatively,

minimize risk for a given level of expected return. Portfolio theory is presented in a

mathematical formulation and clearly gives the idea of diversifying the assets investment

combination with a purpose of selecting those assets that will collectively lower the risk than

any single asset. In the theory, it clearly identifies this combination is made possible when the

individual assets return and movement is opposite direction (Veneeya, 2006). An investor

therefore needs to study the value movement of the intended asset investment and find out

which assets have an opposite movement. However, risk diversification lowers the level of

risk even if the assets’ returns are not negatively or positively correlated.

The modern portfolio theory explains ways of maximizing return and minimizing risk by

carefully choosing different assets (McClure, 2010). The Primary principle upon which the

modern portfolio theory is based is the random walk hypothesis which states that the

movement of asset prices follows an unpredictable path: the path as a trend that is based on

the long-run nominal growth of corporate earnings per share, but fluctuations around the

trend are random. Since the 1980s, banks have successfully applied modern portfolio theory

33
(MPT) to market risk. Many financial institutions are now using value at risk (VAR) models

to manage their interest rate and market risk exposures (Veneeya, 2006). Unfortunately,

however, even though credit risk remains the largest risk facing most banks, the practical of

MPT to credit risk has lagged.

The framework for Modern Portfolio Theory includes numerous assumptions about markets

and investors. Some of these assumptions are explicit, while others are implicit. Markowitz

built his portfolio selection contributions to modern portfolio theory on the following key

assumptions (Markowitz, 1959): investors are rational (they seek to maximize returns while

minimizing risk); investors are only willing to accept higher amounts of risk if they are

compensated by higher expected returns; investors timely receive all pertinent information

related to their investment decision; investors can borrow or lend an unlimited amount of

capital at a risk free rate of interest; markets are perfectly efficient; markets do not include

transaction costs or taxes; and it is possible to select securities whose individual performance

is independent of other portfolio investments. These foundational assumptions of modern

portfolio theory have been widely challenged. Many of the criticisms leveled at the theory are

discussed later in this essay.

Modern portfolio theory maintains that “the essential aspect pertaining to the risk of an asset

is not the risk of each asset in isolation, but the contribution of each asset to the risk of the

aggregate portfolio” (Royal Swedish Academy of Sciences, 1990). Risk of a security can be

analyzed in two ways: stand-alone basis (asset is considered in isolation), and portfolio basis

(asset represents one of many assets). In context of a portfolio, the total risk of a security can

be divided into two basic components: systematic risk (also known as market risk or common

34
risk), and unsystematic risk, also known as diversifiable risk. Modern Portfolio Theory

assumes that these two types of risk are common to all portfolios.

Risk and Return trade-off relates to modern portfolio theory’s basic principle that the riskier

the investment, the greater the required potential return. Generally speaking, investors will

keep a risky security only if the expected return is sufficiently high enough to compensate

them for assuming the risk (Ross, Westerfield & Jaffe, 2002). In modern portfolio theory, risk

is synonymous with volatility, the greater the portfolio volatility, the greater the risk.

Volatility is the amount of risk or uncertainty related to the size of changes in the value of a

security. This volatility is measured by a number of portfolio tools including: calculation of

expected return; the variance of an expected return; the standard deviation from an expected

return; the covariance of a portfolio of securities, and the correlation between investments

(Ross, Westerfield & Jaffe, 2002).

It suggests that it is not enough to look at expected risk and return of a particular stock, but by

investing in more than one stock, an investor can reap the benefits of diversification,

particularly a reduction in the riskiness of a portfolio. MPT quantifies the benefits of

diversification also known as not putting all your eggs in one basket. It considers that, for

most investors, the risk they take when they buy a stock is that the return will be lower than

expected. In other words, it is the deviation from the average return. Each stock has its own

standard deviation from mean which MPT calls it risk. Markowitz theory asserts that, the risk

in a portfolio of diverse individual stock will be less than the risk inherent in holding any one

of the individual stocks provided the risk of the various stocks are not directly related. He

showed that investment is not just about picking stocks, but about choosing the right

combination of stocks which to distribute ones’ nest egg (Seibel, 2006).

35
An increasing body of analytical work has attempted to explain the functioning of credit

markets using new theoretical developments. Challenging the model of competitive

equilibrium, they have explored the implications of incomplete markets and imperfect

information for the functioning of credit markets in developing countries. These provide a

new theoretical foundation for policy intervention. . In this explanation, interest rates charged

by a credit institution are seen as having a dual role of sorting potential borrowers and

affecting the actions of borrowers. Interest rates thus affect the nature of the transaction and

do not necessarily clear the market. Both effects are seen as a result of the imperfect

information inherent in credit repayment. In an attempt to identify borrowers with high

probability of repayment, banks are likely to use the interest rates that an individual is willing

to pay as a screening device. Since the bank is not able to control all actions of borrowers due

to imperfect and costly information, it will formulate the terms of the loan contract to induce

borrowers to take actions in the interest of the bank and to attract low risk borrowers. The

result is an equilibrium rate of interests at which the demand for credit exceeds the supply.

Other terms of the contract, like the amount of the loan and the amount of collateral, will also

affect the behavior of borrowers and their distribution, as well as the return to banks (Moti et

al., 2012).

Raising interest rates or collateral in the face of excess demand is not always profitable, and

banks will deny loans to certain borrowers. Since credit markets are characterized by

imperfect information, and high costs of contract enforcement, an efficiency measure as

exists in a perfectly competitive market will not be an accurate measure against which to

define market failure. These problems lead to credit rationing in credit markets, adverse

selection and moral hazard. Adverse selection arises because in the absence of perfect

information about the borrower, an increase in interest rates encourages borrowers with the

36
most risky projects, and hence least likely to repay, to borrow, while those with the least risky

projects cease to borrow (Ewert et al., 2000).

Interest rates will thus play the allocation role of equating demand and supply for loan funds,

and will also affect the average quality of lenders’ loan portfolios. Lenders will fix the

interest rates at a lower level and ration access to credit. Imperfect information is therefore

important in explaining the projects have identical mean returns but different degrees of risk,

and lenders are unable to discern the borrowers’ actions. An increase in interest rates

negatively affects the borrowers by reducing their incentive to take actions conducive to loan

repayment. This will lead to the possibility of credit rationing (Boland, 2012).

2.2.2 Institutional Theory

This theory embraces the role that financial institutions have in providing knowledge of the

services those they offer. North (1990) defines institutions as the human constraints that

structure political, economic and social interaction. From this perspective, the quality of

institutions is likely to affect financial inclusion through the ability of the financial market to

channel resources to finance productive activities. Whereas better institutions can facilitate

access to finance by overcoming the effects of information and transaction cost, the converse

can also be expected when institutions are weak. According to Ford, Baptist, and Archuleta

(2011), it disapproves that the financial market is frictionless.It embraces a world in which

organizations, networks, norms, and rules construct parameters of the partnership between

service providers and consumers. The theory emphasizes on the role that financial institutions

have to play in the provision of knowledge to improve behavior among financial services

consumers.

37
Anayiotos and Toroyan (2009) show that financial sector across SSA economies operate

within weak institutional environments. The region is characterised by weak judicial systems,

bureaucracy, law and order, and property rights (Creane et al., 2004). Of the 35 SSA

countries covered in the 2017-2018 Global Competitiveness Index, 26 score below 4 in terms

of institutions index, which covers judicial independence, protection of property rights,

burden of government regulation, among other variables, placing them among the worst 51

countries. Additionally, 39 of the 48 countries that are covered by the 2017 Economic

Freedom Index (of the Heritage Foundation) are considered either “mostly unfree” or

“repressed”.The uncertainty associated with an unstable political environment adversely

affects financial inclusion by lowering the rates of financial innovations and banking

infrastructure.

Financial knowledge is vital for sound financial behavior. There is an argument by several

scholars including Bakker (2011) that financial education is supposed to be a part of the

curriculum at the primary level so that the rural community can get basic financial education

in such a way that it can employ the skills and knowledge into everyday practice. It is only

through this strategy that Cameroon can transform itself into a middle-class economy. The

education programs can play a critical role in the creation of attitudes and awareness for

Cameroonians through which they can adopt good financial management practices. At the

individual level, Cameroonians will also be able to utilize their sources effectively and

choose the services and products that best meet their needs. Remmele(2016) states that

financial literacy holds the future for the African community. It is applicable to the

Cameroonian situation because financial services are a vital part of the society.

38
2.2.3 Human Capital Theory and Loans Default Rate

Argued by Barr (2009) expenditure on education is treated as an investment according to

human capital theoryand not as a consumer item. According to Snooks (2008) an individual

is acquiring this human capital through schooling, post school investment and on job training.

Becker (1965) view human capital as directly useful in the production process increases a

worker’s productivity in all tasks, through possibly differentially in different tasks,

organizations and situations. However Ishengoma (2004a) argued that, investigation on the

influences of default rate in students’ loans is a major focus in Tanzania because of the

believe in human capital theory. Decrease in default rate will ensure availability of fund to

support higher education through provision of students’ loans to the needy students. Snook

(2008) continued to argue that, students’ loans will enhance an educated population within

the country which will contribute to the economic development of the country. Olaniyan and

Okemakinde (2008) supported that human capital theory assumes that education is a vital

factor for improvement of production capacity of the population.

Strong and well-built human capital is the key to succeed in the global economy Palacio,

(2002), this strong human capital is achieved through higher education. According to

Chapman (2008) defaulters characteristics affecting repayment is a major source of poor

repayment which may results into unavailability of fund to support the students’ loans

scheme. Carnoy (2006) supported that age, gender and attitudes towards students’ loans

among loans beneficiaries are among the factors affection the repayments of the issued

students’ loans fund .According to Olaniyan and Okemakinde (2008) many developing

countries are aware that investing on higher education is a principle mechanism for

development of human knowledge, thus this justifies the need for investigating on the

39
defaulters characteristics influencing the students’ loans default rate in Tanzania so as to find

a way to achieve the human capital for the country development.

Fagerlind and Saha (1989) commented that, assumptions of human capital theory result into

suggestions that cost of education should be borne by the beneficiaries or the recipient and

not solely the state. This justifies the reason why the state and beneficiaries should share the

cost of higher education through cost sharing. Mora and Vila (2003) supported that, the

government has limited resources given a lot of demands from other public sectors apart from

education example health and defense sector. They continued to argue that, beneficiaries

should bear this cost though proper repayment which can be achieved through reduction of

default rate among loans beneficiaries by taking care of the characteristics associated with

defaulting among students’ loans beneficiaries.

According to Carnoy (2006) pre-college characteristics associated with students’ loans

beneficiaries are important influencing factors on repayments hence affecting default rate.

However Callender (2003) supported that age, gender and attitude among loan beneficiaries

should be controlled for maximum repayment and for support of human capital theory

assertation concerning enhancement of equity within the country. He continued to argue that,

availability of fund through repayment will enhance attainment of higher education to people

from low income group society hence reduce inequality within the country. In this regard

Barr and Crawford (2005) stated that, by availability of funds through repayments to support

higher education, inequalities can be reduced through increased participation in higher

education which results into country’s economic growth.

According to Eicher and Chevaillier (2002a) increased repayment by reduction of default rate

through controlling the characteristics associated with default rate among loans beneficiaries

results into efficiency in provision of students loans hence improvement in human capital

investment, improvement of occupation and income, contribution to the productivity of the

40
workers as well as reduction of the social inequalities. However the human capital theory

concepts which advocate that improvement in human investment through education will

results into improvement in occupation and income has been criticized by Psacharopoulos

and Patrinos (2002) who argues that sometimes improvement in education and income

depends much on other factors such as number of years in service, which is also true for the

case of Tanzania.

Eicher and Chevaillier (2002b) supported that, improvement in human capital through

education does not always contribute to the productivity of the workers and the reduction of

the social inequalities. This is because workers productivities can be affected by other factors

apart from improved education, for example job satisfaction, reward structures, motivations

as well as other personal characteristics. They further argued that, improvement in

educational investment is assumed to decrease the social inequalities by rising income of

people from different backgrounds, this is proved to be not always the case because under

certain circumstances rising income may lead to inequalities in income distribution within the

society.

Therefore, for economic development of the country, there is a need to develop human

capital. Students’ loans schemes in many developing countries resulted in high defaults due

to non-repayment of the amount of loans given to students. Due to this situation the poor

students’ loans scheme can lead to deterioration of the economy due to the loss of economic

revenues. This call for a need to careful implement the students’ loans schemes which can

recover the loans through repayments efficiently by taking into accounts the borrowers’

characteristics affecting students’ loans default rate which includes among others the

borrowers’ age, gender and attitude. Moreover a financially sustainable students’ loans

scheme is the key factor for improvement in the access to higher education so that the human

capital can participate efficiently in the economic progress of the country.

41
2.2.4 Capability Theory

This theory broadly focuses on the relationship and well-beings of humans and individual-

agency. It primarily highlights the ability of the individual in accessing and benefiting from

financial services provided by institutions (Ford, Baptist, and Archuleta, 2011). People have

the responsibility to seek the opportunities presented by financial service providers. Financial

capability refers to possessing a level of understanding of financial matters to take effective

action achieving individual and family financial goals.

The term “financial capability” was first used in a national survey in the UK (Atkinson et al.,

2006). Later, many developed and developing countries conducted similar surveys using

“financial capability” as the label. Before the 2006 UK financial capability survey, many

countries, including the UK, conducted national surveys with the label “financial literacy.” In

the research literature, researchers emphasized the importance of financial literacy in

financial capability. Financial literacy, not only implies a certain level of financial

knowledge, but also an ability to apply the knowledge in action (Huston, 2010). In recent

years, researchers have referred to financial capability as an ability to manage money well by

performing desirable behaviors (Atkinson et al., 2006 and Taylor, 2011). Both financial

literacy and behavior are important components of financial capability (Xiao et al., 2014b

and Xiao et al., 2015). In summary, financial capability should imply a certain level of

financial knowledge and the performance of desirable financial behaviors for achieving

financial well-being.

It is widely reported in literature that individuals with lower education levels including those

without a university (college) education have lower financial literacy and/or lack the

necessary numeracy skills (Lusardi and Mitchell, 2007a, 2013). Factors such as parent’s

education levels and the children’s financial literacy are significantly correlated (Lusardi et

42
al. 2010; Mahdavi, 2012). Knowledge and exposure to parent’s financial behaviours such as

saving and investing (Chiteji & Stafford, 1999; Li 2009; Shim et al., 2009) as well as whether

their parent’s held stock and retirement accounts when they were teenagers (Lusardi et al.

2010) have also been reported to have an impact on an individuals’ financial literacy.

Furthermore, Berheim and Scholz (1993) report very strong correlations between education

and wealth accumulation. With regards to gender, Mahdavi (2012) reports that even well

educated women have low financial literacy. The literature suggests that background factors

have an impact on an individual’s financial capability. Suffice to say that an educated,

employed male living in an urban area to be more financially capable than his peers (Lusardi

& Mitchell, 2009; Klapper & Panos, 2011) especially if his parents were educated (Lusardi et

al., 2010).

The level of financial know-how is higher in urban areas than in the rural community. It is

imperative to note that with the constant rising costs of living, people, especially the rural

populace; must comprehend the importance of living within their budget. Other concepts of

financial literacy that are vital are how to responsibly borrow, save, stay out of debt, and

make informed choices about the use of financial resources that a person has.

2.3 Empirical Literature Review

Borrowers’ characteristics are attributes borrowers should have if they are to benefit from

or access micro credit institution services easily (Nyangiru et al., 2014). Accessibility to

credit by the borrowers will depend on the seriousness MFIs attach to the borrowers’

characteristics before extending credit to clients (Nanayakkara and Stewart, 2015). For

instance, borrowers who own assets will easily access credit since it reduces the risk of the

43
institution losing its funds. These characteristics include demographic characteristics (age,

gender, education, marital status, experience, training and number of times an applicant has

ever borrowed a loan from the MFI), ability to pay and assets owned by the borrower.

According to Nawai and Shariff (2010) for any credit scheme to operate effectively, it is

important to know the character of borrowers in relation to payment. This calls for investing

in information gathering by MFIs on their potential borrowers and always be mindful when

setting performance targets against giving of credit to borrowers. The pay period and

method of paying back Ssekiziyivu et al. 3 should be determined early and

understood by both parties (lender and borrower) since the payback period can be used as a

decision criterion to accept or reject the investment proposals (Nanayakkara and Stewart,

2015).

Bhatt and Tang (2011) looked at the borrower’s socio economic variables for their

influence on loan repayment. The borrower’s socioeconomic variables included gender,

educational level, household income and characteristics of the business (type of business,

years in business, among others). In their study, Bhatt and Tang (2011) found out that

a higher education level was significant and positively related to better repayment

performance. Conversely, female borrowers, level of household income, type of business

and borrower’s experience had no significant effect on repayment performance (Bhatt

and Tang, 2011). While Pasha and Negese (2014) carried out research in Ethiopia to

determine the factors affecting loan repayment among MFIs and found out that the education

level was positively and significantly influencing loan repayment at 1% significance level,

an increase in one year schooling increases the probability of the loan repayment rate by

4.939%. This implies that the borrowers whose educational level is higher say university

degree have the probability of loan repayment four times more than the borrowers who

have lesser education level say primary education or illiterates.

44
Awunyo-Vitor (2012) indicated that the probability of a loan repayment was higher for males

than the females. Awunyo-Vitor (2012) further argued that, male borrowers had experience

in accessing microcredit than their female counterparts. Contrary, Roslan and Abdul Karim

(2009) investigated microcredit loan repayment in Malaysia and in their research, they

found that male borrowers who had a longer duration for repayments had a higher

probability of defaulting. Borrowers involved in non-production oriented business

activities such as in the service or the support sectors, who had training in their particular

business and who borrowed higher loans had lower probabilities of defaulting (Roslan and

Abdul Karim, 2009).

Ifeanyi et al. (2014), studied loan repayment of small holder cooperative farmers in

Nigeria and a negative association was found between age and repayment ability of

respondents, implying that younger farmers were more likely to repay credit than older ones.

Thus, in this study, we try to reaffirm the relationship between borrowers’

characteristics and loan repayment performance by hypothesizing that: HI: There is a

positive relationship between borrowers’ characteristics and loan repayment performance

in the Ugandan MFIs .

According to Ross et al. (2008), in advancing loans, credit standard must be emphasized such

that the credit supplier gains an acceptable level of confidence to attain the maximum amount

of credit at the lowest as possible cost. Credit standards can be tight or loose (Moti et al.,

2012). Tight credit standards make a firm lose a big number of customers and when credit are

loose the firm gets an increased number of clients but at a risk of loss through bad debts. A

loose credit policy may not necessarily mean an increase in profitability because the

increased number of customers may lead to increased costs in terms of loan administration

45
and bad debts recovery. In agreement with other scholars. Horne (2007), advocated for an

optimum credit policy, which would help to cut through weaknesses of both tight and loose

credit standards so, the firm can make profits. This is a criteria used to decide the type of

client to whom loans should be extended.

Cooper et al. (2003) noted that it’s important that credit standards be basing on the individual

credit application by considering character assessment, capacity condition collateral and

security capital. Character it refers to the willingness of a customer to settle his obligations

(Richard et al., 2008) it mainly involves assessment of the moral factors. Social collateral

group members can guarantee the loan members known the character of each client; if they

doubt the character then the client is likely to default. Saving habit involves analyzing how

consistent the client is in realizing own funds, saving promotes loan sustainability of the

enterprise once the loan is paid. Other source should be identified so as to enable him serve

the loan in time. This helps micro finance institutions not to only limit loans to short term

projects such qualities have an impact on the repayment commitment of the borrowers it

should be noted that there should be a firm evidence of this information that point to the

borrowers character (Chijoriga, 2011).

According to Boldizzoni (2008) the evaluation of an individual should involve; gathering of

relevant information on the applicant, analyzing the information to determine credit

worthiness and making the decision to extend credit and to what tune. They suggested the use

of the 5Cs of lending. The 5Cs of lending are Capacity, Character, Collateral, Condition and

Capital. Capacity refers to the customer’s ability to fulfill his/her financial obligations.

Capacity, this is subjective judgment of a customer’s ability to pay. It may be assessed using

a customer’s ability to pay. It may be assessed using the customer’s past records, which may

46
be supplemented by physical or observation. Collateral is the property, fixed assets, chattels,

pledged as security by clients. Collateral security, This is what customers offer as saving so

that failure to honor his obligation the creditor can sell it to recover the loan. It is also a form

of security which the client offers as form of guarantee to acquire loans and surrender in case

of failure to pay; if borrowers do not fulfill their obligations the creditor may seize their asset

(Latifee, 2006).

According to Craig (2006), security should be safe and easily marketable securities apart

from land building keep on losing value as to globalization where new technology keeps on

developing therefore lender should put more emphasis on it. Capital portends the financial

strength, more so in respect of net worth and working capital, evaluation of capital may be by

way of analyzing the balance sheet using the financial ratios. Condition relates to the general

economic climate and its influence on the client’s ability to pay. Condition, this is the impact

of the present economic trends on the business conditions which affects the firm’s ability to

recover its money. It includes the assessment of prevailing economic and other factors which

may affect the client ability to pay (Miller & Noulas, 1997).

Appraisal of clients is a basic stage in the lending process. Ross et al. (2008) describes it as

the ‘heart’ of a high quality portfolio. This involves gathering, processing and analyzing of

quality information as way of discerning the client’s creditworthiness and reducing the

incentive problems between the lenders as principals and the borrowers as agents. The bank’s

credit policy, procedures and directives guide the credit assessment process. Banks should

base their credit analysis on the basic principles of lending which are Character, Capacity,

Capital, Collateral and Conditions (Moti et al., 2012). It is designed to ensure lenders take

actions which facilitate repayment or reduce repayment likely problems. This information

47
about the riskiness of the borrower makes the financial institution to take remedial actions

like asking for collateral, shorter duration of payment, high interest rates and other form of

payment (Abedi, 2000) when a financial institution does not do it well, its performance is

highly affected.

Abedi (2000) stressed the importance of credit analysis when he observed that its

abandonment often resulted into several banks using credit card to process. The variables,

according to Ross et al., (2008) included the length of time taken to process applications,

credit experience, proportion of collateral security to the loan approved. It was found out that

long waiting time reflected a shortage of credible credit information required to make

informed credit decisions. This in turn leads to greater risk more intense credit rationing and

low repayment rates. Horne (2007) also observed that loan experience indicated the ability to

manage the business loans better hence good quality borrowers for the business. A less

experienced borrower has less ability to manage a business loan and therefore is not credit

worthy (Moti et al., 2012; Frank et al., 2014). This implies that there are big risks associated

with new borrowers since the loan officer has no familiarity of recovery from them.

According to Latifee (2006) on the management of credit risk, the following was observed:

Many credit problems reveal basic weaknesses in the credit granting and monitoring

processes. While shortcomings in underwriting and management of market-related credit

exposures represent important sources of losses at banks, many credit problems would have

been avoided or mitigated by a strong internal credit process. They noted too that many banks

find carrying out a thorough credit assessment (or basic due diligence) a substantial challenge

(Boldizzoni, 2008). For traditional bank lending, competitive pressures and the growth of

loan syndication techniques create time constraints that interfere with basic due diligence.

48
Globalization of credit markets increases the need for financial information based on sound

accounting standards and timely macroeconomic and flow of funds data.

According to Basel (2004), one of the features that banks deliberate when deciding on a loan

credit application is the estimated chances of recovery. To arrive at this, credit information is

required on how well the applicant has honored past loan obligations. This credit information

is important because there is usually a definite relationship between past and future

performance in loan repayment. Chijoriga (2011) in a study of the response of National Bank

of Kenya Ltd. to challenges of non-performing loans concludes that the reliance of the bank

on qualitative credit analysis methods that entails such factors as character of the borrower,

reputation of the borrowed and the historical financial capability of the borrower as opposed

to the used of quantitative techniques that emphasized on the borrowers projected cash flows

and analysis of audited financial books of accounts have contributed to immensely to the non-

performing loan portfolio.

Credit terms have been understood to mean collateral, repayment periods and interest rate

(Ayyagari et al., 2003). Collateral is the security given by a borrower to a lender as an

assurance that the loan will be paid and operates as a broad insurance against uninsurable risk

or intentional default leading to non-payment of the loan. Loan repayment period is the time

in which the borrower should repay the loan (Nkundabanyanga, 2014). Interest rate is the rate

which is charged or paid for the use of money and is used as a means of compensating banks

for taking risk. According to Stiglitz and Weiss (1981), credit terms are part of a general

exercise to help determine the extent of risk for each borrower. According to Malimba and

Ganesan (2009), grace period, collateral, interest rate charges and number of official visits to

the credit societies, have a strong effect on loan repayment. Nkundabanyanga et al. (2014),

49
found out that the higher interest rates induce firms to undertake projects with lower

probability of success but higher pay offs when they succeed.

Nanayakkara and Stewart (2015) further indicated that since the financial institution is not

able to control all actions of borrowers due to imperfect and costly information, the MFI will

formulate terms of the loan contract to induce borrowers to take actions in the interest of the

financial institution and to attract low risk borrowers. According to Ifeanyi et al. (2014), the

interest rate has an effect on the use, repayment of the loan and the overall performance of the

business. When the interest rate charged is high, there is a tendency for the borrowers to keep

part of the borrowed money to pay the interest or to use the business capital to pay the

interest. Malimba and Ganesan (2009) further argue that interest on borrowing is one of the

costs of production. The higher the interest rate the higher the likelihood of loan repayment

default as the costs of servicing the loan increase. Anderson (2002) indicated that an increase

in interest rates negatively affects the borrowers by reducing their incentive to take actions

that are conducive to loan repayment.

According to Makorere (2014), Grace period is the period given by the financial institution to

the borrower before the first installment is due. In other words, it is considered to be the time

between when the loan was disbursed to the loan applicant and when the first installment is

paid. While conducting a study in Tanzania, Makorere (2014) found out that most of the

financial institutions tend to provide a grace period of one month only, which was seen not to

be sufficient for the small business enterprise owners to start realizing enough revenue for

them to start paying their loans. Makorere (2014) further found out that businesses that get

enough grace period have never defaulted. Woolcock (1999) observed that if the loan term is

too short, the borrower fails to generate revenue to enable him/her make repayments while a

50
longer loan term may make the client extravagant and the client may in the end fail to pay

back.

The findings made by Atieno (2001), indicates that stringent lending terms discourage

borrowers to apply for bank debt even when they are searching for finance to execute

valuable investment projects. For example, pledging business collateral limits the firms’

ability to obtain future loans from other lenders which creates a position of power for the

lending bank (Mann, 1997). According to Atieno (2001), collateral value requirements deter

SME borrowers from seeking credit. Stiglitz and Weiss (1981) found out that SMEs hesitate

to seek credit when they do not understand why requirements like collateral are imposed on

them. Banks, however, prefer borrowers with collateral.

Ifeanyi et al. (2014) observed that commercial banks usually provide larger loans, longer

repayment periods and lower interest rates when borrowers offer collateral. This means that a

borrower who cannot provide the type of assets lenders require as collateral often gets worse

loan terms than otherwise. Indeed Atieno (2001) notes that borrowers who provide more

collateral receive a better rating. Access to finance is particularly difficult for SMEs with

insufficient collateral that do not have any established track record or credit history.

Nevertheless, some studies (Ayyagari et al., 2003; Nkundabanyanga, 2014) indicate that

higher availability of collateral is expected to increase the supply of bank debt as collateral

can mitigate the information asymmetries between the borrower and lender. This means that

commercial banks’ requirement for collateral positively affects access to formal credit where

collateral is readily available. Contrarily, where collateral is not readily available, the demand

for it will negatively affect access to formal credit. In the majority of studies, this distinction

has not always been made explicit.

51
Collection procedure is required because some clients do not pay the loan in time some are

slower while others never pay. Thus collection efforts aim at accelerating collections from

slower payers to avoid bad debts. Prompt payments are aimed at increasing turn over while

keeping low and bad debts within limits (Malimba and Ganesan, 2009). However, caution

should be taken against stringent steps especially on permanent clients because harsh

measures may cause them to shift to competitors. Anderson (2002) states that collection

efforts are directed at accelerating recovery from slow payers and decreases bad debts

losses .This therefore calls for vigorous collection efforts .The yardstick to measurement of

the effectiveness of the collection policy is its slackness in arousing slow paying customers.

2.4 Knowledge Gap

There have been attempts in the past to study Micro financing and Micro lending but much

focus has been on the impact of MFIs in poverty alleviation. Other studies done focused on

determinants of loan repayments among commercial banks. However, microfinance

institutions have been evolving with time to become like banks although founded upon

microfinance institutions principle. The reviewed studies have confirmed that loan default is

catastrophic in most microfinance institutions. Not much has been done to find out causes of

loan default in MFIs institutions in Cameroon, therefore this research addresses that gap.

52
 CHAPTER THREE

METHODOLOGY OF THE STUDY

This section high lights the technique that was employed in conducting the study. It spells

out the Area of the Study, Research Design, and Population of the Study, Sampling Design

and Sampling Technique, Methods of Data Collection, Methods of Data Analysis and

Presentation, Validation of the Instrument andLimitation of the Study.

3.1 Scope and Area of the Study

The Northwest Region of Cameroon is one of the 10 Regions that constitute the territorial

constituency of Cameroon. Geographically, the northwest region is part of the territory of the

Southern Cameroons, located in the Western Highlands of Cameroon, bordered to the

southwest by the South West Region, to the South by the West Region, to the East by the

Adamawa Region and to the North by the Federal Republic of Nigeria. The Northwest

Region known before 2008 as the Northwest Province is the third most populated region in

Cameroon. It has one major metropolitan city, Bamenda, with several other smaller towns

emerging. The total surface area of Bamenda is 22.9 Km2 hectares and its estimated

population stands at 105.244 (according to projection by CAMGIS in Minimum Urban Local

Development Scheme (SMAUL) February 2008). The North West region is known for its

cool climate and scenic hilly location. The population has considerably decreased over the

last four years due to insecurity issues caused by the Anglophone crisis. The influxes of

migrants from the various divisions in the region have flooded the Bamenda city; the

economic and political headquarter of the region causing an increased in the city’s

population.

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The Northwest region is made up of seven divisions (07) which are; Mezam, Momo,

Menchum, Boyo, Ngoketunja, Bui and Donga Mantum divisions respectively. The Bamenda

city is not only the administrative headquarters of Mezam division but also the

administrative, economic and political headquarters of the Northwest region. In terms of

microfinance institutions, the North West Region of Cameroon and its divisions have the

greatest number microfinance institutions, below is an extract of the microfinance institutions

in Mezam Division.

Table 1: Microfinance Institutions in Mezam Division of Cameroon

S/N Name of MFI Address

1 Cameroon Cooperative Credit Union League B.P. 211 Bamenda

Ltd (CAMCCUL)

2 AGYATI Cooperative Union LTD AGYATI-BAFUT/TUBAH

(AGYACCUL) B.P. 2097 BAFUT

3 AKUM Zone Cooperative Union (AZCCUL) Mile 6 AKUM (SANTA)

B.P 38 Bamenda

4 ANINGDOH Cooperative Credit Union Bamenda 1 up station

(ANICCUL) B.P. 211 Bamenda

5 AWING Cooperative Credit Union (ACCUL) SANTA

6 BALI Central Cooperative Credit Union LTD BALI Center

(BACCUL) B.P 104 BALI

7 BAMBUI Cooperative Credit Union BAMBUI Town

(BAMCCUL) B.P. 5134 NKWEN

8 BAMENDA Business Women Cooperative Cow Street Nkwen

Credit Union (BWSCC)

9 BAMENDA Police Cooperative Credit Union Commercial Avenue Bamenda

54
 (BAPCC)

10 BAYELLE Cooperative Credit Union Nkwen Bamenda

(BACCUL) B.P. 5129 Bamenda

11 CCAST Agricultural Cooperative Union BAMBILI (BAFUT)/MANKON

(CCAST) B.P. 80 BAMENDA

12 CHOMBA Cooperative Credit Union Bamenda

(CHOCCUL)

13 MITANYEN Cooperative Credit Union SONAC STREET Mankon

(MITACCUL) Bamenda

B.P. 205 Bamenda

14 NKWEN  Cooperative Credit Union NKWEN FON’S Palace

B.P. 520 BAMENDA

15 TADKON Cooperative Credit Union Commercial Avenue

(NTACCULL) B.P. 211 Bamenda

16 TIKAR COOPERATIVE CREDIT UNION BAMENDA

LTD T-CCUL)

17 People for Health Cooperative Credit Union BAMENDA

LTD (PHECCUL)

18 ETWII-NGIE Cooperative Credit Union LTD BAMENDA

(ETICCUL)

19 MENKA GREEN VALLEY Cooperative BAMENDA

Credit Union LTD (MGVCCUL)

20 TIKAR Cooperative Credit Union BAMENDA

21 PAPLAKUM Cooperative Credit union BAMENDA

Limited (PACCUL)

22 Caisse Populaire Coopérative des Jeunes au BAMENDA

Cameroun (CAMYISCCUL)

55
23 Ntarinkon Cooperative Credit Union limited Ntarikon Bamenda

(NtaCCUL)

24 Azire Cooperative Credit Union Limited Azire Bamenda

(AziCCUL)

Source: National institute of statistics for the North West region 2021

3.2 Research Design

The study adopted a quantitative survey design, non-experimental and cross sectional in

nature. The unit of analysis was bank customers found within the bank vicinity and loan

officers of the 24 selected microfinance institutions in Mezam. Quantitative research design

was adopted because it describes the study phenomena in terms of numbers and non-

experimental design, which allows analysis using statistical methods to generate descriptive

statistics (Creswell, 2009). Nelly (2010) defined quantitative design as an approach, which

quantifies responses in numbers instead of explanations. The design was considered

appropriate for the study due to the need to collect data from the larger sample to establish

the effect loan repayment default and financial performance of micro-finance institutions

in Mezam division - Cameroon

3.3 Data Collection

Data collection is a course of action of assembling empirical facts and statistics in

pursuance of insights concerning a particular situation and answering the questions that

instigate undertaking of a research (Healey, 2014).

56
3.3.1 Primary data

. Primary data used to conduct the study are collected through the administering of

questionnaires in order to get together the necessary data for the study. Questionnaires were

prepared in English language and carried closed ended questions. These questionnaires were

exploratory in nature to help respondents easily share their views. Taking into consideration

the nature of the study, it is impossible to reach the entire population. Hence, a few

individuals are considered.

3.3.2 Secondary data

Secondary data were collected through documentary sources including: MFIs annual reports

related to loan default problem, journals (published and unpublished) and websites.

Unpublished documents were management and supervisors‟ reports concerning loan defaults.

Published documents were Annual Financial reports, journals and other related documents.

Secondary data provided a list of loan defaulters only from individual lending model from

2017 to 2021. In group lending model, defaulters are not known to the MFI since the group is

required to make a full loan repayment regardless of any default in the group.

3.4 Sampling Technique

Sampling is a technique for the selection of units in a given population of interest in which

the results obtained can be used to generalize the sampled population. It is a method of

selecting a population subset with all population features that is consistent with the

measurement techniques. The sample of the study was selected using convenience sampling

together with simple random sampling method which means all respondents have an

57
opportunity of being chosen. Random sampling is a part of the sampling technique in which

each sample has an equal probability of being chosen (Krista, 2014). A sample was chosen

randomly to ensure unbiased representation of the total population.

3.5 The study population and sample Size

3.5.1 Study population

Mazibuko (2018) describe population as a total units or complete total cases or elements that

include objects, events, or individuals for whom observable information may be obtained

with regard to our area of study. A population in statistics is the specific parameter about

which information is desired and it may include a set of people, services, elements, and

events, group of things or households that are being investigated (Kothari, 2009). The study

population consisted of 24 Microfinance institutions in the North West Region of Cameroon.

In this study, the target respondents were the loan officers and loan borrowers of the 24 MFIs

in Mezam Division. The study used a census model and involved all the MFIs in Mezam

Division of Cameroon. This study applied purposive sampling technique to select one loan

officer and one borrower from every MFI giving a sample size of 48 respondents (24 loan

officers and 24 loan borrowers). This population was selected because they were of interest

to the researcher and they are the persons directly affected and are beneficiaries of the

concept in view. Hence, after determining this target population, we deemed it necessary to

determine the sample

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3.6 Source of Data Collection

3.6.1 Primary and secondary data

The survey made use of primary data. Primary data in this research was collected from

respondents through a formal and informal survey using semi-structured questionnaires. The

informal interview was done to obtain exhaustive information in regards to financial unit

contribution to the performance of financial performance of microfinance institutions. A self-

administering approach with the aid to gather data from the respondent. This was done to

build a proper rapport with the respondent and to ensure accuracy.

3.6.2 Secondary data

Secondary data were collected through documentary sources including: MFIs annual reports

related to loan default problem, journals (published and unpublished) and websites.

Unpublished documents were management and supervisors‟ reports concerning loan defaults.

Published documents were Annual Financial reports, journals and other related documents.

Secondary data provided a list of loan defaulters only from individual lending model from

2017 to 2021. In group lending model, defaulters are not known to the MFI since the group is

required to make a full loan repayment regardless of any default in the group.

3.7 Method of Data Collection

Questionnaires were used to collect primary data as they are effective and simple to use.

However, the questionnaires had closed ended questions. The questionnaires were presented

to the respondents who are the loan officers and loan borrowers of the 24 MFIs by the

researcher. Personal administration of the questionnaire ensured that the researcher explained

and clarified items in the questionnaire to the respondents. The questionnaire was considered

as the appropriate data collection instrument for this research as they ensured competent and

59
accurate data standardization. In addition, quickly and accurately collected information from

the given study group without causing un-wanted tensions among the individuals under

study.

Primary data was collected quantitatively, this aid to collect data in the field with the

questionnaires. The questionnaire was designed following the research objectives. This

technique was preferred because it minimizes bias and enables the researcher to cover a

bigger sample in a limited time frame. Amin (2005) defines a questionnaire as a form

consisting of interrelated questions prepared by the researcher about the research problem

under investigation, based on the objectives of the study. The questionnaire tool was

designed on likert scaled range that is 1(strongly disagree), 2(Disagree), 3(Non-committal),

4(Agree), 5(Strongly agree). .

In addition, the questionnaire was designed to ensure that the personal information of the

participants such as names or identities was not disclosed in any form whatsoever. The

questionnaire was divided into sections, which correspond to the specific objectives of the

study. The sections were drafted in a simple clear and understandable language that is

consistent and short to avoid survey fatigue. The researcher was able to use the enumerators

to present the questions in the questionnaire to respondents in the language understand

(English).

Documentary review

This method was used to collect secondary data whereby relevant documents and information

were reviewed such as annual management reports, journals and other related documents.

The obtained information helped the researcher to modify the objectives of the study as well

as the preparation of the questionnaire to be used.

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3.8 Data Analysis

3.8.1. Descriptive Statistical Analysis

Quantitative data technique was analyzed using SPSS version 20 to generate descriptive

statistics and multiple linear regression coefficients matrix include percentage frequency

table, pie chart, and mean and standard deviation. A Likert scale is more useful when a

behavior needs to be evaluated on a continuum (leedy and Ormrod, 2001). Information was

captured from respondents at minimal costs and in the shortest time possible, given the fact

that respondents have many commitments and ever occupied with clients. SAQs are the most

suitable for larger sample (Gay, 1996).

Besides using frequencies and descriptive analysis, the study used multiple linear regression

analysis to test the statistical significance of the various independent variables (borrower

characteristic, loan-specific factors and lender characteristics) on the dependent variables

(total income, return on assets and customer deposits). Faraway (2002) states that multiple

linear regressions are used in situations where the number of independent variables is more

than one. According to International Business Machines (IBM) (2010), the assumptions of

linear regression must be met by the data to be analyzed, these assumptions state that the

coefficients must be linear in nature, the response errors should follow a normal distribution

and the errors should have a common distribution.

3.8.2. Econometric specification and model specification

A multivariate regression model (OLS) model was used to determine the relationship

between the dependent variable and the independent variables. This model is made up of one

dependent variable (financial performance of MFIs) and three independent variables

(borrower characteristic, loan-specific factors and lender characteristics). Therefore, The

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following multiple linear regression equation was used to determine the effect of repayment

of loan default on financial performance of micro-finance institutions in Mezam division -

Cameroon

Y= f (OC, BC, LSF and LC)….................................................................................1

The regression model used was as follows:

Y = β 0 + β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4 + β 5 X 5 + β 6 X 6 + β 7 X 7 + β 8 X 8 + ε ......……2

Where:

Y = financial performance of micro-finance institutions in Mezam division - Cameroon

β 0=¿ Constant

β 1, β 2, β 3, β 4, β 5, β 6, β 7, β 8 : Coefficients of the determinants of financial performance of

micro-finance institutions in Mezam division - Cameroon

X 1 : Ownership characteristics (OB)

X 2 : Borrower characteristic (BC)

X 3 : Loan-specific factors (LSF)

X 4 : Lender characteristics (LC)

Control Varibles

X 5 : Gender

X6 : Age

X7: Level of Education

X8: Marital Status

ε = Error term

β 1, β 2, β 3, β 4, β 5, β 6, β 7, β 8 Estimators

The data was coded into the Statistical Package for Social Sciences (SPSS) and analysed

using descriptive and regression analyses. The regression analyses coefficients from the

62
regression showed the effect (whether positive or negative) of the independent variables on

the dependent variable.

3.9 Pilot Test

The study carried out a pilot test to test the validity and reliability of the questionnaires in

gathering the data required for purposes of the study. Kombo and Tromp (2009) and Kothari

(2004) describe a pilot test as a replica and rehearsal of the main survey. Dawson (2002)

states that pilot testing assists researchers to see if the questionnaire will obtain the required

results. According to Polit and Beck (2003), a pilot study or test is a small scale version, or

trial run, done in preparation for a major study. Polit and Beck (2003) states that the purpose

of a pilot test is not so much to test research hypotheses, but rather to test protocols, data

collection instruments, sample recruitment strategies and other aspects of a study in

preparation for a larger study. The questionnaire was validated by discussing it with two

randomly selected senior managers and loan officers of the selected MFIs. Subsequently, the

questionnaires were pre-tested by 10 respondents in the target population. These 10 samples

were however exempted from the overall study.

3.10 Validation of Technique

3.10.1 Validity of the Research Instrument

Carmines and Paul (1998), defines Validity is as how much any measuring instrument

measures what it is intended to measure. It‘s a critical aspect of measurement that must be

considered as part of an overall measurement strategy. Validity focuses on what the test or

measurement strategy measures. Admonitions such as those of Singer and McClelland (1990)

are particularly appropriate for newly collected data sets, which have not existed for long

63
periods of scholarly use and which have not been subjected to extensive reliability and

validity tests.

3.10.2 Reliability of the Research Instrument

This quality criterion of the research refers to the consistency of a measure of a concept. This

quality criteria deals with the question whether the results of a study are repeatable (Bryman

and Bell, 2007). Cronbach‘s alpha is used in this study to assess the internal consistency

(reliability of the instrument (questionnaire). Cronbach‘s alpha is a coefficient of reliability

used to measure internal consistency of a test. Cronbach‘s alpha score ranges from 0 to

1.According to George & Mallery (2003) a Cronbach‘s alpha value > 0.9-Excellent, > 0.8-

good, > 0.7-accepteble, > 0.6 questionable,> 0.5 poor and < 5, unacceptable.

3.10.3 Normality Test

Normality test is to testing whether in regression model, the dependent variable and the

independent variable has a normal distribution or not. Good of regression Model has a

normal distribution of the data or close to normal. To detect the normality can be done with

statistical tests. Statistic Tests used include analysis of the histogram graph, normal

probability plots and Kolmogorov Smirnov test (Ghozali, 2005). This normality test can be

done through graph analysis and statistical analysis.

3.10.4. Multi-collinearity Test

According to Ghozali (2005), this test is used to determine whether there is a correlation

between independent variables in the regression model. A good regression model should not

have correlation between independent variables. If there is a correlation between independent

64
variables, these variables are not orthogonal. Orthogonal variable is the independent variable

that value of a correlation between fellow independent variables is zero. To detect there is or

no multicollinearity in regression models can be seen from the tolerance value or the

variance inflation factor (VIF). See as the basis it can be concluded:

1) If the tolerance value > 0.1 VIF value < 10, it can be concluded that there is no

multicollinearity between independent variables in the regression model.

2) If the tolerance value < 0,1 VIF value > 10, it can be concluded that there is

multicollinearity among the independent variables in the regression model.

3.11 Ethical Considerations

Ethical considerations were taken into account. Ethics in business research refers to the set of

behavioral principles and norms beginning with the research from the first phase of the study

(Sekaran 2003). The ethical code of conduct should reflect the behavior of every one

participating in the research project, researcher, participants or moderators (Sekeran, 2003).

In this study in order to keep the confidentiality of the data given by respondents were not

required to write their name and assured that their response will be treated in confidentiality.

The purpose of the study was disclosed in the introductory part of the questionnaire and the

questionnaires were distributed only to voluntary participants at the various micro financial

institutions.

The principle of justice covers the right to privacy and the right to be treated fairly. The study

respected their right to privacy as the researcher gave all respondents their privacy as

questionnaires were distributed to each participant whiles the data that was generated was

also treated with confidence. Anonymity was adhered to by ensuring that no completed

questionnaire could be linked to any specific participant. The study also observed to treat

65
every respondent fairly because the participants were thoughtfully respected in their beliefs,

habits, culture and lifestyle.

3.12 Limitations of the Study

The major limitation of the study was at first unwillingness of the respondent to answer

questions due to the sensitivity of the topic, which was more investigative. Biased

respondents. Some respondents gave the researcher-biased data and some gave wrong

information. The researcher sorted out information at each session of collecting data to rule

out the suspected wrong information. Un-cooperative respondents. Most respondents were

not willing to have the questionnaire answered but the researcher kindly requested them to

answer the rationale of the study.

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 APPENDICES

Appendix I: Letter of Introduction

Monju Grace Mbum

University of Bamenda,

P.O. Box 39, Bambili

Date: ………………………

The General Manager,

…………………………………..

P.O. Box……………….....……..

North West

Dear Sir/Madam,

RE: REQUEST FOR COLLECTION OF RESEARCH DATA

I am a post graduate student (MSC Banking and Finance) of the Faculty of Economics and

Management Sciences (FEMS) in the University of Bamenda, undertaking a research on

“loan repayment default and financial performance in micro- finance institutions in Mezam -

Cameroon”. Your firm has been identified to participate in this study through your loan

officers who would be requested to voluntarily fill the attached questionnaire.

I guarantee any information provided will be held in confidence and shall only be utilized for

the purpose of this academic study. No study firm or respondents will be named in the study,

its findings or recommendation. The study will have direct benefit to the study firms and the

researcher will share the findings and recommendation to the firm that will wish to read the

final report

Yours Faithfully,

Monju Grace Mbum

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 APPENDIX II: QUESTIONNAIRE FOR LOAN CLIENTS

I am Monju Grace Mbum, a postgraduate student in the University of Bamenda. I would be

grateful if you would answer questions herein. The information will be treated confidentially

and will only be used for the purpose of the research. Please respond to questions by ticking

(✓) against the appropriate information and writing appropriate answers in blank spaces.

Don’t write your name or that of the company anywhere on the questionnaire interview.

PART I: Personal Information

1. Gender Male [ ] Female[ ]

2. Age……………………

3. Level of Education

Primary School [ ] Ordinary level [ ]

Advanced Secondary level [ ] Degree and above [ ]
Not educated [ ]
4. Marital status
01. Single [ ] 02. Married [ ] 03. Divorced [ ] 04. Widowed [ ]
5. Source of Income in Household? (Tick)

No Source of Income Tick

1 Business
2 Wages of day works
3 Salary from Employment
4 Agriculture
5 Others

6. Do you have savings?

01. Yes [ ] 02.No [ ]

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 7. How savings is used in Household?
No Expenditures of Savings Tick
1 Business Growth
2 Personal Consumption
3 Household Consumptions
4 Emergencies
5 Repayments of Loan installments
6 Payments of school fees
7 House construction
8. Purchases of valuable items (assets)

8. Types of Assets owned by respondents

No Type of Assets Ticks

1 House(s)
2 Car (s)
3 Plot(s)
4 Furniture(s)
5 TV/ Radio
6 Motorcycle(s)
7 Bicycle(s)
8. Immovable Business
9. Other assets

PART II: Institutional Related Questions

1. How long have you been doing your financial services with your MFI?
…….. …years
2. Is the repayment scheme set by your microfinance suitable for timely repayment
of loans?

Yes [ ] No [ ]

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3. If NO, Why?

No Reasons for delay/default in repayment of Agree Disagree I don’t know

Loan installments

1 Starting time to repay is too early

2 Loan repayment period is short
3 Amount of repayment in each month
4 Other reasons

4. What do you suggest to make the repayment scheme suitable?

No Suggest to make the repayment scheme Agree Disagree I don’t know
suitable

1 Give enough time before starting to repay

2 Make the repayment period longer

3 Reduce amount of loan installment

4 Ability to pay more than one installments at

once
5 Others

5. How is the Interest rate charged on loan set by your microfinance compared to
others?

High [ ] Low [ ]
Medium [ ] Normal Market rates [ ]
6. Are the loans offered biased in any form?
Yes [ ] No [ ]

7. If yes, do you think this biasness contributes to increase in number of loan

defaulters?
Yes [ ] No [ ]

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PART III: LOAN & REPAYMENT RELATED QUESTIONS
1. Why did you Borrow from your MFI?
No Purpose of Loan Tick
1 Business
2 Meet Emergencies
3 Personal Consumption
4 Repayment of Loan Installments
5 Repay Loans from Family and Friends
6 Purchase of Assets
7 House constructions
8 Payments of school fees
9 Others
2. Did you take the preferred amount of loan as you requested?
Yes [ ] 02. No [ ]
3. Was the amount of loan provided enough to meet your plans?

Yes [ ] 02. No [ ]
4. Did you spend the entire loan in reason you specified above?
Yes [ ] 02. No [ ]

5. If, NO, how did you spend the remaining amount of loan?
No Loan Expenditures Tick
1 Personal Expenditures
2 Luxury
3 Social contributions
4 Repayment of family Debt
5 Meet Emergencies
6 Payments of School fees
7 House constructions
8 Purchases of Assets
9 Others

6. What are your income sources for Loan repayments?

No Sources of Incomes for Loan Repayments Tick
1 Sales
2 Profits
3 Profits from other business

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4 Loan from other MFIs
5 Loan from family and Friends
6 Others

7. How do you benefit from full repayment of your loan?

No Benefit from full repayment of your loan on Time
1 Access to the next higher loan
2 Build good relationship with the loan provider
3 Build good relationship with loan provider
4 makes the family stable
5 OTHERS

8. Have you ever failed (defaulted) to repay the loan?

Yes [ ] No [ ]

9. Why did you fail to repay loan installments?

1 2 3 4 5
Strongly disagree Disagree Neutral Agree Strongly agree

No Reasons for failing to repay loan installments 1 2 3 4 5

1 Poor loan supervisions
2 Weak legal enforcements to defaulters
3 High interest rates
4 Grace period
5 Short repayments period ( per week)
6 Death of borrowers
7 Offer of relend loan
8 Family Problems ( Diseases, funerals)
9 Multiple borrowing
10 Acquire more than
11 Misuse of Loan
12 Application of loan without clear objectives
12 Lack of savings

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 13 Few/ lack of Income sources
14 Borrowers‟ characters
15 Age
16 Gender
17 Lack of awareness of Loan to the (spouse)
family
18 Establishment of new business
19 Collapse of business
20 Lack of Business education
21 Economic changes
22 Business types

2. What were the effects you encountered as a result of defaulting?

1 2 3 4 5
Strongly disagree Disagree Neutral Agree Strongly agree

No Effects to loan defaulters 1 2 3 4 5

1 Access to the next higher loan
2 Bad relationship with loan officers
3 Bad relationship with MFIs
4 Lack of trustfulness to the group members
5 Selling of assets set as collaterals
6 Shame and disgrace in community
7 Fear to apply for new loan
8 Shifting in hiding from community
9 Others

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 APPENDIX II: INTERVIEW QUESTIONS FOR LOAN OFFICERS

1. You assess the sources of income of the borrowers? Yes [ ] No [ ]

2. You offer any seminars or trainings to the borrowers to ensure good
management of their business but as well as loan repayments? Yes[ ] No [ ]
3. You assess credit worthiness of the clients especially individual clients?

Yes[ ] No [ ]

4. There is follow-up to ensure that there is effective and efficient usage of loan
acquired by borrowers. Yes [ ] No [ ]
5. Measures are taken immediately borrowers delay to pay installments.

Yes [ ] No [ ]

6. Number of borrowers in Past 5 years

Year Individual Borrowers Group Borrowers
Total Male Female Total Male Female
2017

2018

2019

2020

2021

7. Loan repayment history in Past 5 Years

Year Individual Borrowers Group Borrowers
Defaulters Defaulters
2017
2018
2019
2020
2021

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 8. Effects of Loan default on Interest Income
YEAR 2017 2018 2019 2020 2021
% Interest
MFI Income
% Bad debts
% provision for
bad debt

9. Effects of loan default on Operating Profit

YEAR 2017 2018 2019 2020 2021

% Operating
MFI Profit
% Bad debts
% provision for
bad debt

Thank you for your feedback

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