Chapter I

INTRODUCTION

In this time, poverty rate is increasing, and the price of goods are inflating. Since, many

people need enough money to support or to afford their everyday needs, they end up looking for

lending system that can borrow money to sustain their needs.

The banks or Microfinance Institutions (MFIs) were established all over the world.

Microfinance Institutions (MFIs) is a small financial company which protects the money of the

people and helps the people who need money. They encourage the clients to join on their banks

and make them create accounts for loans. Many people learned about this system and started to

have an account. Some people decided to have loans in the banks. A loan is a borrowed money

and it will be paid back with interest or charge on the given time or scheduled payment. There are

different types of loans which are group loans, individual business loans, agriculture loans, and

energy loans.

This led the researchers to conduct the present study because wanted to solve the

problem in non-payment of loans. Moreover, the researcher wanted to help our nation by giving

knowledge on how to prevent the factors that may affect them in paying their loans. It is timely and

the researchers believed that they can get a lot of knowledge about it.
The Problem and Its Background

Nowadays, the Filipinos are easy to convince when it comes to money. They will decide

without thinking properly and borrowing high amount of money. That’s why, the main problem is the

high interest rate of their loans and high amounts of loans. At the end, they can’t continue to pay

the money that they borrowed because their money is not enough to pay their loans which results

to delinquency of payment.

Somehow, one of the problems of some borrowers is when they face non-performing loan.

A non-performing loan (NPL) is a borrowed money that the borrower did not made the scheduled

payment on the given time. Many companies see business opportunity in acquiring problem and

nonperforming loans. Availing these loans from financial institution at a discount can be lucrative

business. Problem loan is when the loan can’t be pay on the terms of initial agreement or the

borrower unable to made his/her loan obligation.

Furthermore, the borrowers who are facing inflation is also one of the reasons why they

cannot meet the scheduled payments for a specified period

On the other hand, there are some borrowers who receive their monthly salaries late days,

prevailing interest rates are always changing, and different types of loans offer different interest

rates.

For these reasons, the researchers conducted this study with the purpose of finding out

the factors affecting the borrower’s non-payment of loan in CARD Bank of Pinamalayan, Oriental

Mindoro.

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Objective Statement

The study generally investigated the Factors Affecting the Borrower’s Non-Payment of

Loan in CARD Bank of Pinamalayan, Oriental Mindoro.

Specifically, the objectives of the study include the following:

1. To examine the factors affecting the borrower’s non-payment of loan and the level of net

income in Card Bank of Pinamalayan, Oriental Mindoro;

2. To find out the reason why the borrower cannot pay their loans on due date;

3. To provide reliable data that would develop awareness on both borrowers and lenders

about loans; and

4. To recommend strategies that would help both the borrowers and lenders avoid having

non-payment loans.

Statement

of the Problem

This study aimed to determine the factors affecting the borrower’s non-payment of loan in

CARD Bank of Pinamalayan, Oriental Mindoro.

Specifically, it sought to answer to the following questions:

1. What is the extent of factors affecting the borrower’s non-payment of loan in CARD Bank

of Pinamalayan, Oriental Mindoro in terms of:

1.1 Financial Status

1.2 Late Salary Release/Late Income

1.3 Employment

2. What is the level of records in borrower’s non-payment of loan in CARD Bank at Recodo

St., Pinamalayan, Oriental Mindoro in the first quarter?

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 3. Is there a significant relationship between the extent of factors affecting the borrower’s

non-payment of loan and the level of records in borrower’s non-payment of loan in CARD

Bank at Recodo St., Pinamalayan, Oriental Mindoro in the first quarter?

Statement of the Hypothesis

There is no significant relationship between the extent of factors affecting the borrower’s

non-payment of loan and the level of records in borrower’s non-payment of loan in CARD Bank at

Recodo St., Pinamalayan, Oriental Mindoro in the first quarter.

Significance of the Study

The study is considered beneficial to following:

Borrowers. They will be informed to pay their loans on the given time. It would also give them

knowledge that they may experience the factors in non-payment of loans and it would be help them

to prevent it.

Financial Institutions. They will be enlightened on the importance of knowing the factors leading to

borrower’s non-payment of loans in financial institutions. The institutions would also obtain

information on problem of credit management in Pinamalayan, Oriental Mindoro and the strategies

that need to be put in place to solve these problems. Also, this would help them to formulate

policies which would help to minimize the level of borrower’s non-payment of loans from financial

institutions.

Future researchers. They will be equipped with knowledge and they would be able to fill in the gap

on the factors leading to borrower’s non-payment of loans in financial institutions. It would also act

as a source of reference materials for their future study.

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Lenders. They will be help by having effective strategy in collecting the loan repayment of their

borrowers. It will give them knowledge about the factors that their borrowers may experience on

the repayment of loans.

Scope and Delimitation of the Study

The study was comprised of microfinance’s registered by Association of Microfinance

Institute in Pinamalayan, Oriental Mindoro which is CARD Bank. It was limited to the thirty-six (36)

randomly selected respondents who are members of CARD Bank who applied for loan and who

are residents of Recodo Street, Pinamalayan, Oriental Mindoro.

This study specifically focused on the factors affecting the borrower’s non-payment of loan

in CARD Bank of Pinamalayan, Oriental Mindoro in terms of financial status, late salary

release/late income, and employment and the level of records in borrower’s non-payment of loan in

CARD Bank at Recodo St., Pinamalayan, Oriental Mindoro in the of first quarter.

Definition of Terms

For the purpose of classifications on the part of the readers, the important terms used in

the study were hereby operationally defined:

Financial Institutions (FI). It refers to the companies engaged in the business of dealing with

financial and monetary transactions such as deposits, loans, investments, and currency exchange.

Inflation. It is a quantitative measure of the rate at which the average price level of a basket of

selected goods and services in an economy increases over a period of time.

Interest rates. It can be defined as the premium received by the lender after a stated period of time.

Loan Default. It refers to a situation where a loaner fails to repay a loan. It occurs when a borrower

cannot or will not repay the loan and the MFI no longer expects to receive payment.

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Loan Delinquency. It refers to a situation where a loan is past “due”. It is an occurrence in a loan

portfolio where payments are in arrears. A loan account is termed as delinquent when payment is

due and a loaner has failed to honor a payment obligation at the stipulated time.

Microfinance. It is a provision of a broad range of financial services such as savings, credit,

insurance and payment services to the poor or low-income group who are excluded from the

normal banking sectors.

Non-Performing Loan (NPL). It is a loan that is not paid or serviced as per agreement.

Past due. It is loan installment that has not been paid at the period stipulated in the loan contract.

The Center for Agriculture and Rural Development, Inc. (CARD Bank, Inc,). It is a micro-finance

oriented rural bank in the Philippines.

Theoretical Framework

The conduct of this research was supported by the theories which in a way another helped

in providing the validity of the content of this research work.

The Grameen Solidarity Group Theory

This theory is based on group peer pressure whereby loans are made to individuals in

groups of four to seven (Armendariz et al., 2005). Group members collectively guarantee loan

repayment, and access to subsequent loans is dependent on successful repayment by all group

members. Payments are usually made weekly. According to Armendariz et al., (2005), solidarity

groups have proved effective in deterring defaults as evidenced by loan repayment rates attained

by organizations such as the Grameen Bank, who use this type of microfinance model.

The Grameen Solidarity Group Theory was used in this study to explain that their

techniques on preventing loan delinquency or loan default is that they will collect the payment

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weekly and also it is by group payment collection. So, it means that it is regularly monitored if there

has been a missed payment.

Pearson and Greeff Theory

Pearson and Greeff Theory explains about the default of an installment in the sense that it

acts an indicator of behavior if the risk increases, the borrower will fail to honor the loan obligation

and fail to repay the loan. Pearson and Greeff (2006) defined default as a risk status where the

borrower has reached to a point and misses’ payment of his loan on at least three installments

within a period of 24 months in one loan cycle. Pearson and Greeff Theory states that some “bad,”

non-paying members in a group can “free ride” off good paying members by relying on their

payments to help them to repay the loan even though they have the ability to repay on their own

especially if the loan was advanced to them individually/personally rather than as a group. The

theory continues to elaborate that the constant interaction among the members in a group help

them to repay the loans even if other peers in other groups do not pay. This good loan history

creates good reputation and would help them to join other groups in the same village later, should

the group fail.

The relevance of this study is that it explains that it is more riskier if the borrowers missed

a payment for three payments and when they failed to pay it then, it would result to a loan default.

Also, it states that from their group, if someone fail to pay their loans and unable to pay it,

one/some of their group members will help them to pay it back to avoid negative records.

A Theory of Micro-Loan Borrowing Rates and Defaults

This theory was created by Cheung and Sundaresan (2007) in their article “Lending

without Access to Collateral- A theory of Micro-Loan Borrowing Rates and Defaults”, where they

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presented a simple model of lending without collateral. The lender attempts to enforce the contract

by relying on three things:

a) Monitoring to reduce the diversion of resources by the borrower from productive uses,

b) Peer monitoring by lending to a group, which is jointly-liable for the fulfillment of the

contractual provisions, and

c) A punishment technology that imposes a finite cost on defaulting group of borrowers.

They showed that peer monitoring combined with a limited amount of monitoring by

lenders is sufficient to reduce default probability to acceptable levels, so as long as there is a

credible punishment cost. Excessive monitoring by lenders increases the cost of borrowing and this

might lead to non-participation by borrowers. As the loan size increases, we show that the

probability of default increases and the loan rates dramatically increase, unless the maturity of the

loans is increased.

This theory was used in this study to explain that default loans can be avoided by having

peer monitoring and it states that by having large amount of loan has high risk to be defaulted

because its interest is also high unless, their loan has longer maturity.

Liquidity Risk Theory

According to Mema and Njiru (2002) Liquidity theory, risk arises when a project is not able

to generate sufficient resources to meet its liabilities or if an entity cannot meet payment when they

fall due. Difficult for the borrowers to repay the loan if the business is not providing enough profit.

Borrowing at low profit generation rate or selling assets at below market prices, facing penalty

payments under contractual terms. It is better to choose the project which generates sufficient

profit so, it enables borrowers to repay their loan.

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 This theory was used in this study as it explains that the members must choose the project

which generate sufficient profit and free from risk or to understand how to diversify its risks in order

to get profit. So, it would not affect the payment of their loans.

Fraud Risk Theory

Likewise, Merna and Njiru states in their Fraud Risk Theory that the primary sources of

fraud in microcredit operations include phantom loan, kickback schemes, bribes and non-reporting

of client repayments. Such unethical behavior is not effectively directed by audits of paper traits as

the loan officer alone is responsible for generating and following through on loan disbursement and

recovery. Traditional audit procedures will be equipped to detect this type of fraud because they do

not usually involve extensive client visits.

The relevance of this theory is that it explains that the staff of the bank lacks the

responsibility to monitor the loans regularly and the staff are not responsible to report the payment.

Also, the management must have business audits several times to detect the member’s payment

of loans.

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Conceptual Framework

IV DV

Factors Affecting the Borrower’s

Non-Payment of Loan in CARD
Level of Records in Borrower’s
Bank of Pinamalayan, Oriental
Non-Payment of Loan in CARD
Mindoro in Terms of:
Bank at Recodo St., Pinamalayan,
1. Financial Status
Oriental Mindoro in the First
2. Late Salary Release/ Late
Quarter
Income
3. Employment

Figure 1: The Hypothesized Relationship Between Variables

Figure 1 shows the conceptual framework of the study which includes the dependent

variable and the independent variable.

The independent variable pertains to the factors affecting the borrower’s non-payment of

loan in CARD Bank of Pinamalayan, Oriental Mindoro in terms of financial status, late salaries

income/late income and employment.

Meanwhile, the dependent variable pertains to the level of records in borrower’s non-

payment of loan in CARD Bank at Recodo St., Pinamalayan, Oriental Mindoro in terms of first

quarter.

It is also observed that the two types of variables are connected to each other through

double-headed arrow which denotes the hypothesized relationship between them.

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