Microfinance is can also be described as banking for the underprivileged.

Rolando (2010)

opines that microfinance is an excellent way of assisting entrepreneurs and enterprises are

financed either by debt, equity or a combination of the two. Wherein the formal sector of

financing, commercial banks and development banks are the main sources of financing for

businesses, while the informal sector comprises of loans from friends, relatives, and cooperative

societies as per Agwu ME, Murray PJ (2014). According to Warue (2012), the possibility that

microfinance institutions may not get the money given to borrowers is a widespread and usually

the most critical weakness of a microfinance institution. A loan default arises when the debtor

fails to make the necessary payment or fails to conform to the terms of the loan Murray (2011).

While Sheila (2011) suggested that MFIs should also cautiously assess the monitoring and

control stages of the lending process.

There are factors that may affect the performance of lending businesses. As per Ingram

(2011), interest rates are important because they control the flow of money in the economy. High

interest rates curb inflation but also slow down the economy. Low interest rates stimulate the

economy, but could lead to inflation. When interest rates are high, people do not want to take

loans out from the bank because it is more difficult to pay the loans back, and the number of

purchase of real assets goes down. Moreover, Mcloughlin (2013) states that for some time,

policymakers have been concerned about the effects of the seemingly high interest rates typically

charged by microfinance institutions (MFI) lending money to poor people. There is also concern

that high rates reduce the demand for and uptake of financial services. As Dehejia, Montgomery

and Morduch (2012) point out, where these effects are seen, high interest rates can undermine

„the original intention of the push for microfinance‟.

 Furthermore, late payments can hinder the performance of such lending institutions.

According to Miller, T., & Wongsaroj, S. (2017), late payments are payments not paid within a

given time frame based on a study undertaken in 11 countries. The management of credit is a

primary concern for the policy makers, development finance institutions, banks, non-bank credit

providers, managers and owners of those microenterprises because it has a direct impact on the

success, creditworthiness and growth of entrepreneurial ventures. Efficient debt management

determines the cash flow and the success of the day-to-day operations of the business. Poor

credit management leads to late payment to creditors and other stakeholders in the supply chain

(Manguti, 2013).

In the Philippines, Flores (2019) said that in order to collect customer payments, the
lending companies must follow-up their customer mainly through mails, or electronic
transactions like calls often to remind them of their obligations. Results also indicates that the
lending firms deal with delinquent and default payers by doing follow-ups once a month and
calling repetitively. Lenders will also take into account not only the personal information
provided by a borrower, but also the amount of money requested and the length of the
agreement. These factors, when considered together, paint a clear picture of the borrower,
making it easier for lenders to assess the loan's risk level. Credit risk management has
traditionally been done without taking other important factors into account.

REFS:

Rolando GT (2010) Government’s role in promoting social entrepreneurship. Being a

paper presented at the 1st Anniversary of the Institute for Social Entrepreneurship in Asia.
 Agwu ME, Murray PJ (2014) Drivers and inhibitors to e-Commerce adoption among

SMEs in Nigeria. Journal of Emerging Trends in Computing and Information Sciences 5: 192-

199.

Warue, BN (2012) Factors affecting loan delinquency in Microfinance in Kenya.

International Journal of Management Sciences and Business Research 1: 27-48.

Murray J (2011) Default on a loan, United States Business Law and Taxes Guide

National Credit Act (2005). Act No. 34 of 2005, Republic of South Africa. Retrieved from:

http://biztaxlaw.about.com/od/glossaryd/g/default.htm

Sheila AL (2011) Lending Methodologies and loan losses and default in a Microfinance

deposit-taking institutions in Uganda. A case study of Finca Uganda Kabala Branch(MDI).

Research report presented to Makerere University, Uganda.

Ingram, D. (2011).The Effects of low Interest Rates on the Economy.

McLaughlin C - GSDRC (2013) Helpdesk Research Report: Impact of microcredit interest rates

on the poor.

Dehejia, R, Montgomery, H., and Morduch. J., 2012. Do Interest Rates Matter? Credit

Demand in the Dhaka Slums. Journal of Development Economics, Volume 97, Issue 2, March

2012, Pages 437–449.

Munguti, J.,(2013).Determinants of Micro credit performance in Microfinances in Kenya.

https://ir-library.ku.ac.

Miller, T., & Wongsaroji, S. (2017). The Domino Effect: The impact of late payments.

London: Plum Consulting.

 Flores, M (2019). Level of Efficiency of Collection Techniques Used By Lending
Institutions in Ermita, Manila.
https://d1wqtxts1xzle7.cloudfront.net/61792340/82404360620200115-8266-1cd3tog-libre.pdf

Cayanan, C (2023). Credit Risk Management Practices and Its Impact on Rural bank’s
financial performance. https://www.researchgate.net/profile/Christine-Cayanan/publication/
372752929