Abstract
This research is carried out to discover the factors contributing to loan repayment default in micro finance institutions based in Shah Alam, Selangor, Malaysia. The findings will be useful for the micro finance institutions in Malaysia in selecting and implementing suitable policies to reduce defaults. In this research, data is collected through questionnaires. These questionnaires are distributed to 120 loan borrowers of micro finance institution in Shah Alam, Selangor. Furthermore, the data was analyzed with the software known as Statistical package for Social Science, for short SPSS. This study established that nature of business operated by loan borrowers is one of the factors that will influence loan repayment. Finding of this study are established that there is a positive relationship between nature of business operation and negative relationship between age of borrowers, diversion of funds by borrowers as well as repayment schedule to loan defaults.
Highlights
Micro finance is a mechanism that is used to alleviate poverty as well as to promote entrepreneurial development
21.8% of the changes in loan repayment can be attributed to the combined effect of the independent variables
The results show variance inflation factor (VIF) for nature of business operated, age of borrowers, diversion of funds by borrowers and repayment schedule are 1.220, 1.017, 1.186 and 1.200 respectively
Summary
Micro finance is a mechanism that is used to alleviate poverty as well as to promote entrepreneurial development. In Malaysia, micro finance institutions (MFIs) provide only micro credit loans instead of providing other micro finance services together such as insurance and savings. Loans are more accessible to these people with the introduction of micro finance because of waived requirements for collateral or guarantors (Norhaziah & Mohd Noor, 2013). There are few micro finance institutions in Malaysia such as Yayasan Usaha Maju (YUM) and The Economic Fund for National Entrepreneurs Group (TEKUN). YUM provides loans to the poor people in Sabah while TEKUN offers loan to people throughout Malaysia. Both of these micro finance institutions offer loans based on individual lending scheme and they have a standardized lending contract. YUM imposes weekly loan payments on all business types (YUM, 2009); TEKUN offers reasonable grace periods to borrowers depending on the harvesting cycles of their business (TEKUN, 2009)
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