An investigation of Factors that Cause SMEs to Default on Loan Repayment

Abstract

Small and Medium Enterprises (SMEs) have been asserted to be the bases of economies worldwide, including Zambia, playing a major role in economic growth. However, they often struggled with loan repayment, raising the questions why they faltered in fulfilling their financing obligations. This study explored some of the factors contributing to SME loan repayment failures. This research focused on Chipata Business Area, which was currently dominated by SMEs, to uncover the challenges SMEs faced with regard to repaying loans to the financial institutions. Studies show that SMEs in the country, often resorted to informal financial channels due to lack of collateral to access finance from formal institutions. Even when loans were obtained, repayment remained a challenge for most SMEs. Understanding that phenomenon was crucial for future policy considerations to promote economic growth and financial stability in Zambia.