Abstract
Orientation: Despite the use of group lending, microfinance institutions (MFIs) are still faced with the risk of default by borrowers and the absence of physical collateral means that there is no recourse to borrower assets for repayment. It is therefore imperative to understand characteristics of loan default as a means to reduce possible erosion of the capital base of MFIs.Research purpose: The study identified determinants of loan default for collateral lending groups in microfinancing.Motivation for the study: Default on loans, which can be caused by characteristics of the lending groups themselves, has the undesirable effect of eroding the capital base of MFIs and threatening their continued existence. This study aims to identify those characteristics of loan default which could erode the capital base of MFIs.Research design, approach and methods: The study used the probit regression model to identify characteristics of loan default by collateral lending groups in microfinance in order to assist MFIs with insights regarding which factors to eliminate and which to enhance in the design of the groups to which they lend.Main findings: The key findings of the study indicate that probability of default decreases with larger groups, more female borrowers in a group and larger borrower savings. The results also indicate that probability of default increases with larger loan amounts and with borrowers who have more business experience.Practical and managerial implications: Microfinance institutions should consider having a feeder programme where borrowers whose businesses have become successful and larger can be passed on to bigger commercial banks instead of continuing to borrow from the MFIs as part of a group lending scheme.
Highlights
According to the World Bank’s poverty headcount ratio indicator, 41% and 14.7% of people in sub-Saharan Africa and South Asia, respectively, live on under US$1.90 a day (World Bank 2018)
The aim of this section is to present a detailed analysis of the attributes of collateral lending groups that are likely to lead to default on microloans granted to clients
The finding that larger group size leads to reduction in the probability of default could be linked to the fact that, as suggested by Stiglitz (1990), when a member who is part of a large group defaults, the individual contributions by the remaining members to cover the amount in default would be insignificant
Summary
According to the World Bank’s poverty headcount ratio indicator, 41% and 14.7% of people in sub-Saharan Africa and South Asia, respectively, live on under US$1.90 a day (World Bank 2018). There is a dichotomy in that microfinance has a mandate to lend to the poor. This money can be used by the borrowers to fund the individual micro-enterprises that they (borrowers) have created and to lift themselves out of poverty. Collateral lending groups ( referred to as joint liability groups) help MFIs to reduce credit risks that they are faced with. Group members are responsible for the screening, selection, monitoring, mutual support and payment enforcement of fellow group members These activities performed by fellow group members invariably reduce the costs associated with the lending activity on the part of the lender (Bhatt & Tang 2002). The use of collateral lending groups with joint liability is commonly referred to as the ‘Grameen model’ because of the pioneering http://www.actacommercii.co.za
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