DETERMINANTS OF LOAN DEFAULTS IN TWO SELECTED FINANCIAL INSTITUTIONS IN SUMBAWANGA MUNICIPALITY, TANZANIA

Abstract

Purpose: The study intended to determine business and FIs characteristics influencing likelihood of loan borrower defaults in two selected financial institutions (FIs) in Sumbawanga Municipality.
 Methodology: Purposive sampling technique was used to National Microfinance Bank (NMB) and Cooperative Rural Development Bank (CRDB). Simple random sampling was used to select a total of 158 respondents out of 158 groups of loan borrowers. The study used cross-sectional research design to gather information. The study used both primary data and secondary data. A structured and semi-structured interview was used to collect primary data. Secondary data were collected through a documentary review of published and unpublished materials related to loan default in Financial Institutions. Binary logistic regression model was used to estimate the factors influencing the likelihood of borrowers to default and descriptive statistic was used to analyse loan default rate.
 Findings: Results revealed that rate of loan defaults has been decreasing from 9.5% to 2% for the period between 2013 and 2018 due to proper screening of borrowers as well as credit rationing. Age of respondents, business management education, business type, loan use and interest rate charges were statistically significant factors influencing borrower defaults in the study area.
 Recommendations: Based on findings, the study recommends, any appropriate policy measures directed on provision of business management education, appropriate loan use, entrepreneurial skills and reduced interest charges will significantly reduce rate of loan borrower defaults. Capacity of loan borrower should be built through regular training and seminars workshops to enable them to management their businesses and therefore improve their economic status.