Abstract
The purpose of this study is to investigate the contribution of borrowers’ characteristics and credit terms on loan repayment performance of MFIs in rural areas of Uganda. This study is cross sectional and correlational. Data were collected through a questionnaire survey of 51 MFIs in Uganda. Results indicate that there is a significant relationship between credit terms and loan repayment performance among clients of MFIs unlike borrowers’ characteristics. This study’s regression model predicts 16% of the variance in loan repayment performance of MFIs in rural Uganda. The study is relevant to persons who borrow money and managers of MFIs and Savings and Credit Cooperatives (SACCOs). Managers may need to flex their credit terms and borrowers may have to identify those MFIs and SACCOs that are ready to discuss credit terms if the microfinance industry in Uganda is to help in reducing poverty. Whereas hitherto both borrowers’ characteristics and credit terms had been viewed as possible explanations of loan repayment performance, this study only confirms credit terms as a significant predictor of loan repayment performance. Key words: Microfinance institutions (MFIs), borrower characteristics, credit terms, loan repayment.
Highlights
In this paper, the contribution of borrowers’ characteristics and credit terms on loan repayment performance among clients of Microfinance Institutions (MFIs) is reported using evidence from rural areas of developing countries like Uganda
It is important that the MFIs or even banks to some extent operating in rural areas with loan recovery difficulties may have to adjust their credit terms for example, Atieno (2001), indicates that stringent lending terms discourage borrowers to apply for bank debt even when they are searching for finance to execute valuable investment projects and when they access the loans, they are reluctant at paying back
MFIs have to be careful in aligning collateral security and loan size as well as the interest rates for example according to Zeller (1994), collateral value requirements deter SME borrowers from seeking credit
Summary
The contribution of borrowers’ characteristics and credit terms on loan repayment performance among clients of Microfinance Institutions (MFIs) is reported using evidence from rural areas of developing countries like Uganda. MFIs through their loan officers screen their clients in terms of their demographics, ability to pay and assets owned (borrowers’ characteristics) before disbursing the loans. They explain to these clients about the terms and conditions governing the loan in terms of interest rate, collateral and loan period (credit terms). This is done to ensure that only clients who qualify for the loan receive it after understanding their
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