Loan Repayment Schedules Research Articles

The chronic illness of poverty: the effects of microfinance on the severity of poverty and the cost of its eradication

PurposeThis paper investigates the impact of microfinance on poverty gap which is the shortfall in income or consumption expenditures below $1.90, $3.20 and $5.50 per day. The paper’s primary goal is to investigate how microloans have impacted the severity of poverty and influenced the cost of poverty eradication in Latin America, empirically evaluate these effects and offer appropriate policy recommendations.Design/methodology/approachThis paper used panel data for 13 Latin American countries from world bank spanning the period 2001–2019 and Fully Modified Ordinary Least Squares model for heterogeneous cointegrated panels. This study used Gross Loan Portfolio per active borrowers, gross domestic product per capita, Gini index, Inflation and Unemployment rate as independent variables and poverty gaps as dependent variables.FindingsPoverty gaps narrow as the loan per borrower increases, and the degree of effect differs with the poverty line, with the magnitude increasing as the poverty line falls, underscoring microloans as an effective tool in closing poverty gaps and lowering the cost of poverty eradication. Growth of GDP per capita is helpful reducing the poverty gap, especially for the less poor of the poor. Inflation and unemployment have no to little impact on the severe poverty gaps, but they start to matter when the poverty line is $5.5 per day. Finally, income distribution inequality widens the poverty gap regardless of the poverty line used.Originality/valueThis study suggests several implications. For example, Latin American nations need to embrace tangible policies that encourage economic growth while reducing inequalities in income distribution to effectively eradicate poverty. More supportive environment is necessary to increase the effectiveness of microfinance operations, particularly for the poorest populations. Microfinance institutions need to set less stringent conditions for loan accessibility and repayment schedules that are commensurate with different levels of poverty. Finally, strengthening microfinance as a strategic policy to gradually close poverty gaps and reduce the cost of poverty eradication.

Effects of Digital Credit on Small Business Performance in Obunga, Railways Ward, Kisumu County, Kenya.

Small and Micro Enterprises play an important role in economic development of any nation by harnessing human capital, use of raw materials and technology. They require enough funds to facilitate expansion of operations, develop new products, hire new staff and acquire new facilities. Lack of capital and financing conversely has been identified as a major factor affecting their performance leading to their failures. Innovations in financial technology in the form of digital credit have taken advantage of these financing gaps and have come up with powerful tools to mitigate financing barriers faced by small businesses. This study sought to address the effects of digital credit on small business performance in Obunga, Railways ward in Kisumu, Kenya. The business performance was determined through operating cash flow, Sales volume and Net profit margin. Asymmetric Information theory and Default Risk Theory of Credit were selected to anchor this study. The study adopted descriptive research design. The target population was 454 Small and Micro Enterprises while the sample size was 212 Small and Micro Enterprises. The study adopted both stratified and simple random sampling techniques. Primary data was collected using structured questionnaires and interviews. Secondary data was collected through reviewing available records regarding digital credit and small business performance. The study adopted content validity. The data collected was analyzed using the Statistical package for social sciences version 24.0. Data was analyzed using descriptive statistics. The study findings conclude that the performance of the SMEs could be seen from profit margins, sales when they access digital credit.The study in addition suggests that the fast growth of fintechs had increased the cost of borrowing to SMEs and their repayment problems even though they offer flexible loan contracts to SMEs who have the ability to determine their own preferred loan repayment schedule. The study recommends the managers and owners of SMEs in Obunga ward to adopt an entrepreneurial mind-set that would support their ability to better gain financial access from various financial institutions Based on the study findings, it is also recommended that the government mobile loan institutions should consider lowering the costs involved in lending the credit. Lastly, the study recommends the managers and owners of SMEs in Obunga ward to make use of available flexible repayment options to borrow what their businesses actually require.

Make Microfinance Great Again: Can Flexibility in Repayments Improve Business Outcomes in North India?

Classic microfinance loan contracts characterised by rigid weekly repayment schedules used by most microfinance institutions (MFIs) offer little flexibility—and little benefit—to borrowers who are poor and have seasonal income. Previous research has also shown that such contracts can negatively affect the economic well-being of poor borrowers leading to underinvestment of capital, selling of productive assets, over-indebtedness through cross-financing from informal sources, reductions in consumption and income, and in some cases, a deterioration in borrowersʼ mental health arising from stress and worry. If lenders offered more flexibility in loan repayment schedules, would it help to overcome some of these problems? To explore this, we tested whether clientsʼ business outcomes were sensitive to various repayment schedules using primary data collected from the clients of three MFIs, a cooperative society and a few local traders specialising in business lending in a village in North India. We analysed alternatives to the rigid contract model, focussing on the degree of flexibility and the length of gap between repayments in the loan schedule. This study finds that clients repaying their loans monthly invested more in their businesses and earned higher income, compared both to those who repaid weekly and to those with an irregular payment schedule. JEL Codes: G12, D12, O16, O12

Effect of External Debt on External Reserves in Nigeria

It is widely held that developing nations are constrained by insufficient funds to build basic infrastructure that would set the pace for capital formation and sustainable growth. Faced with shortfalls in revenue and the need to increase investment in public works, developing countries engage in deficit spending to bridge the gap in funding public expenditure. One source of deficit spending is external debts. This study investigates the effect of external debt on external reserves in Nigeria from the first quarter of 2009 to the fourth quarter of 2022. An ex post facto research design was adopted for the study. Quarterly time series data for external reserves, multilateral debt, and bilateral debt were collected from the Central Bank of Nigeria statistical bulletin and Debt Management Office reports. Philip Perron test was used to test the stationarity of the data and the Johansen cointegration test was utilized to determine the presence of a long-run relationship. Dynamic Ordinary Least Squares technique was used to test the effect of external debt on external reserves in Nigeria. The findings showed that multilateral debt has a significant effect on external reserves in Nigeria. However, bilateral debt has an insignificant effect on external reserves in Nigeria. The study recommends that the Nigerian government should strengthen its capacity in debt negotiation and contracting. This involves conducting comprehensive assessments of loan terms, interest rates, grace periods, and repayment schedules before accepting multilateral debt. Furthermore, the Ministry of Finance through the Debt Management Office should continue to improve its debt monitoring and evaluation mechanisms for bilateral loans. This involves establishing transparent processes to track the utilization and impact of borrowed funds.

The Impact of High Credit Risk in Financing Small Scale Businesses in Ghana: The Case of Universal Merchant Bank

This descriptive study evaluated the challenges and prospects associated with reducing high risk factors associated with financing small and medium scale enterprises (SMEs) in Ghana with the search light on the operations of Universal Merchant Bank. The study adopted the cross-sectional research design to conduct the study and this enabled the researcher to solicit information from both customers and officials of Universal Merchant Bank for their views. Purposive sampling technique was used to select officials of the bank. The study employed qualitative research analytical tools which focused on the use of tables, pie charts, percentages and bar charts in analyzing and interpreting the data captured from the field. The study found out that although SMEs constitute the engine of growth in the Ghanaian economy and therefore ought to be financially fluid, banks often discriminate against them in their loan investment portfolios owing to serious financial injuries often sustained in the process of providing the badly needed funds. Numerous challenges associated with financing SMEs in Ghana stretch from deliberate efforts at misapplying solicited short-term funds for capital expenditure such as buying land or vehicles which results into repayment challenges. The study noted with surprise that unfair trade practices especially dumping of cheap Chinese products on the local market also result in poor sales for the SMEs leading to difficulty in honoring structured loan repayment schedules. The study made key recommendations.

Assessing the Institutional Outreach and Sustainability of Micro Finance Institution in Ethiopia: Evidence from Omo Microfinance Institutions Hawassa Branch

Institutional sustainability and outreach are key for achieving the micro finance goal of meeting financial requirement of poor people. So, the objective of this study was to assess the institutional outreach and sustainability of Omo Microfinance Institution at Hawassa branch. To this end, the researchers had used descriptive research design because using this type of research design enables the researchers to assess and describe the present situation of institutional sustainability and outreach of the institution. The primary data was collected from 60 randomly selected employees of OMFI Hawassa branch using structured questionnaire. Then, descriptive statistics analysis has been done through SPSS version 23.0 in order to get the reliable findings. Consequently, the result of the study showed that the factors influencing outreach and sustainability of OMFI Hawassa branch were nature of loan extended to customers, Poor loan management, flexibility of loan repayment schedule, loan defaulting faced by customers, and per customer outstanding. Besides, the study showed that level of sustainability and institutional outreach level is increased by higher deposit mobilization, saving mobilization extended to borrowers, increase in saving amount, and regulatory saving framework for the reason most of the respondents expressed their positive level of agreement with statements asked about this variables. Based on the findings of the study, the researcher forwarded possible recommendations for the OMFI Hawassa branch in order to improve the institutional sustainability in one hand and outreach in other hand. Keywords : Omo Microfinance Institution, Institutional Sustainability, Outreach DOI: 10.7176/RJFA/11-15-01 Publication date: August 31 st 2020

Credit Risk Classification in Peer-to-Peer Marketplaces: The Nexus of Neural Network Approach

Financial innovation in recent years have prominently contributed to the growth of Peer-to-Peer lending marketplaces allowing individual and businesses to secure loans on a common internet-based network. Similar to the ‘bricks and mortar’ banking system, online lending is coupled with the problem of information asymmetry. Borrower risk assessment has henceforth become the major concerns of various platforms that aim to reducing information imbalance towards mitigating credit risk. In this article, authors compared two learning algorithms – Logistic regression and Artificial Neural Network to classify borrowers based on loan repayment schedule. We revealed that both approaches were robust in classifying late borrowers with logistic regression being 0.02% more robust than Neural Network. Regarding variable relative importance, gender is considered the least important variable whereas terms-of-repayment is the most important variable affecting borrowers’ intention to pay off loans. Even though our study contributes to existing literature, it is however not limited to determining factors that may affect lenders’ investment decision in social lending.

Assessing the Institutional Outreach and Sustainability of Micro Finance Institutions in Ethiopia: Evidence from Omo Microfinance Institution Hawassa Branch

Institutional sustainability and outreach are key issues in micro finance institutions. So, the objective of this study was to assess the institutional outreach and sustainability of Omo Microfinance Institution Hawassa branch. To this end, the researchers used descriptive research design because using this type of research design enables the researchers to assess and describe the present situation of institutional sustainability and outreach of the institution. The primary data was collected from sixty respondents using structured questionnaire. Then, descriptive statistics analysis has been done through SPSS version 20.0 in order to get the reliable findings. Consequently, the result of this study showed that the level of sustainability and institutional outreach is improved by deposit and saving mobilization. Besides, this study revealed that the outreach and sustainability of OMFI Hawassa branch were influenced by constraints such poor loan management, flexibility of loan repayment schedule, and loan defaulting faced by customers. Based on the findings of the study, the researchers forwarded possible recommendations for the OMFI Hawassa branch in order to improve the institutional sustainability and outreach.

The Role of Microfinance Institution for Poverty Reduction in Ethiopia

Micro finance institutions are basically set up with the goal of poverty alleviation. These institutions have a very important and effective role in both developed and in developing countries because it is considered the backbone of their economies. This indicates that without the establishment of micro finance institutions, no developing nation can achieve a viable economic growth/development or the reduction of poverty since they lack enough amount of money. Micro finance institutions can play a role in reduction of poverty and improving the socio-economic condition of the poor since there is a positive contribution of micro finance institution and social development, in which there is better access to health, education and basic services and greater social respect. The contribution of education level and entrepreneurial skills has positive impact to poverty reduction in which there is increase in income, better living conditions and better access to basic needs. This review examines on the role of micro finance institutions for poverty reduction and the challenges on the performance of operating micro finance institution. The review result suggest that major problems that faces the micro finance institution in order to take and operate their business are absence of training for borrowers, weak monitoring and support system, high interest rate, uncomfortable loan repayment schedule, loan size, loan capital shortage, lack of use of technology and cost effective methods, human resource problem, lack of access to credit, insufficient support from government, limited management capacity of microfinance institutions, less attraction on financial sustainability, improper regulations, and limited management capacity of micro finance institutions. Keywords: MFIs, poverty, role of MFIs, problems on performance, poverty reduction DOI : 10.7176/JESD/10-5-04 Publication date :March 31 st 2019

When irrelevant alternatives do matter. The effect of focusing on loan decisions

In this paper, we investigate some implications of recent results about salience on loan decisions. Using the framework of focus-weighted utility we show that consumers might take out loans even when that yield them negative utility due to the focusing bias. We suggest, however, that this can be counterbalanced and consumers might be more prudent in their decisions and less likely to take out such loans when the usual fixed-installments plan is coupled with an equivalent decreasing-installments option. Moreover, we show that this is true even for loans with prepayment options or when borrowers take default into consideration. We argue that harmful loan consumption could be decreased if a policy would prescribe presentation of loan repayment schedules in a way that employs this effect.

Myth buster

Practice sustainability is a necessity for the viability of the mixed animal veterinary practice industry. To keep mixed animal practices thriving, a plan is needed to transition practices from 1 generation to another. Buying into a mixed animal practice is often promised to a new associate doctor but not fulfilled. The process often lacks communication and a good plan. Drs. Wenger and Middleton will share their experiences on how their practice has transitioned from 1 generation to another. They continue to focus on transition as new-generation partners are joining the practice. They will touch on how to value a mixed animal practice. Purchasing a practice is a return on investment for the owner that is selling and a huge investment for the new owner that is buying shares of the practice. Much has been written about valuing, buying, and selling small animal practices, but there is little information on how this to relates to mixed animal practices. Large student loan debts complicate the process and often stop the discussion because no solution is presented. Current student loan income-based repayment plans may create challenges to young veterinary practice owners due to an increase in income, thereby increasing student loan payments and creating cash flow dilemmas. Drs. Wenger and Middleton conclude that it is possible to become an owner with student loan debt and complicated loan repayment schedules, and will share their experience as to how to make it happen.

ベトナムにおけるハンセン病元患者自立支援プログラムの事例とハンセン病元患者によるプログラムへの評価

One of the leprosy treatment centers (hospital X) in Vietnam offers loan programs to start work as part of the socio-economic rehabilitation program for ex-leprosy patients. The aim of this study is to examine and evaluate the contents of the program from the ex-leprosy patients’ perspective. The interview group was sub-divided into three groups: male/female and the younger group. A focus group interview method was used to collect qualitative data. The participant program group revealed that their income increased and their health condition improved; moreover, they evaluated the program highly as they can borrow business loan at no interest. Meanwhile, the participants were challenged with a few problems: the frequency in the illness of the livestock and the forcible discounting in the livestock’s price by the customers who use the excuse that the livestock has been raised by ex-leprosy patients. The younger group had concerns regarding the program; they were worried about the repayment of the business loan. Both groups noted points to improve the current program especially in terms of changing the loan repayment schedule and loan volume. Therefore, the program has to be adapted to the needs of ex-leprosy patients.

What can increase the default risk in local governments?

Concern has been expressed by international organisations and in previous studies about the financial situation of local governments, and the question of debt has been identified as a crucial element in efforts to overcome the current financial crisis. However, the variables that can affect the financial soundness of these governments have not been sufficiently studied, despite their direct relation to the credit risk premium. In this article, we aim to identify risk factors for default by local governments, and provide useful information to municipal financial managers. We conducted an empirical study of 148 Spanish municipalities and analysed data from four years, applying a random effects logistic regression model. Our findings reveal that a lower population density, less dependent population, falling levels of per capita income and the presence of progressive local government are all risk factors for default by local governments. Furthermore, our findings indicate that the general financing structure variable and debt composition and maturity variable do influence the risk of default by local governments. Points for practitioners The findings of this article can provide useful information for managers and politicians responsible for the financial management of local governments, in particular, by enabling them to better understand the risk premiums assigned by banks. Specifically, by identifying the risk factors for default, this article highlights the warning signs of this risk, so that suitable arguments may be expressed in negotiating loan repayment schedules and interest rates, and in designing financial viability and restructuring plans.

Should Flexibility Matter? A Poor Consumer’s Perspective of Flexible Micro Loans

Repayment schedules characterizing a typical micro loan are rigid and offer little to no flexibility in terms of rescheduling repayments when faced with emerging contingencies. Such rigid structures affect the economic as well as the psychological well-being of the poor leading to underinvestment of the borrowed capital, lower motivational levels and lowered sense of psychological well-being among the underprivileged. Flexibility in loan contracts and repayment schedules can alleviate these adverse effects on the poor and bring the microfinance institutions closer to their goal of poverty alleviation and welfare objectives. In this article, a case is made in favour of flexible loan contracts and repayment schedules based on the psychological underpinnings of decision making among the underprivileged. Implications of such loan contracts on consumer welfare and the microfinance institutions (MFIs) are discussed.

Mitigating seasonal hunger with microfinance in Bangladesh: how does a flexible programme compare with the regular ones?

Microfinance institutions, often criticised for inadequately addressing seasonality and hard-core poverty, have begun to introduce innovative programmes designed to tackle both the concerns. One such programme in Bangladesh is the Programmed Initiatives for Monga Eradication (PRIME). PRIME exclusively targets the ultra-poor, especially in the country’s northwest region, and offers both production and consumption loans with a flexible loan repayment schedule, and other services. This article assesses the effectiveness of PRIME and regular microfinance programmes in reducing seasonal hardship. Findings of this article suggest that PRIME is better targeted than regular microfinance programmes and also performs better in mitigating seasonal starvation.

Impact of the Interest Drawback Programme (IDP) On Loan Repayment under the Agricultural Credit Guarantee Scheme (ACGS)

The interest drawback programme (IDP) as an innovation under the Agricultural Credit Guarantee Scheme (ACGS) was instituted to encourage loan repayment by providing a post payment rebate to loan beneficiaries that honour their loan repayment schedules coupled with the fact that it also presents a reduced effective lending rate for loans under the Scheme. Time series analysis of the operations of the IDP from 2003 till date depicted the IDP as a poor predictor of loans repayment. The long-run estimation showed that both loans guaranteed and IDP payments have been inelastic determinants of loans repaid. For every N 1 million increase in loans guaranteed, loans repaid will increase by N 990,000.00, while for every N 1 million increase in IDP payment, loans repaid will reduce by N 50,000.00. This inverse relationship between loans repaid and IDP payment is contrary to a priori expectation as IDP payment was established to boost loan repayment under the ACGS. The estimation also highlighted a negative long run effect of IDP payments on loans repaid under the scheme. Though the introduction of the IDP has brought about a significant change in the series of loan repayment under the ACGS, however its long run impact on loans repayment should be addressed.

Microfinance as a Vital Tool for Micro-Enterprise

The study assessed the economic impact of MFI program to the growth of micro-enterprises in Isabela. The selected MFIs were ASKI and TSPI with 162 respondents. Descriptive research was used. Results showed that majority were engaged in marketing and had less than 5-year membership. All acknowledged that MFI had high contributions towards their economic growth in terms of Size of Capital, Return of Investment, Net Profit, Net Worth, and Total Assets. They agreed to have encountered problems with MFI in its operation in terms of high risk in operating microfinance; very slow business growth probability; voluminous number of small transactions; very volatile market; high costs of monitoring and evaluation; very poor loan repayment rate; loan proceeds were utilized in other purposes; very slow processing of loan that caused loss of business opportunity; very short term of loan and frequent repayment schedule hampered micro-enterprises’ cash flow; and very small amount of loan offered. They recommended solutions to MFI: reduction of documents needed to fast track loan processing; replacement of collateral based-lending to cash-flow-based lending; increase on amount of loan; giving reasonable grace period for repayment; strict monitoring of MFI to ME in the use of loan; strict collection drive to improve repayment rate. Keywords - Microfinance, micro-enterprise

Education and Optimal Dynamic Taxation

We study optimal tax and educational policies in a dynamic private information economy, in which ex-ante heterogeneous individuals make an educational investment early in their life and face a stochastic wage distribution. We characterize labor and education wedges in this setting analytically and numerically, using a calibrated example. We present ways to implement the optimum. In one implementation there is a common labor income tax schedule, and a repayment schedule for government loans given out to agents during education. These repayment plans are contingent on loan size and income and capture the history dependence of the labor wedges. Applying the model to US-data and a binary education decision (graduating from college or not) we characterize optimal labor wedges for individuals without college degree and with college degree. The labor wedge of college graduates as a function of income lies first strictly above their counterparts from high-school, but this reverses at higher incomes. The loan repayment schedule is hump-shaped in income for college graduates.

An overview of project finance binomial loan valuation

Setting project financing parameters, such as the loan to valuation ratio, loan interest rate, repayment schedules, and fees, requires detailed modelling of the resulting credit risk in a non-recourse setting. Structured credit risk models, based on the early work of Merton, have been developed in continuous time which can assist with project financing structuring. These models require a level of mathematical sophistication that may not always be available to those undertaking project financing analysis. This note provides an overview of a discrete time binomial approach to structural credit risk modelling, which enables project financing analysts a more accessible tool to evaluate project loan structures.

Do Microfinance Programmes Really Serve the Poor? Evidence from Rural Southeast Nepal

During the past 25 years development organisations worldwide have increasingly relied on microfinance programmes to help alleviate poverty and achieve various development objectives. These programmes typically aim to provide financial services to poor households that otherwise cannot access formal financial markets. One such example programme is the Grameen Bikas Bank (GBB) in rural southeast Nepal. While GBB targets poor households, the evidence reveals that the vast majority of GBB clients are relatively wealthy, as measured by land ownership and other socioeconomic indicators. In addition, GBB’s poor clients also feel less satisfied with its services than do wealthy clients, suggesting that GBB has not adequately tailored its products to the needs of the poor. Possible reasons for GBB’s shortcomings include Nepal’s caste system, rigid loan repayment schedules, and below-market interest rates on loans. Remedies to improve GBB’s outreach to the poor include flexible repayment schedules, higher interest rates, and increased staffing to recruit poor households and monitor their loans.