Causes of Defaults in Microfinance Institutions in Sub Saharan Africa

Question: Discuss about theCauses of Defaults in Microfinance Institutions in Sub Saharan Africa. Answer: Introduction Background of the Study Financial institutions have played an important role in various parts of the world. Despite this there have been problems of loan defaults among the microfinance bank than main banks especially in developing countries. We want to establish whether the microfinance institutions contribute significantly to the causes of the defaults. In reference to Otero (1999), microfinance refers to providing or making financial services available to low-income poor people. Microfinance first came on the limelight in 1970s with the construction of Grameen Bank courtesy of Muhammad Yunus (Robinson, 2001). Before then from 1950s the role of the current microfinance was being played by donors and governments. Unfortunately the idea was met by myriad of challenges which resulted in high rate of default and hence losses to the government and the donors (Robinson, 2001). Research by (Schreiner, 2003) asserts that by 1996 there were about 1000 MFIs in about one hundred countries with an estimation of 1000 members. Many countries in sub-Saharan Africa have recently seen an increase in the number of microfinance institutions due to high demand for microcredit for SMEs and poor business people in urban and rural areas. The governments have also facilitated the rate at which the microfinance institutions are being established by liberalizing the economies. Whereas the main aim of any microfinance is not only lending but also making profit, high class competition in the sector has led to most of the microfinance institutions compromising on the critical aspects of lending leaving them exposed to high risk of default. The soaring rates of non-payments in microfinances impact badly on the extent of private investment and restrict operations of the institutions credit to borrower as they have to cater for the defaults. On the other hand, success of any microfinance is measured by delinquency loan as a fraction of gross lending. To salvage the delinquency loans, there is need for the microfinance institutions to lay down robust mitigation strategies such as more strict credit policies, an elaborate loan appraisal procedures and proper default recovery procedures. The subsequent chapters of the proposal will include literature review and methodologies that will be used in the actual research. Literature Review Default in microfinance The core objective of this study is to come up with a model to predict loan default among micro-borrowers in Africa. It will then be proper for the study to define or explain the term default. Default in the context of this research study refers to failure of individual borrower to repay a due installment at the right time. Many microfinances have of late been struggling with the problem of default. This has been occasioned by the level of competition in the market which drives them to lend money without proper loan appraisal. It is an issue of concern since it is affecting the operation of many of those institutions. When defaults are minimal or repayment rates are high, the MFIs are able to increase the amount of money they disburse to lenders. They are also able to offer their loans at lower interest rates and even charge lower processing fees (Acquah Addo, 2011). There have been debates as to the causes of loan defaults but a conclusive result is yet to be found. It has been said that some of the reasons that are likely to encourage poor repayments or default are poor management procedures, using loan for unintended purpose, lack of will by the borrower to repay and other economic factors (Wongnaa, 2013). According to (Arene, 1993), a number of factors such as level of education of a farmer, income and experience were better determiners of credit worthiness of a borrower. A research study done in Kwazulu Natal in South Africa by (Mashatola Darroch, 2003) pointed that farm size, loan size, farming experience and level of education affected loan repayment. According to (Eze Ibekwe, 2007) formal education, loan size, size of the family and occupation of the borrower also significantly influenced repayment behavior. Research Questions and Hypothesis Research Questions Could the initial loan appraisal process be the major cause of non-performing loans in microfinance institutions in sub-Saharan Africa? Are the laid down recovery framework and procedures by microfinance institutions be the major cause of defaults in microfinance institutions? What are the lenders factors that could encourage non-performing loans among borrowers in MFIs? Research hypothesis The following is the main research hypothesis of the research project. H0: Microfinance institutions in sub-Saharan Africa contribute significantly to the causes of defaults that they experience. Versus H1: Loan defaults among microfinance institutions borrowers in sub-Saharan Africa have got nothing to do with the institutions themselves. Operational Definitions and Measurements The population of this research will involve established microfinance companies and borrowers from the same institutions in the sub-Saharan Africa. The population will be limited to those microfinance institutions that have been registered by their various governments Central Bank by December 2015. Credit risk managers and loan officers from microfinance institutions will form the population. Research Methodology Sampling Technique The research combines both qualitative and quantitative research design. The quantitative research technique will be used in cases where the some studys test will be done using inferential statistics. This approach method is preferred because of the random nature of the sample from which inference will be made. This design will be used to describe the data and population characteristic.The dependent variable in this case will be default while the independent variables will be loan amount, size of the business, experience with microfinance, level of education of the borrower to mention but a few. Method of Analysis Correlation analysis will also be conducted, to be specific, Pearsons Correlation coefficient will be employed to establish the cross-relationship between the independent and dependent variables; this will be to determine whether there is a significant relationship that exist between a variable and default to the extent that the variable can be an indicator of looming default. During data analysis, multivariate statistical software XL Stats will be used because of its aptness in multivariate analysis. Since the study is having numerous variables, factor analysis will be used since it is able to screen a group of variables depending on the weight of correlation. To add on, the software Statistical Package for the Social Sciences (SPSS) and Excel will be used to solve the multiple regression equation used in this study and to solve descriptive statistics. Research Process The data will be collected through two ways. These are primary data and secondary data. Primary data will be collected through the use of questionnaires so as to get first-hand information. Secondary data on the other hand refers to data from past records, published journals and data from the microfinances that will be used in the study. Though the study will use both primary and secondary, the study will rely heavily on secondary data. On primary data, a simple random sampling will be employed to select the respondents. A self-administered questionnaire will be employed in data collection. This will help the participants have ample time to answer the questions at their own free time since some of them are usually not ready at the time the researcher wants to conduct the interview. Expected Outcomes From the literature review, it is evident that most of the causes of default or non-payment of loans among microfinance institution borrowers comes from the borrowers themselves and not the microfinance institutions in Africa. Such causes are using the money borrowed for other purposes other than the intended purpose. The other cause from the borrowers may be investing the borrowed money in projects that are not viable. Moreover, there are other causes that come from the institutions themselves such as lack of proper loan appraisal. Conclusion The research study will be an important learning material to policy drafters in MFIs as it will guide them on maintaining a quality and performing loan portfolio. When it comes to delinquency management, the document will come in handy for the top managers of financial institutions and the juniors such as loan officers who directly deal with borrowers from the initial stages of recruitment to loan appraisal. Apart from the financial institutions, the outcome of this research will be a point of reference to potential borrowers to make better choices when looking for any loan product. References Arene, C. J. (1993). 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Global poverty in the late 20th century. Journal of International Affairs, 293-301. Schreiner, M. (2003). A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh. Srinivasan, R. (2007). Measuring Delinquency and Default in Microfinance Institutions. Indian Institute of Management: working paper. Wongnaa, C. A. (2013). Agris on-line Papers in Economics and Informatics Factors Affecting Loan Repayment among yam farmers in Sene District of Ghana.