Examining the causes of loan default in microfinance institutions : a case of Pride Microfinance Ltd (MDI)

Abstract

The purpose of this study was to explore the causes of loan default in microfinance institutions with objectives of examining microfinance institutions specific factors causing customers to default, exploring the customer specific factors that make them default and recommending measures to control loan default in Uganda. The study used a cross-sectional descriptive study research design to explore a population of 829 customers from which a sample of 89 customers answered a structured questionnaire following a simple random sampling technique. The study established that the general customer specific reasons for loan default include multiple borrowing from more than one institution, diversion of funds to other projects other than what they were intended for collapse of business due to avoidable and unavoidable circumstances and poor management skills. The study also identified high interest rates on loans, limited sensitization of customers about the loan products offered, poor loan appraisals by credit officers, poor turnaround time and failure to understand the specific needs of the client leading to failure to design loan products to match customer needs as the institution specific factors leading to high loan default rates in MFIs. The study furthermore identified several measures that can be taken by MFIs to reduce loan default rates. These include: reducing interest rates, conducting seminars & trainings to customers on how to manage loans, conducting proper appraisals, strictly following the CRB rules and guidelines, training loan officers and taking time to listen to client's needs so as to recommend the right product. The study recommends that collateral be provided against loans by borrowers in order to motivate them to repay back the loans and that Microfinance institutions should motivate client officers to spend more time visiting, monitoring and assessing clients. The study also furthermore recommends that penalties should be applied to past due or unpaid loans to discourage defaults for example in the form of refusal of new loans to borrowers who default and publishing defaulters in public spaces like newspapers.