Causes of loan default in microfinance institutions (MFIs), a case study of Pride Microfinance Ltd, Wandegeya Branch

Abstract

This study was carried out to examine causes of loan default in Microfinance a case of Pride Microfinance. Although Microfinance Institutions have been recognized and accepted by the Government and development Agencies as effective tools for poverty alleviation, economic development. jobs creation and industrialization, loan default has been a major setback to these programmes. The purpose of this study was to find out the main causes of loan defaults in Microfinance institutions with an overall aim of proposing measures that can help in controlling and managing loan default in these Microfinance institutions. The study was conducted at Pride Microfinance. A sample size of 60 respondents was drawn using purposive and convenient sampling and questionnaires were used to collect data. According to the results it was concluded that high interest rates, multiple borrowing, poor business practices, diversion of funds, high processing fees, information asymmetry, inadequate credit risk management and pressure on loan officers as some of the variables that are important in explaining loan defaults in Micro Finance Institutions. Some recommendations were established so as to address the high loan default rate especially expanding loan monitoring frame work.