Client perception of loan default management in group lending: a comparative study of FINCA (U) Ltd and MIDCSCS in Gombe Subcounty, Wakiso District

Abstract

Micro finance has proved to be one of the most popular way of making financial services available to the poor. Both formal and informal financial institutions have adopted delivery systems and loan conditions to meet the specific needs of their clients. Although much attention has been given to effects of Micro finance, little discussion has taken place on loan default management in order for the financial institutions to remain financially viable and strong. The study aimed at investigating Client Perception of loan default management in group lending, by comparing FINCA (U) Ltd and MIDCSCS by specifically examining the credit methodologies used in loan default management, group guarantee system on loan default management, the administrative structures in the groups of these two institutions and assess the factors that affect loan recovery. The study used a cross sectional and descriptive research design that used qualitative and quantitative methods of data collection. The study was carried out in Lwadda LCI village Wakiso District because most members of MIDCSCS reside in this place and there was a substantial number of FINCA (U) clients in this area. The survey comprised of 113 respondents systematically selected. The 13 Key informants who were interviewed were purposively selected. FGDs were also held with purposively selected groups comprising of 8-10 members disaggregated by gender and age. The study established that measures to discourage loan default such as group guarantee become ineffective with time in both informal and formal credit institutions. Similarly continued access to follow-on loans was also established as an incentive to repay the loans. High repayment rates are mainly explained by repeat or roll-over loans. The study also established that it is the economically active who had access to loans of formal financial institutions as compared to the informal ones that loan out money to the economically active and inactive. This is due to the latter’s flexibility and mutual understanding amongst the members. Hence, informal financial institutions are people centered and respond to the needs of the beneficiaries. In both institutions short term and small sized loans ensure that default is minimized. This is because loans are broken into small manageable installments that can be paid from regular household income. The study established that insistence on savings by both institutions ensures that security of an individual borrower is built as members’ savings served as insurance against loan default. Where possible, members should involve themselves in their group administration. Access to credit for the most poor can only be facilitated by cooperatives as compared to Micro finance institutions. Cooperatives’ membership had stronger bonds; loan portfolio was financed by member’s savings thereby creating a sense of belonging. Since credit can be used for other purposes, continued investment in basic infrastructure remains a necessary high priority for the remote communities. Recommended areas for further research were: loan default management in big formal institutions, support services received from government, assessment of service delivery by lending institutions.