THE MICROBANKING BULLETIN No. 20 - Microfinance Information ...

FEATURE ARTICLESMICROBANKING BULLETIN, Issue 20, September 2010Microfinance Default Rates in Ghana:Evidence from Individual-LiabilityCredit ContractsGerald Pollio 1 and James ObuobieAbstractIn this paper we present evidence on the factors that affect default probabilities in individual-liability creditcontracts. The data are drawn from a for-profit microfinance lender in Ghana. Our sample consists of nearly1,000 randomly selected loans approved between 2002 and 2007, three quarters of which were repaid; asdefault is relatively rare in microfinance, borrowers who failed to repay their loans were over-sampled. Westudy the impact of demographic, business and loan characteristics on default odds. We find that repaymentis affected mainly by the number of dependents in the household, years in business, use of proceeds, loanstatus, and frequency of loan monitoring. In contrast to other studies, we find no connection between theborrower’s marital status, gender or their savings’ behavior and the likelihood of default.Microfinance, however measured, has increasedrapidly in Ghana since the start of the present decade,growing by 20-30 percent annually. MicrofinanceInstitutions (MFIs) currently provide financialservices to an estimated 15 percent of the country’stotal population compared with 10 percent for thecommercial banking sector.Rural and community banks account for the lion’sshare of MFI activity in Ghana, representing more thanhalf the total number of microfinance borrowers anda similar proportion of the sector’s total loan portfolio(Aryeetey:2008). NGOs, by contrast, are comparativelyunimportant: the average loan size is roughly onethird that provided by rural and community banksand an even smaller fraction (25 percent) of theamount borrowed from savings and loan companies.On the other hand, loan repayment rates, at a reported99 percent, are considerably higher among financialNGOs than among other microfinance providers orgovernment-sponsored lending programs; their loanloss exposure is also relatively modest.Finally, and perhaps not too surprisingly giventheir heavy dependence on donors or officialsources of finance, financial NGOs have the worstrecord of achieving either operational or financialCorresponding author: LSC London, Chaucer House, White Hart Yard,London SE1 1NX, United Kingdom.self-sufficiency, surpassed only by governmentsponsoredprograms. The clear implication here isthat without substantial subsidy, interest rates onloans provided by both NGOs and state-supportedinstitutions would be significantly higher, withan attendant negative impact on repaymentobligations.Ghana’s commercial microfinance operations have,by contrast, broadly achieved a degree of operationalefficiency that compares favorably with mediumsized African financial institutions or worldwide MFIs;even so, in terms of financial sustainability, many stillhave a long way to go. The purpose of this paperis to investigate repayment rates among MFIs thatfollow the individual-liability lending model; sincethis model closely approximates to that pursued bycommercial banks, a close correspondence might beexpected between the two approaches. Our analysis derives from data on loan repaymentsand borrower characteristics provided by ProCredit(Ghana), a local microfinance institution, whichoperates on the basis of individual liability lending.Jha, et al. (2004) and Bank of Ghana (2007) provides an overview ofmicrofinance in Ghana.Owing to space limitations it was not possible to provide the full setof results. Readers interested in obtaining our findings can email thesenior author at the email address given above.Microfinance Information eXchange, Inc