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

FEATURE ARTICLESterms of loan amount, tenure, collateral and thenumber of co-signers who act as guarantors for thecredit. A greater number of guarantors and a highcollateral-to-loan ratio should be consistent withlower default risk; so, too, should the intensity withwhich loans are monitored (but see below). Loanstatus indicates whether the borrower had obtainedprior loan(s). Loan tenures are of variable length,though longer maturities appear consistent with alower risk of default; for a given interest rate, longermaturities imply lower periodic installments. Finally,loans used for working capital or stock accumulationappear less risky than then those used for acquisitionof fixed assets.A larger percentage of defaulted borrowers inour sample are single or divorced and younger onaverage, and a relatively larger fraction is madeup of women (48 percent in the defaulted groupcompared with 43 percent among borrowers whorepaid their loans). Defaulted borrowers also havea relatively larger number of dependents thantheir non-defaulted counterparts. When the varioushousehold characteristics are subject to formalstatistical analysis, the only variable shown todiffer significantly is the borrower’s age; defaultedborrowers on average were eight years younger thannon-defaulted borrowers.The majority of borrowers in the default categoryhave less than five years experience running theirbusinesses. Borrowing for the purpose of adding tostock accounted for 50.1 percent of all loans; workingcapital loans or loans to purchase fixed assetsconstitute 17.9 percent and 32 percent, respectively,of the total sample. Statistical analysis confirmsthat number of years in business is an importantdeterminant of default, in contrast to the purpose ofthe loan, though a higher incidence of working capitalloans among repaid loans is marginally significantindicating a favorable impact on the probability ofrepayment.Loans offered fall into two broad categories: thoseabove GHC1,000 are described as loans to small andmedium enterprises (SME) and micro loans, whileloans below GHC1,000 are known as ‘express’ loans.The majority of loans in the sample were expressloans (55.2 percent), with a greater proportion ofdefaulted loans (54.2 percent) falling into the microand SME loan categories; this compares with repaidexpress loans of 57.6 percent. Loan status indicateswhether the borrower is a new client obtaining his/her first loan or is a repeat borrower; 63 percent ofborrowers fall into the former category. Interestingly,MICROBANKING BULLETIN, Issue 20, September 2010the majority of defaulted borrowers were repeat notnew clients, a statistically significant finding.Collateral coverage is measured as the ratio of thecollateral value to the loan amount. For the majorityof clients in the sample (60.5 percent) this ratioexceeded 150 percent; coverage differences arehighly significant. Each loan was guaranteed by atleast one guarantor, who also acted as a co-signer ofthe loan contract; 56.5 percent of borrowers in thetotal sample had their loans guaranteed by at leastone guarantor. Among borrowers that repaid theirloans, nearly one half had more than one guarantor.Loan monitoring is part of the loan cycle: loan officersvisit the residence and business of each borrowerbefore and after loans are made to ensure that theproceeds are used only for the stated purpose andthat the business/project is being run efficiently.Regular visits also serve to strengthen the relationshipwith the borrower, encouraging repayment whilesimultaneously gathering information concerningthe state of the business and household finances, allof which should be consistent with a lower defaultrate. By contrast, more frequent visits could betaken as evidence that borrowers are experiencingrepayment difficulties, higher frequency indicatinggreater severity. The data appear more consistentwith the second interpretation: defaulted loans weremonitored more frequently than repaid loans, whilestatistical analysis confirms that the differences weresignificant.Loan maturities range from 4-12 months, thoughfixed asset loans are sometimes extended for up to18 months. Sector indicates whether the borrowers’main business is in services, trade (buying andselling), or production (manufacturing). The majorityof borrowers operated in the trade sector (58.8percent), with an average loan maturity of up to12 months. Statistical analysis indicates that businesssector does not matter, though the higher incidenceof default among firms operating in the trade sectoris marginally significant. Loan maturities, too, donot appear to be important, with the slightly higherpercentage of shorter maturities among defaultedloans being statistically insignificant. Finally, whilethe data indicate that the percentage of borrowerswho saved over the life of the loan was higheramong repaid than defaulted loans, the differencesare insignificant.Another way of assessing the extent to whichborrower, business and loan characteristics affectrepayment is to present Odds Ratios (OR) as shown10Microfinance Information eXchange, Inc