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

More documents

Recommendations

Info

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
MICROBANKING BULLETIN, Issue 20, September 2010FEATURE ARTICLESFigure 1: Odds Ratio Classified by Borrower Characteristics1.801.601.401.201.000.800.600.40Series 10.200.00MarriedMore than 40-yearsFemaleMore than 3-dependantsOver 5-years in businessTradeServiceProductionMicro & SME loansOver 12-months loan maturityStockWorking CapitalFixed AssetOver 150% Collater-Loan ratioMore than one guarantorNew loan clientsNo Other Non-Business IncomeNo SavingsNo Monitoringin Figure 1. On this basis, borrowers having more thanthree dependents and operating in the service sectorobtained larger loans with longer maturities, used theproceeds to finance fixed investments, lacked nonbusinessincome, and were at greater risk of default.These findings confirm the bivariate results.2. Multivariate ResultsPair-wise comparisons are illustrative, but fail totake proper account of the interactions that existamong the explanatory variables. Given that themain rationale for this study is to identify andanalyze the factors that influence loan repaymentrates in microfinance institutions, the way forwardis to employ multivariate statistical proceduresbetter able to achieve that objective. The techniquechosen, logistic regression, is perhaps the best ofseveral statistical procedures that can be used whenanalyzing conditional data.The OR is a way of comparing whether the probability of an event isthe same for two groups, and is measured by comparing the ratio ofthe odds of an event occurring (say, default) in one group comparedto the odds of it occurring in another group. An odds ratio of oneimplies that the event is equally likely in both groups. An OR greaterthan one indicates the event is more likely in the first group, while anOR less than one implies the reverse.In the present study, default probability, thedependent variable, is ascribed a value 1 if a givenloan defaulted and 0 otherwise, with default relatedto the various independent variables enumeratedabove. A direct logistic regression was fitted for eachof the independent variables, except for the variousbranches (Tema, Madina, Kaneshie, Tudu, Kokomlemleand Suame) that were used in this study. Theestimation results (not shown) indicate that seven ofthe independent variables are statistically significantat the 5 percent level or higher; other household,business and loan characteristics did not have anysignificant effect on the probability of loan default.1. Other non-business income (OR = 0.5793). A unitincrease in household non-business income leads to areduction in the relative ratio of the default probabilityto repayment by a factor of 0.5793; that is, as thepresence of other income separate from businessincome increases, the rate of credit default declinesby 42 percent. Given that the majority of borrowerswere married, this suggests that in most instancestheir partners either operated income-generatingbusinesses or were working in paid employment. ThisThe zero-order correlation between marital status and non-businessis income is positive and statistically significant.Microfinance Information eXchange, Inc11
Page 1: The Premier Source ofIndustry Bench
Page 4 and 5: The MicroBanking Bulletin (MBB)The
Page 6 and 7: Letter from the PublisherDear Reade
Page 8 and 9: FEATURE ARTICLESMICROBANKING BULLET
Page 10 and 11: FEATURE ARTICLESFigure 3: Ratio of
Page 12 and 13: FEATURE ARTICLESThe debt-equity rat
Page 18 and 19: FEATURE ARTICLESfinding is consiste
Page 22 and 23: BULLETIN TABLESThe Bulletin Tables
Page 24 and 25: Appendixrate, which results in infl
Page 27: ABOUT MIXThe Microfinance Informati

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

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?