Loan repayment performance of clients of informal lending institutions

Abstract

Purpose The purpose of this article is to examine the effects that dynamic incentives and the borrowing histories of clients of informal lending institutions have on loan repayment performance, in particular, the extent to which multiple borrowing and progressive lending affect the repayment of loans. Design/methodology/approach The paper uses a data set of 835 borrowers drawn from an informal lending institution in Tanzania. Descriptive analysis and econometric models are used to test the developed hypotheses. Findings Whereas clients with multiple loans are associated with poor loan repayment, progressive lending contributes to positive repayment outcomes. Multiple borrowers face increased debt levels and thereby an increased inability to meet their repayment obligations; in contrast, progressive lending by building up a lender–client relationship helps clients to obtain higher loans with a minimum amount of screening. Research limitations/implications This was a cross-sectional study based on a sample of individual clients drawn from a single institution. However, since the majority of clients had also taken out loans with other financial institutions, the sample is considered to be representative. Practical implications A client’s past repayment performance and multiple loan history must be assessed so that multiple borrowing can be prevented and credit absorption capacity can be gauged more accurately. The repeated nature of the interactions and the threat to cut off any future lending (if loans are not repaid) can be exploited to overcome any information deficit. Originality/value This study was conducted in a context in which the degree of information sharing was low and institutional access to clients’ credit histories was limited. It contributes knowledge on how lenders minimise the risk flowing from the ex ante information gap and moral hazards arising from the ex post information gap.

The Influence of Relationship Lending on SMEs Loan Repayment Performance

“…Adverse selection is created before the transaction occurs, when selection increases the possibility of loans made to insecure borrowers a consequential undesirable (adverse) outcome (Greenbaum, Kanatas, & Venezia, 1989; Charles & Mori, 2017). On the other hand, moral hazard is a result after the transaction occurs.…”

An assessment of over-indebtedness among microfinance institutions’ borrowers: The Tanzanian perspective

“…MB i is multiple-borrowing i.e. loans from different lenders measured as a binary variable equal to 1 if the borrower had borrowed from several lending institutions and 0 otherwise (Charles & Mori, 2017), and DQ i is delinquency, i.e. a dummy that takes the value of 1 for a borrower who is in arrears of at least one day on an outstanding loan at the time of the survey, and 0 otherwise (Schicks, 2013).…”

“…They further revealed that about 71 percent of all survey respondents admitted to often face the problem of delinquency. Similarly, Charles and Mori (2017) found out that micro-borrowers in Tanzania face increased debt levels and thus an increased inability to meet their repayment obligations. Gonzalez (2008) suggested that inability to repay, or unwillingness to repay is associated with over-indebtedness in Bolivia.…”

“…Multiple borrowing represents the number of loans the borrower has from different lenders (Kempson, 2002). This was measured as a dummy variable that takes the value of 1 if the borrower has multiple loans, and 0 otherwise (Charles & Mori, 2017). Delinquency represents a state in which a borrower repays a loan later than it is due, or in the worst case not repaying all or part of it (Kappel et al, 2010).…”

“…Most countries in Sub-Sahara Africa, including Tanzania face a problem of microcredit debt payment leading to delinquency (Buss, 2005). Charles and Mori (2017) observed a substantial increase in multiple borrowing among micro-borrowers in Tanzania, due to limited information sharing among lenders. The study by Mpogole et al (2012) concentrated on multiple borrowing and loan repayment among microfinance clients in Iringa region, Tanzania.…”