DETERMINANTS OF LOAN DEFAULT OF MICROFINANCE INSTITUTIONS IN GHANA

Abstract

ABSTRACT A growing challenge that threatens the sustainability of microfinancing in Ghana and developing countries is loan default. This is the situation where customers fail to repay the loans granted to them. This study thus examines the determinants of loan default in Ghana, considering demographic factors neglected in research. This study uses the available financial dataset of five deposit-taking microfinance institutions for eight years (2010 to 2018). The study also employs quantitative analysis (including logistic regression) to assess the effect of gender, loan frequency, amount of loan, and loan type on the default rate of selected microfinance institutions in Ghana. The study finds that that gender does not influence the loan default of microfinance institutions. This was statistically insignificant (β=-0.286; p-value=0.32). Other factors such as loan frequency and amount of loan given were equally not statistically significant. Therefore, they do not influence the loan default rate of microfinance. Only loan type was statically proven to be significant in the influence of loan default. The study recommends that microfinance institutions should not pay too much attention to individual characteristics but rather to the business and loan characteristics when assessing the creditworthiness of potential borrowers. Also, Priority should be given to female clients than males when given loans. Moreover, the institution should have clear and effective credit policies and procedures and must be regularly reviewed. In addition, the government and hence the Bank of Ghana should periodically monitor and supervise the MFIs to ensure the safety of clients' deposits and customers' confidence