FACTORS INFLUENCING LOAN REPAYMENT AMONG MICRO ENTERPRISES IN LAGOS

CHAPTER ONE

INTRODUCTION

1.1  Background of the study

Microfinance institutions (MFIs) have emerged as an economic development strategy aimed at assisting micro businesses in obtaining money for the growth and maintenance of their operations. MFIs have made significant efforts throughout Asia, Africa, and Latin America over the past decade to increase poor people's access to credit, but lending to microenterprises remains a time-consuming and difficult business, particularly in terms of improving their incentives to fulfill payback commitments (Hwarire, 2012; Nawai & Shariff, 2013; M. Sharma & Zeller, 1997). Despite the efforts of current MFIs to bridge the credit gap for businesses, according to Angaine and Waari (2014), the entrepreneurs have been defaulting on their loans. MFI schemes operate in over 100 countries (Abbas & Honghui, 2016), with an estimated 10,000 MFIs (Pereira & Mourao, 2012; Responsability, 2017) and a database from the Microfinance Information Exchange (MIX) Market reflecting 291 million clients worldwide (Pereira & Mourao, 2012; Responsability, 2017). (Morduch, 2016). MFIs include anything from credit unions and cooperatives to non-governmental organizations (NGOs), government agencies, private businesses, and commercial banks (Shu Teng, Zariyawati, Mokhtar, & Annuar, 2015). Similarly, the majority of MFIs are semi-formal or informal organizations that are not profit-driven and rely heavily on government subsidies (Nawai & Shariff, 2012). This figure demonstrates that the microfinance movement's most notable characteristic is its fast growth. Greater MFI penetration has resulted in increased rivalry among MFI (Guha & Chowdhury, 2012), which in turn has resulted in an increase in default rates (Guha & Chowdhury, 2012). (McIntosh, Janvry, & Sadoulet, 2004).

A loan is a form of debt incurred by an individual or other entity. The lender usually a corporation, financial institution, or government advances a sum of money to the borrower. In return, the borrower agrees to a certain set of terms including any finance charges, interest, repayment date, and other conditions. In some cases, the lender may require collateral to secure the loan and ensure repayment. Loans may also take the form of bonds and certificates of deposit (CDs). how ever,  this is not the case as microfinance loan default is unquestionably on the rise. Total outstanding microloans increased from $2.2 billion in 2000 to $80 billion in 2011, according to statistics from the Microfinance Information Exchange (MIX). It indicates a 37-fold rise in total, equating to 39 percent annual growth (Kohn, 2013).

Loan Default is the failure to repay a debt, including interest or principal, on a loan or security. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments.  Default risks are often calculated well in advance by creditors.Loan default or poor loan collection may have a detrimental effect on the borrowers', society's, donors', and MFIs' perspectives. Poor loan repayment has been argued to squander precious money and ruin a vital service for the underprivileged and the society as a whole (Al-Sharafat, Qtaishat, & Majdalawi, 2013; Derban, Binner, & Mullineux, 2005). Finally, according to Woolcock (1999), many MFI failures in underdeveloped nations are owing to their inability to guarantee excellent repayment performance among their borrowers. The majority of the research also shows that joint-liability lending is one of the most effective ways to encourage high repayment rates, especially in the absence of collateral (Ghatak & Guinnane, 1999; Godquin, 2004), but the theories of group liability also identify pitfalls that are evident in practice. As a result, many MFIs ultimately consider it to be expensive, limiting loan growth, and have turned to individual lending to increase profitability (Widiarto, Emrouznejad, & Anastasakis, 2017). In addition to growing competition as a result of MFI growth, several group MFIs, like Grameen Bank, provide individual loans to discourage existing customers from transferring to rivals and to attract new clients (Dellien, Burnett, Gincherman, & Lynch, 2005). In 2002, Bangladesh adopted a new system known as Grameen II, which did away with shared responsibility (Hermes & Lensink, 2007). BancoSol Bolivia, for example, has entirely switched to private financing (Cull, Demirguc-Kunt, & Morduch, 2007). Individual lending is often used to attract better-off customers at the cost of the poorest (mission drift) (Armendariz & Szafarz, 2011; Cull et al., 2007). Nonetheless, despite the fact that person based lending is becoming more common in MFIs (Hermes & Lensink, 2007), there is little study on the repayment behavior of small businesses that actually get loans (Deyoung, Glennon, & Nigro, 2006). Because one of the difficulties and constraints for micro enterprises in getting money from financial institutions is access to finance, it begs the issue of why so many micro-entrepreneurs refuse to return their loans while receiving such services from MFIs. This raises the issue of what factors influence loan default repayment intentions among micro business owners. Some of which are high interest rate , marital status, failure in business invested in. Because entrepreneurship academics typically believe that entrepreneur behavior is deliberate and therefore best predicted by individual variables, studying the factors responsible  for micro entrepreneurs  loan default repayment is essential (Bird, 1988). The effects of default repayment in MFIs have become a key basic topic, which are but not limited to, reduced loan amount to other intending borrowers, folding up of micro finance banks, etc, and identifying causes is essential for policymakers' explanation of adjustments that must be made to reduce defaults.

This study is intended to contribute to existing information about micro entrepreneurs' intentions to repay loans in default and to provide practical advice to MFIs on how to manage their financial policies.

1.2  Statement of research problem

Micro enterprises has been noted both in the developed and underdeveloped countries as one of the major drivers of the economy through creation of employment especially. Sources of fund for micro enterprises is one of the major challenges that militates against their growth and sustainability. Hence, for these businesses to strive and maintain relevance in the competitive business arena, tends to source for fund as loan externally through the help of financial institutions such as the Micro finance banks. The collection of this loan comes with its terms and conditions as well interest rates and penalty for defaulting.

Various academics have looked at debt repayment and non-repayment (default) in the past, as well as its factors. Several variables have been found as factors that influences micro enterprises loan repayment in various research.  These variables includes but not limited to, Interest rates, age, marital status, geography, excessive interest rates, insufficient loan sizes, bad assessment, lack of monitoring,  business experience, total household income, total sales, distance to the lender office, the formality of business, period of loan, are all believed to influence the probability of a loan default.  Individual/borrowers factors, company factors, loan factors, and institutional/lender factors are the four types of variables that influence repayment performance. Hence this study will be carried out against the backdrop of these variables.

1.3  Objectives of the study

The primary objective of the study is as follows

l  To find out why individuals  or micro enterprise obtain loan

l  To find out reason for loan repayment default by micro enterprise

l  To find out how micro finance banks can reduce their loan interest rate.

1.4  Research hypothesis

H01: Micro finance banks  can not  reduce their loan  interest rate

H1: Micro finance banks can reduce their interest rate

H02: There are no reason for loan repayment default

H1:There are  reason for loan repayment default

1.5  Significance of the study

The significance of this study cannot be underestimated as:

l  This study will examine   Factors influencing loan repayment among micro enterprises in Lagos

The findings of this research work will undoubtedly provide the much needed information to government organizations, ministry of education and academia.

1.6  Scope of the study

This study will examine  Factors influencing loan repayment among micro enterprises in Lagos. Hence selected micro finance institution in AKURE South of Ondo state will be used as case study

1.7  Limitations of the study

This study was constrained by a number of factors which are as follows:

 just like any other research, ranging from unavailability of needed accurate materials on the topic under study, inability to get data

Financial constraint , was faced by  the researcher ,in getting relevant materials  and  in printing and collation of questionnaires

Time factor: time factor pose another constraint since having to shuttle between writing of the research and also engaging in other academic work making it uneasy for the researcher

Operational definition of terms

Loan repayment:  the act of paying back the borrowed money to the lender

Micro enterprise: a business operating on a very small scale, especially one in the developing world that is supported by microcredit.