Causes Of Default In Microfinance Programs: a case study of DECSI, Mekelle Town
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This study endeavors to investigate causes of default in microfinance programs. The problem identified was that microfinance programs perform poorly because of slow repayment and high default rates. Hence, it was important to establish if these limitations prevailed in the DECSI schemed by determining the average repayment delay and default rate and the causes of the observed trends. In order to address those issues, the researcher used questionnaires and conducted interview with the relevant company managers and referred secondary data sources. The collected data and information were compiled and analyzed for possible indications of problem areas. The results reveal that the board has an average repayment delay of 31.4 percent. The default rate increased over the review period and averaged 57.41 percent as well. The main cause of default was found to be poor business performance, in terms of low profitability or business losses. Loan diversion to unprofitable uses, domestic problems, numerous dependents, and tenancy problems were other factors that caused loan default. The inability to deal with slow repayment and default also was a matter of concern. The study found that operations and maintenance resources are too small to facilitate follow-up on loan usage, and that management information systems are manual. Such systems do not facilitate early detection of potential defaulters and slow-repaying borrowers. Further, nonprosecution of defaulters and the perception that government credits are grants rather than loans encourage default. The board is also understaffed, and key personnel have limited computer skills—factors that cause delays in processing and disbursing loans. Study recommendations are geared largely toward improving the board‟s capacity to manage the loan program. The board should computerize its management information system and build staff capacity in computer applications. Staff strength should be increased and sufficient operations and maintenance budgets should be provided. Processes should be worked out to identify borrower capacity and any obligations that may interfere with repayment. Finally, the board should intensify recovery of outstanding balances from defaulters through increased borrower follow-up.