WOMEN LOAN REPAYMENT RATE: EVIDENCE FROM SELECTED MICROFINANCE INSTITUTIONS, MOSHI MUNICIPALITY KITALA CHRISTIAN TOBIAS MALAMSHA and KIMARO MANASE EMANUEL ABSTRACT Microfinance institutions have emerged as one of the major contributors of poverty alleviation and sustainable economic growth. Specifically women business sector has found the way to improve their business through the use of microfinance services. However, taking loan or borrowing is easy but challenge comes at times of repayments. The delays in repayments and loans default threaten the microfinance institutions. This is due to negative effects of low-repayment rates. Thus, the study assessed low loan repayment rates to microfinance institutions by business women in Tanzania. The paper addressed two specific objectives. The first was to examine effect of loan s conditions set by micro-finance institutions on the loan repayment for business women. The second was to determine factors influencing the repayment of loans borrowed by business women to selected micro-finance institutions. There were four loan conditions set by MFIs namely Interest rate, Training on loan management, Loan repayment grace periods and repayment schedules and Loan repayment enforcement measures Multiple borrowing by many business women was mentioned as one of the major factors influencing loan repayment in microfinance sector. The ability to repay multiple loans becomes a challenge. Other factors include family responsibilities, lack of financial and entrepreneurship training and inconvenient loan repayment time. Therefore, there is a need to undertake training on loan management and business management to the clients. Key words: Loan repayment rate, women entrepreneurs, women borrowers, microfinance institutions. 1. INTRODUCTION Many developing countries including Tanzania have realized that women can contribute immensely to the development and improvement of national economy; hence they see the importance of helping women to improve their living standards (Harns, 2007). Since independence to date the government of Tanzania has been making efforts to ensure that women are fully involved in the production sphere so as to raise their living standard and that of their families. This has been done in collaboration with various microfinance institutions (MFIs). Microfinance refers to provision of small-scale financial services by Moshi Co-operative University, Moshi, Tanzania Email emanuelkimaro@yahoo.com 1
Dr. Kitala Christian Tobias Malamsha is a Senior Lecturer, in the Department of Economics and Statistics, the Moshi Co-operative University (MoCU), Moshi, Tanzania, Email: mwishurie@yahoo.co.uk and Mr. Kimaro Manase Emanuel was an Assistant Lecturer, in the Department of Procurement and Supply Management, Moshi Co-operative University, Moshi, Tanzania Email emanuelkimaro@yahoo.com 1
(MFIs) to people who work in agriculture, fishing and herding, who operate small or micro enterprises, who provide services, who work for wages or commissions, and other individuals and groups at the local levels both in rural and urban areas. MFIs are financial institutions which provide microfinance services (Robinson, 1996; Graume, 1997, Ledgerwood et al., 2013, Kitala, 2014). According to URT (2000), examples of MFIs are Savings and Credit Co-operative Societies (SACCOS), Small enterprise Development Agency (SEDA), Promotion of Rural Initiative Development Enterprises (PRIDE AFRICA) and Foundation for International Community Assistance (FINCA). Different projects for women income generation activities have to be established after being provided with credits and loans as a start- up capital from the MFIs. In this article women who secure loans or credit from MFIs are referred as women borrowers. A number of initiatives have been taken to increase start-up rates and performance levels of women-owned Small and Medium Enterprises (SMEs).Women who own SMEs are referred as women entrepreneurs in this article. These initiatives have been taken by government, international donors and (NGOs), both local and international. However, women in the sector are still found predominantly in low growth areas, earning lower revenues than their male counterparts (Rutashobya, 1995). A loan repayment is one of the prevailing challenges to microfinance lenders as described by Addisu (2006). The accepted repayment rate for sustainable MFI should be 95% or more (Ledger-wood, 2000: Urio and Kessy, 2006, Ledgerwood et al., 2013). In this research the low-repayment rate is referred as loan repayment rate less than 95%.However few MFIs can attain the 95% repayment rate resulting with delinquency. According to Kitala (2014), for randomly selected sample of 120 SACCOS in Tanzania, the repayment rate for those SACCOS in 1998 was 13% and increased gradually to 44% in 2007. Therefore, based on these research findings, the attainment of 95% repayment rate in SACCOS was difficult. This may call upon attention to increase the loan repayment rate in SACCOS and other MFIs. Seventy percent of the world s poor are women. Women form the largest percent of members in microfinance as identified by Harns (2007). Yet traditionally women have been disadvantaged in access to credit and other financial services. Commercial banks often focus on men and formal businesses, neglecting the women who make up a large and growing segment of the informal economy. Microfinance on the other hand often targets women, in some cases exclusively. Female clients represent eighty-five percent of the poorest microfinance clients reached. Therefore, targeting women borrowers makes sense from a public policy standpoint. They also contribute larger portions of their income to household consumption than their male counterparts. There is thus a strong business and public policy case for targeting female borrowers (Harns, 2007). Despite the fact that loan repayment has been recommended to be 95% or more still repayment rate has remained low for MFIs providing loans to men and women. Therefore, the need to undertake the study on the factors that affect the loan non- repayment rate for women borrowers so long as it will enhance the capacity of microfinance institutions and women Moshi borrowing Co-operative capacity University, hence contribute Moshi, Tanzania to the poverty Email alleviation. emanuelkimaro@yahoo.com 1
This paper examines the effect of loan conditions on repayment performance and identified factors that lead to women repayment rates. Moshi Co-operative University, Moshi, Tanzania Email emanuelkimaro@yahoo.com 1
2. WOMEN BORROWERS LOAN REPAYMENT Women loan repayment rate is notes as one of main challenges facing micro-finance institutions. In a study conducted by International Fund for Agricultural Development (IFAD, 1996) showed that, most women fail to re-pay loans in time. IFAD based on its conclusion and analysis of 37 districts in Nepal. The loan recovery rate declined from about 75% for 1991/93 to 35%. Reasons for decline in repayments included rapid expansion of landing activities which lead to overstretching of credit officers coverage and women borrowers low knowledge in their loan repayment obligation. From theoretical point of view, women are viewed from a gender point of view. They seem to be easily susceptible to peer and credit officers pressure. Women borrowers can be monitored more conveniently through group schemes than men (Aghion et al., 2007; Aghion and Morduch, 2003; Goetz and Gupta 1996). Ameen (2004) argues that women have a lower opportunity cost of time than men making their time less valuable than for their male-counterparts. As a result, they are more inclined to have more contact with the MFIs (including group-meetings, meetings with loan-officers) which altogether have a positive impact on their repayment. Goetz and Gupta (1996) suggest that women may have a higher incentive than men for loan repayment since it allows them to retain access to village groups, whereas men have many more opportunities for social contact. Study conducted by Godquin (2004) in Bangladesh found that provision of non-financial services has a positive impact on repayment performance while age of the group members and loan size (amount) of the loan has a negative impact on repayment performance. Deininger and Liu (2009) examined whether and how repayment performance is affected by the source of loan, insurance substitute together with loan and group characteristics, found out that loan monitoring, audit, payment frequency and in-kind credit increase repayment performance. The relation between gender and repayment has been analyzed in a number of studies. However, the evidence is mixed and usually very limited in geographical and/or institutional scope. On the one hand, a number of studies find that women consistently outperform men in terms of repayment. For instance, Aghion and Morduch (2003) report that in its initial faze the Grameen Bank also included men as customers. The bank decided to concentrate on women due to repayment problems related to male customers. In Bangladesh, the analysis carried out by Godquin (2004) shows that correlation between gender and repayment is positive but not significant after controlling for a number of MFIspecific effects. Finally, BRI, a most reputed MFI in Indonesia, has never had any specific focus on women, but still it has achieved nearly perfect repayment rates over several years (Aghion and Morduch, 2003; Aghion et al., 2007). So in spite of popular belief, perhaps the women repayment argument is not as clear cut In this study, emphasis is based on finding out factors that lead to loan repayment rates. The 3
as promoters seem to believe. From the reviewed literatures, loan low-repayment rate is still a challenge need to be addressed in the MFIs. This study focused loan low repayment rates specifically on the loan conditions and factors influencing the loan low- repayment rate by women borrowers to MFIs. In this study, emphasis is based on finding out factors that lead to loan repayment rates. The 3
study based on synthesis of literatures and experience identified independent variables to include loans conditions, interest rate, borrowers access to training and borrowers skills. 3.0 EXTENT OF LOAN REPAYMENT EVIDENCE FROM SELECTED MFIs 3.1 The Study Approach The extent of women loan repayment rate in this study by evidence collected from 90 respondents drawn from three MFIs. Out of 90 respondents, 30 were microfinance officers while the rest (60) were women borrowers patronizing the MFIs. Table 1 provides the details. Table 1: Sample distribution MFIs VISION FUND TANZANIA 20 UAMKIKI SACCOS 35 WARIDI VICOBA 35 TOTAL 90 Women clients were randomly selected to participate in the study to reduce the chances of bias. The study also used purposive sampling to get respondents from microfinance officers who are knowledgeable with the theme of the study. The aim was to make sure that the intended information is obtained and ensures the high level of accuracy. Interview was used to help to obtain qualitative opinions from the micro-finance officers. For the respondents who were busy or not available for an interview, a set of questions were given to them and they filled at their convenient time. The combination of these techniques helped to strengthen the study, because the weaknesses of one technique were offset by the strengths of the other technique. Documentary review of files and other documents from the respective microfinance institutions were used to collect secondary data. The primary data was systematically analysed based on the research objectives. The descriptive approach was used in data analysis whereby frequency analysis, percentages, histograms, pie charts were computed on the repayment rates for business borrowers. The secondary data were sorted out whereby only relevant information was included in the study. 3.2 Results and Discussion Number of Respondents The study was concerned with the loan-low repayments for women borrowers. Seventy three (73) women equal to 81.1% constituted the number of the respondents. The views from male were solicited to strengthen the data and some of them were the loans officers In this study, emphasis is based on finding out factors that lead to loan repayment rates. The 3
from selected MFIs, males were 17 equal to 18.9%. It should also be noted that, currently In this study, emphasis is based on finding out factors that lead to loan repayment rates. The 3
study, the importance of focusing women for the reasons of gender sensitivity as shown on Table 2. Table 2: Gender of the respondents (n = 90) Frequency Percent Valid of Percent Cumulative Percent Female 73 81.1 81.1 81.1 Male 17 18.9 18.9 100.0 Total 90 100.0 100.0 Educational level of respondents The educational level of the respondents were as follows about 40% had below primary education, 26.7% had attained primary education, 18.9% had secondary education while 14.4% had attained higher level education (Table 3). Women borrowers education level is critical in analysis of loan repayment behavior and particularly where skills training is involved. Table 3: Level of education of the respondents (n = 90) Level of education Frequency Frequency Percent Valid of Percent Cumulative Percent Below primary education 36 40.0 40.0 40.0 Primary education 24 26.7 40.0 66.7 Secondary level 17 18.9 18.9 85.6 Higher education 13 14.4 14.4 100.0 Total 90 100.0 100.0 3.3 Loan Conditions Set by MFIs on Loan Repayment for the Business Women The paper covered four loan conditions set by MFIs namely interest rate and low-loan repayment rate, training on loan management, loan repayment grace periods and repayment schedules and loan repayment enforcement measures. The findings and discussions of these loan conditions are as follows: SACCOS the interest rates ranges from 1% to 2% flat rate per month depending on 5
a) Interest rate and low-loan repayment rate Table 4 shows interest charged on loans and loan repayment. MFIs have made some reduction of the interest rate charged on loans disbursed. This resulted with decline in the impact of interest rate on loan repayment of loans. About 66 of respondents equal to 73.3% showed the interest rate is not a big problem,while 14 respondents equal to 15.6% said the interest may influence, 10 respondents equal to 11.1% were uncertain. This can be discussed as there is a relief of interest rate in MFIs. For instance at UAMKIKI the type of loans. For the business loans and emergency loans for example the interest rate 2% and 1% per month respectively. Likewise at Vision Fund Tanzania the interest is 2% to 3% per month depending on the type of loans and security offered, and WARIDI VICOBA group is Tsh.5000/= for every Tsh.100,000/= for three months approximate to 1.7% interest rate per month. However, Mitra (2009) argued that, MFIs unethically tends to hide interest rates, hiding effective interest rate to poor and illiterate borrowers by using creative accounting practices is highly unethical. Many MFIs simply state that they charge only 15% flat rate of interest. Effective interest rate including processing fee, compulsory savings and so on goes well over 100% per annum. Table 4: Interest charged and loan repayment (n = 90) Effect of interest on loan repayment Frequency Percent Interest does not influence loan repayment 66 73.3 Interest influence loan repayment 14 15.6 May influence or not influence 10 11.1 Total 90 100.0 b) Training on loan management Half of borrowers (50%) received no training on loan management. This is particularly on how the loans can produce positive results. More than 50% of the respondents did not have any loan repayment training, and this means there is little arrangement in MFIs in ensuring their clients get the necessary training on how they can use their loans effectively. This resulted to low loan repayment rate. However, 34.4% of respondents had acquired knowledge but most of them from other sources such as schools and colleges and workshops they attended. This implies that more training is needed to enhance better loan management and repayments. Effect of training on loan repayment is shown in Table 5. There is argument that, majority of Tanzanian s women entrepreneurs are quite often lack technical and business management skills, including the sophistication needed to negotiate with financial institutions, this concurs with the findings of this study. The point is, apart from providing loans, women must also learn how they can well apply it for productive outcome so that they can be able to repay back (Nchimbi, 2003). SACCOS the interest rates ranges from 1% to 2% flat rate per month depending on 5
Table 5: Training on loan repayment (n = 90) Effect of training on loan repayment Frequency Percent Not trained borrowers reduce loan repayment Trained borrowers increased loan repayment Training had no effect to loan repayment c) Loan repayment grace periods and repayment schedules Inconvenience loans repayment time, has been mentioned as one of the problem influencing loan repayments, as identified by 56.7% of respondents. Loan duration is also among the issue identified, 22 equal to 24.4% of respondents pointed the repayment duration as a problem. The loan repayment problems are shown in Table 6. The argument is that, the time is fixed and do not takes care of business dynamics. The repayment duration ranges from three to twenty four months depending on loan amount and purpose. The suggestion was to adjust time depending on the change in business condition. However, this argument was opposed by the loans officers as it complicates the collection of debts from number of clients due to business uncertainties and therefore there must be consistency way of loans collection. Table 6: Loan repayment problems (n = 90) Loan repayment problem Frequency Percent Inconvenience loans repayment time 46 51.1 31 34.4 10 11.1 Missing 3 3.4 Total 90 100.0 51 56.7 Repayment duration 22 24.4 Complex procedures 10 11.1 Other problems 5 5.6 Missing 2 2.2 Total 90 100.0 d) Loan repayment enforcement measures Loan repayment requires an extra effort; approaches for loan repayment may differ from 7
one organization to another. Measures for loan repayments are shown in Table 7. 8
Table 7: Measures for loan repayments (n = 90) Measures taken Frequency Percent Reminding the borrowers 34 37.8 Incentive for earlier repayment 20 22.2 Penalties 15 16.7 Punishments 12 13.3 Other measures 9 10.0 Total 90 100.0 3.4 Factors Influencing Loan Repayment Rate Table 8 shows factors influencing loan repayment rate as revealed from field data. There were four main factors influencing loan repayment rate by business women to MFIs. These four factors are multiple borrowing, misuses of loans, inadequate entrepreneurial skills and family responsibilities as they are described below. a) Multiple borrowing Microfinance low loan repayment is influenced highly by multiple borrowing. It was revealed that many women nowadays tend to borrow from various financial institutions. The women normally fail to disclose to other financial institutions if they were already borrowed from other financial institutions. A total of 30 respondents equal to 33.3% mentioned the issue of multiple borrowing. With growing number of MFIs; it has become easy nowadays to borrow from several institutions without disclosing it to other institutions. Also the room for allowing several borrowing has affected the repayment capacity; the burden of multiple borrowing becomes higher and difficult to pay. b) Misuse of the loans Twenty two respondents (22) equal to 24.5% of respondents identified the misuse of the loans as a factor influencing low loan repayment rates. This involves the use of loans for unintended purposes, for instance borrowing for establishing the business and end up with buying food for home consumption, and this is also in conjunction with the poor entrepreneur skills. c) Inadequate entrepreneurial skills Twenty (20) respondents equal to 22.2% mentioned inadequacy of entrepreneurial skills. Lack or inadequate business skills are considered one of the factors especially to the women entrepreneurs in a number of countries Rutashobya (1999). Lack of business skills could be related to failure to invest the borrowed money in profitable business. d) Family responsibilities 9
Sixteen (16) Respondents equal to 17.8% identify the family responsibilities. This again leads to misuse of loans purpose and lead to what is called the dead loans or nonproductive loans, meaning that when the loans used for family spending they are not producing hence difficult to repay the loan. 10
Table 8: Factors influencing loan repayment (n = 90) Factor influencing loan repayment Frequency Percent Multiple borrowing 30 33.3 Misuse of the loans 22 24.5 Inadequacy of entrepreneurial skills 20 22.2 Family responsibilities 16 17.8 Other factors 2 2.2 Total 90 100.0 4.0 SUMMARY AND CONCLUSION The main objective of this paper was to assess loan repayment to MFIs by business women in Tanzania. To achieve this main objective, two specific objectives were addressed. The first specific objective was to examine effect of loan s conditions set by MFIs on the loan repayment for the business women. The result revealed that there was decline in the impact of interest rate on loan repayment of loans. Seventy three percent (73.3%) of respondents showed the interest rate is not the big problem. Training on loan management covered less than 50% of respondents. Inconvenience loans repayment time, has been revealed to be a problem to 56.7% of respondents However repayment measures are well practiced by the studied MFIs. The second specific objective was to determine factors influencing the repayment rates of loans borrowed by business women. The results were that there are four factors influencing low loan repayment. The percent of influence for each factor is in parentheses. The factors are multiple borrowing (33.3%), misuses of loans (24.4%), inadequate entrepreneurial skills (22.2%) and family responsibilities (17.8%). Business women tend to enter into a multiple borrowing approach to sustain their business. Few of women trained on entrepreneurial skills. Women have many responsibilities to attend which lead them to misuse fund from loans. Borrowing from one institution to offset the loan to other institution adds no value to the business. Since the MFIs have no time to make a critical investigation and even if they do, the client will not reveal their real loan and membership status. It becomes difficult to trace the real situation before lending the money. Because of these factors low loan repayment problem remains eating financial resource of MFIs. The conditions set by the MFIs of monthly installments are hard for unemployed women to adhere to it. This makes it difficult for them to repay the loans on time. Without appropriate knowledge on business management is easy to misuse the loans and find it hard to get it back with interest. Therefore, there is a need to undertake training on loan management and business management skills to the clients. Multiple borrowings should be discouraged 11
by information sharing among the MFIs to detect and prevent multiple borrowing. The repayment period should be reconsidered so as to have the convenient repayment period for both business women and MFIs. 12
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