Examining the determinants of loan default among microfinance banks’ borrowers in Kano State, Nigeria

https://doi.org/10.35912/ijfam.v3i4.827
Published: Mar 11, 2022

Abstract:

Purpose: The study examines how the personal and business characteristics of micro, small and medium enterprise (MSMEs) borrowers of microfinance banks influence loan default, using Kano State as a case study.

Research Methodology: The study employed a survey research method and the sample was drawn through multistage stratified random sampling and comprised 544 beneficiaries of microfinance banks selected from 10 local governments across the state. Data was collected using questionnaires and analyzed using Logit and Probit models with the aid of STATA 13 software.

Results: The findings revealed that family size, gender, and business age are significant determinants of loan default. Borrowers’ marital status and age as well as the size and location of business were found to be insignificant in predicting loan default among microfinance MSME borrowers.

Limitations: Part of the limitations of this study is the difficulty involved in getting the required information from the sampled microfinance beneficiaries. This research considered only personal and business characteristics of microfinance banks’ borrowers as determinants of loan default in some selected areas of Kano State. Findings in other areas may differ.

Contributions: This study contributes to the area of microfinance research by adding more value to the knowledge and literature existing in this field. Managers of microfinance banks will also find the outcome of this research useful as it will assist them in understanding the appropriate strategies to adopt in minimizing the default rate of their clients.

Keywords:
1. Borrowers
2. Loan default
3. Microfinance
Authors:
Nasiru A. Umar
Department of Economics, Bayero University, Kano, Nigeria
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How to Cite
Umar, N. A. (2022). Examining the determinants of loan default among microfinance banks’ borrowers in Kano State, Nigeria. International Journal of Financial, Accounting, and Management, 3(4), 335–347. https://doi.org/10.35912/ijfam.v3i4.827
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Issue & Section
Vol. 3 No. 4 (2022): March
Articles
References

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    Ackah, J. and Vuvor, S. (2011). The Challenges faced by Small & Medium Enterprises (SMEs) in Obtaining Credit in Ghana (Master’s Thesis). Blekinge Tekniska Hogskola School of Management, Ghana.

    Aghion, B.A.D. and Morduch, J. (2005). The Economics of Microfinance. The MIT Press Cambridge, Massachusetts, London, England.

    Akpan E.S. and Nneji, I.D. (2015). Contribution of Microfinance Banks to the Development of Small and Medium Scale Enterprises in Nigeria. Research Journal of Finance and Accounting, 6(8): 19-28.

    Ameyaw-Amankwah, I. (2011). Causes and Effects of Loan Defaults on the Profitability of Okomfo Anokye Rural Bank (Unpublished Master’s Dissertation). Institute of Distance Learning, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana.iv

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    Babajide, A. (2012). Effects of Microfinance on Micro and Small Enterprises (MSEs) Growth in Nigeria. Asian Economic and Financial Review, 2(3): 463-477.

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    International Finance Corporation (IFC, 2012). Interpretation Note on Small and Medium Enterprises and Environmental and Social Risk Management. Retrieved from https://www.ifc.org/wps/wcm/connect/de7d92804a29ffe9ae04af8969adcc27/InterpretationNote_SME_2012.pdf?MOD=AJPERES.

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    Kanayo, O., Jumare, F. and Nancy, S. (2013). Challenges of Microfinance Access in Nigeria: Implications for Entrepreneurship Development. Mediterranean Journal of Social Sciences, 4(6): 611-618.

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    Moti, H.O, Masinde J.S, Mugenda N.G & Sindani M.N (2012). Effectiveness of credit Management System on Loan Performance; Empirical Evidence from Microfinance Sector in Kenya, International Journal of Business, Humanities and Technology, 2(6): 99 –108.

    Muiruri, P.M. (2014). The Role of Micro-Finance Institutions to the Growth of Micro and Small Enterprises (MSE) in Thika, Kenya (Empirical Review of Non-Financial Factors). International Journal of Academic Research in Accounting, Finance and Management Sciences, Vol. 4(4): 249–262.

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    Muthoni, M.P. (2016). Assessing Borrower’s and Business’ Factors Causing Microcredit Default in Kenya: A Comparative Analysis of Microfinance Institutions and Financial Intermediaries. Journal of Education and Practice, 7(12): 97-118.

    Pearson, R. & Greef, M. (2006). Causes of Default among Housing Micro Loan Clients. FinMark Trust Rural Housing Loan Fund, National Housing Finance Corporation and Development Bank of Southern Africa, South Africa.

    SMEDAN and NBS (2017). National Survey of MSMEs 2017. Retrieved from http://smedan.gov.ng/images/NATIONAL%20SURVEY%20OF%20MICRO%SMALL%20&MEDIUMN%20ENTERPRISES%20(MSMES)%20%202017%201.pdf.

    Taiwo, J.N. (2012). The Impact of Microfinance on Welfare and Poverty Alleviation in South-West Nigeria (Unpublished PhD Thesis). Covenant University, Ota, Nigeria.

    Wairimu, Z. and Mwilaria, S.M. (2017). Microfinance Institutions’ Social Intermediation and Micro and Small Enterprises Survival in Thika Town, Kenya. Asia Pacific Journal of Multidisciplinary Research, 5(2): 87-93.

    Watse, D.W. (2017). Sources of Financing for Small and Medium Enterprises in Nigeria (Unpublished Doctoral Thesis). Walden University, United States of America.

    Wilfred, N.A., Max, A., Omeke, M., Norman, T. and Moses, N. (2015). The Impact of Microfince Service Delivery on the Growth of SMEs in Uganda. International Journal of Economics, Commerce and Management United Kingdom, 3(5): 229-237.

    Yegon J.C, Kiptemboi J, Kemboi J.K. and Chelimo K.K, (2013), Determinants of a State Owned Agricultural Loan Scheme in Uasin Gishu County, Kenya, Journal of Emerging Trends in Economics and Management Sciences, 5(1): 51-55.

  1. Abdulsaleh, A.M. and Worthington, A.C. (2013). Small and Medium-Sized Enterprises Financing: A Review of Literature. International Journal of Business and Management; 8(14): 36-54.
  2. Ackah, J. and Vuvor, S. (2011). The Challenges faced by Small & Medium Enterprises (SMEs) in Obtaining Credit in Ghana (Master’s Thesis). Blekinge Tekniska Hogskola School of Management, Ghana.
  3. Aghion, B.A.D. and Morduch, J. (2005). The Economics of Microfinance. The MIT Press Cambridge, Massachusetts, London, England.
  4. Akpan E.S. and Nneji, I.D. (2015). Contribution of Microfinance Banks to the Development of Small and Medium Scale Enterprises in Nigeria. Research Journal of Finance and Accounting, 6(8): 19-28.
  5. Ameyaw-Amankwah, I. (2011). Causes and Effects of Loan Defaults on the Profitability of Okomfo Anokye Rural Bank (Unpublished Master’s Dissertation). Institute of Distance Learning, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana.iv
  6. Apiri, T.R. (2013). Loan Performance and Default Rate of Financing SMEs by Microfinance Bank: A Case Study of Accion Microfinance Bank Plc (Master’s Dissertation). University of Stellenbosch.
  7. Asian Development Bank, (ADB, 2000). Finance for the Poor: Microfinance Development Strategy. Retrieved from www.adb.org/sites/default/files/ institutional-document/32094/financepolicy.pdf.
  8. Babajide, A. (2012). Effects of Microfinance on Micro and Small Enterprises (MSEs) Growth in Nigeria. Asian Economic and Financial Review, 2(3): 463-477.
  9. Beck, T. and Cull, R. (2014). Small and Medium-sized Enterprise Finance in Africa. Global Economy and Development Program, Africa Growth Initiative Working Paper No.16,July 2014.
  10. Central Bank of Nigeria,(CBN, 2005). Microfinance Policy, Regulatory and Supervisory Framework For Nigeria. Retrieved from https://www.cbn.gov.ng/OUT/PUBLICATIONS/GUIDELINES/DFD/2006/MICROFINANCE%20POLICY.PDF.
  11. Central Bank of Nigeria (CBN,2011). Microfinance Policy Framework for Nigeria (Revised Microfinance Policy). Retrieved from https://www.cbn.gov.ng/Out/2011 /publications/dfd/ Reviewed%20Microfinance%20Policy%20July%2012%20 2011.pdf.
  12. Central Bank of Nigeria (CBN, 2014). Micro, Small and Medium Enterprises Development Fund (MSMEDF) Guidelines (Revised – August, 2014). Development Finance Department, Central Bank of Nigeria.
  13. Central Bank of Nigeria (CBN, 2017). The Nigerian Microfinance News Letter. An Initiative of the National Organising Committee of the International Year of Microcredit 2005, Vol. 21, January – June, 2017.
  14. Central Bank of Nigeria (CBN, 2018). Licensed Microfinance Banks (Mfbs) in Nigeria as at December 29, 2017. Retrieved from https://www.cbn.gov.ng/Out/2018/FPRD/LIST%2OF%20MICROFINANCE%20IN%20NIGERIA%20AS%20AT%20DECEMBER%2029%202017.pdf.
  15. Ibor, B.I., Offiong, A.I. and Mendie, E.S. (2017). Financial Inclusion And Performance Of Micro, Small And Medium Scale Enterprises In Nigeria. International Journal of Research - Granthaalayah, 5(3): 104-122.
  16. International Finance Corporation (IFC, 2012). Interpretation Note on Small and Medium Enterprises and Environmental and Social Risk Management. Retrieved from https://www.ifc.org/wps/wcm/connect/de7d92804a29ffe9ae04af8969adcc27/InterpretationNote_SME_2012.pdf?MOD=AJPERES.
  17. Iro, H.N (2019). Analysis of Household Energy Consumption for Cooking in Rural and Urban area of Kano State (Unpublished doctoral thesis). Bayero University, Kano, Nigeria.
  18. Kanayo, O., Jumare, F. and Nancy, S. (2013). Challenges of Microfinance Access in Nigeria: Implications for Entrepreneurship Development. Mediterranean Journal of Social Sciences, 4(6): 611-618.
  19. Madole , H. (2013). The Impact of Microfinance Credit in the Performance of SMEs In Tanzania: A Case Study of National Microfinance Bank-Morogoro (Master’s Dissertation). Mzumbe University, Tanzania.
  20. Modi, C.N.O., Anyanwu, C.M, Adebusuyi, B.S., …….. and Zimboh, S.T. (2014). Credit delivery to Small and Medium Enterprises: Post Bank Consolidation in Nigeria. Real Sector Division, Research Department, Central Bank of Nigeria, Occasional Paper No.53.
  21. Mosha, E.S. (2016). Determinants of Loan Defaults in Microfinance Institutions in Tanzania: A Case of Two Selected Microfinance Institutions in Dodoma Municipality (Unpublished Dissertation). Mzumbe University, Tanzania.
  22. Moti, H.O, Masinde J.S, Mugenda N.G & Sindani M.N (2012). Effectiveness of credit Management System on Loan Performance; Empirical Evidence from Microfinance Sector in Kenya, International Journal of Business, Humanities and Technology, 2(6): 99 –108.
  23. Muiruri, P.M. (2014). The Role of Micro-Finance Institutions to the Growth of Micro and Small Enterprises (MSE) in Thika, Kenya (Empirical Review of Non-Financial Factors). International Journal of Academic Research in Accounting, Finance and Management Sciences, Vol. 4(4): 249–262.
  24. Murray, J. (2011). “Default on Loan”. United States Business and Taxes Guide, pp.84.
  25. Muthoni, M.P. (2016). Assessing Borrower’s and Business’ Factors Causing Microcredit Default in Kenya: A Comparative Analysis of Microfinance Institutions and Financial Intermediaries. Journal of Education and Practice, 7(12): 97-118.
  26. Pearson, R. & Greef, M. (2006). Causes of Default among Housing Micro Loan Clients. FinMark Trust Rural Housing Loan Fund, National Housing Finance Corporation and Development Bank of Southern Africa, South Africa.
  27. SMEDAN and NBS (2017). National Survey of MSMEs 2017. Retrieved from http://smedan.gov.ng/images/NATIONAL%20SURVEY%20OF%20MICRO%SMALL%20&MEDIUMN%20ENTERPRISES%20(MSMES)%20%202017%201.pdf.
  28. Taiwo, J.N. (2012). The Impact of Microfinance on Welfare and Poverty Alleviation in South-West Nigeria (Unpublished PhD Thesis). Covenant University, Ota, Nigeria.
  29. Wairimu, Z. and Mwilaria, S.M. (2017). Microfinance Institutions’ Social Intermediation and Micro and Small Enterprises Survival in Thika Town, Kenya. Asia Pacific Journal of Multidisciplinary Research, 5(2): 87-93.
  30. Watse, D.W. (2017). Sources of Financing for Small and Medium Enterprises in Nigeria (Unpublished Doctoral Thesis). Walden University, United States of America.
  31. Wilfred, N.A., Max, A., Omeke, M., Norman, T. and Moses, N. (2015). The Impact of Microfince Service Delivery on the Growth of SMEs in Uganda. International Journal of Economics, Commerce and Management United Kingdom, 3(5): 229-237.
  32. Yegon J.C, Kiptemboi J, Kemboi J.K. and Chelimo K.K, (2013), Determinants of a State Owned Agricultural Loan Scheme in Uasin Gishu County, Kenya, Journal of Emerging Trends in Economics and Management Sciences, 5(1): 51-55.