Loan repayment performance of clients of informal lending institutions

Goodluck Charles (Department of Marketing, University of Dar es Salaam Business School, Dar es Salaam, Tanzania)
Neema Mori (University of Dar es Salaam Business School, Dar es Salaam, Tanzania)

International Journal of Development Issues

ISSN: 1446-8956

Publication date: 4 September 2017

Abstract

Purpose

The purpose of this article is to examine the effects that dynamic incentives and the borrowing histories of clients of informal lending institutions have on loan repayment performance, in particular, the extent to which multiple borrowing and progressive lending affect the repayment of loans.

Design/methodology/approach

The paper uses a data set of 835 borrowers drawn from an informal lending institution in Tanzania. Descriptive analysis and econometric models are used to test the developed hypotheses.

Findings

Whereas clients with multiple loans are associated with poor loan repayment, progressive lending contributes to positive repayment outcomes. Multiple borrowers face increased debt levels and thereby an increased inability to meet their repayment obligations; in contrast, progressive lending by building up a lender–client relationship helps clients to obtain higher loans with a minimum amount of screening.

Research limitations/implications

This was a cross-sectional study based on a sample of individual clients drawn from a single institution. However, since the majority of clients had also taken out loans with other financial institutions, the sample is considered to be representative.

Practical implications

A client’s past repayment performance and multiple loan history must be assessed so that multiple borrowing can be prevented and credit absorption capacity can be gauged more accurately. The repeated nature of the interactions and the threat to cut off any future lending (if loans are not repaid) can be exploited to overcome any information deficit.

Originality/value

This study was conducted in a context in which the degree of information sharing was low and institutional access to clients’ credit histories was limited. It contributes knowledge on how lenders minimise the risk flowing from the ex ante information gap and moral hazards arising from the ex post information gap.

Keywords

Citation

Charles, G. and Mori, N. (2017), "Loan repayment performance of clients of informal lending institutions", International Journal of Development Issues, Vol. 16 No. 3, pp. 260-275. https://doi.org/10.1108/IJDI-04-2017-0039

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Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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