FACTORS AFFECTING THE REPAYMENT PERFORMANCE

OF MICROCREDIT IN DAR ES SALAAM TANZANIA: A CASE

OF TUJIJENGE TANZANIA LIMITED

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FACTORS AFFECTING THE REPAYMENT PERFORMANCE
OF MICROCREDIT IN DAR ES SALAAM TANZANIA: “A CASE
OF TUJIJENGE TANZANIA LIMITED”

By
Benbela John

A Research Report Submitted to Dar es Salaam Campus College in Fulfillment

of the Requirements for the Award of Masters Degree in Business
Administration in Corporate Management (MBA-CM) of Mzumbe University

2013

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 CERTIFICATION

We, the undersigned, certify that we have read and hereby recommend for
acceptance by the Mzumbe University, a dissertation entitled Assessment of
Factors Affecting the Repayment Performance of Microcredit in Dar es Salaam
Tanzania: “A Case of Tujijenge Tanzania Limited” in partial fulfillment of the
requirements for award of the degree of Masters of Science in Procurement and
Supply Chain Management of Mzumbe University.

…………………………………………….
Major Supervisor

………………………………………………
Internal Examiner

Accepted for the Board of……………………………..

………………………………………………………………….

DEAN/DIRECTOR, FACULTY/ DIRECTORATE/SCHOOL/BOARD

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 DECLARATION AND COPRIGHT

I Benbela John Makengo hereby declare that the work presented in this dissertation
entitled Factors Affecting the Repayment Performance of Microcredit in Dar es
Salaam Tanzania: A Case of Tujijenge Tanzania Limited is my original work and
has never been presented to any other University or Institution of higher learning for
any academic qualification or otherwise. Where it is indebted to the work of others,
the acknowledgement has been made.

Signature..................................................

Date..............................................

This dissertation is a copyright material protected under the Berne Convention, the
Copyright Act 1999 and other international and National enactments, in that behalf,
on intellectual property. It may not be reproduced by any means in full or in part,
except for short extracts in fair dealings, for research or private study, critical
scholarly review or discourse with an acknowledgement, without the written
permission of Mzumbe University, on behalf of the author.

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 ACKNOWLEDGEMENTS

This study would not have been possible without the assistance of many persons to
whom I am deeply indebted to. I must recognize and extend my sincere gratitude to
my supervisor Sir. MAIGE MWAKASEGE MWASIMBA for his constructive
guidance, advice and time given throughout this research report.

Many thanks go to staff and some clients of Tujijenge Tanzania Limited who spare
sometimes and provided all the data which made data collection a success. Your
cooperation is highly appreciated.

Special thanks go to WINNIE TERRY (General Secretary; Tanzania Associations of

Microfinance Institutions - TAMFI) for her supportive role, advice, encouragement
and suggestions which all contributed to the quality of this work.

I am greatly beholden to my classmates for their support and encouragement they

gave me that contributed immensely to the success of this research.

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 DEDICATIONS

To God, my Dad John Makengo (RIP), then the three pillars:- my mum Regina Msae
and my wife Bahati Mosha Makengo for their un comparable assistance that
rekindled my dream to come to realization. I greatly appreciate all the love and
support you rendered me, May the Lord God bless you profusely.

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 ABBREVIATIONS

ERP Economic Recovery Program

GDP Growth Domestic Products
MFI Micro-Finance Institution
NBC National Bank of Commerce
NPES National Poverty Eradication Strategy
RIP Rest in Piece
SACCOs Savings and Credit Co-operatives
SMEs Small and Medium Enterprises
TAMFI Tanzania Association of Microfinance Institutions
UNDP The United Nation Development Program
URT United Republic of Tanzania

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 ABSTRACT

This study has assessed the factors that affecting the Repayment Performance of
Microcredit in Dar es Salaam Tanzania. Loan repayment has been a serious problem
for most small holder credit programmes. Problems of loan recovery to most micro-
credit programmes are attributed to several factors including natural calamities. An
observational study was carried out in one MFI in the Dar es Salaam city namely the
Tujijenge Tanzania Limited located in Kijitonyama - Makumbusho ward.

The general objective was to analyse factors affecting the repayment performance of
Microfinance industry in Dar es Salaam Tanzania. Data were collected using
informal and formal interviews where structured questionnaires were administered to
100 randomly selected respondents. Data were analyzed by using simple excel table,
figures and a regression analysis was done to analyze factors affecting the repayment
performance in Tanzania.

The study findings show that 68.9% of the factors affecting loan repayment related to
the level of household annual income, education level, household labor size,
household assets and amount of loan obtained. Also findings shows that most of the
borrowers are female while 64 of the respondents state that interest rate is friendly
for charging at 4% per month which translate to 48 per annum

The conclusion is that the study discovered that positive factors affecting loan
repayment performance are amount of loan obtained by client, composition of
household, labor size, education level and household annual income. Meanwhile the
value of household assets negatively influences repayment of loan.
The study recommends that: (a) interest rate should be lowered (b) business
education should be provided to both loan officers and clients and (c) the government
in collaboration with the Bank of Tanzania should review the financial policy giving
opportunity to micro investors to access loans.

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 TABLE OF CONTENTS

CERTIFICATION ...................................................................................................... i
DECLARATION AND COPRITY........................................................................... ii
ACKNOWLEDGEMENTS...................................................................................... iii
DEDICATIONS ........................................................................................................ iv
ABBREVIATIONS .................................................................................................... v
ABSTRACT ............................................................................................................... vi
TABLE OF CONTENTS......................................................................................... vii
LIST OF TABLE ....................................................................................................... x
LIST OF FIGURE ..................................................................................................... x

CHAPTER 0NE.......................................................................................................... 1
PROBLEM SETTINGS ............................................................................................ 1
1.1 Introduction ............................................................................................................ 1
1.2 Background Information ........................................................................................ 2
1.3 Problem Statement ................................................................................................. 4
1.4. Research Objectives .............................................................................................. 5
1.4.1 General Objective................................................................................................ 5
1.4.2 Specific Objectives.............................................................................................. 5
1.5. Research Questions ............................................................................................... 5
1.5.1 General Question................................................................................................. 5
1.6. Significance of the Study ...................................................................................... 5
1.7. Limitation of the Study ......................................................................................... 6
1.8. Delimitation of the Study ...................................................................................... 6

CHAPTER TWO ....................................................................................................... 8

LITERATURE REVIEW.......................................................................................... 8
2.1 Introduction ............................................................................................................ 8
2.2 Definition of Key Terms ........................................................................................ 8
2.3 Theories and Concepts ......................................................................................... 10
2.4 Empirical Studies ................................................................................................. 22
2.4.1 Tanzania Case ................................................................................................... 22
2.4.2 Abroad Case ...................................................................................................... 23
2.5 Conceptual Framework ........................................................................................ 27
2.7.1 Variables Interconnectivity ............................................................................... 27

CHAPTER THREE ................................................................................................. 29

METHODOLOGY................................................................................................... 29
3.1 Introduction .......................................................................................................... 29
3.2 Research Design................................................................................................... 29
3.3 Research Setting................................................................................................... 29
3.4 Population ............................................................................................................ 29
3.5 Sampling Technique and Sample Size................................................................. 30
3.6Data Collection ................................................................................................ 31
3.6.1 Primary data ...................................................................................................... 31
3.6.2 Secondary data .................................................................................................. 31

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3.7 Data processing and analysis ............................................................................... 31

CHAPTER FOUR.................................................................................................... 33
PRESENTATION OF FINDINGS AND ANALSIS ............................................. 33
4.1 Introduction .......................................................................................................... 33
4.2 Demographic characteristics of the respondents.................................................. 33
4.2.1 Sex of the respondents ...................................................................................... 33
4.2.2 Marital status of the respondents’ ..................................................................... 34
4.2.3 .Age structure of the respondents...................................................................... 35
4.2.4 Education levels of the respondents.................................................................. 36
4.3 Existing credit policies and procedures in Tujijenge Tanzania ........................... 36
4.3.0 Credit policy analysis........................................................................................ 36
4.3.1. Credit standards................................................................................................ 36
4.3.1.1 Character assessment to measure the risk level of Tujijenge clients ............. 37
4.3.1.2 Collateral security assessment........................................................................ 37
4.3.1.3 Respondents view on whether Tujijenge considers financial status before
extending the loan............................................................................................. 38
4.3.1.4 Assessment of the prevailing economic conditions. ...................................... 39
4.3.1.5 Customer’s capacity assessment .................................................................... 40
4.3.1.6 Trust assessment of customers ....................................................................... 40
4.3.2 Credit term analysis .......................................................................................... 41
4.3.2.1. Comfort ability of loan period analysis......................................................... 41
4.3.2.2 Respondent’s view on how good the loan size is........................................... 42
4.3.2.3 Analysis on the length of loan period. ........................................................... 42
4.3.2.4 Respondent’s view on loan amount asked for. .............................................. 43
4.3.2.5 Interest rate assessment. ................................................................................. 44
4.3.3 Collection efforts analysis................................................................................. 44
4.3.3.1 Credit weekly deposits and meetings ............................................................. 45
4.3.3.2 Methods of communication to defaulting clients........................................... 45
4.3.3.3 Assessment of whether clients are reminded when to meet repayment......... 46
4.4 Findings on how loans are recovered in Tujijenge Tanzania............................... 47
4.4.1 Use of legal means to enforce loan repayment ................................................. 47
4.4.2 Penalties assessment ......................................................................................... 47
4.4.3 Respondent’s view on whether Tujijenge trains officers on loan recovery ...... 48
4.4.4 Assessment of the loan percentage recovered................................................... 49
4.4.5 Regulatory framework influence....................................................................... 49
4.5 Regression results ................................................................................................ 50

CHAPTER FIVE...................................................................................................... 53
DISCUSSION OF THE FINDINGS....................................................................... 53
5.1. Effect of credit fund to the economic condition.................................................. 53
5.2. Effect on the length of loan period...................................................................... 54
5.3. Effect of loan size and Repayment performance ................................................ 55
5.4. Effect of interest rate on Repayment performance ............................................. 56
5.5. Effect on weekly repayment................................................................................ 57

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CHAPTER SIX ........................................................................................................ 58
CONCLUSIONS AND RECOMMENDATIONS................................................. 58
6.0 Introduction .......................................................................................................... 58
6.1 Conclusion ........................................................................................................... 58
6.2 Recommendations ................................................................................................ 59
6.2.1 Interest rate reduction........................................................................................ 59
6.2.2 Provision of business education and training.................................................... 59
6.2.3 Creation of favorable policy for borrowers....................................................... 59
6.2.4 Emphasis on individual lending ........................................................................ 60
6.3 Suggestion ............................................................................................................ 60
REFERENCE……………………………………………………………………...62
APPENDEIXES…………………………………………………………………...65

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 LIST OF TABLE
Table 2.1: Categories of SMES in Tanzania.............................................................. 20
Table 4.1: Sex of the respondents .............................................................................. 33
Table 4.2: Gender of staff…………………………………………………………...34
Table 4.3: Marital status of the respondents .............................................................. 34
Table 4.4: Age of the respondents.............................................................................. 35
Table 4.5: Education level of the respondents ........................................................... 36
Table 4.6: Response on whether Tujijenge considers client’s character for loan
extension………………………………………………………………………37
Table 4.7: Consideration of collateral........................................................................ 38
Table 4.8: Analysis of customer’s financial status.................................................... 38
Table 4.9: Relevance of the prevailing economic conditions .................................... 39
Table 4.10: Clients’ capacity to pay back .................................................................. 40
Table 4.11: Trust of the customers............................................................................. 40
Table4. 12: Comfort with the loan period.................................................................. 41
Table 4.13: Goodness of loan size. ........................................................................... 42
Table 4.14: Response of the length of the loan period............................................... 43
Table 4.15: response to loan amounts asked for. ....................................................... 43
Table4.16 Description of interest rates charged......................................................... 44
Table 4.17: Requirement to make weekly repayment................................................ 45
Table 4.18: Collection procedures or methods .......................................................... 46
Table 4.19: Frequency of customer reminder ............................................................ 46
Table 4.20: Employment of legal means in loan recovery......................................... 47
Table 4.21: Responses on use of penalties due to failure to pay in time ................... 48
Table 4.22: Training of loan officers in loan recovery .............................................. 48
Table 4.23: Responses to loan percentage paid back ................................................. 49
Table 4.24 Influence of regulatory framework on recovery of loans ........................ 50
Table 4.25 Parameter estimates of logistic model for factors affecting the repayment
performance ...................................................................................................... 51

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 LIST OF FIGURE

Figure 2.1 Loan repayment conceptual frameworks.................................................. 27

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 CHAPTER ONE

PROBLEM SETTINGS

1.1 Introduction
Poverty is a serious problem in most of African countries including Tanzania. Both
income and non-income poverty measures reported in the household Budget survey
(2002) indicate that the incidence of poverty is as 39%. The world Bank (2002)
reports that about 36% of the population lives on less than US$ 0.50 per day, which
is below the defined poverty line of UD$ 0.65 per day. The poverty situation is
believed to be worse in the rural areas (World Bank, 2002). This is attributed to poor
performance of agriculture, which is the main source of rural income to Tanzanian.
The United Nation Development Program (UNDP) revealed the average Human
Poverty Index estimates that about 36.3% of the population is poor (Human
Development Report, 2002). Based on these statistics, the World Bank (2002) ranks
Tanzania to be among the ten poorest countries in the world.

According to the National Poverty Eradication Strategy (NPES) paper, indicators

which reflect realities of intensive poverty in Tanzania; illiteracy, prevalence of
malnutrition, inadequate clean and safe water, poor social services communication,
infrastructure, poor housing and poor health services, high incidence of
unemployment and environment degradation (Vice Presidents Office, 1998).

A recent strategy adopted by the Government in the fight against poverty in

Tanzania, especially in the rural areas where the majority of the poor population live,
has been the establishment of MFIs, which provide credit on favorable and
affordable terms. This was after the Government realized that, while financial market
principles enshrined in the 1991 financial sector reforms should be the guiding force
as the basis for a sound financial sector development, the research for a better
alternative to reach the poor directly was needed and hence, additional focus was
placed on the expansion of financial services to micro level clients (MoF, 2000).

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The government tried to convince commercial banks to support small and medium
businesses. Once the National Microfinance Policy was implemented in 2001,
microfinance was officially recognized as a tool for poverty eradication and with its
increased use and exposure to the country; banks have taken an interest in offering
microfinance. The National Microfinance Bank is an institutional provider of
microfinance services, and the AKIBA Commercial bank and CRDB Bank are also
two big supporters of microfinance. There are additional organizations involved in
microfinance in Tanzania, including FINCA, PRIDE and SEDA as well as the
Tanzania Postal Bank. Community banks and small banks have taken an interest in
this, as well as many NGOs and non-profit organizations like TUJIJENGE
TANZANIA (MoF, 2000).

Loans disbursements to the poor individuals have been among the major efforts done
by governments, Banks and Microfinance in Tanzania. However, credit programs
have also been widely plagued by serious problems of loan recovery and most loans
have gone away from the targeted population and the need. Moreover these credit
programs have not been comprehensive in operation as they have been mostly
confined to particular target groups and designed to promote specific technologies
(Mohamed, 1999).

However there is no clear understanding of which factors affecting loan repayment.

This study was conducted to identify and evaluate different factors affecting loan
repayment performance of Microfinance institution in Tanzania.

1.2 Background Information

In Tanzania financial sector reform began with the Economic Recovery Progrmme
(ERP) of 1986. The Banking and financial institutions Act (1991) permitted the entry
of private banks into the financial market and subsequently led to restructuring all of
Government Of Tanzania’s (GOTs) major banks and financial institutions (URT,
2003a). Following the Structural Adjustment Programmes (SAPs) there has been
financial sector restructuring that has encouraged more participation of private and
NGOs in credit schemes in the country (Kashuliza, 1993

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The implementation of SAPs in financial sector, eventually led into the enactment of
the Banking and Financial Institution Act (1911). Private Banks and Financial
Institutions have been allowed to enter Tanzania financial market and this marked
the beginning of major financial sector reform programme. Together with the
Financial sector reforms, there was also an enactment of a new Cooperative Societies
Act (1991), which enabled the formation of voluntary and autonomous SACCOSs,
and the National Microfinance Policy of 2000 to address the development of
enabling environment for rural and micro financial services (URT, 2002). In general
the aspects of financial sector reform (FSR) are concerned with restructuring the
banking sector (Baden, 1996)

Microfinance was meant to stand for financial intermediation between micro savers
and micro borrowers, or, in other words, to comprise micro savings and micro credit.
Micro finance is the provision of a wide range of financial services, such as deposits,
loans, and insurance. The basic principle of micro finance is a provision of a package
of financial services to low-income households. Micro credit (which is a component
of micro finance) is a provision of credit facilities to low income household. The
basic principle of micro credit is to give poor people access to capital and exploit
their capacities and potentialities for economic development. The fundamental
differences between these two terms understand of poor people economy and
livelihood conditions. Thus, microfinance covers the acute need of poor people's
financial services and protect from being further vulnerable but micro credit seems to
be more technical and a stand-alone approach to provide only credit services (Seibel,
1979).

Nowadays, Micro-Finance Institutions (MFIs) are increasingly and becoming an

essential part of the country’s financial sector. This process has been growing in
most developing countries, including Tanzania. This is due to the majority of citizens
are facing poor economic conditions and severe poverty. Provision of micro-credit to
small scale and micro entrepreneurs, small-scale farmers and low-income households
is seen as one way of breaking the poverty trap and enhancing the country’s
development.

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1.3 Problem Statement
Since independence in 1961, the Government of Tanzania had poverty reduction as
its main goal. In 1997, the Government adopted the National Poverty Eradication
Strategy, which spells out a vision of a society without abject poverty, and with
improved social conditions. This vision, which is in line with the International
Development Goals, remains a point of reference for current poverty actions.

Commercial banks in most developing countries exclude the poor and hardcore poor
by imposing strict rules and regulations. The demand for the products and services
offered by commercial banks is low among the poor, not because “poor do not need
financial services”, but the product and service are not designed to meet their
requirements.

However, Loan repayment has become a serious problem for most small holder
credit programmes. Default rates i.e. the amount of loans not collected on current and
past due loans for the reference period, for loans taken from credit institutions vary
from country to country, region to region, sector to sector. But all credits of
developing countries were found to share one common characteristic; all suffer from
a considerable amount of default rate. For instance, microfinance credits found in
the city of Addis Ababa, which are striving to meet the financial need of the lower
class of the society, primarily composed of the informal sector, are recently
suffering from considerable amount of default/delinquency rate. Based on a
preliminary data collected, on average for the year ended 1997 (EC), delinquency
rate was estimated to reach around 31%. (Kashuliza 1993).

Therefore, whether default is random and influenced by erratic behaviors or if it is

influenced by certain factors in a specific situation needs an investigation so that the
findings can be used by micro financing institutions to manipulate their credit
program for the better (Khandker et al., 1995). These states of affairs have
necessitated the launching of this research to identify factors affecting the repayment
performance of Microfinance Institutions in Dar es Salaam Tanzania.

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1.4. Research Objectives

1.4.1 General Objective

The general objective of this study was to analyse factors affecting the repayment
performance of Microfinance industry in Dar es Salaam, Tanzania.

1.4.2 Specific Objectives

i. To evaluate factors affecting the repayment performance;
ii. To assess the process mapping of MFIs in loans disbursed;
iii. To review terms and conditions for giving loan and the repayment
schedules;
iv. To assess the way credit received and how it is used by the recipient; and
v. To give credit policy making/adjustment of credit conditions.

1.5. Research Questions

1.5.1 General Question

a) What are the factors affecting the repayment performance of microcredit?

Specific Questions
a) How are MFIs performing in terms of loan disbursement?
b) What the terms and procedures for giving a loan?
c) What are the possible causes of loan diversion?
d) What are the options available for improvement of credit policy making?

1.6. Significance of the Study

The Government initiative on poverty reduction policies is based on the perception

that poverty affects the country’s economy and individuals’ as well. MFIs have been
given a big role of helping the poor with instruments and tools to help them out their
poverty trap.

The study provides the input that can be used to evaluate the credit provided by the
TUJIJENGE TANZANIA for poverty reduction and recovery of the loan. The results

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obtained on this have both significant challenges and consequence to the formal
banking industry, MFIs and the Government. Also findings from this study have an
important impact to the appraisal of the future strategies to be adopted by
TUJIJENGE TANZANIA.

The Researcher benefits from this study by getting both experiences in research work
and general knowledge on how Microfinance can improve the repayment
performance.

This study gives recommendations related to the financial sectors especially

Microfinance in Tanzania in order to assist towards credit policy making/adjustment
of credit conditions.

1.7. Limitation of the Study

Several factors was hindered the study, these include;

Limited Financial resource: The researcher was followed the respondents from one
place to another which is significantly expensive due to the borrower’s place of
business and or residences being far apart.

Low level of literacy: Time utilized to accomplish interviews and questionnaires was
long due to low level of literacy amongst the respondents in answering questions.

Time constraints: Due to the nature of the population that was relevant to this study,
more time was needed for data collection activities. The researcher was spend more
time to convince and win respondents hearts to receive truthful and relevant
information.

1.8. Delimitation of the Study

Financial resource: The researcher has been able to overcome this limitation by given
out questioners through loan officer who normally visit customers during the loan
repayment. Therefore at this part researcher incur free cost

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Low level of literacy: Group leaders must know how to write and read as per
Tujijenge Tanzania credit policies and procedures manual, therefore questioners
were given to those leaders for response

Time constraints: Loan officers helped to collect questioners on time as it was well
organized by Tujijenge Tanzania Operations Manager

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This section of the study outlines some theoretical arguments of the prior researches
in relation to factors affecting loan repayment in microfinance. Over the last several
decades, many experimental researches have been done related to microfinance and
performance of repayment or arrears or delinquency. Understanding these research
and research results, from the prior studies concerning this specific topic is very
important, and it gives firm foundation for a smooth process of this research.

2.2 Definition of Key Terms

Microfinance
Microfinance refers to the provision of financial services to poor or low-income
clients, including consumers and the self-employed. The term also refers to the
practice of sustainably delivering those services. Microcredit (or loans to poor
microenterprises) should not be confused with microfinance, which addresses a full
range of banking needs for poor people.

More broadly, it refers to a movement that envisions “a world in which as many poor
and near-poor households as possible have permanent access to an appropriate range
of high quality financial services, including not just credit but also savings,
insurance, and fund transfers. Those who promote microfinance generally believe
that such access will help poor people out of poverty (Wikipedia, 2009)
"Microfinance is the supply of loans, savings, and other basic financial services to
the poor." As the financial services of microfinance usually involve small amounts of
money – small loans, small savings etc. – the term "microfinance" helps to
differentiate these services from those which formal banks provide.
Why are they small? Someone who doesn't have a lot of money isn't likely to want to
take out a $5,000 loan, or be able to open a savings account with an opening balance
of $1,000. Hence – "micro".

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Microcredit
Microcredit refers to very small loans for unsalaried borrowers with little or no
collateral, provided by legally registered institutions. Currently, consumer credit
provided to salaried workers based on automated credit scoring is usually not
included in the definition of microcredit, although this may change.

Credit
A contractual agreement in which a borrower receives something of value now and
agrees to repay the lender at some date in the future, generally with interest. The term
also refers to the borrowing capacity of an individual or company.
The amount of money available to be borrowed by an individual or a company is
referred to as credit because it must be paid back to the lender at some point in the
future. For example, when you make a purchase at your local mall with your VISA
card it is considered a form of credit because you are buying goods with the
understanding that you'll need to pay for them later.

Loan
This is an arrangement in which a lender gives money or property to a borrower and
the borrower agrees to return the property or repay the money, usually along with
interest, at some future point in time. Usually, there is a predetermined time for
repaying a loan, and generally the lender has to bear the risk that the borrower may
not repay a loan, though modern capital markets have developed many ways of
managing this risk (Allen, 2003).

Loan Disbursement
Robinson M.S report on microfinance revolution Volume I (1994) defines a loan
disbursement as an extension of credit to another person (client) which maybe long
term (more than a year) a short term (less than a year).
Breth (1999) stated that before a deal in signed a loan application is to be completed.
This provides risk protections by enabling the lending institutions to follow up when
the borrowers fail to honor the agreement.

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Borrower
A person that has applied, met specific requirements, and received a monetary loan
from a lender. The individual initiating the request signs a promissory note agreeing
to pay the lien holder back during a specified timeframe for the entire loan amount
plus any additional fees. The borrower is legally responsible for repayment of the
loan and is subject to any penalties for not repaying the loan back based on the
lending terms agreed upon.

Recipient
A recipient is a person who receives something (item, goods, services, money) from
someone or some entity (such as an individual, group, organization, company, or
agency). A recipient can receive a wide variety of things, including a letter, a
telephone call, a message, a sum of money, or even a physical embrace.

2.3 Theories and Concepts

Theory of microfinance

Microfinance has spawned a large theoretical literature, which can be divided into
two.

The first addresses the specific problems that poor people have in gaining access to
financial services at an affordable cost, particularly as a result of their lack of
collateral. Would-be lenders are also deterred by high costs of collecting reliable
information about the actual, or projected, incomes that borrowers might be able to
lend against, particularly for potential clients with low overall ‘debt capacity’ (von
Pischke 1991). Section 1.2.2 elaborates on this literature with particular reference to
the potential for reducing loan monitoring, screening and enforcement costs through
group lending.

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The second strand of literature explores impact pathways of microfinance on
enterprises, households, and individuals. We take account of the ways communities
assign access to livelihood opportunities, and how problems of access to credit, their
income and consumption smoothing opportunities can at least partially be overcome
by engagements with MFIs. Section 1.2.3 elaborates on this literature.

Theory of Group liability on repayment performance

The first wave of theoretical work on microfinance focused exclusively on joint

liability. The term joint liability can be interpreted in several ways, which can be
lumped under two categories. First, under explicit joint liability, when one borrower
cannot repay her loan, group members are contractually required to repay in her
stead. Such repayments can be enforced through the threat of common punishment,
typically the denial of future credit to all members of the defaulting group, or by
drawing on a group savings fund that serves as collateral. Second, the perception of
joint liability can be implicit. That is, borrowers believe that if a group member
defaults, the whole group will become ineligible for future loans even if the lending
contract does not specify this punishment. One form in which this can happen is if
the microfinance organization itself chooses to fold its operations when faced with
delinquency.

Ghatak and Guinnane (1999) review the key mechanisms proposed by various
theories through which joint liability could improve repayment rates and the welfare
of credit-constrained borrowers. These all have, in common, the idea that joint
liability can help alleviate the major problems facing lenders — screening,
monitoring, auditing, and enforcement — by utilizing the local information and
social capital that exist among borrowers. In particular, joint liability can do better
than conventional banks for two reasons.

First, members of a close-knit community may have more information about one
another (that is, each other’s types, actions, and states) than outsiders.

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Second, a bank has limited scope for financial sanctions against poor people who
default on a loan, since, by definition, they are poor. However, their neighbors may
be able to impose powerful non-financial sanctions at low cost. An institution that
gives poor people the proper incentives to utilize information about their neighbors
and to apply non-financial sanctions to delinquent borrowers can do better than a
conventional bank.

Theory of Fair Interest Rates on Microcredit

Microcredit pertains to the unexpectedly high rates of interest charged on

microloans. Microcredit is supposed to be to the advantage of borrowers in some of
the poorest regions of the world, but at the same time commercial institutions need to
cover their comparably high costs. This article seeks to find a theoretical basis for a
more balanced way of setting prices on microcredit; i.e. a theory of fairness in
interest rates. By drawing on both contemporary debates in the industry as well as
more general philosophical ideas, the article discusses four main theoretical
approaches. In the end the authors favour a combination of consequentialism and
liberal galitarianism which seems able to adequately balance the needs of the
institutions with the needs of the clients. However it is also acknowledged that
further research in the area is needed. (Marek Hudon and Joakim Sandberg, 2011)

Entrepreneurship Theory & Practice

Microfinance is stimulating entrepreneurial activity in developing and developed

countries. Although microfinance grew as a means of providing uncollateralized
start-up loans to groups or individuals living in poverty, today, it reflects a range of
financial services including debt and equity financing, insurance, savings, and
retirement plans. Denominated in relatively small amounts, microfinance instruments
provide entrepreneurs with financial services that are difficult for them to acquire
otherwise. As its popularity has grown, the provision of microfinance has become
a contested terrain. Banks, savings and loan organizations, for-profit investment
funds, insurance companies, and mobile network operators are all vying for a share
of the microfinance market. In addition, individuals have new opportunities to

12
participante in micro finance as microbandes and microlenders. Révolutionner
développements in technology are also changing the landscape of entrepreneurial
financing, and, in the case of new technology and media ventures, may be
superseding the traditional role of seed venture capital. Specifically, mobile
technologies, social networking tools, and crowdfunding mechanisms make it easier
to pool and distribute small amounts of seed capital from individuals who want to
invest in or lend to entrepreneurial ventures. The evolution of microfinance is
accelerating, yet our understanding of the effects that it has on entrepreneurs starting
and growing new ventures remains in its infancy.

A Positive Theory of Social Entrepreneurship

Social entrepreneurship, commonly defined as “entre preneurial activity with an
embedded social purpose” (Austin, Stevenson, & Wei-Skillern, 2006), has become
an important economic phenomenon at a global scale (Mair & Marti, 2006; Zahra,
Rawhouser, Bhawe, Neubaum, & Hayton, 2008). Some of the most striking social
entrepreneurship innovations originate from developing countries and involve the
deployment of new business models that address basic human needs (Seelos & Mair,
2005), such as the provision of low-cost cataract surgeries to cure blindness or the
deployment of sanitation systems in rural villages (Elkington & Hartigan, 2008). Yet,
social entrepreneurship is a vibrant phenomenon in developed countries as well. For
example, according to the Global Entrepreneurship Monitor 2005 survey, an
estimated 1.2M people in the UK (representing 3.2% of the working age population)
are social entrepreneurs (defined in the survey as being involved in founding and
running a social oriented venture younger than 42 months). Given that the
comparable number for commercial entrepreneurship is 6.2%, these data raises the
intriguing possibility that social entrepreneurship may be almost as important a
phenomenon as commercial entrepreneurship (Harding, 2006).

Although social entrepreneurs usually start with small, local efforts, they often target
problems that have a local expression but global relevance, such as access to water,

13
promoting small-business creation, or waste management. The innovative solutions
that social entrepreneurs validate in their local context often get replicated in other
geographies and can spun new global industries (Zahra et al., 2008). An example is
the growth of the microfinance industry throughout the world (Seelos et al., 2005).
Social entrepreneurship is thus having profound implications in the economic
system: creating new industries, validating new business models, and allocating
resource to neglected societal problems.

These developments have started to spark academic interest. Practitioner oriented

research and several books focused on social entrepreneurship have been published
in the last 3 few years (Dees, Emerson, & Economy, 2001; Elkingto n et al., 2008;
Nichols, 2006). Business schools which, with a few exceptions (Dees , 2001), had
largely ignored this phenomenon, have been joining the field in the last six years by
creating academic centres and developing new courses and research (Mair et al
., 2006). Yet, and despite the increasing academic interest in social entrepreneurship,
the management field still lacks a good conceptual understanding of the economic
role and logic of action of social entrepreneurship. Definitions a bound - a recent
paper summarized twenty of them (Zahra, Gedajlovic, Neubaum, & Shulman, For
thcoming) - but they are usually driven by practice rather than theory (Mair et
al.,2006). Current research typically (and tautologically) define social entrepreneurs
as entrepreneurs with a social mission (Dees, 2001; Martin & Osberg, 2007) and
considers social entrepreneurship as entrepreneurial activity with an embedded social
purpose (Austin et al., 2006). Definitions are then derived from the integration of
these two concepts – entrepreneurship and social (Mair et al., 2006;Martin et al.,
2007). Social entrepreneurship has a lso been called the simultaneous pursuit of
economic, social, and environmental goals by enterprising ventures (Haugh, 2007).
One approach offers a more idealized view of social entrepreneurs as change agents
in the social sector (Dees, 2001). This approach contrasts with more pragmatic
definitions that see social entrepreneurship as the generation of earned income by
ventures in the pursuit of social outcomes (Boschee, 2001).

14
The concept of social entrepreneurship has thus become a large tent (Martin et al.,
2007) where many different activities are finding a home under a broad umbrella of
“activities and processes to enhance social wealth”(Zahra et al., Forthcoming) or
“entrepreneurship with a social purpose” (Austin et al., 2006). As a consequence, the
concept of social entrepreneurship is poorly defined and it s boundaries with other
fields of study remain fuzzy (Mair et al., 2006).

Repayment performance

The borrower’s ability to pay installments and interest on the loan is the number one
requirement for getting a loan. What is crucial here is that the applicant’s income is
regular and that loan repayments leave the applicant with enough money for other
expenses and living. The borrower is required to disclose his or her income,
expenses and debts. To avoid excessive indebtedness, it is necessary to include
servicing costs on other loans in the expense calculation. Any guarantees or pledges
issued by the borrower are also taken into account, as they may lead to further
indebtedness if the borrower becomes liable to pay under the commitments (Finland,
2007)

Loan funds
The first approach made by the government of Tanganyika toward providing credit
to farmers was during the World War II when it granted loans to promote agricultural
production to alleviate food shortages. This was followed after the war by
establishment of the African Loan Funds. The Local Development Loan Fund and
the African Productivity Loan Fund were set up in 1947 and 1955 respectively to
provide special credit facilities as a means of increasing the productivity of the
peasant farmer and of promoting projects that would generally aid production in the
Territory. After the war some of the native Authorities and cooperatives also started
to make loans to African farmers (Binhammer, 1975)

15
Credit defaults and repayment capacity
The majority of small credit program has been affected by serious defaults rates
ranging from 50% to as high as 80%, have been reported in small credit programs in
Africa, Asia and Middle East (Kashuliza, et al., 1986)

There is an opinion that credit program supported by funds from the external aid
agencies often encountered loan repayment problems simply because both borrowers
and lending institutions take loan recovery rather lightly. She observed that
unwillingness to improve sanctions by the lending organization allows willful
defaulters to go free as the respective organization can’t pressure the borrower to
meet their loan repayment obligations (Biseth, 1987).

The lower the proportion of the cost of an investment financed by borrowing, the
lower the risk to the lending institution. Borrowers should always be encouraged to
contribute as high as proportion of the cost of the proposed loan as possible from
their own resources rather than a fixed minimum percentage (FAO, 1989)

It has been observed that the inefficiency or the absence of registration titles or title
deeds often constitutes as a serious handicap to the supply of credit in cases where
security of landed property is required. In this respect several governments of
developing countries could make a valuable contribution to the expansion of
agricultural credit by taking steps to organize and keep up to date efficient systems of
registration of title deeds which enable agricultural credit institutions to determine
with a sufficient degree of accuracy the existence of rights in land (FAO, 1989)

Microfinance, Repayment and Delinquency

A microfinance portfolio even with very low arrears can, within a few months,
exhibit a dramatic rise in arrears, which can destroy the MFI" (Norell 2001). The risk
that the borrower tends not to repay the interest and or the principal of the loan that
he has received normally expressed as Credit Risk. In point of fact credit risk can be
explained further as a risk of an unexpected change in the credit worth of the
borrower that may go below the value of the loan. Credit risk, is not only taking into

16
consideration the amount which is expected not to repay but also taking into
consideration the inestimable value of the borrowers down grading. The effect of
increased credit risk will smash up the whole group as it will reduce the total capital
of the group and also the respect of members within the society.

In the micro finance, the insolvency loss effect is the main element of credit risk. In
microfinance the two important factors for delinquency or arrears are the interest rate
and the installment of repayment. Members with in a group need to consider the
capital, donations, outside interest rate by other institutions and provisions for risk
and profit while they decide about the rules and regulation for the whole system of
micro finance for the group, and also decisions on interest rates (Torre and Vento
2006).

Schreiner (2004) in one of his researches had mentioned that micro lenders provide
small, short, unsecured loans to the self-employed poor people using microfinance as
a strategy. Some of these borrowers have collateral for their loans, credit bureau
records, or formal day pay jobs. In the past, lenders main challenge was to guess the
risk of lending to the borrowers in microfinance. So it was hard for them to calculate
the risk and to set up a suitable interest rate. The lenders were accused for usury if
they set the interest rates of loans to overcome the costs of small loans, but if the
lenders tend to set lower rates, then they will be in greater risk of losing money
through interest (Schreiner 2004).

According Bond and Rai (2002), microfinance has defined a new way to reduce the
cost of judging the credit risk of the self-employed poor in savings and credit groups
as the responsibility is being partially passed on to that particular group itself. The
group members are from the same community and know each member and their
attitude it will be easy to them to judge the credit risk. At the other hand individual
lenders control the risk through complete evaluations of the borrowers and their
businesses, regular repayments, step of loan sizes, and collateral (Bond and Rai,
2002; cited by Schreiner 2004).

17
Desai (2007), in his work had mentioned the common practices for micro finance,
regardless of the environments in which they function. "These are pinched from the
Micro enterprises best practice project and do not abuse the idea that improvement
strategies be context precise and not one-size-fits-all" (Desai 2207). The first
common practice mentioned is that the service can be changed as to the local
consumer population. This includes contribution and short-term loans or small loan,
opening offices in available locations. The other practice is to function efficiently so
that the MFIs can keep the costs down; like any other regular business. The decrease
of unit costs will eventually benefit to the customers as it will bring down the
minimum interest rates or functional and processing fees. The last one is that the on
time repayment income, in which MFIs must concentrate a great deal and must
encourage clients continuously.

Nature and character of Micro Finance Institutions

It is said that MFIs cater for the needs of the poor without imposing cumbersome
conditionality inherent in the traditional banking system. Yet providing at the same
time mechanisms that will ensure maximum loan repayment (Benedict, 2001). Micro
finance entails development of appropriate financial institutions for mobilizing
financial resources from small urban and rural servers and directing credit to Small
and Micro enterprises (SMEs) and small scale farmers (SSFs) who do not have
access to credit facilities from the established commercial banking system
(Benedict, 2001). Methods of financial services delivery in micro-financing are
devised in such a way that services are appropriate for the target market and yet
avoid obstacles that inhibit traditional financial institutions from reaching these
SMEs and SSFs. Most formal banking institutions avoid lending to these groups of
people. Limited capital and lack collateral make them from the point of view the
banks, risky borrowers. In addition, they do not seem profitable to commercial banks
because they require high supervision and administration. MFIs seek to reach out to
those vulnerable groups especially women, the landless and unemployed.

Most MFIs have faith in lending to poor women rather than men because they
consider women as more responsible and trustworthy. Goetz and Gupta (1994) have

18
observed that women may be preferred to men as participant of micro-credit
programmers because they are seen to be more reliable and tractable and are easier
for field workers to access. In addition, different research findings ( Rattus, 1998,
and Philemon, 1996)) suggest that women are regular borrowers of MFIs. This is due
to the fact that most women did not receive appropriate education which could give
them a chance to be employed in the formal labor market. As a result women tend to
employ themselves in micro and small scale businesses for the ambition to receive
income and sustain their families.

Role of Microfinance Institutions

Microfinance has played a great role in provision of a broad range of financial

services such as deposits, loans, payment services, money transfer, and insurance to
poor and low income households and their micro enterprises. On top of it other non
financial services such as training and business advice are provided by Microfinance.

Microfinance in Tanzania is one of the approaches that the government has focused
its attention in recent years in pursuit of its long term vision of providing sustainable
financial services to majority of Tanzanian population. In Tanzania, before the
current financial and banking restructuring took place, most of financial services for
rural, small and medium enterprises were offered by the National Bank of Commerce
(NBC) and the Co-operative and Rural Development Bank (CRDB).

Microfinance credit and SME enterprises’ Performance

The SMEs nomenclature is used to mean micro, small and medium enterprises. It is
sometimes referred to as micro, small and medium enterprises (SMEs). The SMEs
cover non-farm economic activities mainly manufacturing, mining, commerce and
services.

There is no universally accepted definition of SME. Different countries use various

measures of size depending on their level of development. The commonly used
yardsticks are total number of employees, total investment and sales turnover. In the
context of Tanzania, micro enterprises are those engaging up to 4 people, in most

19
cases family members or employing capital amounting up to Tshs.5.0 million. The
majority of micro enterprises fall under the informal sector. Small enterprises are
mostly formalized undertakings engaging between 5 and 49 employees or with
capital investment from Tshs.5 million to Tshs.200 million. Medium enterprises
employ between 50 and 99 people or use capital investment from Tshs.200 million to
Tshs.800 million.

As referred from Microfinance development policy 2002 of the United Republic of

Tanzania SME’s defined basing on number of employees and capital, see the table
below:

Table 2.1 Categories of SMES in Tanzania

Category Number of Employees Capital Investment

Micro-Enterprises 1-4 Employees UP TO 5M

Small Enterprises 5-49 Employees Above 5M-200M

Medium Enterprises 50-99 Employees 200M-800M

Large Enterprises 100 and above Above 800M

Source: United Republic Of Tanzania, Small and Medium Enterprises Development

Policy 2002.

Kessy and Urio, (2006) came with the following results; much of the study’s data
indicates that MFIs improve the business of SME’s. Of the research sample, eighty
one percent SME’s experienced increased levels of profit after receiving loans from
MFIs, fifty percent of observed SME’Ss stated their income levels were higher after
attaining an MFI loan and ninety eight percent answered that access to MFI loans is
influential to their plans for future expansion of their businesses.

Another portion of data displays that fifty two percent of the studied SME’s
considered financial services rendered by MFIs as not helpful, due to undersized
loans and short timelines for loan repayment. Forty eight percent asserted that
interest rates for loans from MFIs were too high.

20
Other studies on microfinance services, in Tanzania were carried out by Kuzilwa
(2002) and Rweyemamu et al, (2003). Kuzilwa examines the role of credit in
generating entrepreneurial activities. He used qualitative case studies with a sample
survey of businesses that gained access to credit from a Tanzanian government
financial source. The findings reveal that the output of enterprises increased
following the access to the credit. It was further observed that the enterprises whose
owners received business training and advice, performed better than those who did
not receive training.

Importance of Small and Medium Enterprises

It is estimated that about a third of the GDP originates from the SMEs sector.
According to the Informal Sector Survey of 1991, micro enterprises operating in the
informal sector alone consisted of more than 1.7 million businesses engaging about 3
million persons that were about 20% of the Tanzanian labor force. Though data, the
SMEs sector are rather sketchy and unreliable, it is reflected already in the above
data that SMEs sector plays a crucial role in the economy.

Since SME’s tend to be labor-intensive, they create employment at relatively low

levels of investment per job created. At present, unemployment is a significant
problem that Tanzania has to deal with. Estimates show that there are about 700,000
new entrants into the labor force every year. About 500,000 of these are school
leavers with few marketable skills. The public sector employs only about 40,000 of
the new entrants into the labor market, leaving about 660,000 to join the unemployed
or the underemployed reserve. Most of these persons end up in the SMEs sector, and
especially in the informal sector. Given the fact that Tanzania is characterized by low
rate of capital formation, SMEs are the best option to address this problem. SMEs
tend to be more effective in the utilization of local resources using simple and
affordable technology. Also play a fundamental role in utilizing and adding value to
local resources. In addition, development of SMEs facilitates distribution of
economic activities within the economy and thus fosters equitable income
distribution. Furthermore, technologies are easier to acquire, transfer and adopt.
Also, SMEs are better positioned to satisfy limited demands brought about by small

21
and localized markets due to their lower overheads and fixed costs. Moreover, SMEs
owners tend to show greater resilience in the face of recessions by holding on to their
businesses, as they are prepared to temporarily accept lower compensation.

Through business linkages, partnerships and subcontracting relationships, SMEs

have great potential to complement large industries requirements. A strong and
productive industrial structure can only be achieved where SME’s and large
enterprises not only coexist but also function in a symbiotic relationship. However,
the linkages between SMEs and large enterprises are very weak in Tanzania. SMEs
development policy creates the potential for enhancing linkages within the economy.
In addition, SMEs serve as a training ground for entrepreneurship and managerial
development and enable motivated individuals to find new avenues for investment
and expanding their operations.

There are also opportunities indicating a bright future for SMEs sector development
in Tanzania. This includes the various on-going reforms that are oriented towards
private sector development and, thus, lay the ground for SME’s development. In
addition, the recognition of SME sector that it has higher potential for employment
generation per capital invested attracts key actors to support SMEs development
programmers. Since SMEs Development does contribute significantly to poverty
alleviation, resources earmarked for poverty alleviation will also be availed to the
SME sector. Given the fact that Tanzania is endowed with abundant natural
resources, the creation of enabling business environment will facilitate exploitation
of these resources through SME’s. This is again an opportunity for SME’s
development.

2.4 Empirical Studies

Quite several studies have been conducted in different developing countries
regarding micro credit performance in terms of loan repayment and impact .We
begin by those that focus on factors affecting loan repayments in Microfinance:

2.4.1 Tanzania Case

Krain (1994) provided more causes for low repayment as occasional debt
forgiveness, lack of good marketing facilities, deficient technical package, lack of

22
inputs and transport facilities and low unstable prices. Citing a specific case, he notes
that Zanzibar State Trading Corporation as by 1992 was unable to recover Tshs 42
million from clove growers. Low loan recovery of around 40% was caused by those
farmers who managed to get away by not repaying their loans and thus setting a bad
example to those who had paid back in time and fully.

According to the tendency of politicians to exempt farmers from payment has, to a

large extent, affected the loan repayment performance of a small credit scheme for
rice farmers of Zanzibar. The catastrophic effect of political decisions to ignore
outstanding debts is to create expectation that future accumulations of arrears will be
treated likewise. Similar outcomes were observed with credit programmes for
fisheries in Zanzibar. The precondition for getting a loan was that the applying
fishermen had to form cooperatives. In response to this requirement, several
cooperatives were hastily formed and most of them included members who were not
fishermen, a situation which caused a big portion of the fund not to be used for the
intended purposes and to remain in arrears. The biggest trouble lies with the
adjustable loans that begin with artificially low interest rates. Those rates may only
last for a month, a year, or two years, and then comes a "payment shock" as the rates
reset in ways that can double the required payments (Krain, 1994).

Kashuliza(1993) used a linear regression model to analyze determinants of loan

repayment in smallholder agriculture in the southern highlands of Tanzania. His
study showed that level of education, attitude towards repayment, farm income and
off-farm income positively affect loan repayment with farm income being
significant, while age, household expenditure and household size have negative
influence on loan repayment performance with household expenditure being
significant.

2.4.2 Abroad Case

Earlier this year, an analysis by First American Real Estate Solutions in Santa Ana,
Calif., estimated that $368 billion in adjustable-rate mortgages originated in 2004

23
and 2005 are at risk of default because of this pattern. Many more borrowers with
traditional ARM (Adjustable-Rate Mortgage) loans also face the prospect of rising
interest rates, but of a more manageable magnitude.

"This translates into 1.8 million families that are at risk as a result of the possibility
of default and another 500,000 that are likely to go into foreclosure," Allen Fishbein
of the Consumer Federation of America said last week at a Senate hearing on
nontraditional mortgages (Adams, et al., 1979)

Ajayi (1992) employed correlation and multiple regression analysis in his study
about factors affecting default in residential mortgages of the Federal Mortgage bank
of Nigeria. His results revealed that cost of construction, monthly repayment, loan to
valve ratio, market value of property, age of borrower and annual income of
borrower enhance loan defaults, while expected rental income from property reduces
loan default.

Vigano (1993) in his study about the case of development bank of Burkina Faso
employed a credit-scoring model. He found out that being women, married, aged,
more business experience, value of assets, timeliness of loan release, small periodical
repayments, project diversification and being a pre-existing depositor are positively
related to loan repayment performance. On the other hand, loan in kind, smaller loan
than required, long waiting period from application to loan release and availability of
other source of credit were found to have negative relation with loan repayment
performance.
Zellar (1996) analyzed the determinants of loan repayment of credit groups in
Madagascar with the purpose of quantifying the effect of intra-group pooling of risky
assets or projects by controlling for community level and program design factors that
influence the repayment rate of group loan. He employed a tobit model using a data
set on groups from six different lending programs. The results showed that socially
cohesive groups pool risks by diversifying the members’ asset portfolio so that their
repayment performance is improved even in communities with high risk exposure
Groups with higher level of social cohesion as measured by the number of common

24
bonds, have a better repayment rate. Moreover the results also indicated that it is not
the level of physical and human assets of group members but the degree of variance
of such assets among members that leads to better repayment, by pooling risks
among group members.

Njoku and Odii (1991) studied determinants of loan repayment under the Social
Emergency Loan Scheme in Nigeria. Their study showed that late release of loans,
complicated loan processing procedures, loan diversion to non- agricultural
enterprise low enterprise returns resulting from low adoption rate of improved
agricultural technologies and emphasis on political considerations in loan approvals
contributed to poor loan repayment performance of small holders. Loan volume,
years of formal education, household size and interest paid on loan were found to
positively and significantly affect loan repayment; while years of farming
experience, loan period, farm size, farming as major occupation, farm output and
value of assets were found to negatively and significantly affect loan repayment.

Chirwa (1997) used a probit model to estimate the probability of agricultural credit
repayment in
Malawi. The result indicted that crop sales, income transfers, degree of
diversification and quality of information are positively related while size of club is
negatively related to the probability of repayment. Other factors like amount of loan,
sex, household size and club experience were found to be insignificant.

The other important study is that by Arene (1992). He evaluated the credit delivery
system of Supervised Agricultural Credit Schemes among smallholder maize farmers
in Nigeria employing multiple regression analysis. The analysis indicated that loan
size, farm size, income, age, number of years of farming experience, level of formal
education and adoption of innovation are significantly and positively related to
repayment rate. Distance between home and source of loan, household size and
credit needs were found to be negatively related to repayment rate.

25
Adeyemo (1984) used descriptive analysis on loan delinquency in multipurpose
cooperative union in Kwara state, Nigeria. The result showed that natural calamities,
crop failure due to pest, poor storage facilities, lack of adequate transport facilities,
sales income, farm size, education, tenure status of borrowers are factors associated
with loan delinquency.

The Study by Hunte (1996) examined repayment behavior of borrowers and the
credit rationing technology of lenders in a rural financial institution, Hunte estimated
loan rationing and loan repayment equations using tobit model and found out that
only 33% of the criteria utilized identified credit worthy borrowers implying that the
screening system was not efficient. Impact analysis for any credit program is
essential to evaluate the success of the program or to see whether the program brings
the desired benefits to the target groups. In recent years impact assessment has
become an increasingly important aspect of development activity as agencies, and
particularly aid donors, have sought to ensure that funds are well spent (Hulme,
2000).

Conventionally, economic indicators have been widely utilized in assessing the

impact of micro finance where analyzers are particularly interested in measuring
changes in income, expenditure, consumption and assets. Recently, social indicators
such as educational status, access to health services, nutritional levels, contraceptive
uses, etc., together with the above economic indicators have been used to assess
impact of micro finance on the beneficiaries (Ibid).

26
2.5 Conceptual Framework

Figure 2.1 Loan repayment conceptual frameworks

Tujijenge Tanzania Limited

Tujijenge
Customers

Loan Defaults Loan Repayment  Client appraisal

Performance
 Credit risk
control

 Collection policy

Loan repayment feedback

Source: Research field data, 2013

2.7.1 Variables Interconnectivity

Microfinance institution extends credit to a customer, then the credit terms will
specify the credit period and interest rates, this therefore will have an effect on the
performance of loans since it stipulates the time of loan repayments hence creating a
timely repayment and decrease in default rate. Client appraisal helps MFIs to
improve loan performance, as they get to know their customers. These 5Cs
considered in client appraisal are character, capacity, collateral, capital and condition.
Credit risk is an investor's risk of loss arising from a borrower who does not make
payments as promised. Such an event is called a default. Credit risk controls has an
effect on timely repayments and decrease in default rate. They are risk based pricing,

27
tightening, diversification etc. Collection policy is needed because all customers do
not pay in time some customers are slow payers which some are non-payers.

28
 CHAPTER THREE

METHODOLOGY

3.1 Introduction

This section presents the methodological approach which was used in this study. It
covers the description of the study area, research design, sampling procedure, and
data collection procedures and data analysis.

3.2 Research Design

Is a detailed outline of how an investigation done, the research design typically
include how data was collected, what instruments were employed, how the
instruments was used and the intended means for analyzing data collected.

A cross-sectional research design was applied in this study. The cross-sectional

research design is a design that, allows data to be collected at a single point in one
time and used in descriptive study and for determination of relationships of variables
(Babbie, 1990). This type of research design was considered to be favourable
because of resources limitations and time for data collection.

3.3 Research Setting

Tujijenge Tanzania operates on 3 regions in Tanzania which include Dar Es Salaam,
Mwanza and Mara. It has 5 networking branches. Based on financial constrains and
time the study was carried out in Dar es Salaam, Tanzania, where Tujijenge Tanzania
has three branches Makumbusho, Tazara and Mbagala. These three branches in Dar
es Salaam have 70% (6,800) of Tujijenge customers.

3.4 Population
The study was carried out in Dar es Salaam, Tanzania. The city is located on the
coast belt between latitude 660 and 714 south of equator and longitude 3912 and
3967 east of Greenwich. Administratively the City is divided into three

29
municipalities of Ilala, Kinondoni and Temeke. The city is located between latitude
70o North and 39o East at 10 meters above sea level. Dar es Salaam is a commercial
city with a population of 2.5 million according to the 2002 census data and an annual
growth rate of 4.3% (URT, 2003b).

3.5 Sampling Technique and Sample Size

There are a variety of different sampling methods available to researchers to select

individuals for a study. Sampling method fall into two categories:

Probability sampling: Every individual in the population is known and each has a
certain probability of being selected. A random process decides the sample based on
each individual’s probability.

Non-probability sampling: The population is not entirely known, thus individual

probabilities cannot be known. Common sense or ease is used to choose the sample,
but efforts are made to avoid bias and keep the sample representative.

Simple random is an example of probability sampling. This is when a list containing

all of the population is created and used to obtain participants by random selection.
This random selection guarantees that each individual has an independent and equal
chance of being selected. This method is very fair, unbiased and easy to carry out.
thefore for this study a convenience and simple random sampling techniques were
used in this study to select MFI where by one MFI was selected for the study. Due to
shortage of fund, illiteracy and time resources, a list of borrowers was taken and a
proportional sampling technique was employed to obtain true representative
members from each group. The respondents was drawn using simple random and
convenience sampling techniques, therefore the sample size was comprised of 100
respondents out of 6800 customers from Tujijenge Dar Es salaam branches

30
3.6Data Collection

3.6.1 Primary data

The primary data was obtained through interviewing the respondents (borrowers) by
using structured questionnaires having both open and close-ended questions and
from lenders by using checklist.

3.6.2 Secondary data

Secondary data was collected from records, reports and published documents
obtained from the MFI and other financial Institutions.

3.7 Data processing and analysis

The collected data was sorted, coded and summarized prior to analysis.
The factors affecting loan repayment performance was assessed using a regression
analysis:
Loan repayment = f (Household income, education level for the head of household,
interest rate, payback period) i.e. Y = α + β1X1 + β2X2 + β3X3 + ….. + βnXn
Where; Y = Dependent variable (Loan repayment)
α = Constant/intercept
β = Coefficients
X1 = Household annual income (Tshs/year)
X2 = Education level for the head of household (number of years in school)
X3 = Interest rate (%)
X4 = Amount of loan taken (Tshs)
X5 = Grace period (months)
X6 = Repayment period (months)
X7 = Value of household assets (Tshs)
X8 = Family/household size (Adult labour equivalent)

31
The performance of MFIs in repayment performance was assessed in terms of:
i. Loan portfolio (different groups of borrowers)
ii. Competence of staff members (knowledge on loan)
iii. Objectivity of the firm (e.g. money intended to be lent if met)

The causes of loan diversion by borrowers will be evaluated using the following
yardsticks:
a) Intended goal or reason for borrowing
b) Type of loan i.e. cash or equipments like tractor
c) Product of the loan (Does it generate income?)

32
 CHAPTER FOUR

PRESENTATION OF FINDINGS AND ANALSIS

4.1 Introduction
This chapter presents the findings. Data are presented and analyzed according to
research questions. Findings are presented in statistical tables and percentages. Basic
characteristics of the sample borrowers are presented followed by the results of
regression analysis.

4.2 Demographic characteristics of the respondents

4.2.1 Sex of the respondents

The table below shows the sex of the respondents.
Table 4.1Sex of the respondents

Gender Frequency Percent

Female 74 74
Male 26 26

Total 100 100.0

Source: Research field data 2013

The table 4.1 indicates that majority of respondents (74%) were females while
minorities (26%) were males. This implies that the study involved more females than
males. This happened because Tujijenge gives small loans which most qualified
customers are female. Female are busy with small activities than men.

The composition of both female staff members and female clients was higher than
that of males, as far as table 4.2 is concern

When questioned about this unfair distribution, the branch manager explained that
females tend to be honest in their dealings with clients and so efficient service
delivery and those female customers were more than their male counterparts because
women have been highly marginalized in the society and so they have embraced

33
microfinance as a way of elevating themselves from poverty. When one male was
asked to comment on the same issue, he said that “there is a poor perception among
men that microfinance is basically a government program to benefit women only,
hence, they have tended to ignore it”.

Table 4.2 Gender of staff

Gender Frequency Percent

Female 69 69

Male 31 31

Total 100 100.0

Source: Research field data 2013

4.2.2 Marital status of the respondents’

Marital status of the respondents was another interest of the researcher in the sense
that it explains the extent of one’s responsibility, therefore it was investigated and the
following table shows the response.

Table 4.3 Marital status of the respondents

Marital status Frequency Percent

Married 41 41
Single 43 43
Divorced 16 16
Total 100 100.0

Source: Research field data 2013

According to the table 4.3, 43% of the respondents which is the biggest percentage
were single while 41% and 16% of the respondents married and divorced
respectively. The analysis helped the researcher to deeply understand Tujijenge’s
clients and compare the rate of loan default and their responsibilities. Findings
revealed the majority singles indicated poor loan repayment simply because they can

34
easily switch from one area to another in case legal actions were applied, the second
biggest percentage who were married had few chances to move from one locality to
another since they were established and were constrained by their family
responsibilities much as they can default just like singles. Whereas the 16% who still
borrow from Tujijenge MFI as they also involve in business ventures and are
divorced exhibited higher chances of defaulting, this is complimented by the fact that
they themselves failed to manage their homes.

4.2.3 .Age structure of the respondents

It was also found necessary to establish the age groups of the respondents since it
could explain the perspective in which loans acquisition is viewed.

Table 4.4: Age of the respondents

Age Frequency Percent

Under 25 10 10

26-35 28 28

36-45 47 47

Above 46 15 15

Total 100.0 100.0

Source: Research field data 2013

In accordance with the table 4.4, 47% of the respondents were in the 36-45 age
groups which were the majority. 28% were between 36 and 45 years, 15% which is
above 46 years while 15% which is the minority were under 25years. This indicates
that most of the clients are already married, established and mature to organize and
borrow money for income generating projects. Below 25 years, they are not
economically and physically active.

35
4.2.4 Education levels of the respondents
The education level was also considered important and therefore worth examining.
The following table shows the results.

Table 4.5 Education level of the respondents

Education level Frequency Percent

Primary 50 50

Diploma 40 40

Degree 10 10

Total 100 100.0

Source: Research field data 2013

On this table 4.5 indicates that Tujijenge clients are fairly educated able to have
capacity to understand questionnaires and answer accordingly. 10% of the
respondents were found to be at the degree level, 40% were at diploma level while
the majorities (50%) were found to be at the primary level. However, poor credit
management was also found among the degree and diploma holders despite their
ability to understand all necessities regarding loan management. This therefore
showed that the problem does not only come from customer’s side but also from
Tujijenge’s inadequate application of tools of credit policy management.

4.3 Existing credit policies and procedures in Tujijenge Tanzania

The study sought to establish the different credit policies employed in Tujijenge
Tanzania. Different questions were asked and responded to by different respondents
in a bid to achieve the objective. The following are the findings.

4.3 Credit policy analysis

4.3.1. Credit standards

Credit standards were set in order to identify the credit worthy clients so that the
institution maximizes the revenue and minimizes bad debts. The application of the

36
clients is investigated basing on the character, capacity, collateral security, capital
and economic condition, credit standards were the yardstick for measuring the risk
level of a client. This result to each element of credit standard were as follows

4.3.1.1 Character assessment to measure the risk level of Tujijenge clients

Consideration of client’s characters before extending a loan was also another aspect
to be investigated by the researcher.

Table 4.6 Response on whether Tujijenge considers client’s character for loan
extension.

Response Frequency Percent

Strongly agree 39 39
Agree 52 52
Not sure 7 7
Disagree 2 2
Total 100 100.0

Source: Research field data 2013

According to the table 4.6, the respondents who strongly agreed and the ones who
agreed were the majority taking the same percentage of 91% whiles those who were
not sure and the ones who disagreed were 7% and 2% respectively. The findings
revealed 91% unanimously agreed that Tujijenge considers client’s character before
extending the loan but then poor loan recovery has continued to increase, it means
Tujijenge needs to review the implementation, monitoring and evaluation of its credit
policies to revive its glory.

4.3.1.2 Collateral security assessment.

To find out whether Tujijenge considers a person’s collateral before giving out a loan
was also inevitable since it is a major tool in effective loan recovery. The following
were the results

37
Table 4.7 Consideration of collateral

Response Frequency Percent

Strongly agree 63 63
Agree 37 37
Total 100 100.0

Source: Research field data 2013

The analysis on table 4.7 shown that 63% of the respondents which was the majority
strongly agreed where as 37% agreed. This is in a bid to safeguard their money
extended to clients through loans. Because clients can at any time default or change
location hence this is a better control measure in the loan recovery.

4.3.1.3 Respondents view on whether Tujijenge considers financial status before

extending the loan.

The researcher continued to find out if the economic condition of a client was
always put into consideration before he is given a loan. The following are the
findings as shown in the table below.

Table 4.8 Analysis of customer’s financial status.

Response Frequency Percent

Strongly agree 15 15

Agree 12 12

Not sure 45 45

Disagree 28 28

Total 100 100.0

Source: Research field data 2013

It was observed that on table 4.8, 45% of the respondents was not sure if the
economic condition was considered before a person could get a loan. 28% disagreed,
15% strongly agreed while 12% of the respondents agreed. The analysis shows that

38
the majority clients were ignorant about the question that is 45% and 28% who were
not sure and disagreed respectively where as 15% and 12% strongly agreed and
agreed that Tujijenge considers client’s financial stance before extending the loan to
them. However, all in all Tujijenge considers client’s financial position before
extending the loan to them in an attempt to reduce bankruptcy exposures and also
reduce advancing credit to unworthy clients.

4.3.1.4 Assessment of the prevailing economic conditions.

Given the relevancy of the financial status of a client before a loan can be extended,
the researcher had to find out if the prevailing economic conditions of a country are
considered in order to give out loans. The table below summarizes the findings.

Table 4.9 Relevance of the prevailing economic conditions

Response Frequency Percent

Agree 43 43
Not sure 26 26
Disagree 20 20
Strongly disagree 11 11
Total 100 100
Source: Research field data 2013

The table 4.9 shows that 43% of the respondents agreed that economic conditions are
considered. 26% were not sure, 20% disagreed while the rest that comprised 11%
strongly disagreed. The results from the respondents show that they were ignorant
and illiterate about the question. However, although Tujijenge considers this factor,
loan repayment was still a problem. In order to ensure repayment from clients, these
conditions such as political and economic factors need to be considered. Loans
should not be given to clients during inflationary conditions or given to clients during
instabilities due low returns expected.

39
4.3.1.5 Customer’s capacity assessment
During the study, the researcher found it necessary to establish whether the client’s
capacity to pay back the loan in a given loan period is considered by the
Microfinance.
Table 4.10 Clients’ capacity to pay back

Response Frequency Percent

Strongly agree 23 23
Agree 49 49
Not sure 8 8
Disagree 20 20
Total 100 100

Source: Research field data 2013

From the table 4.10, the majority of the population (49%) agreed. It was followed by
23%which strongly agreed, 20% disagreed while 8% of the respondents were not
sure. The loan officer assessed by looking at clients past records such as earnings,
debt load and savings. However, findings revealed that where clients were not able to
pay back the loan in time, their pledged property (personal assets) or tangible
businesses could be sold in a bid to regain the principal. Besides this, legal actions
such as imprisonment could be taken against the borrower.

4.3.1.6 Trust assessment of customers

The researcher continued to find out if trustworthiness of the customer was
considered before a loan could be extended and the following were the results.

Table 4.11: Trust of the customers

Response Frequency Percent

Strongly agree 34 34
Agree 49 49
Not sure 3 3
Disagree 14 14
Total 100 100
Source: Research field data 2013

40
From the analysis on table 4.11, it can be seen that 49% of the respondents agreed,
34 % strongly agreed, 14 % disagreed while 3 % were not sure. The findings on the
other hand revealed that despite the application forms which are not comprehensive
enough to cater for all attributes of credit screening, there is no formal trust
assessment mechanism in place.

4.3.2 Credit term analysis

The researcher sought to whether the credit terms such as credit period, loan size,
interest rate to mention but a few could increase loan recovery in Tujijenge

4.3.2.1. Comfort ability of loan period analysis

Respondents were asked whether the customers were comfortable with the loan
period extended to them. The following table shows the level of response.

Table4. 12: Comfort with the loan period

Response Frequency Percent

Agree 40 40

Not sure 11 11

Disagree 15 15

Strongly disagree 34 34

Total 100 100

Source: Research field data 2013

The results summarized in the table 4.12 show that 40% of the respondents agreed
with the fact that customers are comfortable with the loan period extended to them,
34% strongly disagreed, 15% disagreed while 11% were not sure about it. The 40%
besides being comfortable with the loan period, they also expressed that discounts
were allowed to customers with prompt settlement of the loan this serves as an
incentive to pay promptly, 11% showed they did not know what was happening, 34%
and 15% strongly disagreed and disagreed that they are not comfortable with the loan

41
period given to them because have ever fallen victims to the application of law while
enforcing payment from them.

4.3.2.2 Respondent’s view on how good the loan size is.

Respondents were further asked whether the loan size that Tujijenge extends to
clients was good.
The following table shows the level of response.

Table 4.13: Goodness of loan size.

Response Frequency Percent

Strongly agree 10 28.6

Agree 11 31.4

Not sure 8 22.9

Disagree 6 17.1

Total 35 100.0

Source: Research field data 2013

From the table 4.13, it is shown that majority of the respondents (31.4%) agreed,
28.6% strongly agreed, 22.9% were not sure while 17.1% disagreed. This implies
that clients are satisfied with the size of the loans extended to them since it was
commensurate with their standards of living and at the same time they are able to
meet to loan obligations.

4.3.2.3 Analysis on the length of loan period.

Considering the length of the loan period, respondents had this to say in accordance
with the table below.

42
Table 4.14: Response of the length of the loan period.

Response Frequency Percent

Less than 6 months 85 85

1 year 15 15

Above one year 0 0

Total 100.0 100.0

Source: Research field data 2013

The table 4.14 shows that majority of respondents (54.3%) acquired the loan for a
period of less than six months. This implies that most of the loans extended have a
life span of less than six months therefore no enough periods for the clients. The
researcher concluded that the length of loan was insufficient in accordance to one’s
loan size. This however, raises concern that, the loan period might be the reason of
poor loan recovery.

4.3.2.4 Respondent’s view on loan amount asked for.

Tujijenge considered giving small loans to ensure quick repayment; nevertheless,
loan default was steadily rising implying the existence of a problem in Tujijenge’s
policies. In response to the loan amount clients ask for, the table below shows the
results.

Table 4.15: response to loan amounts asked for.

Response Frequency Percent

100,000-400,000 23 23

500,000-900,000 40 40

1,000,000-2,000,000 20 20

Above 2,000,000 17 17

Total 100 100

Source: Research field data 2013

43
From the table 4.15, 40% of the respondents ask for loans that range from 500,000 to
900,000 Shillings, 23% ask for the amounts from 100,000 to 400,000 Shillings, 17%
ask for the amounts from 1,000, 000= to 14,000,000 while 20% ask for above
14,000,000. The results imply that Tujijenge cuts across all categories of people in
loan offer a condition that encourages people from all walks of life to access loans
for development.

4.3.2.5 Interest rate assessment.

The interest rate of loan offered by Tujijenge is 48 % per year and the monthly
interest is 4% flat. The interest rate is set depending on loan period of the loan.
Responses to the description of interest rates charged by Tujijenge Tanzania yielded
the following information as shown in the table below.

Table4.16 Description of interest rates charged

Response Frequency Percent

Low 10 10
High 34 34
Fair 56 56
Total 100 100

Source: Research field data 2013

It is shown from the table 4.16 that 56% were convinced that the interest rate is fair,
34% said the interest was high because Tujijenge serves a number of customers who
are scattered and so high operating cost. This interest rate was meant to cover
operating cost and consequent burden is felt by borrowers while 20% claimed that
the interest was low. This implies that the loans extended by Tujijenge Tanzania
were client friendly.

4.3.3 Collection efforts analysis

Collection efforts determine the actual collection period that is procedures that the
institution follows to recover payments of past dues. Like phone calls and individual
visits.

44
4.3.3.1 Credit weekly deposits and meetings
Tujijenge requires its clients to meet weekly deposits. This method of payment is in a
bid to secure their lending and minimized defaults. Tujijenge loans are in form of
revolving funds administered which also constitute the payback period. It was also
important for the researcher to find out if Tujijenge Tanzania requires clients to make
weekly deposit in order to avoid default. The following responses were recorded

Table 4.17: Requirement to make weekly repayment

Response Frequency Percent

Agree 54 54

Not sure 20 20

Disagree 23 23

Strongly disagree 3 3

Total 100 100

Source: Research field data 2013

From the table 4.17, the majority (54%) agreed that clients are required to make
weekly repayment in order to avoid default. They further expressed that they have to
meet weekly for making repayment and discuss with loan officers regarding the
business. weekly meetings did not give the opportunity to use credit to organize their
businesses. 23% disagreed, 20% were not sure while 3% strongly disagreed.
However, weekly meetings and repayment are meant to guarantee and enhance loan
repayment together with interest rate payment.

4.3.3.2 Methods of communication to defaulting clients

The response on how Tujijenge communicates with its clients indicates that it was
personal visit by loan officers and use of letters since telephones were expensive.
The table below shows the list of methods used during loan portfolio collection and
their frequency in use.

45
Table 4.18: Collection procedures or methods

Frequency and percentage

Method Very common Common Not common No opinion

letter - - 90 clients 10 clients

90% 10%

telephone - - 83 clients 17 clients

83% 17%

Personal 100 - - -
visit 100%

Source: Research field data 2013

The results from table 4.18, indicated that 90(90%) out of respondents said letters
were not commonly used in recovery procedures by Tujijenge, 10(10%) gave no
opinion, 83(83%) said that telephones were also not commonly used, 17(17%) had
no opinion while 100(100%) said that personal visits were very commonly used by
loan officers. However, recovery rate is not all that successful due to other factors
like deaths sickness and business failing hence need to revise its collection
procedures such as credit screening, debt monitoring and consistency in delivery of
letters and phone calls to remind its customers to pay.

4.3.3.3 Assessment of whether clients are reminded when to meet repayment

When asked how often customers are reminded in case of a default, the respondents
had the following to say as summarized in the table below.

Table 4.19: Frequency of customer reminder

Responses Frequency Percent

Weekly 80 80
Monthly 16 16
End of contract 4 4
Total 100 100

Source: Research field data 2013

46
Table 4.19 shows that 80% said customers are reminded weekly, 16% said they are
reminded monthly while 4% said they are reminded at the end of the loan period, this
is in an attempt to reduce the rate of loan default and at the same time avoid
unnecessary excuses from borrowers that they were not aware of payment date.

4.4 Findings on how loans are recovered in Tujijenge Tanzania.

The study still wanted to examine how loans are recovered in Tujijenge Tanzania.
Different questions were asked and responded to by different respondents in a bid to
achieve the objective.
The following are the findings

4.4.1 Use of legal means to enforce loan repayment

The respondents too were asked if the legal means are sometimes employed by the
management when all other efforts failed. The following responses were recorded.

Table 4.20: Employment of legal means in loan recovery

Responses Frequency Percent

Strongly agree 36 36

Agree 57 57

Strongly disagree 7 7

Total 100 100

Source: Research field data 2013

The table 4.20 shows that majority of the respondents (57%) agreed that legal means
were sometimes employed. 36% strongly agreed while 7% strongly disagreed. Never
the less it has continued to register an increasing low loan recovery rate despite the
use of legal means this was attributed to management laxity to effect legal actions
after due dates.

4.4.2 Penalties assessment

These are used in loan recovery procedures to recover the loan. The researcher also
asked if the customers can face penalties if they do not pay the loan in time. The
following table shows the responses.

47
Table 4.21: Responses on use of penalties due to failure to pay in time

Response Frequency Percent

Strongly agree 57 57

Agree 30 30

Not sure 9 9

Disagree 4 4

Total 100 100

Source: Research field data 2013

The table 4.21 shows that the majority (57%) strongly agreed that customers face
penalties if they do not pay in time. 30% agreed, 9% were not sure while 4%
disagreed. The researcher found out that there was a penalty of 0.5% charged for
every day of delayed payment. However despite penalties, clients still default due to
some other factors like deaths, floods, sickness, business making losses and theft,
thereby making chances to recover loans minimal.

4.4.3 Respondent’s view on whether Tujijenge trains officers on loan recovery

The respondents were also asked whether loan officers are trained to recover loans
from clients. The respondents gave the following responses.

Table 4.22: Training of loan officers in loan recovery

Response Frequency Percent

Strongly agree 40 60
Agree 10 27
Not sure 37 10
Disagree 13 3
Total 100 100

Source: Research field data 2013

According to the table 4.22, 40% of the respondents strongly agreed that the loan
officers are trained while 10% of the respondents agreed; it was the same percentage
as those who were not sure and those who disagreed. This was in a bid to effect

48
proper implementation of credit policy management though the results contradicted
this objective. This was attributed to limited and inefficient collection policies to
influence timing of collections or payments coupled by management laxity to effect
legal actions.

4.4.4 Assessment of the loan percentage recovered

It was also equally important to ask the respondents the percentage of the loan
disbursed to customers if it is paid back. The table below shows the responses.

Table 4.23: Responses to loan percentage paid back

Response Frequency Percent

Less than 50% 10 10
50% 36 36
Between 50-75% 31 31
Between 75-100% 23 23
Total 100 100

Source: Research field data 2013

From the table 4.23, 36% of the respondents said that 50% of the loan is paid back.
31%
Said that the percentage is between 50 and 75%, 23% said it is between 75 and 100%
while
10% of the respondents said it is less than 50%.
The findings above depict that loans are recovered in varying ways relying on the
ability of borrowers.

4.4.5 Regulatory framework influence

The researcher also asked whether the regulatory framework influences recovery of
loans and the results were as below.

49
Table 4.24 Influence of regulatory framework on recovery of loans

Response Frequency Percent

Strongly agree 12 12

Agree 34 34

Not sure 52 52

Disagree 2 2

Total 100 100

Source: Research field data 2013

From the table 4.24, 52% of the respondents were not sure whether regulatory
framework influences repayment of loans and this was the majority. 34% agreed,
12% strongly agreed while 2% disagreed. It was seen that proper regulatory body
could determine the obligation set by the body for example to suit their client’s
needs. When the government or the association of MFI in Tanzania requires MFI to
charge low interest rate (Fair) the blow is felt by this institution. Especially having
extended the loan on a higher interest rate than the one recommended and in this case
there is reluctance from customers to meet their loan obligations like monthly
interest remittances inclusive

4.5 Regression results

In this study, a multiple linear regression was used to analyze factors which influence
loan repayment. Table 12 shows parameter estimates of logistic model for factors
influencing loan repayment.

The following multiple linear regression model was used in this study:

Y = α + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + μ

Where; Y = Loan repayment, X1 = Household annual income, X2 = Education level,

X3 = Composition of household labor size, X4 = Value of household assets and X5 =
Amount of loan obtained. From the analytical model above; β1, β2, β3, β4 and β5 are
the coefficients of the respective independent variables.

50
From the results of regression analysis, the parameter estimates of the explanatory
variables would fit the regression equation as follows:

Y = -350509 + 0.018X1 + 13134.201X2 + 52015.043X3 - 0.009 X4 + 697590.9X5

From the results of multiple linear regression;

Coefficient of multiple correlation (R) = 0.83. This implies that there was strong
positive correlation between the five independent variables and dependent variable is
high.

Coefficient of determination, R2 = 0.689. This implies that 68.9% of the variation in

loan repayment was accounted by the explanatory variables included in the model
while the rest which is 31.1% is accounted by other explanatory variables which
were not included in the model. Adjusted R2 is 0.625 implying that 62.5% of the
variation in loan repayment was due to the five independent variables included in the
model and 37.5% is due to other variables that were not included in the equation.

Table 4.25 Parameter estimates of logistic model for factors affecting the
repayment performance Dependent variable: Loan repayment

Model Unstandardized Coefficients

T Sig.
B Std Error
(Constant) -350509 542465.5 -.646 .524
Household annual income .018 .009 1.932 .065
Education level 13134.201 131390.8 .100 .921
Composition of 52015.043 53900.909 .965 .344
household labor size

Value of household assets -.009 .004 -2.121 .044

Amount of loan obtained 697590.9 103060.5 6.769 .000‫٭٭٭‬

Source: Primary data

From the results in the Table 24 above: The value of parameter estimate of annual
household income is positive. This implies that if the household annual income
increases by one unit regardless of other factors, the loan repayment performance

51
will increase by 0.018. The positive effect of annual household income on loan
repayment can be attributed to the fact that households whose annual incomes are
high are more capable of repaying loans than the families whose annual household
incomes are low.

The value of parameter estimate of level of education is positive. This implies that
the education level of the borrowers positively affecting loan repayment. This can be
attributed to the fact that the borrowers who have higher level of education are likely
to have more knowledge about loans’ contracts, procedures for loan repayment and
the consequences for delayed loan repayment, than borrowers with no or low level of
education.

The value of parameter estimate of composition of household labor size is positive.

This means that composition of household labor size positively affect loan repayment
capacity. This can be attributed to the fact that borrowers with families composed of
people who are able to work and earn income are more likely to be able to repay the
loans than those families with many dependants.

The parameter estimate for value of household assets is negative. This implies that
there is negative relationship between loan repayment capacity and value of
household assets. This can be attributed to the fact that not all household assets are
used in income generating activities. Furthermore, some of the borrowers use the
money acquired through loans to purchase assets that cannot be used to generate
income.

The value of parameter estimate for amount of loan is positive. This implies that the
amount of loan obtained has positive effect on the repayment performance. This can
be attributed to the fact that borrowers are more capable of repaying small amount of
loans than big loans.

52
 CHAPTER FIVE

DISCUSSION OF THE FINDINGS

5.1. Effect of credit fund to the economic condition

The findings revealed that on table 4.9, despite the negative effect of the credit terms,
to some extent improvements noted on their business investments of which their
business had expanded and their house hold income had increased significantly as a
result of having taken loans. The most significant impact evident among the
entrepreneurs involved in business activities was that the capital they owned had
doubled after taking the loan. The results revealed that the beneficiaries had
significant improvement in terms of infrastructure and net income. However, some
entrepreneurs revealed significant improvement after taking the loan in terms of
business expansion.

The findings revealed that MFIs often use monitoring and evaluation as a tool for
measuring the impact or performance of SMEs. However, it was noted that most
MFIs carried out impact evaluation exercises to satisfy the conditions laid down by
donors. This implied that as MFIs become financially independent, less attention
would be paid to monitoring and evaluation exercises mainly because of cost
implications. Nevertheless, monitoring and evaluation carried out in a consistent and
orderly fashion, helps in aligning the needs of clients with the implementation
strategies thereby leading to a positive impact of the loan program.

The major reasons behind this claimed by borrowers were business failures, and
increasing household consumption. Through discussion with the interviewees, the
beneficiaries claimed that majority of people in Dar es Salaam do not have annual
budget on their household consumption. They just spend the amount they have at
disposal, they also regard loans as grants and subsidy of which failure to repay can
be compensated by the government.

53
5.2. Effect on the length of loan period

The results from table 4.14 revealed that 85% respondents were under 4-6 month
loan period, this is because most of clients take a group loan scheme. The
respondents preferred the group loan scheme because the loans were easily
accessible and the guarantee system was favorable (Group guarantorship). Though
group based minimalist approach was the most preferred, few (15%) were in long
term of one year which requiring the group to be in grade A which most of them are
not qualifying.

The results revealed that a large majority of the respondents found no grace period
and loan repayment period to be very short, thus straining and pressurizing them to
make quick repayments. Consequently, the respondents did not feel the immediate
impacts of the loan but instead they felt immense pressure to put all their earnings
towards loan repayment. The immense pressure associated with quick loan
repayment which has led some micro entrepreneurs to sell their land in order to
meet the demand for quick repayment. It was observed that most MFIs were setting
short repayment periods, high interest rates and short grace periods not only to meet
the operational costs and shield themselves from the high risk factor involved in
lending to SMEs, but also to realize bottom line.

Zeller (1998) stated that group based minimalist schemes provides peer pressure
which triggered loan repayment. The high loan repayment rates among could be
attributed to peer pressure from the group members.

(Urio and Kessy 2006) observed that, repayment period for most microfinance
ranges from three to six months, this depends on the loan sizes. This is indicated by
SMEs as short period. Most MFIs client pay back after one or two weeks and they
continuously make weekly instalments for 4-6 months. This varies from one
institution to another. However this period is considered too short to use credit and to
be able to pay back and as a result SMEs working capital continue to be limited since
payments are immediate and even at times from other sources other than the business
itself hence affecting clients performance negatively, Yunus M (1983).

54
5.3. Effect of loan size and Repayment performance
Findings of the study (Table 4.15) revealed that 23 % of borrowers received loan
from Tsh100, 000 to Tsh400, 000. However 40% received the loan amount ranges
from Tshs. 400,001 to Tsh 900,000 while 20% receive from Tsh 1,000,000 to Tsh
2,000,000 and 17% above Tsh 2,000,000.

This implies that lenders are more sensitive to amount of loan due to a couple
reasons like repayment capacity, SMEs’ characters and returns from the actual
business/ investment. However SMEs were concerned about the lending
methodology.

when SMEs’ interviewed stated that, there are several factors which hinder them on
loan size to be given, some of the factors are lack of collaterals, and guarantorship
where by Tujijenge require an applicant to have been in business for at least six
months and is a member of a group or can find a formally employed guarantor. Also
borrowers added other factors such as missing savings deposited amount first time
borrowing, failure to formulate the required group for group lending, and repayment
schedule together with repayment period are other factors hinders borrowers on
getting the requested loan size.

Some of the respondents also felt that the size or amount of the loan issued was too
small to make an impact on the businesses. An interesting finding to note was that a
high percentage of clients were taking multiple loans. This could have been due to
the fact that the first loan taken did not provide adequate impact and hence the need
to look for the second one.

Inappropriate loan sizes do not fit between the objectives of the lender and the
borrower and mostly tend to result into bad loans hence negatively affecting the
performance of the borrower. Most MFIs prefer to give too little credit to too many
borrowers. Waterfield (1996) noticed that, in an ideal world each client would
receive a loan tailored exactly to the need of the business.

55
Microfinance institutions are still relying on loan sizes established long time when
they were starting, they have forgotten value of money change over time, fifty
thousands of ten years ago is not the same as of current. (Urio and Kessy 2000).

Churchill, (1999) argued that, MFIs should move to client focus lending which is to
design the right product for the client. This will fit in the loan size required by
business, loan period and repayment plans.

5.4. Effect of interest rate on Repayment performance Results in Table 4.16

shown that 66% were convinced that the interest rate charged is fair, because they are
not qualifying to get loan from commercial banks due to lack of collaterals.
Meanwhile 34% said interest rate is high, which Tujijenge said is because of the
operating costs are too high.

The average interest rate of WAT SACCOS at Kinondoni district is 21% annually
with ranges between 1.5% and 2% per month. And the average interest rate of other
MFIs at Dar es Salaam (SEDA, FANIKIWA, BRAC etc) is 36% annually with 3%
per month. Tujijenge Tanzania Limited charges an interest rate of 48% per annum.
These rates are very high compared to income generation through business unit
investment as a result failure to repay the loan Cost of loan to borrower and income
to the lending institution is reflected in interest rate charged on loans (Water field
and Duval 1996).

Most of organizations charges interest rates which covers operating costs, it is

normally charged on flat bases or declining. Ledger wood (2000), noted that interest
rates of most MFIs is charged on flat rate and it is too high to be met by a number of
SMEs. Wright et al 2000, observed that when interest are charged highly, there is a
tendency for borrowers to keep part of borrowed money or to use the business capital
to pay the interest which greatly affect business performance by reducing working
capital hence profitability.

56
Stiglitiz and Weiss (1981) came with argument that high interest rates affect
borrower’s behaviour negatively by reducing their incentives to take actions
conducive to repaying their loans. On the other hand it is argued that interest set too
low makes MFIs fail to cover their cost which leads to poor monitoring of loans at
the end MFIs losses. Gonzalez-Vega (1998).

Generally interest rates of microfinance institutions have been an issue over which
there have been many debates among practitioners.

5.5. Effect on weekly repayment

The results from table 4.17 shows 54% accept weekly repayment frequency, while
20% and 23% were not sure and disagreed respectively. 3% were strongly disagreed
as they said the repayment period is too short for them starting paying back the loan.
In one week time they have to repay interest plus interest.

On the interview with respondents, borrowers said as the loan grows bigger the
weekly repayment causes them to pull out large amount of money from the business
in order to make weekly repayment, this reduces the working capital of the business
and subsequent levels of profitability.

Even though economic theory suggests that a more flexible repayment schedule
would benefit clients and potentially improve their repayment capacity, micro-
finance practitioners argue that the fiscal discipline imposed by frequent repayment
is critical to preventing loan default. However, it is clear that weekly repayment
schedules significantly increase the transaction costs faced by the clients and the MFI
(by requiring it to maintain a very large staff to client ratio). It is therefore important
to know whether in practice, a more flexible repayment schedules for MFIs clients
worsens default, and more generally alters repayment patterns.
(www.findarticles.com.2007)

57
 CHAPTER SIX

CONCLUSIONS AND RECOMMENDATIONS

6.0 Introduction
This chapter presents the summary discussions, conclusion and recommendations of
the findings

6.1 Conclusion
The general objective of this study is to analyze the factors affecting the repayment
performance of Microfinance industry in Dar es Salaam, Tanzania. The specific
objectives were: to evaluate factors affecting the repayment performance; : to assess
the performance of MFIs in loans disbursed ; to review the terms and procedures for
giving out loan and the repayment schedules; to assess the way credit received and
how it is used by the recipient and to give credit policy making/adjustment of credit
conditions.

The study used primary data (which was the main source of information) and
secondary data. Primary data was obtained by using structured questionnaires that
were addressed to borrowers and checklists that were addressed to MFIs.
Furthermore, descriptive statistics were used to analyze borrowers’ perception on
repayment while multiple linear regression model was used to analyze factors
affecting loan repayment capacity.

Results of the study revealed that major factors that positively affecting the
repayment performance are amount of loan obtained composition of household labor
size, education level and household annual income. On the other hand, the value of
household assets negatively influences repayment of loan.

58
6.2 Recommendations

6.2.1 Interest rate reduction

The study has found that the interest rates charged by MFIs on loans are very high.
This is a major constraint to loan beneficiaries. High interests discourage individuals
to apply for credit. Lowering interest rate will encourage small entrepreneurs
(borrowers) to access credit in order to improve their welfare. Fair interest rates that
are lower than those charged by formal credit providers and commercial banks will
enable micro and small enterprises to improve their businesses.

6.2.2 Provision of business education and training

Some of the borrowers who get loans on the condition of pledging their valuable
assets as collateral sometimes get their assets confiscated by the lenders due to their
failure to repay the credit timely. In this case borrowers may be limited by MFIs.
Borrowers need to be educated about financial service providers and their method of
operation before they choose to access credit. Such education will increase chances
of the poor to improve their living standards through benefits realized from the credit
services.

Moreover, managers and loan officers of such financial services need to more trained
so that they can manage more effectively and efficiently government and non-
governmental financial institutions to reach many poor people while improving the
sustainability of the MFIs services.

6.2.3 Creation of favorable policy for borrowers

The government should revise the policies and programmes to regulate the current
rules and regulations of MFIs including difficult conditions in borrowing. To
implement this, the government should subsidize the MFIs in their loan recovery to
encourage small entrepreneurs to participate in economic development activities.

59
6.2.4 Emphasis on individual lending
Individual lending should be emphasized by lending institutions. This is because,
groups tend to assess credit based on need for the loan, agreed amount of money to
save and repay over certain periods of time. If a group member doesn’t repay his/her
loan timely, no more loans are given to any other member of the group. Therefore
individual lending will reduce the failure of loan repayment.

6.3 Suggestion
The research has not been exhaustive and conclusive enough due to the limited
resources at the disposal of the researcher. However, areas that required further
research are like whether the micro finance institutions (MFI) have helped in
improving business of their clients and the implication of giving out long-term loans
to clients.

60
 REFERENCES
Adams, D. W and G. D. Nehman (1979). Borrowing Costs and the Demand for Rural
Credit. The Journal of Development Studies 15(12): 165 – 176

Allen, B. (2003). Definition of the word ‘loan’.

[http://www.businessdictionary.com/] site visited on 30th Jan 2009.

Babbie, E. R (1990). Survey Research Methods. Wardsworth Publishing Co.

Belmomount California. 395pp

Baden, S. (1996). Gender Issues in Financial Liberalization and Financial Sector

Reform. [http://www.ids.ac.uk/bridge] site visited on 12/12/ 2008.

Bank of Tanzania (2008). Economic Bulletin for the Quarter Ended 31st March.
Government Printer, Dar es salaam, Tanzania. 64pp.

Binhammer, H. H. (1975). The Development of Financial Infrastructure in Tanzania,

University of Dar es salaam. Economic Research Bureau, series 1. Dar es
salaam, Tanzania. 110pp.

Biseth, H (1987). Credit for Small–scale Farmers in Northern Province, Zambia.

Norwegian Centre for International Agricultural Development NORAGRIC,
Agriculture University of Norway. Agricultural Development Reports
SKRIFTTSERIE B. No. 7 Occasional Papers, Series B. 119pp.

Eddy L. LaDue and David J. Leatham (1984). Floating versus Fixed-Rate Loans in
Agriculture: Effects on Borrowers, Lenders, and the Agriculture Sector.
Blackwell Publishing on behalf of the Agricultural & Applied Economics
Association. Oxford. 53pp
FAO (1989). Revolving loan funds and credit programmes for fishing communities.
Rome. 67pp

61
Finland (2007). Federation of Finnish financial Services; Helsinki, Finland.
[http://www.repaymentcapacity.asp] site visited on 30th Jan 2009.

Kashuliza, A. K and Sanderatne (1986): Financing small farmers in Tanzania. An

evaluation of Institutional Credit Allocation and Borrower Repayment Trends.
Unpublished Masters Degree Thesis, University of Gulph Toronto. 136pp

Kashuliza, A. K. (1993). Perception and Role of Informal Rural Finance in

Developing Countries. The example of Tanzania. Journal of Rural Studies.
Oxford, 9(2): 150 – 180.

Krain, E (1994). Survey on Rural Household Economy. Farming Systems Research

Sections, National Coconut Development Programme, Unpublished Paper.

Mohamed, K.S. (1999): Review on the performance of credit operations under the
Zanzibar Smallholder Support Project. Unpublished paper presented at the
project Interministrial steering committee meeting No 1/99.

Muhammad, Y. (2008). Creating a World Without Poverty: Social Business and the
Future of Capitalism. Public Affairs, New York. 179pp

Seibel, H. D (1979): Industrial Relations in Africa. International Institute for Labour

Studies, Switzerland: London. Macmillan. 150pp

Simba, S. M (1996). Credit opportunities for Tanzanian women: Submitted in partial

fulfillment of the requirements For the Post Graduate Diploma in Women’s
Law, Faculty of Law, University of Zimbabwe. 43pp

URT (2002). Rural Financial Services Programme. RURAL Financial Services and
Micro financing Institution. Government Printers, Dar es salaam. 122pp

62
URT (2003a). Poverty Reduction Strategy. The second Progress Report 2001/02. The
Government Printer. Dar es salaam, Tanzania. 92pp

URT (2003b). Integration of Population Variables in Development Planning. Part II

trainees manual. Demographic Training Unit. University of Dar es salaam,
Tanzania. 205pp

Wikipedia (2009). [http://en.wikipedia.org/wiki/Microfinance#Microfinance] site

visited on 31st Jan 2009.

63
APPENDIXES
QUESTIONNAIRE TO RESPONDENTS ON RESEARCH FOR
FACTORS DETERMINING LOAN REPAYMENT IN TANZANIA
Introducing myself and the topic to respondents
A. Basic information
1. Date……../……../… 2. District……………. 3. Street………
….. ………

4. Name 5. Gender 6. Age { }

1. M 1=18-25
years

{ } 2=26-33
years

3=34-41
2. F
years

4=42-49
years

5=above 49
years

7. Position in the hold { 8. Occupation + 9. Marital

} monthly status{ }
1=Household head income………… 1= Single
Income per month
2=other (specify) 2= Married
……………………
3= Widow

4= Divorced

10. Education level{ } 11. Composition of Male

1= No formal education house hold members Female
1= Under 5
2= Adult education years……. ……………
……………….
3= Primary education 2=Between 5-17
years …………. ……………
4= Secondary education ……………….
3=Between 18-35
5= Higher education years………… ……………
……………….
4= Above 35
years…….. ……………
……………….

……………
……………….

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B. Technical information

12. What did you use the loan for ( )

1. Business
2. School
3. Building
4. Others (specify)………………………………………

13. What kind of loan did you get ( )

1. Cash
2. Equipments (specify)……………………………….
14. How much did you manage to get in Tsh for ou current loan? ( )
1. 100,000- 400,000
2. 500,000- 900,000
3. 1,000,000- 2,000,000
4. 2,000,000 and above
15. Did you incur any cost in getting loan apart from interest? ( )
1. Yes
2. No
16. If yes how much did you spend to obtain it?
17. Did you get grace period in loan repayment? ( )
1. Yes
2. No
18. If yes what time where you given? ( )
1. 1 week
2. 2 weeks
3. 3 weeks
19. Did borrowing help you? ( )
1. Yes
2. No
20. If yes,
how……………………………………………………………………………………
…………………………………………………………………………………………

…………………………………………………………………………………………

21. Did you manage to borrow the intended amount? ( )

1. Yes
2. No

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22. If no, why?
a) ……………………………………………………………
b) ……………………………………………………………
c) ……………………………………………………………
d) ……………………………………………………………
23. Was the interest rate fair? ( )
1. Yes
2. No
24. If no, how much did you think is fair?
25. Did you manage to pay in due time without problem? ( )
1. Yes
2. No
26. If no, what where the main reasons?
a) ...............................................................................................................
b) ………………………………………………………………………….
c) ………………………………………………………………………….
d) …………………………………………………………………………
27. How can these problems be avoided or solved?
a) …………………………………………………………………………
b) …………………………………………………………………………
c) …………………………………………………………………………
d) …………………………………………………………………………
28. If yes which problems did you experience?
a) …………………………………………………………………………
b) ………………………………………………………………………….
c) ………………………………………………………………………….
d) ………………………………………………………………………….
29. Do you plan to apply for the other loan in the same institution? ( )
1. Yes
2. No
30. If no, why?...............................................................................
…………………………………………………………………………………

…………………………………………………………………………………

31. Give general comments on why people fail to pay their loans
…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

Thank for very much for your positive response!

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APPENDIXES II

CHECKLIST FOR TUJIJENGE TANZANIA LTD

Introducing the topic to Tujijenge Tanzania Ltd Managing Director

A. Basic information.
1. Name of the Branch ………………………………………………………
2. District ………………………………… Ward ……………………………..
3. Date of establishment ………………../…………………./…………..
4. Formal registration…………………………………………………………
5. Organization structure (A sheet to be provided)
B. Informaton.
6. What type of credit does the institution offer? ( )
1=Short term and long term loans

2=Long term only

3=Short term only

4=Others (specify)

7. To whom do give the credit ? ( )

1= Employees

2=Individuals

3=Others (specify)

8. Conditions, policies and lending procedure (A sheet to be provided)

9. Terms of the loan: -interest rate…………………………………………
-loan duration……………………………………….

-Repayment schedules (A sheet to be provided)

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APPENDIXES III

CHECKLIST FOR TUJIJENGE TANZANIA LTD

Introucing the topic to Tujijenge Tanzania Loan Officers

1. What top 3 factors do you consider when assessing loan application? ( )

2. What problems do you face on collecting repayments?
a) ……………………………………………………………
……………………………………………………………
b) ……………………………………………………………
c) ……………………………………………………………
3. How many loans application do you receive monthly?
4. How many of them are approved?
5. Do loan officers attend any seminars on credit management? ( )
1. Yes
2. 2. No
6. If yes, where………………………. And how many times per
year…………………….
7. How much is your outstanding portfolio?
8. What the reayent rate of your portfolio?
9. What are the main causes for late repayments?
a) ……………………………………………………………
……………………………………………………………
b) ……………………………………………………………
c) ……………………………………………………………
10. How do you handle clients in arrears?

Thank you so much for your cooperation!

68