CAUSES OF DEFAULT IN GOVERNMENT MICRO CREDIT PROGRAMMES

8/3/2019 CAUSES OF DEFAULT IN GOVERNMENT MICRO CREDIT PROGRAMMES

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CAUSES OF DEFAULTIN GOVERNMENTMICRO CREDIT PROGRAMMES

A CASE STUDY OF UASIN GISHU DISTRICTTRADE DEVELOPMENT JOINT LOAN BOARD

By Rose A.B. Wakuloba

Senior EconomistMinistry of State for Youth Affairs, KENYA


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What is Microcredit?

Micro-credit: Small loans extended to the

poor to undertake self-employment projectsthat would generate income and enable themto provide for themselves and their families(Yunus, 1999)

Default: is the inability to repay the loan byeither failing to complete the loan as per theloan agreement or neglect to service the loan


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Government as a Provider of Micro-

Credit

Provide alternative credit to most vulnerable

Aim is to provide an opportunity to gaincommercial experience and attain thestandard of credit worthiness required by

commercial lending institutions


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Examples of Government Micro-Credit

Programs in Kenya

District Trade Development Joint Loan Board Scheme -launched in1954 and formalised through legal notice No. 265 of 1963, Local

Government Regulation 104.Aim -Provide loans to assist in business expansion

Rural Enterprise Fund - established in 1991

Aim - Increase productive capacity of the borrowers, create

employment and income generating opportunities.

District Poverty Eradication Program - Rolled out in 2002

Aim Provide and promote access to affordable credit, strengthen theexisting alternative credit among the poor communities, and topromote innovative approaches to the provision of basic socialservices.


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THE PROBLEM

Government micro-credit programs perform

poorly in terms of slow repayment and highdefault rates


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Performance of Joint Loan Board Schemesin Kenya (2000-2004)

Financial Year Loan Disbursed (Kshs) Amount Recovered(Ksh)

2000/01 23,684,000.00 17,438,003.83

2001/02 5,385,000.0014, 717,455.652002/03 1,336,557.00 14,215,918.22

2003/04 18,585,000.00 15,431,083.18

2004/05 21,227,000.00 11,543,646.59

Total 90,217,577.00 73,345,107.47

Source: Joint Loan Boards Scheme M&E of Joint Loan Boards Report 2005


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Problem Cont

Non-Performing Loans (NPL)

Nairobi Special Loans Board 7 NPLUGDTDJLB had 52 NPLs

Some Boards had between Ksh. 6 million Ksh. 11million (US$86,000 US$157,000)


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Rural Enterprise Fund Outstanding

balances

F/Year Cumulative Repayment (Kshs) Outstanding (Kshs.)

1995/96 1,309,020.50 4,482,072.00

1996/97 1,467,543.70 6,625,890.00

1997/98 1,467,923.10 6,805,901.60

1998/99 1,566,296.30 7,400,312.10

1999/00 153,682.60 6,647,900.60

2000/01 256,284.60 8,821,774.60

Source: Compiled from Rural Enterprise Fund records; Uasin Gishu District


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Problem continued

Due to poor repayment,

- a number of Joint Loan Boards are dormant withsubstantial amounts in non-performing loans- REF Scheme collapsed with substantial outstandingbalances- Others, such as Kenya Industrial Estates (KIE),businessmen do not pay their loans on time or at all,

constraining KIEs ability to assist other enterprises. With dismal performance, most government programs have,1) failed to achieve their predetermined objectives, and2) Led to huge monetary losses.


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OBJECTIVE OF THE STUDY

To determine the Causes of loan default in

Uasin Gishu District Trade DevelopmentJoint Loan Board scheme.


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SIGNIFICANCE

Study results would be useful

- in policy formulation and decision making inrespect of government micro-credit.

- to Government departments implementing micro-credit programs.

- Contribute to existing body of literature and forma basis for further research.


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SCOPE OF THE STUDY

Covers a Government Micro-Credit Scheme

namely Uasin Gishu District TradeDevelopment Joint Loan Board

Covers loan disbursement and recoverybetween 2000 and 2005.


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METHODOLOGY

Used both primary and Secondary data sources. Primary data instruments were three (3) sets of questionnaires to different

categories of Board Clients and Board Staff.

Secondary data obtained from the Trade office data instruments namely,- Loan Application form,- Applicant Appraisal form,- Loan Agreement Form- Ledger Books for each group disbursed to- Published and unpublished literature

Classified the respondents into Board staff and Loanees (regular, slow,

defaulters) The questionnaires were administered to all Board employees and randomly

selected loanees Data analysis done using SPSS and Excel software packages.


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STUDY FINDINGS: Profile of Board

Clients

20 - 29 30 - 39 40 - 49 50 - 59 60 and above

age of the loanee

0

10

20

30

Count


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Profile cont

Mean age was 47 years 2

/3 of Board clients were repeat loanees 70% of the clients were maleAmount disbursed ranges from Ksh.20,000 to

50,000 ($286 to $714)

Repayment period ranges from 12 to18months.

73% of Board clients found in retail trade.


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Board Performance

The default for UGDTDJLB scheme

averaged 31.2%. The Board experiences a repayment delay of

31.4%.


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CAUSES OF DEFAULT:

Among Slow Loanees

5%

5%

5%

50%

35%

Other

Many dependants

Business closed down

Diversion of funds

Poor business performance


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CAUSES OF DEFAULT:

Among Defaulters

Other

Theft/robbery

Businessclosed down

Tenancyproblems

Poor timing

Domestic problemsDiversion of funds

Poor business performance

36%

10%

10%

6%

4%

2%

6%

6%

20%


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CAUSES OF DEFAULT: Cont

Study found a strong relationship between

Major source of income and cause of default.Loanees who depended on their businessesthat performed poorly, defaulted.


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Other Findings

The Board lacks capacity (staffing) to handle core functions. It takes at least 6 months for an applicant to apply and get the

loan. Was found to contribute to loan diversion. Board receives inadequate funds for operations and

maintenance (O&M). Board lacks appropriate Management Information Systems

(MIS). E.g Manual record keeping by the Board is not suitablefor effective management of the loan scheme. Board cannotdetect Slow loanees and potential defaulters. Also leads toover- and under-repayment of Board loans.

Non-prosecution of defaulters is contributing to the rising trendsin default


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CONCLUSION

The study found that although UGTDJLB

performed relatively well, it had high andrising default rates over the period.

The main causes of default are, poorbusiness performance, diversion of funds

and domestic problems.


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RECOMMENDATIONS

Given that the main cause of default is poor businessperformance, improving Boards Performance can make it moreeffective in carrying out its mandate and provide technicalsupport to micro-enterprises and improve their profitability.

Therefore,

1) The Board should

Strengthen the Boards MIS systems to facilitate provisionof up-to-date loan repayment statements to loanees andenable early detection of potential slow loanees anddefaulters. This will facilitate appropriate action including,follow-up, counseling or serving demand notices.


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Recommendations Cont

Strengthen the Board through capacity building in computerapplications for optimal utilization of computer facilitiesavailable, speed up loan processing and ensure timelydisbursements.

Intensify loanee follow-up to, improve recovery ofoutstanding loan balances accruing to slow loanees andprosecute defaulters.

Revise Loan Appraisal instrument to help identify deserving

micro-entrepreneurs. E.g should help determine how muchdebt the borrower can comfortably handle, income streamsand any other obligations that could interfere withrepayment.


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Recommendations cont

Carry out a workload analysis to establish the optimal Boardstaffing levels for consideration by the Ministry.

The Ministry of Trade and Industry should,

Increase the staffing levels of the Trade Office to facilitateefficient service delivery in terms of quick processing ofapplications, disbursement of loans and monitoring loan

usage. Provide sufficient resources for O&M to Board to facilitate

efficient monitoring of loanees and cater for expensesinvolved to prosecute the defaulters.


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THANK YOU

Documents

CAUSES OF DEFAULT IN GOVERNMENT MICRO CREDIT PROGRAMMES