CAUSES OF DEFAULT IN GOVERNMENT MICRO CREDIT PROGRAMMES

A CASE STUDY OF UASIN GISHU DISTRICT TRADE DEVELOPMENT JOINT LOAN BOARD

By Rose A.B. Wakuloba

Senior EconomistMinistry of State for Youth Affairs, KENYA

What is Microcredit?

Micro-credit: Small loans extended to the poor to undertake self-employment projects that would generate income and enable them to provide for themselves and their families (Yunus, 1999)

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

Government as a Provider of Micro-Credit

Provide alternative credit to most vulnerable

Aim is to provide an opportunity to gain commercial experience and attain the standard of credit worthiness required by commercial lending institutions

Examples of Government Micro-Credit Programs in Kenya

District Trade Development Joint Loan Board Scheme -launched in 1954 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 the existing alternative credit among the poor communities, and to promote innovative approaches to the provision of basic social services.

THE PROBLEM

Government micro-credit programs perform poorly in terms of slow repayment and high default rates

Performance of Joint Loan Board Schemes in 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, 717,455.65

2002/03 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

Problem Cont…

Non-Performing Loans (NPL) Nairobi Special Loans Board – 7 NPL UGDTDJLB had 52 NPLs Some Boards had between Ksh. 6 million –

Ksh. 11million (US$86,000 – US$157,000)

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 8,821,774.60Source: Compiled from Rural Enterprise Fund records; Uasin Gishu District

Problem continued…

Due to poor repayment, - a number of Joint Loan Boards are dormant with substantial amounts in non-performing loans- REF Scheme collapsed with substantial outstanding balances- Others, such as Kenya Industrial Estates (KIE), businessmen do not pay their loans on time or at all, constraining KIE’s 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.

OBJECTIVE OF THE STUDY

To determine the Causes of loan default in Uasin Gishu District Trade Development Joint Loan Board scheme.

SIGNIFICANCE

Study results would be useful - in policy formulation and decision making in respect of government micro-credit.- to Government departments implementing micro-credit programs.

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

SCOPE OF THE STUDY

Covers a Government Micro-Credit Scheme namely Uasin Gishu District Trade Development Joint Loan Board

Covers loan disbursement and recovery between 2000 and 2005.

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.

STUDY FINDINGS: Profile of Board Clients

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

age of the loanee

0

10

20

30C

ou

nt

Profile cont…

Mean age was 47 years 2/3 of Board clients were repeat loanees 70% of the clients were male Amount disbursed ranges from Ksh.20,000 to

50,000 ($286 to $714) Repayment period ranges from 12 to

18months. 73% of Board clients found in retail trade.

Board Performance

The default for UGDTDJLB scheme averaged 31.2%.

The Board experiences a repayment delay of 31.4%.

CAUSES OF DEFAULT: Among Slow Loanees

5%

5%

5%

50%

35%

Other

Many dependants

Business closed down

Diversion of funds

Poor business performance

CAUSES OF DEFAULT:Among Defaulters

Other

Theft/robbery

Business closed down

Tenancy problems

Poor timing

Domestic problemsDiversion of funds

Poor business performance

36%

10%

10%

6%

4%

2%

6%

6%

20%

CAUSES OF DEFAULT: Cont…

Study found a strong relationship between Major source of income and cause of default. Loanees who depended on their businesses that performed poorly, defaulted.

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 suitable for effective management of the loan scheme. Board cannot detect Slow loanees and potential defaulters. Also leads to over- and under-repayment of Board loans.

Non-prosecution of defaulters is contributing to the rising trends in default

CONCLUSION

The study found that although UGTDJLB performed relatively well, it had high and rising default rates over the period.

The main causes of default are, poor business performance, diversion of funds and domestic problems.

RECOMMENDATIONS

Given that the main cause of default is poor business performance, improving Board’s Performance can make it more effective in carrying out its mandate and provide technical support to micro-enterprises and improve their profitability.

Therefore,1) The Board should

Strengthen the Board’s MIS systems to facilitate provision of up-to-date loan repayment statements to loanees and enable early detection of potential slow loanees and defaulters. This will facilitate appropriate action including, follow-up, counseling or serving demand notices.

Recommendations Cont…

Strengthen the Board through capacity building in computer applications for optimal utilization of computer facilities available, speed up loan processing and ensure timely disbursements.

Intensify loanee follow-up to, improve recovery of outstanding loan balances accruing to slow loanees and prosecute defaulters.

Revise Loan Appraisal instrument to help identify deserving micro-entrepreneurs. E.g should help determine how much debt the borrower can comfortably handle, income streams and any other obligations that could interfere with repayment.

Recommendations cont…

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

The Ministry of Trade and Industry should, Increase the staffing levels of the Trade Office to facilitate

efficient service delivery in terms of quick processing of applications, disbursement of loans and monitoring loan usage.

Provide sufficient resources for O&M to Board to facilitate efficient monitoring of loanees and cater for expenses involved to prosecute the defaulters.

THANK YOU