A critical analysis of factors affecting loan repayment performance in state owned microfinance institutions: the case of Malawi Enterprise Development Fund (MEDF)

Abstract

Loan default is one of the major challenges facing MFIs. Existing literature highlights social capital and successful implementation of group lending as a solution to loan repayment. A lot of loan success of loan repayment comes from the private and NGOs and not state owned MFIs. The main objective of this study therefore, was to investigate the factors affecting loan performance in state owned MFIs with a focus on MEDF. The specific objectives of the study were, (1) to find out the characteristics of MEDF loan beneficiaries; (2) analyse the self-selection process in group formation (3) examine MEDF’s institutional framework in serving the loan administration process and (4) to analyse the challenges with loan administration processes in enhancing loan repayment. The study adopted both qualitative and quantitative approaches. Data was collected through unstructured interviews, focus group discussion and a survey. The study’s population was drawn from loan beneficiaries, group leaders and MEDF credit officers using systematic and purposive sampling. The results reveal that while the MEDF has a robust institutional framework, it is caught up in a number of challenges: Political interference, inadequate financial resources, late loan disbursement, failure to provide repeat loans and training, interference in group formation, adequate appraisal and monitoring are the factors affecting repayment. Furthermore, the trust that MEDF had used in disbursing its loans is working against it due to loan beneficiaries’ incapacitated social capital.