Loan Delinquency in Microfinance: Does It Have Any Relationship With Poverty Level of Borrowers?

Abstract

Delinquent loans do not necessarily turn into default, but they adversely affect the financial performance of any lending institution. In microfinance, loan delinquency is a key concern, as poor borrowers lack collateral and microfinance institutions (MFIs) face information asymmetry which may lead to the problems of adverse selection and moral hazard. But is there any relationship between loan delinquency and poverty level of borrowers? In other words, are poor people, compared to the not-so-poor ones, riskier in terms of their chance of default? This paper undertakes a rigorous examination of the relationship between loan delinquency and level of poverty. The findings confirm their positive relationship and suggests that the poorer the microborrowers, the higher the risk in terms of chances of default.

Keywords: Microfinance, Loan Delinquency, Poverty Levels, Information Asymmetry