Although the literature acknowledges a growing number of credit-only microfinance institutions (COMFIs) in developing countries, little is known about the influence of their product offerings on their loan performance. To address this gap, this study examined the effect of product characteristics on repayment of loans offered by COMFIs in Tanzania. Specifically, the study assessed the extent to which loan features (type, size, tenure and interest rate) influenced loan delinquency and default rates. Using the information asymmetry theory, five hypotheses were developed and tested based on the data drawn from 1,031 active borrowers of one of the leading COMFIs in Tanzania. Summary statistics were generated for the purpose of ascertaining the nature of the dataset. T-tests and correlation analyses were then performed to determine the difference in means between repayment and loan characteristics, and to establish the association among variables. Finally, Logistic and probit regression analyses was done to test whether there was a causal relationship among variables. Results indicate that, while most borrowers delayed repaying their loans, a noteworthy proportion of delayed loans was eventually repaid. It is also evident that the default rate of the business loans was significantly higher than the default rate of personal loans. Furthermore, a higher amount of loan and interest rates contributed to a higher default rate, resulting from the increased burden of repaying loans which were originally designed to meet short-term needs. We also evidenced higher defaults rates for loans which had combined characteristics such as a loan which has both a long tenure and a high interest rate. This study advances the microfinance literature by focusing on the loan characteristics of COMFIs, whose products are flexible in terms of loan type, size and how they are priced. The study also shows how a flexible bridging financing model mitigates the pronounced challenges of adverse selection and moral hazard in the microfinance industry. This study suggests that considering terms and conditions of loans offered by COMFIs in the context where there is a growing variety of financial institutions expands our understanding of the moral hazards.
Mori et al. (Tue,) studied this question.